<PAGE> 1
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SCHEDULE 14C
INFORMATION REQUIRED IN INFORMATION STATEMENT
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary information statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14c-5(d)(2))
[X] Definitive information statement
</TABLE>
O'SULLIVAN CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK, $1.00 PAR VALUE PER SHARE
(2) Aggregate number of securities to which transaction applies:
1,879,466 SHARES OF COMMON STOCK
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$12.25 PER SHARE OF COMMON STOCK
(4) Proposed maximum aggregate value of transaction:
$23,023,458.50
(5) Total fee paid:
$4,604.69
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$38,945.03
(2) Form, Schedule or Registration Statement No.:
SCHEDULE 14D-1 TENDER OFFER STATEMENT
(3) Filing Party:
TGC ACQUISITION CORPORATION AND THE GEON COMPANY
(4) Date Filed:
JUNE 8, 1999
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<PAGE> 2
O'SULLIVAN CORPORATION
1944 VALLEY AVENUE
WINCHESTER, VIRGINIA 22601
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 23, 1999
To the Shareholders of O'Sullivan Corporation:
A Special Meeting of Shareholders of O'Sullivan Corporation ("O'Sullivan"),
a Virginia corporation, will be held on Monday, August 23, 1999 at 10:00 a.m.,
Eastern Daylight Saving Time, at the executive offices of The Geon Company
("Geon"), which are located at One Geon Center, Avon Lake, Ohio, for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger (the "Merger Agreement") among
O'Sullivan, Geon and TGC Acquisition Corporation (the "Purchaser"), a
Virginia corporation and a wholly owned subsidiary of Geon, pursuant
to which the Purchaser will be merged with and into O'Sullivan (the
"Merger") and each then outstanding share of common stock, $1.00 par
value (the "Shares"), of O'Sullivan (other than Shares owned by Geon
or any of its subsidiaries and Shares held as treasury shares or
otherwise by O'Sullivan) will be converted into the right to receive
$12.25 per share net in cash, without interest thereon; and
2. To transact such other business as may properly come before the
Special Meeting.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
The Merger is the second step of a two-step transaction pursuant to which
Geon, as the owner of all of the capital stock of the Purchaser, will acquire
the entire equity interest in O'Sullivan. The first step was a tender offer by
the Purchaser for the Shares at $12.25 per Share net to the seller in cash,
without interest thereon (the "Offer"). The Purchaser acquired 13,715,221 Shares
upon the completion of the Offer on July 7, 1999, representing approximately
87.9% of the issued and outstanding Shares.
As a result of the Offer, the Purchaser has the right to vote at the
Special Meeting a sufficient number of the Shares to approve and adopt the
Merger Agreement without the affirmative vote of any other shareholder, thereby
assuring such approval and adoption. Pursuant to the Merger Agreement, the
Purchaser is obligated to vote the Shares owned by it in favor of approving and
adopting the Merger Agreement. O'Sullivan currently anticipates that the Merger
will be effected on August 23, 1999, or as promptly as possible thereafter.
On June 1, 1999, the Board of Directors of O'Sullivan unanimously
determined that the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, are fair to and in the best interests of the
shareholders of O'Sullivan, and approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger.
By Order of the Board of Directors,
GREGORY L. RUTMAN
Secretary
July 23, 1999
<PAGE> 3
O'SULLIVAN CORPORATION
1944 VALLEY AVENUE
WINCHESTER, VIRGINIA 22601
INFORMATION STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON AUGUST 23, 1999
This Information Statement is being furnished by the Board of Directors of
O'Sullivan Corporation ("O'Sullivan"), a Virginia corporation, to the holders of
the outstanding shares of common stock, par value $1.00 per share (the
"Shares"), of O'Sullivan in connection with the proposed merger (the "Merger")
of TGC Acquisition Corporation (the "Purchaser"), a Virginia corporation and a
wholly owned subsidiary of The Geon Company ("Geon"), a Delaware corporation,
with and into O'Sullivan pursuant to an Agreement and Plan of Merger, dated June
2, 1999 (the "Merger Agreement"), among O'Sullivan, Geon and the Purchaser, a
copy of which is attached hereto as Annex C. As a result of the Merger,
O'Sullivan will become a wholly owned subsidiary of Geon and each then
outstanding Share (other than Shares owned by Geon or any of its subsidiaries
and Shares held as treasury shares or otherwise by O'Sullivan) will be converted
into the right to receive $12.25 per Share net in cash, without interest thereon
(the "Merger Consideration").
The Merger is the second step of a two-step transaction pursuant to which
Geon, as the owner of all of the capital stock of the Purchaser, will acquire
the entire equity interest in O'Sullivan. The first step was a tender offer by
the Purchaser for the outstanding Shares at $12.25 per Share net to the seller
in cash, without interest thereon (the "Offer"). The Purchaser acquired
13,715,221 Shares upon the completion of the Offer on July 7, 1999, representing
approximately 87.9% of the issued and outstanding Shares.
This Information Statement accompanies a Notice of Special Meeting of
Shareholders of O'Sullivan to be held on Monday, August 23, 1999, at which time
the shareholders of O'Sullivan will be asked to consider and vote upon a
proposal to approve and adopt the Merger Agreement and such other business as
may properly come before the Special Meeting.
As a result of the Offer, the Purchaser has the right to vote a sufficient
number of the outstanding Shares at the Special Meeting to approve and adopt the
Merger Agreement without the affirmative vote of any other shareholder, thereby
assuring such approval and adoption. Pursuant to the Merger Agreement, the
Purchaser is obligated to vote the Shares owned by it in favor of approving and
adopting the Merger Agreement. O'Sullivan currently anticipates that the Merger
will be effected on August 23, 1999, or as promptly as possible thereafter.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND US A PROXY.
This Information Statement is dated July 23, 1999 and is first being mailed
to the shareholders of O'Sullivan on or about July 23, 1999.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 1
The Parties to the Merger Agreement....................... 1
The Merger Agreement...................................... 1
Special Meeting of Shareholders; Vote Required to Approve
and Adopt the Merger Agreement......................... 2
Payment for Shares........................................ 2
No Dissenters' Rights of Appraisal........................ 2
The Merger................................................ 3
Selected Financial Information of O'Sullivan.............. 4
Historical Price and Dividend Information on the Shares... 5
Special Meeting of Shareholders............................. 6
The Offer and the Merger.................................. 6
Time and Location of the Special Meeting.................. 6
Vote Required to Approve and Adopt the Merger Agreement... 6
Payment for Shares.......................................... 7
Surrender of Shares to the Paying Agent................... 7
Letter of Transmittal..................................... 7
Valid Surrender of Shares................................. 7
Book-Entry Transfer....................................... 7
Signature Guarantees...................................... 7
Backup Federal Income Tax Withholding..................... 8
No Dissenters' Rights of Appraisal.......................... 8
Historical Price and Dividend Information on the Shares..... 9
The Merger.................................................. 10
Background of the Offer and the Merger.................... 10
Opinion of Financial Advisor.............................. 12
Federal Income Tax Consequences of the Merger............. 13
Regulatory Matters........................................ 13
Interests of Certain Persons in the Merger.................. 14
Employee and Director Stock Options....................... 14
Employee Benefit Plans; Salary Continuation Agreements.... 14
The Merger Agreement........................................ 15
The Share Tender Agreements................................. 22
Financial Arrangements of Geon.............................. 23
Business of O'Sullivan...................................... 23
Selected Financial Information of O'Sullivan................ 25
Security Ownership of Certain Beneficial Owners and
Management................................................ 26
Available Information....................................... 27
Financial Statements and Other Information; Information
Incorporated by Reference................................. 27
ANNEXES
Annual Report on Form 10-K of O'Sullivan for the Fiscal Year
Ended December 31, 1998................................... A-1
Quarterly Report on Form 10-Q of O'Sullivan for the
Quarterly Period Ended March 31, 1999..................... B-1
Agreement and Plan of Merger................................ C-1
Opinion of Bowles Hollowell Conner, a division of First
Union Capital Markets Corp................................ D-1
</TABLE>
i
<PAGE> 5
SUMMARY
The following summary highlights selected information contained in this
Information Statement. This summary may not contain all of the information that
is important to you. You are urged to read this Information Statement and the
annexes hereto in their entirety. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
THE PARTIES TO THE MERGER AGREEMENT
O'Sullivan. O'Sullivan manufactures calendered plastics products for the
automotive and specialty plastics manufacturing industries. Calendered plastics
products manufactured by O'Sullivan include vinyl sheeting for vehicular
dashboard pads, swimming pool liners and covers, notebook binders, luggage,
upholstered furniture, golf bags, floor tile, pond liners, protective clothing,
mine curtains, boat and automobile windows and medical grade materials.
O'Sullivan is a Virginia corporation with its principal executive offices
located at 1944 Valley Avenue, Winchester, Virginia 22601, and its telephone
number there is (540) 667-6666.
The Purchaser. The Purchaser is a newly incorporated Virginia corporation
and a wholly owned subsidiary of Geon. To date, the Purchaser has not conducted
any business other than in connection with the Offer and the Merger. The
principal executive offices of the Purchaser are located at One Geon Center,
Avon Lake, Ohio 44012-0122, and its telephone number there is (440) 930-1000.
Geon. Geon is a leading North American-based polymer services and
technology company with operations in vinyl compounds, specialty vinyl resins
and formulations and other value-added products and services. Geon's operations
are conducted primarily in two business segments. Geon's "Performance Polymers
and Services" segment includes polyvinyl chloride ("PVC") compounds, specialty
resins, plastisol formulators and analytical testing services, three compounding
joint ventures, and one joint venture that manufactures material systems based
on a unique technology for reinforced thermoplastic polymers. Geon's "Resin and
Intermediates" segment includes its equity holdings in Oxy Vinyls, L.P.
("OxyVinyls"), the largest North American producer of PVC suspension and mass
resins. OxyVinyls also produces vinyl chloride monomer ("VCM") and chlorine (a
principal feedstock for VCM which is an intermediate precursor to PVC). Geon's
"Resin and Intermediates" segment also includes equity holdings in a
chlor-alkali joint venture and an Australian PVC operation. Geon is a Delaware
corporation with its principal executive offices located at One Geon Center,
Avon Lake, Ohio 44012-0122, and its telephone number there is (440) 930-1000.
THE MERGER AGREEMENT
This Information Statement is being delivered to the shareholders of
O'Sullivan in connection with the Merger of the Purchaser with and into
O'Sullivan pursuant to the Merger Agreement. As a result of the Merger,
O'Sullivan will become a wholly owned subsidiary of Geon, each issued and
outstanding Share (other than Shares owned by Geon or any of its subsidiaries
and Shares held as treasury shares or otherwise by O'Sullivan) will be converted
into the right to receive $12.25 per Share net in cash, without interest
thereon, and the equity interests of all pre-Merger shareholders in O'Sullivan
will be terminated.
The Merger is the second step of a two-step transaction pursuant to which
Geon, as the owner of all of the capital stock of the Purchaser, will acquire
the entire equity interest in O'Sullivan. The first step was the Offer. The
Purchaser acquired 13,715,221 Shares upon the completion of the Offer on July 7,
1999, representing approximately 87.9% of the issued and outstanding Shares.
Pursuant to the Merger Agreement, on July 8, 1999, nine of the eleven
members of the Board of Directors of O'Sullivan resigned as directors, and seven
persons designated by the Purchaser were subsequently appointed as members of
the Board of Directors. The persons designated by the Purchaser are all
directors and/or employees of Geon.
1
<PAGE> 6
SPECIAL MEETING OF SHAREHOLDERS; VOTE REQUIRED TO APPROVE AND ADOPT THE MERGER
AGREEMENT
The Special Meeting of Shareholders will be held on Monday, August 23, 1999
at 10:00 a.m., Eastern Daylight Saving Time, at the executive offices of Geon,
which are located at One Geon Center, Avon Lake, Ohio. At the Special Meeting,
shareholders will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement and such other proposals as may properly come before
the Special Meeting.
Pursuant to O'Sullivan's Amended and Restated Articles of Incorporation, as
amended, the affirmative vote of at least seventy percent (70%) of the issued
and outstanding Shares is required to approve and adopt the Merger Agreement at
the Special Meeting. Only holders of record of Shares at the close of business
on July 19, 1999 (the "Record Date") are entitled to notice of and to vote at
the Special Meeting. At such date there were 15,594,687 Shares issued and
outstanding, each of which will be entitled to one vote on each matter to be
acted upon or which may properly come before the Special Meeting.
As a result of the Offer, the Purchaser was the holder of record of
13,715,221 Shares on the Record Date, representing approximately 87.9% of the
Shares issued and outstanding on the Record Date. Pursuant to the terms of the
Merger Agreement, the Purchaser is obligated to vote all of the Shares held by
it in favor of approving and adopting the Merger Agreement, which under Virginia
law and O'Sullivan's Amended and Restated Articles of Incorporation, as amended,
will be a sufficient number of Shares to approve and adopt the Merger Agreement
without the affirmative vote of any other shareholder, thereby assuring such
approval and adoption.
PAYMENT FOR SHARES
Upon the completion of the Merger, O'Sullivan will make available to The
Bank of New York, as the paying agent (the "Paying Agent") for the holders of
record of Shares, as needed, the amount of cash to be paid in respect of the
Shares converted into the right to receive the Merger Consideration pursuant to
the Merger. Holders of record should use the Letter of Transmittal (to be
provided under separate cover after the effective time of the Merger) to effect
the surrender of certificates evidencing Shares in exchange for the Merger
Consideration. All certificates so surrendered will be canceled. After the
completion of the Merger and upon the surrender of a certificate evidencing
Shares, together with a duly executed Letter of Transmittal, the holder thereof
will receive in exchange for each Share surrendered the Merger Consideration.
Any cash held by the Paying Agent that remains unclaimed by shareholders for
three months after the effective time of the Merger will be returned to
O'Sullivan, as the Surviving Corporation in the Merger, and thereafter
shareholders may look, subject to applicable abandoned property, escheat and
other similar laws, only to O'Sullivan for payment of the Merger Consideration.
A Letter of Transmittal will be sent to all shareholders of O'Sullivan
under separate cover after the effective time of the Merger. The Letter of
Transmittal will advise each shareholder of the procedures for surrendering to
the Paying Agent certificates evidencing Shares in exchange for the Merger
Consideration. See "Payment for Shares."
NO DISSENTERS' RIGHTS OF APPRAISAL
Pursuant to Virginia law, shareholders of O'Sullivan do not have
dissenters' rights of appraisal in connection with the Merger. See "No
Dissenters' Rights of Appraisal."
2
<PAGE> 7
THE MERGER
Background of the Merger. For a description of the events leading up to the
approval of the Merger Agreement by the Board of Directors of O'Sullivan, see
"The Merger -- Background of the Offer and the Merger."
Approval of the Board of Directors of O'Sullivan. The Board of Directors of
O'Sullivan, on June 1, 1999, unanimously determined that the Merger Agreement
and the transactions contemplated thereby, including the Offer and the Merger,
are fair to the shareholders of O'Sullivan, approved the Merger Agreement and
recommended that O'Sullivan's shareholders tender their Shares pursuant to the
Offer and approve and adopt the Merger Agreement. See "The Merger -- Background
of the Offer and the Merger."
Interests of Certain Persons in the Merger. Pursuant to the Merger
Agreement, at the effective time of the Merger each outstanding option to
acquire Shares granted under O'Sullivan's 1995 Stock Option Plan, 1995 Outside
Directors Stock Option Plan and 1985 Incentive Stock Option Plan to the
directors, officers and other employees of O'Sullivan, whether or not vested or
exercisable, will be converted into the right to receive from Geon a cash
payment per option equal to the amount by which the Merger Consideration exceeds
the exercise price of the option. In addition, Geon has agreed in the Merger
Agreement to provide the employees of O'Sullivan and its subsidiaries, for a
period of at least two years, with benefits no less favorable than those in the
aggregate provided by Geon and its subsidiaries as of the effective time of the
Merger. Geon has also agreed to honor all employee benefit obligations of
O'Sullivan existing at the effective time of the Merger, including the salary
continuation agreements between O'Sullivan and its officers and 36 other
employees. See "Interests of Certain Persons in the Merger" and "The Merger
Agreement."
Opinion of Financial Advisor. Bowles Hollowell Conner, a division of First
Union Capital Markets Corp. ("BHC"), O'Sullivan's financial advisor, has
delivered to O'Sullivan its written opinion that the consideration to be
received by the shareholders of O'Sullivan pursuant to the Merger Agreement is
fair to such shareholders from a financial point of view. The complete opinion
of BHC, which sets forth the assumptions made, the matters considered and the
limits of BHC's review, is attached to this Information Statement as Annex D and
should be read in its entirety. See "The Merger -- Opinion of Financial
Advisor."
Purpose of the Merger. The purpose of the Merger is to enable Geon, as the
owner of all of the capital stock of the Purchaser, to acquire the remaining
equity interest in O'Sullivan not currently owned by the Purchaser.
Conditions to the Merger. The Merger is subject to the satisfaction of
certain conditions. See "The Merger Agreement -- Conditions to the Merger."
Assuming the satisfaction of such conditions, it is expected that the Merger
will be effected on August 23, 1999, or as promptly as possible thereafter.
Regulatory Matters. The waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, expired on June 18, 1999 without
such waiting period being extended by the Federal Trade Commission or the
Antitrust Division of the Department of Justice. O'Sullivan is not aware of any
federal, state or foreign regulatory requirement that remains to be complied
with in order to complete the Merger. See "The Merger -- Regulatory Matters."
Federal Income Tax Consequences of the Merger. The receipt of cash pursuant
to the Merger Agreement will be a taxable transaction to shareholders for
federal income tax purposes. See "The Merger -- Federal Income Tax Consequences
of the Merger." Shareholders are urged to consult their own tax advisors as to
the particular tax consequences of the Merger to them, including the
applicability and the effect of federal, state, local, foreign and other tax
laws.
3
<PAGE> 8
SELECTED FINANCIAL INFORMATION OF O'SULLIVAN
The selected financial information of O'Sullivan set forth below has been
derived from the audited financial statements of O'Sullivan for the fiscal years
ended December 31, 1994, 1995, 1996, 1997 and 1998 and the unaudited financial
statements of O'Sullivan for the three month periods ended March 31, 1998 and
1999. The selected financial information of O'Sullivan should be read in
conjunction with the audited financial statements and other financial
information of O'Sullivan included later in this Information Statement or
incorporated herein by reference.
The period-to-period comparability of the selected financial information
shown below is affected by O'Sullivan's July 1997 sale of substantially all of
the assets of its subsidiary Melnor Inc., a corporation engaged in the water
sprinkler and lawn and garden business, for approximately $22.0 million less
$2.5 million which was returned to the purchaser when the acquired business did
not meet certain operating result thresholds after closing. The sale of the
Melnor business was treated as a discontinued operation in O'Sullivan's
financial statements.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1994 (1) 1995 (1) 1996 (1) 1997 1998 1998 1999
-------- -------- -------- ------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT
DATA:
Net sales................... $ 149.4 $ 169.5 $ 171.2 $ 163.6 $ 163.2 $ 41.9 $ 42.9
Income from continuing
operations............... 10.5 15.5 14.1 8.8 11.6 3.0 3.1
Net income.................. 2.6 14.0 10.7 4.5 11.6 3.0 3.1
PER COMMON SHARE:
Income from continuing
operations............... $ 0.64 $ 0.94 $ 0.87 $ 0.56 $ 0.74 $ 0.19 $ 0.20
Net income.................. 0.16 0.85 0.66 0.29 0.74 0.19 0.20
Net income -- fully
diluted.................. 0.16 0.85 0.66 0.29 0.74 0.19 0.20
SELECTED BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets................ $ 144.5 $ 150.0 $ 140.8 $ 138.0 $ 142.9 $ 140.6 $ 145.9
Long-term liabilities....... 7.2 6.3 6.2 9.4 7.7 8.9 7.4
Working capital............. 57.9 60.9 70.0 70.1 71.1 71.1 72.8
Shareholders' equity........ 106.6 115.8 114.0 112.7 117.6 114.4 119.4
OTHER SELECTED DATA:
Book value per common
share.................... $ 6.47 $ 7.01 $ 7.19 $ 7.16 $ 7.54 $ 7.27 $ 7.66
Cash dividends declared per
common share............. 0.28 0.31 0.32 0.32 0.32 0.08 0.08
</TABLE>
- ---------------
(1) Income statement data for the fiscal years ended December 31, 1994, 1995 and
1996 varies from the data for such years presented in O'Sullivan's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, which is
included in this Information Statement as Annex A. O'Sullivan restated its
financial statements for such fiscal years to account for the July 1997 sale
of the Melnor business.
4
<PAGE> 9
HISTORICAL PRICE AND DIVIDEND INFORMATION ON THE SHARES
The Shares are listed on the American Stock Exchange under the symbol OSL.
The following table sets forth the high and low closing sales prices per Share
for each quarter of 1997 and 1998 and the first quarter of 1999 as reported on
the American Stock Exchange, together with the per Share dividends paid by
O'Sullivan during the same period of time.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------ --------
<S> <C> <C> <C>
Year Ended December 31, 1997:
First quarter............................................. $ 10.75 $ 8.00 $ 0.08
Second quarter............................................ 9.69 7.94 0.08
Third quarter............................................. 11.00 8.38 0.08
Fourth quarter............................................ 11.00 9.88 0.08
Year Ended December 31, 1998:
First quarter............................................. $ 10.88 $ 8.75 $ 0.08
Second quarter............................................ 10.25 9.25 0.08
Third quarter............................................. 10.13 8.25 0.08
Fourth quarter............................................ 10.38 7.38 0.08
Year Ending December 31, 1999:
First quarter............................................. $ 10.00 $ 8.06 $ 0.08
</TABLE>
On June 1, 1999, the last full trading day prior to the public announcement
of the execution of the Merger Agreement and the Purchaser's intention to
commence the Offer, the closing sale price for the Shares was $9.38 per Share.
On June 7, 1999, the last full trading day before the commencement of the Offer,
the closing sale price for the Shares was $12.13 per Share. On July 22, 1999,
the last full trading day prior to the commencement of mailing of this
Information Statement, the closing sale price for the Shares was $12.06 per
Share. Shareholders are urged to obtain current market quotations for the
Shares.
5
<PAGE> 10
SPECIAL MEETING OF SHAREHOLDERS
THE OFFER AND THE MERGER
This Information Statement is being delivered to the shareholders of
O'Sullivan in connection with the Merger of the Purchaser with and into
O'Sullivan pursuant to the Merger Agreement. As a result of the Merger,
O'Sullivan will become a wholly owned subsidiary of Geon, each issued and
outstanding Share (other than Shares owned by Geon or any of its subsidiaries
and Shares held as treasury shares or otherwise by O'Sullivan) will be converted
into the right to receive $12.25 per Share net in cash, without interest
thereon, and the equity interest of all shareholders in O'Sullivan will be
terminated.
The Merger is the second step of a two-step transaction pursuant to which
Geon, as the owner of all of the capital stock of the Purchaser, will acquire
the entire equity interest in O'Sullivan. The first step was the Offer. The
Purchaser acquired 13,715,221 Shares upon the completion of the Offer on July 7,
1999, representing approximately 87.9% of the issued and outstanding Shares.
Pursuant to the Merger Agreement, on July 8, 1999, nine of the eleven
members of O'Sullivan's Board of Directors (C. Hugh Bloom, Jr., John C. O.
Bryant, Robert L. Burrus, Jr., Max C. Chapman, Jr., James T. Holland, R. Michael
McCullough, Stephen P. Munn, Timothy J. Sandker and Leighton W. Smith, Jr.)
resigned as directors and seven persons designated by the Purchaser (William F.
Patient, Thomas A. Waltermire, Donald P. Knechtges, V. Lance Mitchell, Gregory
L. Rutman, W. David Wilson and John L. Rastetter) were subsequently elected as
members of the Board of Directors. Arthur H. Bryant II and John S. Campbell
continue to serve as directors of O'Sullivan. All of the persons designated by
the Purchaser are directors and/or employees of Geon.
TIME AND LOCATION OF THE SPECIAL MEETING
The Special Meeting will be held on Monday, August 23, 1999 at 10:00 a.m.,
Eastern Daylight Saving Time, at the executive offices of Geon, which are
located at One Geon Center, Avon Lake, Ohio. At the Special Meeting,
shareholders will be asked to consider and vote upon a proposal to approve and
adopt the Merger Agreement and such other proposals as may properly come before
the Special Meeting.
VOTE REQUIRED TO APPROVE AND ADOPT THE MERGER AGREEMENT
Pursuant to O'Sullivan's Amended and Restated Articles of Incorporation, as
amended, the affirmative vote of at least seventy percent (70%) of the issued
and outstanding Shares is required to approve and adopt the Merger Agreement at
the Special Meeting. Only holders of record of Shares at the close of business
on the Record Date (July 19, 1999) are entitled to notice of and to vote at the
Special Meeting. At such date there were 15,594,687 Shares issued and
outstanding, each of which will be entitled to one vote on each matter to be
acted upon or which may properly come before the Special Meeting.
As a result of the Offer, the Purchaser was the holder of record of
13,715,221 Shares on the Record Date, representing approximately 87.9% of the
Shares issued and outstanding on the Record Date. Pursuant to the terms of the
Merger Agreement, the Purchaser is obligated to vote all of the Shares held by
it in favor of approving and adopting the Merger Agreement, which under Virginia
law and O'Sullivan's Amended and Restated Articles of Incorporation, as amended,
will be a sufficient number of Shares to approve and adopt the Merger Agreement
without the affirmative vote of any other shareholder, thereby assuring such
approval and adoption.
O'Sullivan currently anticipates that the Merger will be effected on August
23, 1999, or as promptly as possible thereafter. To effect the Merger, a
certificate of merger will be filed with the Virginia State Corporation
Commission in accordance with the Virginia Stock Corporation Act. The Merger
will become effective upon the issuance of a Certificate of Merger by the
Virginia State Corporation Commission.
6
<PAGE> 11
PAYMENT FOR SHARES
SURRENDER OF SHARES TO THE PAYING AGENT
Upon the completion of the Merger, O'Sullivan will make available to The
Bank of New York, as the paying agent (the "Paying Agent") for the holders of
record of Shares, as needed, the amount of cash to be paid in respect of the
Shares converted into the right to receive the Merger Consideration pursuant to
the Merger. Holders of record should use the Letter of Transmittal (to be
provided under separate cover after the effective time of the Merger) to effect
the surrender of certificates evidencing Shares in exchange for the Merger
Consideration. All certificates so surrendered will be canceled. After the
completion of the Merger and upon the surrender of certificates evidencing
Shares, together with a duly executed Letter of Transmittal, the holder of
record thereof will receive in exchange for each Share surrendered the Merger
Consideration. Any cash held by the Paying Agent that remains unclaimed by
shareholders for three months after the effective time of the Merger will be
returned to O'Sullivan, as the Surviving Corporation in the Merger, and
thereafter shareholders may look, subject to applicable abandoned property,
escheat and other similar laws, only to O'Sullivan for payment of the Merger
Consideration.
LETTER OF TRANSMITTAL
A Letter of Transmittal will be sent to all shareholders of O'Sullivan
under separate cover after the effective time of the Merger. The Letter of
Transmittal will advise each shareholder of the procedures for surrendering to
the Paying Agent certificates evidencing Shares in exchange for the Merger
Consideration.
VALID SURRENDER OF SHARES
For Shares to be validly surrendered pursuant to the Merger, a Letter of
Transmittal (or a manually signed facsimile thereof), properly completed and
duly executed, with any required signature guarantees, must be received by the
Paying Agent, at one of its addresses set forth in the Letter of Transmittal,
and either (a) certificates representing Shares must be received by the Paying
Agent or (b) Shares must be delivered by book-entry transfer.
BOOK-ENTRY TRANSFER
The Paying Agent will establish an account with respect to the Shares at
The Depository Trust Company ("DTC") for purposes of the Merger. Any financial
institution that is a participant in DTC's systems may make book-entry delivery
of Shares by causing DTC to transfer such Shares into the Paying Agent's account
at DTC in accordance with the procedures for such transfer.
SIGNATURE GUARANTEES
All signatures on a Letter of Transmittal must be guaranteed by a firm
which is a member of a registered national securities exchange or the National
Association of Securities Dealers, Inc. or by a financial institution (including
most commercial banks, savings and loan associations and brokerage houses) that
is a participant in the Securities Transfer Agents Medallion Program, the New
York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange
Medallion Program (an "Eligible Institution"), unless the Shares delivered
therewith are delivered (a) by a registered holder of Shares who has not
completed either the box entitled "Special Delivery Instructions" or the box
entitled "Special Payment Instructions" on the Letter of Transmittal or (b) for
the account of an Eligible Institution. If the certificates representing Shares
are registered in the name of a person other than the signer of the Letter of
Transmittal or if payment is to be made to a person other than the registered
holder, then the certificates representing Shares must be endorsed or
accompanied by appropriate stock powers, in each case signed exactly as the
name(s) of the registered holder(s) appear(s) on the certificates, with the
signatures on the certificates or stock powers guaranteed as described above and
as provided in the Letter of Transmittal.
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<PAGE> 12
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE
SURRENDERING SHAREHOLDER. IF DELIVERY IS MADE BY MAIL, REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
BACKUP FEDERAL INCOME TAX WITHHOLDING
To prevent backup federal income tax withholding of 31% of the aggregate
Merger Consideration payable to a shareholder, shareholders must provide the
Paying Agent with his or her correct taxpayer identification number and certify
that such number is correct and that he or she is not subject to backup
withholding of federal income tax by completing the substitute Form W-9 included
in the Letter of Transmittal.
NO DISSENTERS' RIGHTS OF APPRAISAL
Pursuant to Virginia law, shareholders of O'Sullivan do not have
dissenters' rights of appraisal in connection with the Merger. Under Section
13.1-730 of the Virginia Stock Corporation Act, dissenters' rights of appraisal
are not available with respect to the shares of a corporation which, as of the
record date fixed to determine the shareholders entitled to receive notice of
and to vote at the shareholders meeting to act upon the agreement or plan of
merger, were either (a) listed on a national securities exchange or the Nasdaq
National Market or (b) held of record by at least 2,000 shareholders, unless in
either case (i) the corporation's articles of incorporation provide otherwise,
(ii) the holders of such shares are required by the terms of such agreement or
plan to accept for such shares anything except cash and/or shares of the
surviving or acquiring corporation or another corporation that is listed on a
national securities exchange or the Nasdaq National Market or the shares of
which are held of record by at least 2,000 shareholders, or (iii) the
transaction to be voted on is an "affiliated transaction" under Article 14 of
the Virginia Stock Corporation Act that has not been approved by a majority of
the corporation's disinterested directors.
As of the Record Date, O'Sullivan was listed on a national securities
exchange, the American Stock Exchange. In addition, shareholders of O'Sullivan
will, pursuant to the terms of the Merger Agreement, receive consideration
consisting entirely of cash in connection with the Merger, and the Merger was
unanimously approved in advance by O'Sullivan's directors, all of which are
deemed to be disinterested for purposes of Article 14 of the Virginia Stock
Corporation Act. O'Sullivan's Amended and Restated Articles of Incorporation, as
amended, do not provide that dissenters' rights of appraisal under Virginia law
are to apply to the corporation notwithstanding these circumstances.
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<PAGE> 13
HISTORICAL PRICE AND DIVIDEND INFORMATION ON THE SHARES
The Shares are listed on the American Stock Exchange under the symbol OSL.
The following table sets forth the high and low closing sales prices per Share
for each quarter of 1997 and 1998 and the first quarter of 1999 as reported on
the American Stock Exchange, together with the per Share dividends paid by
O'Sullivan during the same period of time.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
------- ------ --------
<S> <C> <C> <C>
Year Ended December 31, 1997:
First quarter............................................. $ 10.75 $ 8.00 $ 0.08
Second quarter............................................ 9.69 7.94 0.08
Third quarter............................................. 11.00 8.38 0.08
Fourth quarter............................................ 11.00 9.88 0.08
Year Ended December 31, 1998:
First quarter............................................. $ 10.88 $ 8.75 $ 0.08
Second quarter............................................ 10.25 9.25 0.08
Third quarter............................................. 10.13 8.25 0.08
Fourth quarter............................................ 10.38 7.38 0.08
Year Ending December 31, 1999:
First quarter............................................. $ 10.00 $ 8.06 $ 0.08
</TABLE>
On June 1, 1999, the last full trading day prior to the public announcement
of the execution of the Merger Agreement and the Purchaser's intention to
commence the Offer, the closing sale price for the Shares was $9.38 per Share.
On June 7, 1999, the last full trading day before commencement of the Offer, the
closing sale price for the Shares was $12.13 per Share. On July 22, 1999, the
last full trading day prior to the commencement of mailing of this Information
Statement, the closing sale price for the Shares was $12.06 per Share.
Shareholders are urged to obtain current market quotations for the Shares.
9
<PAGE> 14
THE MERGER
BACKGROUND OF THE OFFER AND THE MERGER
On July 29, 1998, O'Sullivan announced that it would hire an investment
bank to assist it in exploring various strategic alternatives for O'Sullivan to
enhance shareholder value. On August 19, 1998, the Board of Directors of
O'Sullivan engaged Bowles Hollowell Conner ("BHC"), a division of First Union
Capital Markets Corp., to act as financial advisor to O'Sullivan in this regard.
Beginning in August 1998, BHC conducted detailed due diligence on O'Sullivan
and, together with O'Sullivan's management, conducted an analysis of various
strategic alternatives available to O'Sullivan.
BHC presented a detailed review of strategic alternatives to the Board of
Directors at its regularly scheduled meeting on October 27, 1998. At this
meeting and based on the review of strategic alternatives, the Board of
Directors authorized BHC to work with management to explore whether there
existed a strategic merger/sale transaction that would be in the best interests
of O'Sullivan's shareholders. During the months of November and December 1998,
representatives of Geon and O'Sullivan met twice, at Geon's request, to discuss
developments in the business and whether a combination of the two companies
might be possible. On December 16, 1998, O'Sullivan and Geon signed a
confidentiality agreement and began preliminary discussions regarding the merits
of a potential merger/sale transaction. Shortly thereafter O'Sullivan sent Geon
a confidential information memorandum. During January 1999, Geon submitted
through BHC a non-binding indication of interest and a follow-up letter
regarding the possible acquisition of O'Sullivan. BHC discussed Geon's interest
with O'Sullivan.
At the Board of Directors' regularly scheduled meeting held on January 25,
1999, BHC reported on Geon's indication of interest, the Board of Directors
directed BHC to expand its discussions to include additional parties potentially
interested in pursuing a transaction with O'Sullivan, and the Board of Directors
empowered its Executive Committee, composed of Messrs. Arthur H. Bryant II,
Chapman, Holland and Burrus, to oversee the process relating to a potential
strategic merger/sale transaction, subject ultimately to approval of any
possible transaction by the full Board of Directors. Beginning in February 1999,
BHC contacted 66 strategic and financial parties regarding their possible
interest in a potential transaction with O'Sullivan. As a result of these
contacts, O'Sullivan supplied 21 qualified potential parties non-public
information, all of which was subject to various confidentiality and
nondisclosure agreements. Based on a continued interest in acquiring O'Sullivan
and further qualification, four interested parties submitted preliminary
indications of interest and were invited to conduct detailed due diligence,
including meetings with O'Sullivan's management, review of additional non-public
information and tours of O'Sullivan's facilities. Such due diligence occurred
during April and early May 1999. These parties were then asked to submit written
proposals setting forth the definitive terms and conditions of an offer to
acquire all of the outstanding Shares and to provide comments on a proposed form
of merger agreement. Two parties submitted formal qualifying proposals.
Following the receipt of written proposals, BHC advised the Executive
Committee (which had previously met 6 times by phone between January and May
1999 to discuss the solicitation process with BHC) that all qualified parties
expressing an interest in acquiring O'Sullivan had been afforded an equal
opportunity to evaluate O'Sullivan and submit a proposal. At the direction of
the Executive Committee, BHC held discussions with the two parties that
submitted proposals to ascertain, among other things, (a) the level of
additional due diligence required prior to executing a merger agreement, (b)
what, if any, material contingencies remained prior to executing a merger
agreement, (c) the timing necessary to resolve any remaining issues on the
merger agreement or otherwise in connection with a transaction, and (d) the
willingness to increase the value of the proposal. Based on these discussions,
the Executive Committee approved further negotiations with Geon in an effort to
modify Geon's $11.00 per Share cash proposal to a price that would be acceptable
to O'Sullivan. On May 21, 1999, Geon indicated that, subject to various
conditions, including approvals of both Boards of Directors, it would increase
the value of its proposal to $12.25 per Share. On May 24, 1999, the Executive
Committee indicated to Geon through BHC that it would submit Geon's proposal to
O'Sullivan's entire Board of Directors, subject to the negotiation of a
definitive merger agreement. Shortly thereafter, the parties began to negotiate
the Merger Agreement and Geon conducted confirmatory due diligence on several
matters.
10
<PAGE> 15
The Board of Directors of O'Sullivan met on June 1, 1999 and considered
Geon's proposal and the proposed Merger Agreement. At the meeting, the Board of
Directors reviewed the terms of the Merger Agreement and representatives of BHC
reviewed the transaction process. In addition, BHC provided an opinion to the
Board of Directors, based on various analyses and subsequently confirmed in
writing on June 2, 1999, that the consideration to be received by O'Sullivan's
shareholders was fair to O'Sullivan's shareholders from a financial point of
view. The Board of Directors thereupon, among other things, (a) determined by
unanimous vote that the proposed acquisition of O'Sullivan by Geon was fair to
and in the best interests of O'Sullivan and its shareholders, (b) authorized and
approved the Merger Agreement and the Share Tender Agreements to be entered into
by Geon and the Purchaser with Arthur H. Bryant II, Magalen O. Bryant and John
C. O. Bryant, and (c) recommended by unanimous vote that the shareholders of
O'Sullivan accept the Offer and tender their shares pursuant to the Offer.
On June 2, 1999, Geon and O'Sullivan executed the Merger Agreement and
Arthur H. Bryant II, Magalen O. Bryant and John C. O. Bryant entered into the
Share Tender Agreements.
In reaching its conclusions described above, the Board of Directors of
O'Sullivan considered a number of factors, including, without limitation, the
following:
- the opinion of BHC that as of the date of its opinion the $12.25 per
Share in cash to be received by shareholders pursuant to the Offer
and the Merger is fair to such shareholders from a financial point
of view (shareholders are urged to read such opinion, which is
attached as Annex D hereto, in its entirety);
- the presentation of BHC in connection with such opinion, as to
various financial and other considerations deemed relevant to the
Board of Directors' evaluation of the Offer and the Merger
including: (a) a review of financial and other information that was
publicly available or furnished to BHC by O'Sullivan's management;
(b) a review and analysis of current and historical market prices of
the Shares; (c) a comparison of the financial position and operating
results of O'Sullivan with those of certain publicly traded
companies which BHC deemed relevant; (d) a comparison of the
proposed financial terms of the Offer and the Merger with those of
certain other mergers and acquisitions which BHC deemed relevant;
(e) a discounted cash flow analysis of the financial forecasts
furnished to BHC by O'Sullivan's management; and (f) a premiums paid
analysis of similar public company transactions completed over the
past several years;
- the results of the extensive transaction process undertaken by BHC
to solicit proposals from third parties to acquire O'Sullivan and,
in light of the process, O'Sullivan's belief that the Offer
represented the best means available under the circumstances to
provide shareholders with attractive value and immediate liquidity
for their Shares;
- information with respect to the financial condition, results of
operations and business of O'Sullivan, on both a historical and
prospective basis, and current industry, economic and market
conditions;
- the merits of the Offer relative to other strategic alternatives
available to O'Sullivan; and
- the terms and conditions of the Offer and the Merger, including,
without limitation, the fact that, to the extent required by
fiduciary obligations of the Board of Directors to the shareholders
under the Virginia Stock Corporation Act, but subject to certain
terms and conditions including the payment of a $5 million break-up
fee, O'Sullivan could terminate the Merger Agreement in order to
approve a tender offer or exchange offer for the Shares by a third
party, or another type of business combination, on terms more
favorable to O'Sullivan's shareholders than the Offer and the
Merger.
The Board of Directors did not assign weights to the individual factors and
viewed their position and recommendation as being based on the totality of the
information presented to and considered by them.
On June 8, 1999, the Purchaser commenced the Offer. The Offer expired at
12:00 midnight, Eastern Daylight Saving Time, on July 7, 1999. As of the
expiration of the Offer, the Purchaser accepted for payment 13,715,221 Shares
(representing approximately 87.9% of the issued and outstanding Shares) validly
tendered and
11
<PAGE> 16
not withdrawn pursuant to the Offer, which number gives effect to the failure of
a number of Shares to be delivered in accordance with guaranteed delivery
procedures.
Pursuant to the Merger Agreement, on July 8, 1999, nine of the eleven
members of O'Sullivan's Board of Directors (C. Hugh Bloom, Jr., John C. O.
Bryant, Robert L. Burrus, Jr., Max C. Chapman, Jr., James T. Holland, R. Michael
McCullough, Stephen P. Munn, Timothy J. Sandker and Leighton W. Smith, Jr.)
resigned as directors and seven persons designated by the Purchaser (William F.
Patient, Thomas A. Waltermire, Donald P. Knechtges, V. Lance Mitchell, Gregory
L. Rutman, W. David Wilson and John L. Rastetter) were subsequently elected as
members of the Board of Directors. Arthur H. Bryant II and John S. Campbell
continue to serve as directors of O'Sullivan. All of the persons designated by
the Purchaser are directors and/or employees of Geon.
In addition, on July 8, 1999, the following persons were elected by
O'Sullivan's new Board of Directors to the indicated offices of O'Sullivan:
Thomas A. Waltermire (Chairman of the Board); John S. Campbell (President and
Chief Executive Officer); C. Bryant Nickerson (Chief Financial Officer,
Assistant Treasurer and Assistant Secretary); Gregory L. Rutman (Vice President,
General Counsel, Secretary and Assistant Treasurer); Jean M. Miklosko
(Treasurer); Charles P. Dylag (Director of Tax Administration); Gregory P. Smith
(Assistant Treasurer); and Woodrow W. Ban (Assistant Secretary). Other than
Messrs. Campbell and Nickerson, who were officers of O'Sullivan prior to the
completion of the Offer, each person elected is an executive officer or employee
of Geon.
OPINION OF FINANCIAL ADVISOR
O'Sullivan engaged BHC to act as its financial advisor in connection with
the Offer and the Merger. Pursuant to its agreement with O'Sullivan, BHC is
entitled to a transaction fee of approximately $1.9 million in cash at the
closing of the Merger (less $100,000 paid by O'Sullivan in connection with
O'Sullivan's retention of BHC and less $250,000 paid by O'Sullivan in connection
with the delivery by BHC of its fairness opinion to the Board). In addition,
O'Sullivan agreed to reimburse BHC periodically for its reasonable travel and
out-of-pocket expenses, including the fees and disbursements of its counsel, and
to indemnify BHC against certain expenses and liabilities incurred in connection
with its engagement, regardless of whether the Offer or the Merger were
completed.
At the meeting of O'Sullivan's Board of Directors on June 1, 1999, BHC
provided its opinion that, as of such date, based upon and subject to the
various conditions set forth in the opinion, the cash consideration to be
received by the shareholders of O'Sullivan in the Offer and the Merger is fair
to such shareholders from a financial point of view. BHC confirmed this opinion
to O'Sullivan in writing on June 2, 1999. BHC was not requested to update, and
has not updated, its opinion.
THE FULL TEXT OF BHC'S OPINION, WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, THE PROCEDURES FOLLOWED, THE MATTERS CONSIDERED AND THE
LIMITATIONS ON THE SCOPE OF THE REVIEW UNDERTAKEN BY BHC IN RENDERING ITS
OPINION, IS INCLUDED AS ANNEX D TO THIS INFORMATION STATEMENT. YOU ARE URGED TO
READ BHC'S OPINION CAREFULLY AND IN ITS ENTIRETY. BHC'S OPINION ADDRESSES ONLY
THE FAIRNESS TO THE SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW AS OF THE DATE
OF THE OPINION OF THE CASH CONSIDERATION TO BE RECEIVED BY SUCH SHAREHOLDERS IN
THE OFFER AND THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO THE
SHAREHOLDERS OF O'SULLIVAN AS TO HOW SUCH SHAREHOLDERS SHOULD VOTE WITH RESPECT
TO THE MERGER AGREEMENT. THE SUMMARY OF BHC'S OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION SET FORTH
AS ANNEX D.
In arriving at its opinion, BHC reviewed the Merger Agreement, including
the financial terms of the Merger Agreement, as well as certain historical
business, financial and other information regarding O'Sullivan that was publicly
available or furnished to BHC by O'Sullivan's management. Included in the
information provided during discussions with management were certain financial
forecasts and other data relating to O'Sullivan's business. BHC also conducted
discussions with members of O'Sullivan's management with respect to O'Sullivan's
business, financial and other information, including its business prospects and
financial forecasts, and the effects of the transactions contemplated by the
Merger Agreement. In addition, BHC reviewed the current and historical market
prices of the Shares, compared the financial position and operating results of
O'Sullivan with those of publicly traded companies that they deemed relevant,
compared the financial terms of the transactions
12
<PAGE> 17
contemplated by the Merger Agreement with certain of the financial terms of
other similar transactions that they deemed relevant, and conducted such other
financial studies, analyses and investigations that they deemed appropriate.
In the ordinary course of business, BHC and its affiliates may trade the
equity securities of O'Sullivan for their own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. BHC or its affiliates have in the past provided investment
banking, commercial banking and financial advisory services to O'Sullivan for
which services they have received compensation.
BHC, a division of First Union Capital Markets Corp. and an affiliate of
First Union Corporation, is an investment banking firm engaged in the evaluation
of businesses and their securities in connection with mergers and acquisitions,
negotiated primary and secondary underwritings, private placements and
valuations for corporate and other purposes. O'Sullivan selected BHC as its
financial advisor based upon its experience, ability and reputation with respect
to mergers and acquisitions.
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the material federal income tax consequences
of the Merger to shareholders of O'Sullivan whose Shares are converted in the
Merger into the right to receive the Merger Consideration. The discussion
applies only to shareholders of O'Sullivan holding Shares as capital assets and
may not apply to shareholders who received their Shares pursuant to the exercise
of employee stock options or otherwise as compensation, or who are not citizens
or residents of the United States.
The federal income tax consequences set forth below are included for
general informational purposes only and are based upon current law. Because
individual circumstances may differ, each shareholder should consult the
shareholder's own tax advisor to determine the applicability of the rules
discussed below to the shareholder and the particular tax effects of the Merger,
including the application and effect of state, local, foreign and other tax
laws.
Receipt of the Merger Consideration. The receipt by a shareholder of the
Merger Consideration in exchange for Shares will be a taxable transaction for
federal income tax purposes. In general, a shareholder will recognize gain or
loss equal to the difference between such shareholder's adjusted tax basis in
the Shares exchanged for cash in the Merger and the amount realized in such
exchange (i.e., generally the amount of cash received therefor). Gain or loss
will be calculated separately for each block of Shares converted in the Merger.
Such gain or loss will be capital gain or loss, which will be long-term capital
gain or loss if the shareholder's holding period for the Shares exceeds one
year.
In the case of non-corporate taxpayers, long-term capital gain will be
subject to a maximum federal income tax rate of 20%. In the case of corporate
taxpayers, long-term capital gain generally will be subject to a maximum federal
income tax rate of 35%. Generally, the deductibility of capital losses for
non-corporate taxpayers for a taxable year is limited to the amount of capital
gains for the taxable year plus $3,000. The deductibility of capital losses for
corporate taxpayers for a taxable year is limited to the amount of capital gains
for the taxable year.
Backup Withholding. Payments in connection with the Merger may be subject
to "backup withholding" at a 31% rate. Backup withholding generally applies if
the shareholder (a) fails to furnish his or her social security number or other
taxpayer identification number ("TIN"), (b) furnishes an incorrect TIN, (c) has
failed to properly report interest or dividends, or (d) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN provided is the shareholder's correct number and that the
shareholder is not subject to backup withholding. Any amounts withheld from a
payment to a shareholder under the backup withholding rules will be allowed as a
credit against such shareholder's federal income tax liability, if the required
information is provided to the Internal Revenue Service. Certain persons
generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include the reportable payments in income. Each
shareholder should consult with the shareholder's own tax advisor as to the
shareholder's qualification for exemption from withholding and the procedure for
obtaining such exemption.
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<PAGE> 18
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), certain acquisition transactions may not be completed unless
certain information has been furnished to the Federal Trade Commission (the
"FTC") and the Antitrust Division of the Department of Justice (the"Antitrust
Division") and certain waiting period requirements have been satisfied. Geon
filed a Notification and Report Form with respect to the Offer and the Merger on
June 3, 1999, and O'Sullivan filed a Notification and Report Form with respect
to the Offer and the Merger on June 4, 1999. The applicable waiting period under
the HSR Act with respect to the Offer and the Merger expired at 11:59 p.m.,
Eastern time, on June 18, 1999 without such waiting period being extended by the
FTC or the Antitrust Division. O'Sullivan is not aware of any federal, state or
foreign regulatory requirement that remains to be complied with in order to
complete the Merger.
The FTC and the Antitrust Division frequently scrutinize the legality under
the U.S. antitrust laws of transactions such as Geon's acquisition of
O'Sullivan. At any time, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the completion of the Merger or seeking
the divestiture of Shares acquired by the Purchaser or the divestiture of
substantial assets of Geon or its subsidiaries, or O'Sullivan or its
subsidiaries. Private parties and state attorneys general may also bring legal
action under certain circumstances. There can be no assurance that a challenge
to the Merger on antitrust grounds will not be made or, if such a challenge is
made, of the result thereof.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
EMPLOYEE AND DIRECTOR STOCK OPTIONS
Pursuant to the Merger Agreement, at the effective time of the Merger each
outstanding option to acquire Shares granted under O'Sullivan's 1995 Stock
Option Plan, 1995 Outside Directors Stock Option Plan and 1985 Incentive Stock
Option Plan to the directors, officers and other employees of O'Sullivan,
whether or not vested or exercisable, will be converted into the right to
receive from Geon a cash payment per option equal to the amount by which the
Merger Consideration exceeds the exercise price of the option. See "The Merger
Agreement -- Stock Option and Other Plans."
The pre-Offer nonemployee directors of O'Sullivan currently hold the
following number of options with the indicated weighted average exercise prices:
C. Hugh Bloom, Jr. (14,000 at $10.083); Arthur H. Bryant II (14,000 at $10.083);
John C. O. Bryant (11,000 at $9.568); Robert L. Burrus, Jr. (14,000 at $10.083);
Max C. Chapman, Jr. (14,000 at $10.083); James T. Holland (11,000 at $8.764); R.
Michael McCullough (14,000 at $10.083); Stephen P. Munn (14,000 at $10.083);
Timothy J. Sandker (12,000 at $9.713); and Leighton W. Smith, Jr. (12,000 at
$8.359).
The pre-Offer officers of O'Sullivan currently hold the following number of
options with the indicated weighted average exercise prices: John S. Campbell
(76,802 at $8.576); C. Bryant Nickerson (21,560 at $9.893); William O. Bauserman
(6,000 at $10.698); Ewen A. Campbell (11,116 at $10.106); John P. Crowther
(2,310 at $10.245); James L. Tremoulis (15,700 at $9.473); and Robert C.
Westfall (11,500 at $10.587). The pre-Offer officers and all other employees of
O'Sullivan together currently hold 171,242 options with a weighted average
exercise price of $9.418.
EMPLOYEE BENEFIT PLANS; SALARY CONTINUATION AGREEMENTS
Geon has agreed in the Merger Agreement to provide the employees of
O'Sullivan and its subsidiaries, for a period of at least two years, with
benefits no less favorable than those in the aggregate provided by Geon and its
subsidiaries as of the effective time of the Merger. Geon has also agreed that
it will honor all employee benefit obligations of O'Sullivan existing at the
effective time of the Merger, including the salary continuation agreements
between O'Sullivan and its officers and 36 other employees. See "The Merger
Agreement."
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<PAGE> 19
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
The summary is qualified in its entirety by reference to the Merger Agreement, a
copy of which is attached to this Information Statement as Annex C.
The Tender Offer. Pursuant to the terms of the Merger Agreement and subject
to a number of conditions to the Offer (the "Offer Conditions"), the Purchaser
agreed to commence the Offer as promptly as practicable but within five business
days after the public announcement of the execution of the Merger Agreement. The
obligation of the Purchaser to complete the Offer and to accept for payment and
promptly to pay for the Shares tendered in the Offer was subject only to the
Offer Conditions, which included, among other things, there being validly
tendered and not withdrawn a number of Shares which constituted at least seventy
percent (70%) of the Shares outstanding. In accordance with these terms, the
Purchaser commenced the Offer on June 8, 1999 and, when Offer expired on July 7,
1999, purchased all of the Shares validly tendered and not withdrawn.
In the Merger Agreement, O'Sullivan consented to the Offer and the Merger
and represented that (a) its Board of Directors (at a meeting duly called and
held) (i) determined by the unanimous vote of the directors that each of the
Offer and the Merger is fair to and in the best interests of the holders of
Shares, (ii) approved the Offer, the Merger, the Merger Agreement and the Share
Tender Agreements, (iii) recommended acceptance of the Offer and approval and
adoption of the Merger Agreement by the shareholders of O'Sullivan, and (iv)
took all other action necessary to render Articles 14 and 14.1 of the Virginia
Stock Corporation Act inapplicable to the Offer and the Merger; and (b) BHC
delivered to the Board of Directors of O'Sullivan its opinion that the
consideration to be received by the holders of Shares pursuant to the Offer and
the Merger is fair to the holders of Shares from a financial point of view,
subject to the usual and customary assumptions and qualifications contained in
such opinion.
Board Designees. The Merger Agreement provides that promptly upon the
acceptance for payment of and payment by the Purchaser in accordance with the
Offer for at least seventy percent (70%) of the outstanding Shares pursuant to
the Offer (the "Offer Closing"), the Purchaser would be entitled to designate
such number of directors on the Board of Directors of O'Sullivan, rounded up to
the next whole number, as would give the Purchaser, subject to compliance with
Section 14(f) of the Securities Exchange Act of 1934, as amended, representation
on such Board of Directors equal to at least that number of directors which
equals the product of the total number of directors on the Board of Directors
(giving effect to the directors elected pursuant to this sentence) multiplied by
the percentage that such number of Shares so accepted for payment and paid for
or otherwise acquired or owned by the Purchaser or Geon bears to the number of
Shares outstanding. O'Sullivan agreed that its Board of Directors would, at such
time, take any and all actions needed to cause the Purchaser's designees to be
appointed to O'Sullivan's Board of Directors (including causing directors to
resign). In accordance with these provisions, on July 8, 1999, nine of the
eleven members of O'Sullivan's Board of Directors resigned as directors, and
seven persons designated by the Purchaser were appointed as members of such
Board of Directors. O'Sullivan also agreed that it would, as of the Offer
Closing, if so requested by Geon or the Purchaser, use its reasonable efforts to
cause persons designated by the Purchaser to constitute the same percentage of
each committee of such board, each board of directors of each subsidiary of
O'Sullivan and each committee of each such board (in each case to the extent of
O'Sullivan's ability to elect such persons).
Geon, the Purchaser and O'Sullivan agreed that they would, at all times
before the effective time of the Merger (the "Effective Time"), use their
reasonable efforts to ensure that at least two members of O'Sullivan's Board of
Directors, as constituted on the date of the Merger Agreement, remain on
O'Sullivan's Board of Directors, except to the extent that no such individuals
or their appointees agree to serve as directors (the "Continuing Directors"). In
the event that one or more Continuing Directors resigns from O'Sullivan's Board
of Directors, Geon, the Purchaser and O'Sullivan would permit the remaining, or
in the case of the resignation of all Continuing Directors, the resigning,
Continuing Director(s) to appoint his or their successors in his or their
reasonable discretion.
Following the election or appointment of the Purchaser's designees to
O'Sullivan's Board of Directors and prior to the Effective Time, and so long as
there shall be at least one Continuing Director, the approval of a
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majority of the Continuing Directors is required to authorize any termination of
the Merger Agreement by O'Sullivan, any amendment of the Merger Agreement
requiring action by O'Sullivan's Board of Directors, any extension of time for
the performance of any of the obligations or other acts of Geon or the Purchaser
under the Merger Agreement and any waiver of compliance with any of the
covenants, agreements or conditions under the Merger Agreement for the benefit
of O'Sullivan.
The Merger. Pursuant to the terms of the Merger Agreement, the Purchaser
will be merged with and into O'Sullivan in accordance with the Virginia Stock
Corporation Act. As a result of the Merger, the separate existence of the
Purchaser will cease and O'Sullivan will continue as the surviving corporation
under the name of "O'Sullivan Corporation" (the "Surviving Corporation"). After
satisfaction or waiver of all conditions to the Merger set forth in the Merger
Agreement, Articles of Merger shall be filed with the Virginia State Corporation
Commission. The Merger will become effective upon the issuance of a Certificate
of Merger by the Virginia State Corporation Commission.
By virtue of the Merger, at the Effective Time: (a) each share of common
stock of the Purchaser then issued and outstanding will be converted into one
share of common stock of the Surviving Corporation; and (b) each Share then
issued and outstanding (other than any Shares which are held by O'Sullivan as
treasury shares or otherwise or, directly or indirectly, by Geon or any direct
or indirect subsidiary of Geon, including the Purchaser, all of which shall be
canceled and none of which shall receive any payment with respect thereto) will
be converted, by virtue of the Merger and without any action on the part of the
holder thereof, into the right to receive the Merger Consideration. After the
Effective Time, each holder of a certificate representing any Shares shall cease
to have any rights as a shareholder of O'Sullivan, except for the right to
receive the Merger Consideration therefor, and no transfer of Shares shall be
made on the stock transfer books of the Surviving Corporation. The articles of
incorporation and by-laws of the Purchaser in effect immediately prior to the
Effective Time shall be the articles of incorporation and by-laws of the
Surviving Corporation after the completion of the Merger, until amended in
accordance with applicable law. The directors and officers of the Purchaser
immediately prior to the Effective Time shall be the directors and officers of
the Surviving Corporation after the completion of the Merger, until their
successors are duly elected or appointed and qualified in accordance with
applicable law.
Stock Option and Other Plans. The Merger Agreement provides that each
outstanding stock option to purchase Shares (an "Option") heretofore granted
under O'Sullivan's 1995 Stock Option Plan, 1995 Outside Directors Stock Option
Plan or 1985 Incentive Stock Option Plan or any other employee, director or
other stock option plan now or formerly maintained by O'Sullivan (collectively,
the "Option Plans"), whether or not vested or exercisable, shall be deemed to be
canceled immediately prior to the Effective Time and shall no longer be
exercisable for the purchase of Shares. The holder of each Option shall receive
a payment in cash (subject to any applicable withholding taxes) at the Effective
Time (the "Cash Payment") equal to the product of (x) the total number of Shares
subject to such Option, whether or not then vested or exercisable, and (y) the
excess, if any, of the Merger Consideration over the exercise price per Share
subject to such Option. The Option Plans and any other plan, program or
arrangement providing for the issuance or grant of any other interest in respect
of the capital stock of O'Sullivan or any subsidiary shall be terminated by
O'Sullivan effective as of the Effective Time. O'Sullivan will take all steps to
ensure that neither O'Sullivan nor any of its subsidiaries is or will be bound
by any Options or other options, warrants, rights or agreements which would
entitle any person or entity, other than Geon or its affiliates, to own any
capital stock of the Surviving Corporation or any of its subsidiaries or to
receive any payment in respect thereof.
Representations and Warranties of O'Sullivan. In the Merger Agreement,
O'Sullivan made customary representations and warranties to Geon and the
Purchaser, including, but not limited to, representations and warranties
relating to the following: the organization, good standing and corporate power
of O'Sullivan and its subsidiaries; the authority of O'Sullivan to enter into
and perform its obligations under the Merger Agreement; the capitalization of
O'Sullivan; consents and approvals required in connection with the Merger
Agreement; filings made by O'Sullivan with the Securities and Exchange
Commission; the accuracy of O'Sullivan's financial statements; the absence of
material changes or developments since December 31, 1998; O'Sullivan's
possession of and compliance with all material permits required by its business;
pending and threatened litigation; labor and
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<PAGE> 21
employee benefit matters; filing of tax returns and payment of taxes; material
liabilities; broker's and finder's fees; compliance with environmental laws and
regulations; state anti-takeover statutes and O'Sullivan's lack of a shareholder
rights plan; opinion of a financial advisor; material contracts; vote required
for the Merger; real and personal property; intellectual property rights;
insurance; inventory; and computer software and databases and "Year 2000"
compliance.
Representations and Warranties of Geon and the Purchaser. Geon and the
Purchaser also made customary representations and warranties in the Merger
Agreement, including, but not limited to, representations and warranties
relating to the following: the organization, good standing and corporate power
of Geon and the Purchaser; the authority of Geon and the Purchaser to enter into
and perform their obligations under the Merger Agreement; consents and approvals
required in connection with the Merger Agreement; broker's and finder's fees;
availability of sufficient funds to complete the Offer and the Merger; lack of
ownership of any Shares as of the date of the Merger Agreement; and the
formation of the Purchaser solely to complete the Offer and the Merger.
Conduct of O'Sullivan Pending the Effective Time. O'Sullivan agreed that it
and each of its subsidiaries would, except as contemplated or permitted by the
Merger Agreement or otherwise approved in writing in advance by Geon, from the
date of the Merger Agreement until the Effective Time, conduct their respective
operations in the ordinary and usual course of business consistent with past
practice and use their reasonable best efforts to preserve intact their
respective business organizations, keep available the services of their officers
and employees and maintain satisfactory relationships with licensors, suppliers,
distributors, clients and others having business relationships with them.
O'Sullivan agreed that neither it nor any of its subsidiaries would, from
the date of the Merger Agreement until the Effective Time: (a) make any change
in its articles of incorporation or by-laws; (b) issue or sell any shares of its
capital stock (other than in connection with the exercise of Options outstanding
on the date hereof) or any of its other securities, or issue any securities
convertible into, or options, warrants or rights to purchase or subscribe to, or
enter into any arrangement or contract with respect to the issuance or sale of,
any shares of its capital stock or any of its other securities, or make any
other changes in its capital structure; (c) sell or pledge or agree to sell or
pledge any stock owned by it in any of its subsidiaries; (d) except for regular
quarterly dividends, declare, pay, set aside or make any dividend or other
distribution or payment with respect to, or split, combine, redeem or
reclassify, any shares of its capital stock; (e) enter into any contract or
commitment with respect to capital expenditures in excess of $1 million or enter
into any other material contract except contracts in the ordinary course of
business, it being understood that O'Sullivan shall be permitted to make all
capital expenditures contemplated in its 1999 capital expenditure budget; (f)
release or relinquish any material contract rights other than in the ordinary
course of business; (g) adopt, enter into or amend in any material respect any
employee benefit plan or non-employee benefit plan or program, employment
agreement, severance agreement, stay-in-place bonus agreement, license agreement
or retirement agreement or, except in the ordinary course of business and
consistent with past practice or as required under any employee benefit plan,
contract, agreement or arrangement listed in the schedules to the Merger
Agreement, pay or commit to pay any bonus or contingent or other extraordinary
compensation to any employee or director or increase in any manner the
compensation or fringe benefits payable to any employee or director; (h) merge,
consolidate or enter into a share exchange with any person or entity, acquire a
material amount of capital stock or assets of any person or entity, or sell,
lease, license, mortgage, pledge or otherwise dispose of a material amount of
assets to any person or entity, except for the purchase or sale of inventory in
the ordinary course of business consistent, in all material respects, with past
practice; (i) other than in the ordinary course of business, transfer, lease,
license, guarantee, sell, mortgage, pledge, dispose of, encumber or subject to
any lien any assets or incur or modify any indebtedness or other liability or
issue any debt securities or assume, guarantee or endorse or otherwise as an
accommodation become responsible for the obligations of any person or entity;
(j) agree to the settlement of any material claim or litigation; (k) make any
material tax election or settle or compromise any material tax liability; (l)
make any material change in its method of accounting; (m) agree, in writing or
otherwise, to take any of the foregoing actions; (n) take any action, engage in
any transaction or enter into any agreement which would cause any of
O'Sullivan's representations or warranties set forth in the Merger Agreement to
be untrue as of the Closing Date; or (o) purchase or acquire, or offer to
purchase or acquire, any Shares.
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Reasonable Best Efforts. O'Sullivan, Geon and the Purchaser agreed that
they would, and would cause each of their subsidiaries to, subject to the terms
and conditions of the Merger Agreement, cooperate and use their respective
reasonable best efforts to take, or cause to be taken, all appropriate action
and to make, or cause to be made, all filings necessary, proper or advisable
under applicable laws and regulations to complete and make effective the
transactions contemplated by the Merger Agreement, including, without
limitation, their respective reasonable best efforts to obtain, prior to the
Effective Time, all licenses, permits, consents, approvals, authorizations,
qualifications and orders of governmental authorities and parties to contracts
with O'Sullivan and its subsidiaries as are necessary for the completion of the
transactions contemplated by the Merger Agreement and to fulfill the conditions
to the Offer and the Merger. O'Sullivan, Geon and the Purchaser agreed that they
would use their reasonable efforts to complete the Merger as promptly as
practicable after the closing of the Offer.
Special Meeting of Shareholders; Information Statement. O'Sullivan agreed
that it would, promptly after the expiration or termination of the Offer, if
required to complete the Merger, call a special meeting of shareholders, in
accordance with applicable law, for the purpose of voting upon the Merger
Agreement and the Merger. O'Sullivan agreed that it would, subject to the
provisions of the Merger Agreement governing Acquisition Proposals, include in
the information statement prepared in connection with the special meeting of
shareholders the recommendation of its Board of Directors that shareholders
approve and adopt the Merger Agreement and approve the Merger. Geon agreed that
it would cause all Shares owned by Geon and its subsidiaries to be voted in
favor of the Merger.
No Solicitation of Other Offers. O'Sullivan agreed that, from the date of
the Merger Agreement until the Effective Time or the earlier termination of the
Merger Agreement, neither O'Sullivan nor any of its subsidiaries would, directly
or indirectly, take (and O'Sullivan would not authorize or permit the officers,
directors, employees, representatives, consultants, investment bankers,
attorneys, accountants or other agents or affiliates of O'Sullivan or its
subsidiaries to so take) any action to (a) solicit, initiate, encourage or take
any other action to facilitate the submission of any Acquisition Proposal, or
(b) participate in any way in discussions or negotiations with or furnish any
information (whether public or nonpublic) to any person or entity (other than
Geon or the Purchaser) in connection with an Acquisition Proposal; provided,
however, that O'Sullivan could take any action described in clause (b) above, if
(i) such action is taken in connection with an unsolicited Acquisition Proposal,
(ii) the Board of Directors believes in its good faith judgment (based on the
advice of its financial and legal advisors) that failing to take such action
would constitute a breach of its fiduciary duties, and (iii) in the case of the
disclosure of nonpublic information relating to O'Sullivan in connection with an
Acquisition Proposal, the disclosure of such information would be covered by a
confidentiality agreement that provides substantially the same protection to
O'Sullivan as is afforded by the confidentiality agreement entered into between
Geon and O'Sullivan in connection with the transactions contemplated by the
Merger Agreement.
O'Sullivan agreed that neither it nor its Board of Directors nor any
committee thereof would withdraw or modify in a manner adverse to Geon or the
Purchaser the approval and recommendation of the Offer and the Merger Agreement
or approve or recommend any Acquisition Proposal, provided that the Board of
Directors (or a committee thereof) could, prior to the acceptance for payment of
Shares pursuant to the Offer, recommend to its shareholders an unsolicited
Acquisition Proposal and in connection therewith withdraw or modify its approval
or recommendation of the Offer or the Merger if (a) the Board of Directors of
O'Sullivan determined in its good faith judgment (based on the advice of its
financial and legal advisors) that the unsolicited Acquisition Proposal was a
Superior Proposal, and (b) simultaneously with such withdrawal, modification or
recommendation, O'Sullivan terminated the Merger Agreement and paid to Geon the
Break-up Fee (as defined below). Geon and O'Sullivan agreed that any actions
taken by O'Sullivan or its subsidiaries or their officers, directors, employees,
representatives, consultants, investment bankers, attorneys, accountants or
other agents or affiliates prior to the date of the Merger Agreement in
soliciting, encouraging, initiating, facilitating or participating in any
discussions relating to any Acquisition Proposal would not be construed to
render an Acquisition Proposed received after the date hereof a solicited
Acquisition Proposal.
O'Sullivan agreed that it would promptly notify Geon orally and in writing
of any Acquisition Proposal or any inquiries with respect thereto. Any such
written notification would include the identity of the person or entity
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making such inquiry or Acquisition Proposal and a description of the material
terms of such Acquisition Proposal (or the nature of the inquiry) and would
indicate whether O'Sullivan was providing or intended to provide the person or
entity making the Acquisition Proposal with access to nonpublic information
relating to O'Sullivan or any of its subsidiaries. O'Sullivan would, to the
extent reasonably practicable, also promptly inform Geon of any material change
in the details (including amendments or proposed amendments) of any such inquiry
or Acquisition Proposal. In the event that the Board of Directors of O'Sullivan
determined that an Acquisition Proposal was a Superior Proposal and desired to
terminate the Merger Agreement, it would give Geon written notice of its
intention to terminate the Merger Agreement no later than three business days in
advance of any date that it intended to terminate the Merger Agreement. During
that three business day period, Geon would have the right, by giving written
notice to O'Sullivan, to match the terms of such Superior Proposal. If Geon
notified O'Sullivan within such three business day period that it agreed to
match the terms of the Superior Proposal, O'Sullivan would forthwith cease any
discussion with the person or entity making the Superior Proposal, and Geon and
O'Sullivan would promptly incorporate the terms of the Superior Proposal into
the Merger Agreement, which except for such amendments would remain in full
force and effect.
"Acquisition Proposal" means any proposal or offer from any person or
entity relating to any direct or indirect acquisition or purchase of a
substantial amount of assets of O'Sullivan or any of its subsidiaries (other
than investors in the ordinary course of business) or of over 20% of any class
of equity securities of O'Sullivan or any of its subsidiaries or any tender
offer or exchange offer that if completed would result in any person or entity
beneficially owning more than 20% of any class of equity securities of
O'Sullivan or any of its subsidiaries, or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving O'Sullivan and taken as a whole its
subsidiaries other than the transactions contemplated by the Merger Agreement.
"Superior Proposal" means a bona fide Acquisition Proposal on terms which a
majority of the members of the Board of Directors of O'Sullivan determines in
its good faith judgment (based on the advice of its financial and legal
advisors) to be more favorable to O'Sullivan and its shareholders than the
transactions contemplated by the Merger Agreement.
The parties have agreed that nothing contained in the Merger Agreement
would prohibit O'Sullivan from taking and disclosing to its shareholders a
position contemplated by Rule 14e-2(a) promulgated under the Securities Exchange
Act of 1934, as amended, or from making any disclosure to O'Sullivan's
shareholders if, in the opinion of the Board of Directors of O'Sullivan, after
consultation with counsel, failure to so disclose would be inconsistent with its
fiduciary duties to O'Sullivan's shareholders under applicable law; provided
that O'Sullivan does not, except as permitted above, withdraw or modify, or
propose to withdraw or modify, its position with respect to the Offer or the
Merger or approve or recommend, or propose to approve or recommend, any
Acquisition Proposal.
Indemnification of O'Sullivan's Directors and Officers. The parties agreed
in the Merger Agreement that the articles of incorporation and by-laws of the
Surviving Corporation would contain the provisions with respect to
indemnification and exculpation from liability set forth in O'Sullivan's Amended
and Restated Articles of Incorporation, as amended, and By-Laws on the date of
the Merger Agreement, which provisions are not to be amended, repealed or
otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who on
or prior to the Effective Time were directors, officers, employees or agents of
O'Sullivan, unless such modification is required by law.
Geon agreed that it will, for a period of six years from the Effective
Time, either (a) maintain in effect O'Sullivan's current directors' and
officers' liability insurance covering those persons who are currently covered
on the date of the Merger Agreement by O'Sullivan's directors' and officers'
liability insurance policy (the "Indemnified Parties"); provided that Geon will
not be required to expend in any one year an amount in excess of 200% of the
annual premiums paid by O'Sullivan for such insurance at the time of the Merger
Agreement (in which case Geon shall be obligated to obtain a policy with the
greatest coverage available for a cost not exceeding such amount); and provided
further that Geon may substitute for such policies, policies with at least the
same coverage containing terms and conditions which are no less advantageous, if
said substitution does not result in any gaps or lapses in coverage with respect
to matters occurring prior to the Effective Time, or (b) cause Geon's directors'
and officers' liability insurance to cover those persons who are covered on the
date of the Merger
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Agreement by O'Sullivan's directors' and officers' liability insurance policy
with respect to those matters covered by O'Sullivan's directors' and officers'
liability policy.
Geon has agreed that it will, from and after the date of purchase of Shares
pursuant to the Offer, indemnify all Indemnified Parties to the fullest extent
permitted by applicable law with respect to all acts and omissions arising out
of such individuals' services as officers, directors, employees or agents of
O'Sullivan or any of its subsidiaries or as trustees or fiduciaries of any plan
for the benefit of employees, or otherwise on behalf of O'Sullivan or any of its
subsidiaries, occurring prior to the Effective Time, including, without
limitation, in connection with the transactions contemplated by the Merger
Agreement. Without limitation of the foregoing, in the event that any such
Indemnified Party is or becomes involved in any capacity in any action,
proceeding or investigation in connection with any matter, including, without
limitation, the transactions contemplated by the Merger Agreement, occurring
prior to, and including, the Effective Time, Geon, from and after the date of
purchase of Shares pursuant to the Offer, will pay as incurred such Indemnified
Party's legal and other expenses (including the cost of any investigation and
preparation) incurred in connection therewith.
Employee Benefits. Geon agreed that, during the period commencing at the
Effective Time and ending on the second anniversary thereof, the employees (and
former employees) of O'Sullivan and its subsidiaries will continue to be
provided with employee benefits and benefit plans no less favorable in the
aggregate than those provided by O'Sullivan and its subsidiaries as of the
Effective Time. Geon will, and will cause the Surviving Corporation to, honor
employee (or former employee) benefit obligations and contractual rights
existing as of the Effective Time and all employment, incentive and deferred
compensation or severance agreements, plans or policies adopted by the Board of
Directors of O'Sullivan (or any committee or subcommittee thereof) prior to the
date of the Merger Agreement in accordance with their terms, in each case to the
extent disclosed in the schedules to the Merger Agreement. Geon will provide
employees of O'Sullivan and its subsidiaries with credit for service with
O'Sullivan or any of its subsidiaries or predecessors prior to the Effective
Time for purposes of determining eligibility to participate, vesting, benefits
and benefit accrual under any employee benefit plans of Geon or its
subsidiaries. Employees of O'Sullivan and its subsidiaries shall not be subject
to pre-existing condition limitations, proof of insurability requirements or any
similar conditions or requirements under health benefit plans maintained by Geon
or its subsidiaries that would delay commencement of an employee's participation
in, or limit an employee's level of coverage under, any of the health benefit
plans of Geon or its subsidiaries.
Geon also agreed that, provided that the Board of Directors of O'Sullivan
has taken action to eliminate the requirement that the Trust Agreement for
O'Sullivan Corporation Salary Continuation Agreements, with First Union National
Bank as trustee and dated as of November 18, 1997 (the "Salary Continuation
Agreements Trust"), be fully funded for all current benefit obligations upon a
change of control of O'Sullivan, the Surviving Corporation will, from and after
the Effective Time, assume and fully discharge, and Geon will guarantee the
performance of, all obligations of O'Sullivan (and the Surviving Corporation)
under the salary continuation agreements listed on Appendix A of the Salary
Continuation Agreements Trust or on the schedules to the Merger Agreement. Geon,
O'Sullivan and their subsidiaries (including the Surviving Corporation) will not
amend or terminate any of such salary continuation agreements at any time, will
continue to make sufficient cash deposits into the Salary Continuation
Agreements Trust to permit the trustee to pay all premiums required to be paid
pursuant to life insurance contracts held in the Salary Continuation Agreements
Trust and will not directly or indirectly take any action that would in any way
diminish or reduce the cash surrender value of such life insurance contracts
(including, but not limited to, borrowing against the cash surrender value of
the life insurance contracts).
Conditions to the Merger. The parties agreed that the respective
obligations of Geon and the Purchaser, on the one hand, and O'Sullivan, on the
other hand, to effect the Merger are subject to the satisfaction or waiver
(subject to applicable law) at or prior to the Effective Time of each of the
following conditions: (a) to the extent required by applicable law or
O'Sullivan's Amended and Restated Articles of Incorporation, as amended, the
Merger Agreement and the Merger shall have been approved and adopted by holders
of at least seventy percent (70%) of the Shares; (b) any waiting period (and any
extension thereof) under the HSR Act applicable to the Merger shall have expired
or been terminated; (c) no preliminary or permanent injunction or other order
shall have been issued by any court or by any governmental or regulatory agency,
body or authority which prohibits the
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completion of the Offer or the Merger and the transactions contemplated by the
Merger Agreement; provided, however, that in the case of a decree, injunction or
other order, each of the parties shall have used reasonable efforts to prevent
the entry of any such injunction or other order and to appeal as promptly as
possible any decree, injunction or other order that may be entered; (d) the
Purchaser shall have accepted for payment and paid for the Shares tendered
pursuant to the Offer; and (e) no statute, rule, regulation, executive order,
decree or order of any kind shall have been enacted, entered, promulgated or
enforced by any court or governmental authority which prohibits the completion
of the Offer or the Merger or has the effect of making the purchase of Shares
illegal.
Termination. The Merger Agreement provides that it may be terminated and
the transactions contemplated thereby may be abandoned at any time prior to the
Effective Time, whether before or after approval of the Merger by O'Sullivan's
shareholders: (a) by mutual written consent of O'Sullivan, on the one hand, and
of Geon and the Purchaser, on the other hand; (b) by either Geon or O'Sullivan
if any governmental or regulatory agency shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or otherwise
prohibiting the acceptance for payment of, or payment for, Shares pursuant to
the Offer or the Merger and such order, decree or ruling or other action shall
have become final and nonappealable; (c) by either Geon or O'Sullivan if the
Effective Time shall not have occurred within six months after commencement of
the Offer unless the Effective Time shall not have occurred because of a
material breach of any representation, warranty, obligation, covenant, agreement
or condition set forth in the Merger Agreement on the part of the party seeking
to terminate the Merger Agreement; (d) by Geon or O'Sullivan if the Offer is
terminated or expires in accordance with its terms without the Purchaser having
purchased any Shares thereunder due to a failure of any of the Offer Conditions
to be satisfied, unless such termination or expiration has been caused by or
results from the failure of the party seeking to terminate the Merger Agreement
to perform in any material respect any of its respective covenants or agreements
contained in the Merger Agreement; (e) subject to the payment of the Break-up
Fee (as defined below), by either Geon or O'Sullivan if the Board of Directors
of O'Sullivan has determined that an Acquisition Proposal would result in a
Superior Proposal and the Board believes (and has been advised by counsel) that
a failure to terminate the Merger Agreement and enter into an agreement to
effect the Superior Proposal would constitute a breach of its fiduciary duties;
(f) prior to the completion of the Offer, by O'Sullivan, if any of the
representations and warranties of Geon or the Purchaser contained in the Merger
Agreement were untrue or incorrect in any material respect when made or have
since become, and at the time of termination remain, incorrect in any material
respect, or Geon or the Purchaser shall have breached or failed to comply in any
material respect with any of their respective obligations, covenants or
agreements under the Merger Agreement, including, without limitation, their
obligation to commence the Offer within the time period required by the Merger
Agreement; and (g) by O'Sullivan, if Geon or the Purchaser shall have terminated
the Offer prior to the closing of the Offer, the Offer is terminated or expires
without the Purchaser having purchased any Shares, or the Purchaser or Geon
fails to purchase validly tendered Shares in violation of the terms and
conditions of the Offer or the Merger Agreement.
In the event of the termination of the Merger Agreement by O'Sullivan, Geon
or the Purchaser in accordance with the immediately preceding paragraph, written
notice of such termination is required to forthwith be given to the other party
or parties specifying the provision of the Merger Agreement pursuant to which
such termination is made, and the Merger Agreement shall become void and have no
effect, and there shall be no liability thereunder on the part of Geon, the
Purchaser or O'Sullivan, except that the provisions of the Merger Agreement
relating to confidentiality, the Break-up Fee (as defined below), fees and
expenses, and termination shall survive any termination of the Merger Agreement.
Fees and Expenses. The Merger Agreement provides that all costs and
expenses incurred in connection with the Merger Agreement and the completion of
the transactions contemplated by the Merger Agreement will be paid by the party
incurring the costs and expenses.
Break-up Fee. The parties agreed that if (a) the Merger Agreement is
terminated by O'Sullivan because the Board of Directors of O'Sullivan has
determined that an Acquisition Proposal would result in a Superior Proposal and
the Board of Directors believes (and has been advised by counsel) that a failure
to terminate the Merger Agreement and enter into an agreement to effect the
Superior Proposal would constitute a breach of its fiduciary duties, (b) the
Board of Directors of O'Sullivan has failed to recommend, withdraws, modifies or
changes its
21
<PAGE> 26
recommendation of the Offer or the Merger in any respect adverse to Geon or the
Purchaser, or has resolved to do so, for any reason other than a breach by Geon
or the Purchaser in any material respect of its representations or warranties
contained in the Merger Agreement or a failure by Geon or the Purchaser to
perform in any material respect any of its covenants or agreements contained in
the Merger Agreement, or (c) prior to the purchase of Shares by the Purchaser,
O'Sullivan has violated its obligations with respect to Acquisition Proposals in
any material respect and thereafter enters into an agreement to effect a
Superior Proposal, then O'Sullivan shall pay Geon a fee of $5 million. Payment
of the $5 million by O'Sullivan shall be the exclusive remedy of Geon and the
Purchaser for any of the matters referred to in clauses (a), (b) or (c) of this
paragraph.
Waiver. The parties agreed in the Merger Agreement that they could, subject
to the provisions of the Merger Agreement relating to the timing of the Offer,
at any time prior to the Effective Time, by action taken in writing by or on
behalf of their respective Boards of Directors (a) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(b) waive any inaccuracies in the representations and warranties contained in
the Merger Agreement by any other applicable party or in any document,
certificate or writing delivered pursuant to the Merger Agreement by any other
applicable party, or (c) waive compliance with any of the agreements or
conditions contained therein.
THE SHARE TENDER AGREEMENTS
In connection with the execution of the Merger Agreement, Geon and the
Purchaser entered into the Share Tender Agreements with Arthur H. Bryant II,
Magalen O. Bryant and John C. O. Bryant (the "Bryants"), who prior to the
completion of the Offer together controlled approximately 26% of the Shares.
Pursuant to the Share Tender Agreements, each of the Bryants separately agreed
to, among other things, tender all of the Shares controlled by them into the
Offer. The following is a summary of the material terms of the Share Tender
Agreements and is qualified in its entirety by reference to the copies of the
Share Tender Agreements included as exhibits to the Schedule 14D-1 Tender Offer
Statement filed with the Securities and Exchange Commission by Geon and the
Purchaser with respect to the Offer, which can be obtained in the manner
provided under "Available Information" below.
Tender of Shares. The Bryants agreed to validly tender (and not withdraw),
or cause the record owner of such Shares to validly tender (and not withdraw),
and sell pursuant to and in accordance with the terms of the Offer all of the
Shares controlled by them, subject to the terms and conditions of the Merger
Agreement.
Transfer of Shares. The Bryants agreed that, during the term of the Share
Tender Agreements, they would not (a) tender into any tender or exchange offer
(other than the Offer) or otherwise sell, transfer, pledge, assign, hypothecate
or otherwise dispose of, or encumber with any encumbrance, any of the Shares
controlled by them, (b) exercise any of the options to acquire Shares held by
them (except to the extent permitted under the Merger Agreement), (c) deposit
the Shares controlled by them into a voting trust, enter into a voting agreement
or arrangement with respect to such Shares or grant any proxy or power of
attorney with respect to such Shares, or (d) enter into any contract, option or
other arrangement or undertaking with respect to the direct or indirect
acquisition, sale, transfer, pledge, assignment, hypothecation or other
disposition of any interest in or the voting of any Shares or any other
securities of O'Sullivan.
Voting of Shares. The Bryants agreed, so long as the Share Tender
Agreements remain in effect, to vote all of the Shares controlled by them (a) in
favor of the approval and adoption of the Merger Agreement and the approval of
the transactions contemplated thereby and (b) against any action or agreement
that would result in a breach of any representation, warranty, covenant or
agreement of O'Sullivan contained in the Merger Agreement or would impede,
interfere with, delay or prevent the completion of the Merger or the purchase of
Shares pursuant to the Offer; provided that this provision would not prevent
Arthur H. Bryant II or John C. O. Bryant from exercising their fiduciary duties
as directors of O'Sullivan, including with respect to the provisions of the
Merger Agreement governing Acquisition Proposals.
22
<PAGE> 27
No Solicitation. The Bryants agreed that they would not, directly or
indirectly, through any agent, financial advisor, attorney, accountant or other
representative or otherwise, (a) solicit, initiate or take any other action to
facilitate any inquiries or the making of any proposal which constitutes an
Acquisition Proposal, (b) participate in any discussions or negotiations
regarding any Acquisition Proposal, (c) in connection with an Acquisition
Proposal, disclose any nonpublic information relating to O'Sullivan or afford
access to the properties, books or records of O'Sullivan to any person, or (d)
otherwise cooperate in any way with, assist, participate in, facilitate or
encourage any effort or attempt by any other person or entity to make an
Acquisition Proposal; provided that this provision would not prevent Arthur H.
Bryant II or John C. O. Bryant from exercising their fiduciary duties as
directors of O'Sullivan, including with respect to the provisions of the Merger
Agreement governing Acquisition Proposals.
Termination. The Share Tender Agreements terminated automatically upon the
purchase by the Purchaser of all of the Shares controlled by the Bryants
pursuant to the Offer.
FINANCIAL ARRANGEMENTS OF GEON
The total amount of funds required by the Purchaser to purchase the
13,715,221 Shares tendered pursuant to the Offer was approximately $168.0
million. The Purchaser obtained all of the funds needed to purchase such
tendered Shares through a capital contribution from Geon.
Geon obtained the funds for such capital contribution through a combination
of cash on hand and borrowings under its existing revolving credit facilities
which are provided under two separate Credit Agreements, dated August 16, 1994,
as amended, and May 27, 1999, with Citibank, N.A., as an agent, NationsBank,
N.A. or an affiliate, as an agent, and various other financial institutions (the
"Credit Facilities"). The Credit Facilities, which are unsecured, provide for
revolving credit of up to $250 million for general corporate purposes until May
2000, with respect to the $150 million facility, and December 2001, with respect
to the $100 million facility. Prior to the completion of the Offer, there was
approximately $35 million of indebtedness outstanding under the $100 million
facility. Interest on borrowings under the Credit Facilities are payable, at the
option of Geon, according to a fluctuating base rate, an applicable margin over
LIBOR or a competitive bid rate. The Credit Facilities contain financial
covenants which require Geon to maintain an interest coverage ratio, an EBITDA
to debt coverage ratio and a minimum retained earnings or net loss amount. As of
the close of the Offer, borrowings under the $100 million facility bore interest
at less than 6.5% per year. Interest on the $150 million facility would
currently bear interest at less than 6.5% per year.
Although no definitive plan or arrangement for the repayment of borrowings
under the Credit Facilities has been made, Geon anticipates that such borrowings
will be repaid with internally generated funds (including, if the Merger is
completed, those of O'Sullivan) and from other sources which may include the
proceeds of future refinancings. No decision has been made concerning the method
Geon will use to repay the borrowings under the Credit Facilities. Such decision
will be made based on Geon's review from time to time of the advisability of
particular actions, as well as prevailing interest rates, financial and other
economic conditions and such other factors as Geon may deem appropriate.
On July 8, 1999, the Board of Directors of O'Sullivan approved a cash loan
to Geon of up to $30 million, to be memorialized in a credit agreement and
promissory note between O'Sullivan and Geon and bearing interest at a
fluctuating annual rate equal to 1 1/2% below Citibank, N.A.'s base interest
rate. Geon plans to use such funds to pay a portion of the costs incurred by
Geon and the Purchaser in connection with the Offer and the Merger.
BUSINESS OF O'SULLIVAN
O'Sullivan Corporation is a Virginia corporation with its principal
executive offices located at 1944 Valley Avenue, Winchester, Virginia 22601.
O'Sullivan was originally organized in 1896 as O'Sullivan Rubber Company. In
1970 the corporate name was changed from O'Sullivan Rubber Company to O'Sullivan
Corporation to acknowledge the increasing importance of plastics manufacturing
to O'Sullivan's operations.
23
<PAGE> 28
Subsequent to its name change and through the early 1990s, O'Sullivan
concentrated on the expansion of its plastics manufacturing operations, both
calendering and injection-molding. The expansion was accomplished by adding
additional capacity within the corporation and the acquisition or creation of
several subsidiaries to gain facilities in other regions of the United States.
In 1986, O'Sullivan divested itself of its rubber operations. In 1994,
O'Sullivan sold the injection-molding operations portion of its plastics
products segment. In 1992, O'Sullivan created a subsidiary, Melnor Inc., to
acquire substantially all of the assets of a corporation engaged in the water
sprinkler and lawn and garden business. O'Sullivan sold this business in July
1997.
O'Sullivan's activities are now conducted in a single business segment:
calendered plastics products. O'Sullivan manufactures calendered plastics
products for the automotive and specialty plastics manufacturing industries.
Calendered plastics products manufactured by O'Sullivan include vinyl sheeting
for vehicular dashboard pads, swimming pool liners and covers, notebook binders,
luggage, upholstered furniture, golf bags, floor tile, pond liners, protective
clothing, mine curtains, boat and automobile windows and medical grade
materials. A more detailed description of O'Sullivan's business is included in
its Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
which is included in this Information Statement as Annex A.
24
<PAGE> 29
SELECTED FINANCIAL INFORMATION OF O'SULLIVAN
The selected financial information of O'Sullivan set forth below has been
derived from the audited financial statements of O'Sullivan for the fiscal years
ended December 31, 1994, 1995, 1996, 1997 and 1998 and the unaudited financial
statements of O'Sullivan for the three month periods ended March 31, 1998 and
1999. The selected financial information of O'Sullivan should be read in
conjunction with the audited financial statements and other financial
information of O'Sullivan included later in this Information Statement or
incorporated herein by reference.
The period-to-period comparability of the selected financial information
shown below is affected by O'Sullivan's July 1997 sale of substantially all of
the assets of its subsidiary Melnor Inc., a corporation engaged in the water
sprinkler and lawn and garden business, for approximately $22.0 million less
$2.5 million which was returned to the purchaser when the acquired business did
not meet certain operating result thresholds after closing. The sale of the
Melnor business was treated as a discontinued operation in O'Sullivan's
financial statements.
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------- -----------------
1994 (1) 1995 (1) 1996 (1) 1997 1998 1998 1999
-------- -------- -------- ------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT
DATA:
Net sales................... $ 149.4 $ 169.5 $ 171.2 $ 163.6 $ 163.2 $ 41.9 $ 42.9
Income from continuing
operations............... 10.5 15.5 14.1 8.8 11.6 3.0 3.1
Net income.................. 2.6 14.0 10.7 4.5 11.6 3.0 3.1
PER COMMON SHARE:
Income from continuing
operations............... $ 0.64 $ 0.94 $ 0.87 $ 0.56 $ 0.74 $ 0.19 $ 0.20
Net income.................. 0.16 0.85 0.66 0.29 0.74 0.19 0.20
Net income -- fully
diluted.................. 0.16 0.85 0.66 0.29 0.74 0.19 0.20
SELECTED BALANCE SHEET DATA
(AT END OF PERIOD):
Total assets................ $ 144.5 $ 150.0 $ 140.8 $ 138.0 $ 142.9 $ 140.6 $ 145.9
Long-term liabilities....... 7.2 6.3 6.2 9.4 7.7 8.9 7.4
Working capital............. 57.9 60.9 70.0 70.1 71.1 71.1 72.8
Shareholders' equity........ 106.6 115.8 114.0 112.7 117.6 114.4 119.4
OTHER SELECTED DATA:
Book value per common
share.................... $ 6.47 $ 7.01 $ 7.19 $ 7.16 $ 7.54 $ 7.27 $ 7.66
Cash dividends declared per
common share............. 0.28 0.31 0.32 0.32 0.32 0.08 0.08
</TABLE>
- ---------------
(1) Income statement data for the fiscal years ended December 31, 1994, 1995 and
1996 varies from the data for such years presented in O'Sullivan's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998, which is
included in this Information Statement as Annex A. O'Sullivan restated its
financial statements for such fiscal years to account for the July 1997 sale
of the Melnor business.
25
<PAGE> 30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of Shares beneficially owned as
of July 23, 1999 by (a) each shareholder known by O'Sullivan to be a beneficial
owner of more than 5% of the Shares; (b) each person who was a director of
O'Sullivan immediately prior to the completion of the Offer; (c) the Chief
Executive Officer of O'Sullivan and the other four most highly compensated
officers of O'Sullivan as of December 31, 1998; (d) the directors and officers
of O'Sullivan appointed after the completion of the Offer; and (e) all of the
foregoing directors and officers as a group.
<TABLE>
<CAPTION>
SHARES OPTION SHARES PERCENT OF
BENEFICIALLY OWNED EXERCISABLE OUTSTANDING
NAME EXCLUDING OPTIONS WITHIN 60 DAYS (1) SHARES
---- ------------------ ------------------ -----------
<S> <C> <C> <C>
TGC Acquisition Corporation (2)............................. 13,715,221 0 87.9%
c/o The Geon Company
One Geon Center
Avon Lake, Ohio 44012-0122
John S. Campbell............................................ 0 76,802 *
C. Bryant Nickerson......................................... 0 21,560 *
Ewen A. Campbell............................................ 0 11,116 *
John P. Crowther............................................ 0 2,310 *
James L. Tremoulis.......................................... 0 15,700 *
C. Hugh Bloom, Jr........................................... 0 14,000 *
Arthur H. Bryant II......................................... 0 14,000 *
John C. O. Bryant........................................... 0 11,000 *
Robert L. Burrus, Jr........................................ 0 14,000 *
Max C. Chapman, Jr.......................................... 0 14,000 *
James T. Holland............................................ 0 11,000 *
R. Michael McCullough....................................... 0 14,000 *
Stephen P. Munn............................................. 0 14,000 *
Timothy J. Sandker.......................................... 0 12,000 *
Leighton W. Smith, Jr....................................... 0 12,000 *
William F. Patient (3)...................................... 0 0 --
Thomas A. Waltermire (3)(4)................................. 0 0 --
Donald P. Knechtges (3)..................................... 0 0 --
V. Lance Mitchell (3)....................................... 0 0 --
Gregory L. Rutman (3)(4).................................... 0 0 --
W. David Wilson (3)......................................... 0 0 --
John L. Rastetter (3)....................................... 0 0 --
Jean M. Miklosko (4)........................................ 0 0 --
Charles P. Dylag (4)........................................ 0 0 --
Gregory P. Smith (4)........................................ 0 0 --
Woodrow W. Ban (4).......................................... 0 0 --
All directors and officers as a group (26 persons).......... 0 257,488 1.6%
</TABLE>
- ---------------
(*) Less than 1%.
(1) Represents options granted to the named officers and directors of O'Sullivan
under the 1995 Stock Option Plan, 1995 Outside Directors Stock Option Plan
or 1985 Incentive Stock Option Plan, all of which options are currently
exercisable and will be cashed-out at the effective time of the Merger in
accordance with the terms of the Merger Agreement. See "Interests of Certain
Persons in the Merger -- Employee and Director Stock Options."
(2) TGC Acquisition Corporation, which is referred to throughout this
Information Statement as the "Purchaser," is a wholly owned subsidiary of
Geon. See "Summary -- The Parties to the Merger Agreement." Accordingly,
Geon is deemed to beneficially own the Shares owned by the Purchaser.
(3) Until the completion of the Offer, the Board of Directors of O'Sullivan
consisted of the following eleven members: C. Hugh Bloom, Jr., Arthur H.
Bryant II, John C. O. Bryant, Robert L. Burrus, Jr., John S. Campbell, Max
C. Chapman, Jr., James T. Holland, R. Michael McCullough, Stephen P. Munn,
Timothy J. Sandker and Leighton W. Smith, Jr. Pursuant to the Merger
Agreement and upon the completion of the Offer, nine of the eleven members
of the Board of Directors (C. Hugh Bloom, Jr., John C. O. Bryant, Robert L.
Burrus, Jr., Max C. Chapman, Jr., James T. Holland, R. Michael McCullough,
Stephen P. Munn, Timothy J. Sandker and Leighton W. Smith, Jr.) resigned as
directors and seven persons designated by the Purchaser (William F. Patient,
Thomas A. Waltermire, Donald P. Knechtges, V. Lance Mitchell, Gregory L.
Rutman, W. David Wilson and John L. Rastetter) were subsequently elected as
directors.
(4) After the completion of the Offer, the following persons were elected to the
indicated offices of O'Sullivan: Thomas A. Waltermire (Chairman of the
Board); John S. Campbell (President and Chief Executive Officer); C. Bryant
Nickerson (Chief Financial Officer, Assistant Treasurer and Assistant
Secretary); Gregory L. Rutman (Vice President, General Counsel, Secretary
and Assistant Treasurer); Jean M. Miklosko (Treasurer); Charles P. Dylag
(Director of Tax Administration); Gregory P. Smith (Assistant Treasurer);
and Woodrow W. Ban (Assistant Secretary).
26
<PAGE> 31
AVAILABLE INFORMATION
O'Sullivan is subject to the information filing requirements of the
Securities Exchange Act of 1934, as amended, and in accordance therewith files
reports, proxy and information statements and other information with the
Securities and Exchange Commission (the "SEC"). The Schedule 14D-1 Tender Offer
Statement filed by the Purchaser and Geon and the Schedule 14D-9
Solicitation/Recommendation Statement filed by O'Sullivan, each in connection
with the Offer, and the respective exhibits thereto, as well as such reports,
proxy and information statements and other information filed by O'Sullivan with
the SEC, may be inspected and copied at the public reference facilities
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the SEC: Midwest Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and Northeast Regional Office, 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such information should be obtainable by mail, upon
payment of the SEC's customary charges, by writing to the SEC's principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Such material
should also be available on-line through EDGAR, which is located on the SEC's
public access site at http://www.sec.gov.
Statements contained in this Information Statement or in any document
incorporated in this Information Statement by reference as to the contents of
any contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an annex to this Information Statement or such other
document, each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS AND OTHER INFORMATION;
INFORMATION INCORPORATED BY REFERENCE
The Annual Report on Form 10-K of O'Sullivan for the fiscal year ended
December 31, 1998 is included in this Information Statement as Annex A, and is
hereby incorporated by reference. Also incorporated by reference into this
Information Statement are the following reports filed by O'Sullivan with the SEC
since the end of the year ended December 31, 1998: (a) the Quarterly Report on
Form 10-Q of O'Sullivan for the quarterly period ended March 31, 1999 (included
in this Information Statement as Annex B); and (b) the Current Reports on Form
8-K of O'Sullivan filed on June 2, 1999 and July 20, 1999.
Representatives of Yount, Hyde & Barbour, P.C., a firm of certified public
accountants located in Winchester, Virginia and O'Sullivan's auditors for the
fiscal year ended December 31, 1998, are not expected to be present at the
Special Meeting.
Shareholders may obtain a copy of any of the reports filed by O'Sullivan
with the SEC that are incorporated by reference into this Information Statement
free of charge upon oral or written request to the Secretary of O'Sullivan, 1944
Valley Avenue, Winchester, Virginia, Telephone Number (540) 667-6666. O'Sullivan
will provide to the requesting shareholder by first class mail or other equally
prompt means a copy of any and all requested information (except for exhibits to
the report that is incorporated by reference unless such exhibits are
specifically incorporated by reference into the report).
By Order of the Board of Directors,
GREGORY L. RUTMAN
Secretary
July 23, 1999
27
<PAGE> 32
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-4438
O'SULLIVAN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Virginia 54-0463029
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1944 Valley Avenue
PO Box 3510
Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
</TABLE>
540-667-6666
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock -- par value $1
Name of each exchange on
which registered American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant on March 8, 1999 (based on the last sale price on the American
Stock Exchange as of such date) was $130,607,723.
The number of shares of the registrant's Common Stock, Par Value $ 1,
outstanding as of March 8, 1999 was 15,594,952.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Meeting of
Stockholders on April 28, 1999 are incorporated by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 33
PART I
ITEM 1. BUSINESS
O'Sullivan Corporation ("O'Sullivan" or the "Corporation") is a Virginia
corporation originally organized in 1896 as O'Sullivan Rubber Company. In 1932
the Corporation was moved to Winchester, Virginia. In 1970 the corporate name
was changed from O'Sullivan Rubber Corporation to O'Sullivan Corporation to
acknowledge the increasing importance of plastics manufacturing to the
Corporation's operations.
Subsequent to the Corporation's name change and through the early 1990's,
the Corporation concentrated on expansion of its plastics manufacturing
operations, both calendering and injection-molding. The expansion was
accomplished by adding additional capacity within the Corporation and the
acquisition or creation of several subsidiaries to gain facilities in other
regions of the United States. In 1986, the Corporation divested itself of its
rubber operations.
In 1994, the Corporation sold the injection-molding operations portion of
its plastics products segment. The sale involved primarily the inventories and
fixed assets of the Corporation associated with injection-molding operations and
the stock of a subsidiary corporation also involved in injection-molding
operations. The sale was for approximately $50 million net of certain
liabilities assumed by the purchaser.
In 1992, the Corporation created a subsidiary, Melnor Inc. ("Melnor"), to
acquire substantially all the assets of a corporation engaged in the water
sprinkler and lawn and garden business. In July, 1997, the Corporation sold this
business. The sale involved substantially all assets of the business, including
the stock of Melnor Inc.'s Canadian subsidiary. The sale was for approximately
$22.0 million which included $2.5 million designated for an escrow account. All
of this escrow was returned to the purchaser of the business because the
business operations did not meet certain thresholds. The disposal of this
business in 1997 was treated as a discontinued operation in the accompanying
financial statements.
The Corporation's activities are now conducted in a single business
segment: calendered plastics products which manufactures calendered plastics
products for the automotive and specialty plastics manufacturing industries.
PLASTICS PRODUCTS BUSINESS
The Corporation's Plastics Products business manufactures calendered
plastics products for the automotive and specialty plastics manufacturing
industries. Calendered plastics products manufactured include vinyl sheeting for
vehicular dashboard pads, swimming pool liners and covers, notebook binders,
luggage, upholstered furniture, golf bags, floor tile, pond liners, protective
clothing, mine curtains, boat and automobile windows and medical grade
materials. The Plastics Products business products are sold in markets in which
there is competition from many plastic manufacturers, both domestic and foreign.
While no single competitor offers all of the products produced by this segment,
there are many competitors for any single product. Major competitors include:
Canadian General Tower, Delphi Automotive Systems, Ellay Corp., Haartz Corp.,
Intex Plastics Inc., Nanya Plastics Corporation, Sandusky Vinyl Products and
Vernon Plastics Inc. Distribution of the segment's products is by direct sales
to other manufacturers.
The normal production backlog of the Plastic Products business is
approximately thirty to forty-five days. The Corporation has various long-term
contracts totaling several million dollars applicable to this segment, but such
contracts are not considered firm orders until production releases are received
from customers. The business of the segment is not seasonal.
All essential raw materials are readily available to the Plastics Products
business. For critical raw materials, secondary sources of supply are available
if required. Major suppliers of raw materials to this segment include the
following companies: The Geon Company, General Electric Plastics, Aristech
Chemicals, Witco Corporation, Voltek Incorporated and Toray Plastics.
The Corporation possesses significant technology in the compounding,
formulation and manufacture of its products.
A-1
<PAGE> 34
A significant customer of the Corporation accounting for ten percent or
more of the 1998 sales of the business was Ford Motor Company.
GENERAL
The Corporation anticipates no material effects on the capital
expenditures, earnings or competitive position of the Corporation's businesses
from the enactment or adoption of federal, state or local environmental
regulations. The Corporation has several ongoing environmental programs,
including recycling, waste reduction and environmental audits. The Corporation
also has proactive dialogues with federal and state environmental agencies to
ensure continuing compliance with environmental regulations.
The Corporation and its Subsidiaries currently have approximately 900
employees.
The Corporation and its Subsidiaries are not engaged in any material
transactions with customers or suppliers located outside North America.
ITEM 2. PROPERTIES
The Corporation owns approximately 643,000 square feet of manufacturing,
warehouse and office space on approximately 113 acres in Winchester, Virginia;
76,000 square feet of manufacturing, warehouse and office space on approximately
six acres in Lebanon, Pennsylvania; 110,000 square feet of manufacturing and
warehouse space on approximately five acres in Newton Upper Falls,
Massachusetts; and 85,000 square feet of manufacturing and warehouse space on
approximately thirty-eight acres in Yerington, Nevada.
The Corporation leases 29,250 square feet of warehouse space in St. Louis,
Missouri and 10,000 square feet of warehouse space in Yerington, Nevada. The
Corporation also leases space for sales offices located in Chicago, Illinois and
Bloomfield Hills, Michigan.
Management of the Corporation believes that unused capacity existed in the
Corporation's operations during 1998. Percentage utilization of the
Corporation's facilities is difficult to accurately measure due to the
Corporation's policy of adding facilities as required by business conditions.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its Subsidiaries are involved in legal proceedings
incidental to their normal business activities. While the outcome of these
proceedings cannot be completely predicted, the Corporation does not believe the
ultimate resolution of any existing matters will have a material adverse effect
on its financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were voted upon during the fourth quarter of 1998.
A-2
<PAGE> 35
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The principal market in which the Corporation's common stock is traded is
the American Stock Exchange. The stock is traded under the symbol OSL.
The quarterly price range of common stock and the quarterly dividends per
share for 1998 and 1997 are included as part of Note 18 of "Notes to
Consolidated Financial Statements" included elsewhere in this Form 10-K.
At December 31, 1998 the number of owners of the Corporation's common stock
was 3,000.
The Corporation has paid quarterly dividends since 1958. There are no
restrictions on the payment of dividends at the current time. The payment and
amount of future dividends will depend on the existing conditions, including
such factors as the Corporation's earnings, financial condition and working
capital requirements.
ITEM 6. SELECTED FINANCIAL DATA (FROM CONTINUING OPERATIONS)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales............ $163,178,700 $163,599,400 $171,218,487 $169,455,886 $149,438,108
Net income........... 11,589,461 8,813,858 14,113,747 15,496,033 10,460,397
Net income per common
share.............. .74 .56 .87 .94 .64
Total assets......... 142,899,002 138,031,696 140,822,440 149,996,525 144,528,888
Cash dividends per
common share....... .32 .32 .32 .31 .28
Return on equity..... 10.3% 7.7% 12.2% 14.5% 9.6%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 1998 VERSUS 1997
Net sales in 1998 were $163.2 million compared to $163.6 million in 1997.
Net income from continuing operations was $11.6 million, $.74 per share, in
1998, compared to $8.8 million, $.56 per share, in 1997.
Sales of automotive-related products improved for 1998 compared to 1997,
but the increase was offset by a slightly greater decline in net sales for
industrial products. The results for the fourth quarter were even more
pronounced for the increase and decrease in sales of the two product types.
Gross profit increased $3.1 million in 1998. As a percent of sales, gross
profit was 17.6% in 1998 and 15.7% in 1997. The net improvement in 1998 resulted
from decreased material costs, achieved through a combination of lower raw
material prices, improved formulations and manufacturing efficiencies offset to
some degree by higher labor and benefit costs.
Selling expenses, exclusive of the allowance for doubtful accounts, were
$5.6 million in 1998, 3.5% of net sales, and $5.1 million in 1997, 3.1% of net
sales. The increased costs resulted from marginal increases in compensation and
benefit charges and consulting charges. General and administrative expenses were
$6.1 million in 1998, 3.7% of net sales, and $5.7 million in 1997, 3.5% of net
sales. Increased costs were primarily related to increased professional fees.
A-3
<PAGE> 36
In 1997, postemployment benefits and deferred compensation expenses in the
amount of $3.5 million were charged to operations in connection with staff
reductions and the early retirement of certain executive officers. This expense
had an effect of $.14 per share in 1997.
Operating income increased by $2.2 million in 1998 exclusive of the 1998
charge of $1.1 million for an additional allowance for doubtful accounts and the
1997 charge of $3.5 million for postemployment benefits and deferred
compensation expenses. The change was due entirely to the improvement in the
gross margin for 1998.
Net other income was $3.0 million in 1998 and $2.9 million in 1997. There
was a decline in interest income of approximately $.5 million in 1998, but this
decline was offset by the gains from sales of various non-operating assets.
Income tax expense was $6.9 million in 1998 and $4.9 million in 1997. The
effective tax rate was 37.3% in 1998 and 35.8% in 1997. The increased effective
tax rate resulted primarily from higher state tax expense and increased federal
taxable income.
RESULTS OF OPERATIONS 1997 VERSUS 1996
Net sales in 1997 were $163.6 million compared to $171.2 million in 1996, a
decline of $7.6 million or 4.4%. Net income from continuing operations was $8.8
million, $.56 per share in 1997, compared to $14.1 million, $.87 per share, in
1996.
The sales decline in 1997 was due to lowered demand for products of the
industrial portion of the Corporation's business. The decline occurred through
the first nine months of 1997. In the fourth quarter, sales of the industrial
group returned to levels comparable to the final quarter of 1996. Intense price
competition continued to impact sales for this area of the business. The
automotive portion of the business had sales volumes similar to 1996.
Gross profit decreased $5.4 million in 1997. As a percent of sales, gross
profit was 15.7% in 1997 and 18.1% in 1996. The decline in 1997 resulted from a
combination of increased material costs and higher unit costs for certain labor
and fixed manufacturing charges. The increased material costs were caused by
increased unit costs for raw materials along with a significant expense
associated with material consumed through sampling and start-up of a new product
line. The increased unit costs for certain labor and fixed manufacturing charges
were a direct result of the sales declines experienced for 1997.
Selling expenses were $5.1 million in 1997, 3.1% of net sales, and $5.0
million in 1996, 2.9% of net sales. The increased costs resulted from marginal
increases in compensation and benefit charges. General and administrative
expenses were $5.7 million in both 1997 and 1996. As a percent of net sales, the
expenses were 3.5% in 1997 and 3.3% in 1996.
In 1997, postemployment benefits and deferred compensation expenses in the
amount of $3.5 million were charged to operations in connection with staff
reductions and the early retirement of certain executive officers. This expense
had an effect of $.14 per share in 1997.
Operating income decreased by $9.1 million in 1997. The decline was a
combination of decreased gross margins as a result of decreased sales and
increased material costs coupled with the $3.5 million charged for
postemployment benefits and deferred compensation.
Net other income, primarily interest income, was $2.9 million in 1997 and
$3.0 million in 1996.
Income tax expense was $4.9 million in 1997 and $8.8 million in 1996. The
effective tax rate was 35.8% in 1997 and 38.4% in 1996. The reduction in income
tax expense was due to the reduced level of income in 1997 and adjustments made
to estimated effective federal and state tax rates.
A-4
<PAGE> 37
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15.0 million in 1998,
compared to $20.2 in 1997 and $17.0 million in 1996. Cash and cash equivalents
were substantially the same at both December 31, 1998 and 1997.
Capital expenditures for property, plant and equipment for 1998 were $10.5
million compared to $4.9 million in 1997 and $5.9 million in 1996. The increase
was due to funds expended on an additional coating facility. 1999 capital
expenditures are expected to be substantially similar to 1998 due to the
construction of an additional laminating facility, which is expected to require
an outlay of approximately $4.0 million. Other capital expenditures, in amounts
comparable to 1998, are planned by the Corporation to provide additional
capacity or modernize equipment to meet customer demands for new or improved
products or production processes.
The Corporation had no outstanding debt at December 31, 1998. There is in
place a $50 million line of credit, which expires in June 2000. At December 31,
1998, the line of credit was uncommitted.
The Corporation's Board of Directors has previously authorized the
repurchase of shares of the Corporation's common stock as market conditions
permit. Of the total authorization of 1.8 million shares, approximately 886,000
remain.
Management of the Corporation believes that net cash flow from operating
activities, along with available financing capabilities will be adequate to meet
the Corporation's funding requirements for 1999.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to manufacture products, acquire or ship inventory, process transactions, send
invoices or engage in other normal business activities. Due to the significance
of computer processing in the conduct of the Corporation's business activities,
failure of these systems could have a materially adverse effect on the
Corporation. In addition, the failure of vendor computer systems could cause
interruption of deliveries of key supplies or utilities, which might result in
similar material adverse effects. Because of the complexity of the issues and
the number of parties involved, O'Sullivan cannot reasonably predict with
certainty the nature or likelihood of such impacts.
However, in 1997, the Corporation began an assessment of its potential
exposure to business interruption due to Year 2000 computer hardware and
software failures. The Corporation's MIS department has made substantial
progress in identifying areas of concern. Throughout 1998, the department
identified, tested and began modifying those systems determined to be
susceptible to Year 2000 operating failures. They have made significant progress
and expect to have all systems tested and modified well before the end of 1999.
The Corporation's cost of identifying and modifying programs is expected to have
an immaterial effect on future operating results since, for several years, it
has had a plan to regularly upgrade the software and hardware for the
Corporation's primary operating systems. This plan has caused the systems to be
continually reviewed and modified as business conditions warrant. Incremental
costs incurred to resolve Year 2000 issues were less than $500,000. Any
additional costs to be incurred are expected to be immaterial.
In addition, the Corporation has initiated communications with suppliers
and major customers to determine, to the extent possible, if any problems exist
in connection with electronic interfaces. Since there are no guarantees that
O'Sullivan will be able to rely on others to have their systems converted in a
timely manner, the Corporation has been developing a strategy to continue
business transactions with customers and suppliers in the event of interface
disruptions.
To prepare for the reasonably likely worst-case scenario, O'Sullivan has
developed a contingency plan to mitigate the effects on its operations in case
certain of its systems or suppliers fail to perform as planned. The contingency
plan consists of providing all required resources to repair internal systems
should they fail at critical
A-5
<PAGE> 38
times, as well as establishing additional inventories and back-up procedures in
the event suppliers are unable to deliver raw materials and services in a timely
manner.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ from those plans currently anticipated.
Specific factors that could cause such material differences include, but are not
limited to, the availability of personnel trained in Year 2000 issues, the
ability of third-party vendors to correct their hardware and software, the
ability of significant customers to remedy their Year 2000 issues and similar
circumstances.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation currently does not have market risk sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This page left blank intentionally. See following pages for financial
statements.
A-6
<PAGE> 39
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 35,361,408 $ 35,444,138
Receivables............................................... 26,285,798 25,658,216
Inventories............................................... 23,411,945 20,674,689
Deferred income tax assets................................ 1,307,151 1,041,564
Other current assets...................................... 2,379,394 3,234,108
------------ ------------
Total current assets................................... $ 88,745,696 $ 86,052,715
------------ ------------
Property, Plant and Equipment............................... $ 45,039,233 $ 40,316,399
------------ ------------
Other Assets................................................ $ 9,114,073 $ 11,662,582
------------ ------------
Total assets........................................... $142,899,002 $138,031,696
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 11,187,082 $ 9,988,826
Accrued expenses.......................................... 6,435,752 5,968,248
------------ ------------
Total current liabilities.............................. $ 17,622,834 $ 15,957,074
------------ ------------
Other Long-Term Liabilities................................. $ 6,254,471 $ 8,404,635
------------ ------------
Deferred Income Tax Liabilities............................. $ 1,429,370 $ 954,921
------------ ------------
Commitments and Contingencies............................... $ -- $ --
------------ ------------
Stockholders' Equity
Common stock, par value $1.00 per share; authorized
30,000,000 shares......................................... $ 15,594,982 $ 15,743,062
Additional paid-in capital................................ 1,410,372 2,717,863
Retained earnings......................................... 100,829,647 94,254,141
Accumulated other comprehensive income.................... (242,674) --
------------ ------------
Total stockholders' equity............................. $117,592,327 $112,715,066
------------ ------------
Total liabilities and stockholders' equity............. $142,899,002 $138,031,696
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-7
<PAGE> 40
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................... $163,178,700 $163,599,400 $171,218,487
Cost of products sold........................... 134,444,519 137,976,808 140,180,005
------------ ------------ ------------
Gross profit.................................. $ 28,734,181 $ 25,622,592 $ 31,038,482
------------ ------------ ------------
Operating expenses
Selling and warehousing....................... $ 5,629,965 $ 5,067,830 $ 4,923,111
Allowance for doubtful accounts............... 1,106,250 -- 77,000
General and administrative.................... 6,087,002 5,701,472 5,650,032
Postemployment benefits and deferred
compensation............................... 457,994 4,033,375 493,773
------------ ------------ ------------
$ 13,281,211 $ 14,802,677 $ 11,143,916
------------ ------------ ------------
Income from operations.......................... $ 15,452,970 $ 10,819,915 $ 19,894,566
------------ ------------ ------------
Other income
Interest income............................... $ 2,012,626 $ 2,551,492 $ 2,590,080
Other, net.................................... 1,006,445 360,388 422,008
------------ ------------ ------------
$ 3,019,071 $ 2,911,880 $ 3,012,088
------------ ------------ ------------
Income from continuing operations before income
taxes......................................... $ 18,472,041 $ 13,731,795 $ 22,906,654
Income taxes.................................... 6,882,580 4,917,937 8,792,907
------------ ------------ ------------
Income from continuing operations............. $ 11,589,461 $ 8,813,858 $ 14,113,747
------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations, net of
taxes...................................... $ -- $ (593,593) $ (3,384,254)
Loss on disposal of discontinued operations,
net of taxes............................... -- (3,674,046) --
------------ ------------ ------------
$ -- $ (4,267,639) $ (3,384,254)
------------ ------------ ------------
Net income.................................... $ 11,589,461 $ 4,546,219 $ 10,729,493
============ ============ ============
Net income (loss) per common share, basic and
diluted:
Net income per common share from continuing
operations................................. $ .74 .56 .87
Net loss per common share from discontinued
operations................................. -- (.04) (.21)
Net loss per common share from disposal of
discontinued operations.................... -- (.23) --
------------ ------------ ------------
Net income per common share................... $ .74 .29 .66
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-8
<PAGE> 41
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income from continuing operations............. $ 11,589,461 $ 8,813,858 $ 14,113,747
Adjustments to reconcile net income from
continuing operations to net cash provided by
operating activities of continuing operations:
Depreciation.................................... 5,713,650 5,464,100 5,177,727
Provision for doubtful accounts................. 1,106,250 -- 77,000
Deferred income taxes........................... 339,532 (1,259,559) 975,985
Postemployment benefits and deferred
compensation................................. (138,411) 3,373,377 301,173
Other operating assets and long-term
liabilities, net............................. (184,157) (1,023,289) 132,420
(Gain) loss from disposal of assets............. (682,041) 345,533 (552,461)
Unremitted (income) from joint venture.......... (327,864) (186,989) (19,071)
Interest accrual on zero coupon notes
receivable................................... -- -- (4,538)
Changes in assets and liabilities:
Receivables..................................... (1,733,832) (1,870,188) (505,769)
Inventories..................................... (2,737,256) 5,732,595 1,332,390
Other current assets............................ 347,825 757,469 (206,833)
Accounts payable................................ 1,198,256 (280,859) (2,141,185)
Accrued expenses................................ 467,508 351,640 (1,688,406)
------------ ----------- ------------
Net cash provided by operating activities......... $ 14,958,921 $20,217,688 $ 16,992,179
------------ ----------- ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment......... $(10,453,849) $(4,885,185) $ (5,888,238)
Proceeds from disposal of assets.................. 1,863,658 205,037 1,306,488
Proceeds from disposal of subsidiary.............. -- 21,958,209 --
Payments received from non-operating notes
receivable...................................... 1,371,000 207,289 2,417,883
Funds (advanced to) repayment from discontinued
operations...................................... -- 1,088,618 (5,628,416)
Investment in and loan to joint venture........... -- -- (441,000)
Change in other assets............................ (1,352,934) (3,503,485) (626,447)
------------ ----------- ------------
Net cash provided by (used in) investing
activities...................................... $ (8,572,125) $15,070,483 $ (8,859,730)
------------ ----------- ------------
Cash Flows from Financing Activities
Cash dividends.................................. $ (5,013,955) $(5,040,428) $ (5,160,413)
Purchase of common stock.......................... (1,455,571) (996,036) (7,235,736)
------------ ----------- ------------
Net cash (used in) financing activities........... $ (6,469,526) $(6,036,464) $(12,396,149)
------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents..................................... $ (82,730) $29,251,707 $ (4,263,700)
Cash and cash equivalents at beginning of
period.......................................... 35,444,138 6,192,431 10,456,131
------------ ----------- ------------
Cash and cash equivalents at end of period........ $ 35,361,408 $35,444,138 $ 6,192,431
============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-9
<PAGE> 42
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
----------- ----------- ------------
<S> <C> <C> <C>
Balance at January 1, 1996........................ $16,510,402 $10,182,295 $ 89,453,514
Comprehensive income
Net income...................................... -- -- 10,729,493
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of
tax.......................................... -- -- --
Minimum pension liability adjustment, net of
tax.......................................... -- -- --
Other comprehensive income...................... -- -- --
Comprehensive income.............................. -- -- --
Purchase of common stock.......................... (659,840) (6,575,896) --
Dividends declared, $.32 per share................ -- -- (5,160,413)
----------- ----------- ------------
Balance at December 31, 1996...................... $15,850,562 $ 3,606,399 $ 95,022,594
Comprehensive income
Net income...................................... -- -- 4,546,219
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of
reclassification adjustment resulting from
sale of foreign entity, net of tax........... -- -- (274,244)
Minimum pension liability adjustment, net of
tax.......................................... -- -- --
Other comprehensive income...................... -- -- --
Comprehensive income.............................. -- -- --
Purchase of common stock.......................... (107,500) (888,536) --
Dividends declared, $.32 per share................ -- -- (5,040,428)
----------- ----------- ------------
Balance at December 31, 1997...................... $15,743,062 $ 2,717,863 $ 94,254,141
Comprehensive income
Net income...................................... -- -- 11,589,461
Other comprehensive income, net of tax
Minimum pension liability adjustment, net of
tax............................................. -- -- --
Comprehensive income.............................. -- -- --
Purchase of common stock.......................... (148,080) (1,307,491) --
Dividends declared, $.32 per share................ -- -- (5,013,955)
----------- ----------- ------------
Balance at December 31, 1998...................... $15,594,982 $ 1,410,372 $100,829,647
=========== =========== ============
</TABLE>
A-10
<PAGE> 43
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
INCOME INCOME EQUITY
------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1996....................... $(383,246) $115,762,965
Comprehensive income
Net income..................................... -- $10,729,493 10,729,493
--------- ----------- ------------
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of
tax......................................... $ (23,225) (23,225)
Minimum pension liability adjustment, net of
tax......................................... (74,762) (74,762)
--------- ----------- ------------
Other comprehensive income....................... $ (97,987) (97,987)
--------- ----------- ------------
Comprehensive income............................. $10,631,506
===========
Purchase of common stock......................... -- (7,235,736)
Dividends declared, $.32 per share............... -- (5,160,413)
--------- ----------- ------------
Balance at December 31, 1996..................... $(481,233) $113,998,322
Comprehensive income
Net income..................................... -- $ 4,546,219 4,546,219
--------- ----------- ------------
Other comprehensive income, net of tax
Foreign currency translation adjustment, net of
reclassification adjustment resulting from sale
of foreign entity, net of tax.................. $ 243,791 (30,453)
Minimum pension liability adjustment, net of
tax............................................ 237,442 237,442
--------- ----------- ------------
Other comprehensive income....................... $ 481,233 481,233
--------- ----------- ------------
Comprehensive income............................. $ 5,027,452
===========
Purchase of common stock......................... -- (996,036)
Dividends declared, $.32 per share............... -- (5,040,428)
--------- ----------- ------------
Balance at December 31, 1997..................... $ -- $112,715,066
Comprehensive income
Net income..................................... -- $11,589,461 11,589,461
--------- ----------- ------------
Other comprehensive income, net of tax
Minimum pension liability adjustment, net of
tax............................................ (242,674) $ (242,674) (242,674)
--------- ----------- ------------
Comprehensive income............................. $11,346,787
===========
Purchase of common stock......................... -- (1,455,571)
Dividends declared, $.32 per share............... -- (5,013,955)
--------- ----------- ------------
Balance at December 31, 1998..................... $(242,674) $117,592,327
========= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
A-11
<PAGE> 44
O'SULLIVAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
O'Sullivan Corporation ("O'Sullivan" or "the Corporation") manufactures
calendered plastics products for the automotive and specialty manufacturing
industries. The most substantial portion of the Corporation's business is
conducted in North American markets.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
Subsidiaries. Significant intercompany accounts and transactions have been
eliminated. Investments in affiliates in which the Corporation has a 20% to 50%
interest are carried at cost, adjusted for the Corporation's proportionate share
of the affiliate's undistributed earnings or losses.
The preparation of consolidated 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments with
an original maturity of three months or less.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
Receivables from trade customers are generally due within thirty to ninety
days. The Corporation conducts periodic reviews of its major customers'
financial condition and grants trade credit based upon evaluations of the credit
worthiness of each customer. Management performs regular assessments of
receivables and makes estimates as to the adequacy of the allowance for doubtful
accounts based on historical data and knowledge of customers' financial
condition. Credit losses have been within the expectations of management.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost being
determined substantially by the first-in, first-out or average cost method.
INVESTMENT SECURITIES
Investment securities held principally for the purpose of selling them in
the near term are classified as trading securities. Trading securities are
recorded in other current assets at fair value with the change in fair value
during the period included in earnings. At December 31, 1997, other current
assets included securities with a fair value of $507,870. These securities were
sold during 1998. At December 31, 1998 and 1997, O'Sullivan had no investments
in derivative financial instruments.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated at historical cost. Depreciation
is computed primarily by the straight-line method over the estimated useful
lives of assets. The estimated useful lives are twenty to forty years for
buildings and three to ten years for machinery and other equipment. Accelerated
methods of depreciation are utilized for tax purposes. Expenditures for repairs
and maintenance are charged to operations as incurred. Betterments and
improvements that extend the useful life of an asset are capitalized. Upon sale
and other
A-12
<PAGE> 45
disposition of assets, the cost and related accumulated depreciation is removed
from the accounts, and the resulting gain or loss is reflected in operations.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and tax credit
carryforwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
ADVERTISING COSTS
Costs incurred for producing and communicating advertising are expensed
when incurred. Advertising costs were $182,423 for 1998, $89,090 for 1997, and
$76,122 for 1996.
RESEARCH AND DEVELOPMENT
O'Sullivan conducts a broad range of research and development activities.
These activities are aimed at improving existing products and manufacturing
processes and developing new products and processes.
Product and process research and development activities are charged to
expense as incurred. The amounts incurred in 1998, 1997 and 1996 were
$3,264,955, $2,739,388 and $2,554,826, respectively.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Statement No. 128
replaced the calculation of primary and diluted earnings per share with basic
and diluted earnings per share. Basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities and is calculated by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the year. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share as it
reflects the potential dilution that could occur if dilutive securities and
other contracts to issue common stock were exercised or converted into common
stock. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement No. 128 requirements.
PENSION PLANS
The Corporation and its Subsidiaries have retirement plans that cover
substantially all employees who meet certain eligibility requirements. The
Retirement Savings Plan ("Plan") is a 401(K) plan under which the majority of
the Corporation's employees are covered. The plan permits eligible employees to
contribute up to ten percent of before-tax compensation and up to five percent
of after-tax compensation subject to certain Internal Revenue Service
restrictions. The Corporation may, in its discretion, make an Employer Basic
Contribution of up to three percent of each participant's compensation each
year. The Corporation may also, in its discretion, make an Employer Matching
Contribution of up to two percent for participants who have elected to make
before-tax contributions to the plan. After three years of service, participants
become 100% vested in the employer contributions for each participant.
Current and former employees not covered under the Retirement Savings Plan
are participants in either multiemployer plans sponsored by other entities or
non-contributory defined benefit plans. The plans provide benefits to certain
salaried employees based on years of service and final years' average earnings
and to certain hourly employees based on a dollar unit multiplied by years of
eligible service. The Corporation's policy is to fund at least the minimum
amounts required by the applicable governing bodies.
A-13
<PAGE> 46
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers Disclosures about Pensions
and Other Postretirement Benefits". This Statement revises employers disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The Statement standardizes the
disclosure requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligation and fair value of plan assets that will facilitate financial analysis
and eliminates certain disclosures. The Statement is effective for the
Corporation's financial statements for the year ended December 31, 1998.
Information for prior years has been restated to conform to the Standard.
POSTRETIREMENT BENEFITS
The Corporation provided health care benefits to certain of its retired
employees under a plan which was terminated January 1, 1993. Upon termination of
the plan, this group of retired employees was allowed to continue to be covered
by the Corporation's group insurance plan. Effective January 1, 1993, the
Corporation adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits
other than Pensions" to account for its share of the costs of benefits provided
to this group. To effect adoption of Statement No. 106, the Corporation accrued,
as of January 1, 1993, its share of the estimated costs to insure this group of
retirees. Prior to January 1, 1993, the Corporation expensed its share of these
expenses as they were incurred.
POSTEMPLOYMENT BENEFITS
The liability and expense for postemployment benefits are accrued when the
obligations vest and can be reasonably estimated. Obligations that do not vest
are recorded when payment of the benefits is probable and can be reasonably
estimated.
RECLASSIFICATION OF AMOUNTS
Certain amounts for 1997 and 1996 have been reclassified to conform to the
1998 presentation.
2. SUPPLEMENTARY BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
BALANCES AT DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Receivables
Accounts receivable......................................... $ 27,008,437 $26,228,366
Less allowance for doubtful accounts........................ 722,639 570,150
------------ -----------
$ 26,285,798 $25,658,216
============ ===========
</TABLE>
Receivable balances for automotive-related business were $17,375,273 at
December 31, 1998, and $14,711,831 at December 31, 1997.
A-14
<PAGE> 47
<TABLE>
<S> <C> <C>
Inventories
Finished goods.............................................. $ 4,971,465 $ 4,505,483
Work in process............................................. 5,708,598 3,385,687
Raw materials............................................... 9,110,258 9,380,683
Supplies.................................................... 3,621,624 3,402,836
------------ -----------
$ 23,411,945 $20,674,689
============ ===========
Property, Plant and Equipment Land.......................... $ 1,558,382 $ 1,414,776
Buildings................................................... 32,049,426 27,762,932
Machinery and equipment..................................... 64,357,301 58,458,348
Transportation equipment.................................... 4,070,761 3,981,665
------------ -----------
$102,035,870 $91,617,721
Less accumulated depreciation............................... 56,996,637 51,301,322
------------ -----------
$ 45,039,233 $40,316,399
============ ===========
</TABLE>
Depreciation expense totaled $5,713,650, $5,464,100 and $5,177,727 in 1998,
1997 and 1996, respectively.
<TABLE>
<S> <C> <C>
Accrued Expenses
Accrued compensation........................................ $ 2,590,716 $ 2,527,053
Employee benefits........................................... 1,090,660 886,467
Dividends payable........................................... 1,245,769 1,257,623
Other accrued expenses...................................... 1,508,607 1,297,105
------------ -----------
$ 6,435,752 $ 5,968,248
============ ===========
Other Long-Term Liabilities
Deferred compensation....................................... $ 4,005,363 $ 3,978,100
Employee benefits........................................... 1,333,713 845,466
Postemployment benefits..................................... 915,395 1,081,069
Contingency reserve for discontinued operations............. -- 2,500,000
------------ -----------
$ 6,254,471 $ 8,404,635
============ ===========
</TABLE>
The contingency reserve for discontinued operations was an allowance for
potential adjustments relating to the sale of the Corporation's former consumer
products subsidiary (See note 14).
3. DEBT
The Corporation has a $50,000,000 unsecured line of credit through First
Union National Bank of Virginia to support general corporate activities.
Interest rates for the line of credit vary based on the Corporation's choice of
rate options provided by the lender. All available rates are at or below
prevailing prime interest rates. The line of credit matures June 30, 2000. There
was no outstanding balance at December 31, 1998.
4. INCOME TAX MATTERS
Income from continuing operations before income taxes was taxed entirely by
domestic jurisdictions.
A-15
<PAGE> 48
The provision for income taxes charged to continuing operations consists of
the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Current
Federal............................................. $5,019,226 $ 5,119,111 $6,681,713
State............................................... 1,523,822 1,058,385 1,021,619
---------- ----------- ----------
$6,543,048 $ 6,177,496 $7,703,332
---------- ----------- ----------
Deferred
Federal............................................. $ 517,327 $(1,037,444) $ 951,017
State............................................... (177,795) (222,115) 138,558
---------- ----------- ----------
$ 339,532 $(1,259,559) $1,089,575
---------- ----------- ----------
$6,882,580 $ 4,917,937 $8,792,907
========== =========== ==========
</TABLE>
The following is a reconciliation of the statutory Federal income tax rates
to the Corporation's effective tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
Income taxed at lower federal tax rate...................... -- (.7) --
State taxes, net of federal benefit......................... 4.7 4.0 3.3
Business credits............................................ (.8) (.6) (.4)
Other....................................................... (1.6) (1.9) .5
---- ---- ----
37.3% 35.8% 38.4%
==== ==== ====
</TABLE>
Net deferred tax assets (liabilities) at December 31, 1998 and 1997,
consisted of the following components:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Provision for doubtful accounts........................... $ 279,907 $ 224,709
Employee benefits......................................... 3,060,966 2,970,247
Inventory basis differences............................... 61,338 109,675
Contingency reserve for discontinued operations........... 131,148 1,024,453
State operating loss carryforward......................... 197,107 65,300
Other..................................................... 20,000 --
---------- ----------
$3,750,466 $4,394,384
---------- ----------
Deferred tax liabilities
Property, plant and equipment............................. $3,342,946 $3,608,737
Like-kind exchange........................................ 237,374 254,856
Employee benefits......................................... 292,365 241,000
Investment securities..................................... -- 203,148
---------- ----------
$3,872,685 $4,307,741
---------- ----------
Net deferred tax assets (liabilities)....................... $ (122,219) $ 86,643
========== ==========
</TABLE>
A-16
<PAGE> 49
The deferred tax amounts included above have been classified on the
Consolidated Balance Sheets for December 31, 1998 and 1997, as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Current assets.............................................. $ 1,307,151 $1,041,564
Noncurrent liabilities...................................... (1,429,370) (954,921)
----------- ----------
Net deferred tax assets (liabilities)....................... $ (122,219) $ 86,643
=========== ==========
</TABLE>
5. BENEFIT PLANS
DEFINED BENEFIT AND POSTRETIREMENT BENEFIT PLANS
The following tables provide a reconciliation of the changes in the benefit
obligations and fair value of assets for the years ended December 31, 1998 and
1997, and a statement of the funded status as of December 31, 1998 and 1997, for
the pension plans and postretirement benefit plan of the Corporation and its
Subsidiaries:
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Reconciliation of Benefit Obligation
Obligation at January 1.................. $8,739,489 $8,505,089 $ 348,000 $ 408,000
Service cost............................. 70,319 77,867 -- --
Interest cost............................ 601,189 579,703 18,300 26,000
Participant contributions................ -- -- 4,000 5,600
Actuarial (gain) loss.................... 637,660 12,208 (51,000) --
Benefit payments......................... (484,564) (435,378) (65,300) (91,600)
---------- ---------- --------- ---------
Obligation at December 31.................. $9,564,093 $8,739,489 $ 254,000 $ 348,000
========== ========== ========= =========
Reconciliation of Fair Value Of Plan Assets
Fair value of plan assets at January 1..... $9,219,999 $7,991,911 $ -- $ --
Actual return on plan assets............. 188,101 1,538,466 -- --
Employer contributions................... 127,753 125,000 61,300 86,000
Participant contributions................ -- -- 4,000 5,600
Benefit payments......................... (484,564) (435,378) (65,300) (91,600)
---------- ---------- --------- ---------
Fair value of plan assets at December 31... $9,051,289 $9,219,999 $ -- $ --
========== ========== ========= =========
Funded Status
Funded status at December 31............. $ (512,804) $ 480,510 $(254,000) $(348,000)
Unrecognized transition (asset).......... (170,598) (190,240) -- --
Unrecognized prior-service cost.......... 386,821 456,155 -- --
Unrecognized (gain) loss................. 614,506 (569,651) 20,000 71,000
---------- ---------- --------- ---------
Net amount recognized.................... $ 317,925 $ 176,774 $(234,000) $(277,000)
========== ========== ========= =========
</TABLE>
The following table provides the amounts recognized in the statement of
financial position as of December 31, 1998 and 1997:
<TABLE>
<S> <C> <C> <C> <C>
Prepaid benefit cost........................ $ 730,913 $602,499 $ -- $ --
Accrued benefit liability................... (1,099,713) (568,466) (234,000) (277,000)
Intangible asset............................ 313,381 53,190 -- --
Accumulated other comprehensive income...... 373,344 89,551 -- --
----------- -------- --------- ---------
Net amount recognized....................... $ 317,925 $176,774 $(234,000) $(277,000)
=========== ======== ========= =========
</TABLE>
Two pension plans of subsidiary corporations had accumulated benefit
obligations in excess of plan assets. The accumulated benefit obligations were
$6,838,444 at December 31, 1998, and $6,252,860 at December 31,
A-17
<PAGE> 50
1997. The fair value of plan assets for these plans were $5,738,731 at December
31, 1998, and $5,684,394 at December 31, 1997.
The following table provides the components of net periodic benefit cost
(income) for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
PENSION BENEFITS
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................... $ 70,319 $ 77,867 $ 70,097
Interest cost.............................................. 601,189 579,703 569,327
Expected return on plan assets............................. (724,321) (631,335) (594,802)
Amortization of transition (asset)......................... (19,642) (19,642) (19,642)
Amortization of prior-service cost......................... 69,334 69,334 69,334
Amortization of net (gain)................................. (10,277) -- --
-------- -------- --------
Net periodic benefit cost (income)......................... $(13,398) $ 75,927 $ 94,314
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT BENEFITS
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest cost............................................... $18,300 $26,000 $28,000
Amortization of net loss.................................... -- 5,000 2,000
------- ------- -------
Net periodic benefit cost................................... $18,300 $31,000 $30,000
======= ======= =======
</TABLE>
The amount included within other comprehensive income arising from a change
in the minimum pension liability, net of deferred income tax expense, was
$242,674, $(237,442) and $74,762 for the years ended December 31, 1998, 1997 and
1996, respectively.
The weighted-average discount rates for all plans were 6.5% for 1998 and
7.0% for 1997 and 1996. The expected return on plan assets was 8.0% for all
periods.
The transition asset, prior-service costs and net gains and losses are
being amortized on a straight-line basis over the average remaining service
period of active participants.
For measurement purposes for the postretirement benefit plan, a 12.0%
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 1999. The rate was assumed to decrease by 1.0% per year to a
rate of 6.0% for 2005 and later periods.
A 1.0% increase in assumed health care cost trend rates would increase
service and interest costs by $1,000 and increase the accumulated postretirement
benefit obligation by $16,000. A 1.0% decrease in assumed health care cost trend
rates would decrease service and interest costs by $1,000 and decrease the
accumulated postretirement obligation by $14,000.
RETIREMENT SAVINGS PLAN
The expense associated with the Retirement Savings Plan was $1,366,400 for
1998, $1,406,655 for 1997 and $1,360,993 for 1996.
DEFERRED COMPENSATION PLAN
The Corporation has a deferred compensation plan for key employees of the
Corporation. Under this plan, the Corporation agrees to pay each covered
employee a certain sum annually for fifteen years upon their retirement or, in
the event of their death, to their designated beneficiary. A benefit is also
paid if the employees terminate employment (other than by their voluntary action
or discharge for cause) before they attain age 65. In that event, the amount of
the benefit depends on the employee's years of service with the Corporation.
Full benefits are paid only if the employee completes 25 years of service. The
Corporation has purchased individual life insurance contracts with respect to
each employee covered by this program. The Corporation is the owner and
A-18
<PAGE> 51
beneficiary of the insurance contracts. The employees are general creditors of
the Corporation with respect to these benefits. The expense associated with the
Deferred Compensation Plan was $457,994 for 1998, $2,503,375 for 1997 and
$493,773 for 1996. The expense for 1997 included an additional charge of
$1,975,747 resulting from a change in the estimated costs for deferred
compensation payable to several employees who prematurely separated from service
with the Corporation.
POSTEMPLOYMENT BENEFITS
The Corporation provides certain compensation benefits to former employees.
For 1997, a provision for costs in the amount of $1,530,000 was charged to
operations. No such charge was incurred in 1998 or 1996.
6. STOCK OPTION PLANS
1985 STOCK OPTION PLAN
The 1985 stock option plan expired January 28, 1995. Options previously
granted may be exercised by the participants until the options expire, which is
ten years after the date of the original option grant. The option price of
grants under this plan could not be less than the fair market value of the
common stock on the date of grant.
1995 STOCK OPTION PLAN
The Corporation has a stock option plan under which options may be granted
to certain key employees for the purchase of the Corporation's common stock. The
effective date of the plan was February 7, 1995, with an expiration date of
February 6, 2005. The plan reserves for issuance an aggregate of 200,000 shares
of the Corporation's common stock. The option price for options granted cannot
be less than 100% of fair market value of the common stock on the date of the
grant. The plan contains an antidilutive provision providing for adjustments to
the options previously granted in the event of changes in the Corporation's
capital structure.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN
The Corporation has a stock option plan under which options for the
purchase of the Corporation's common stock may be granted to members of the
Corporation's Board of Directors. The effective date of the plan was April 25,
1995, with an expiration date of April 24, 2005. The plan reserves for issuance,
an aggregate of 200,000 shares of the Corporation's common stock. Each eligible
director received an option for 10,000 shares of common stock on the effective
date of the plan. On each April 25 thereafter, each eligible director will
receive an option for 1,000 shares of common stock. Directors who become
eligible after April 25, 1995, will receive an option for 10,000 shares as of
the date they become eligible for the plan and will receive an option for 1,000
shares on each April 25 thereafter. The option price for options granted cannot
be less than 100% of fair market value of the common stock on the date of the
grant. The plan contains an antidilutive provision providing for adjustments to
the options previously granted in the event of changes in the Corporation's
capital structure.
The Corporation uses the intrinsic value approach specified in Accounting
Principles Board Opinion No. 25 in accounting for its stock option plans.
Accordingly, no compensation expense has been recognized for 1998, 1997 or 1996.
If the fair value method of accounting for stock options prescribed by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," had been applied, there would have been no expense relating to
the stock options for 1997. The expense would have $60,045 in 1998 and $41,437
in 1996. Pro forma net income would have been $11,529,416 in 1998 and
$10,688,056 in 1996. Pro forma earnings per share would have been $.74 in 1998
and $.66 in 1996.
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model. For 1998, weighted-average assumptions were:
Dividend rate of 2.9%, price volatility of 24.0%, a risk-free interest rate of
4.8% and expected lives of 7.75 years. For 1997, no options were granted
requiring measurement under this model. For 1996, weighted-average assumptions
were: Dividend rate of 2.9%, price volatility of 25.0%, a risk-free interest
rate of 5.31% and expected lives of 7.75 years.
A-19
<PAGE> 52
The status of the stock option plans during 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 DIRECTORS
1985 OPTION PLAN 1995 OPTION PLAN OPTION PLAN
-------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,
1998....................... 67,870 $10.74 103,500 $10.48 104,000 $ 9.96
Granted during 1998.......... -- -- 51,782 7.94 19,000 9.22
Exercised during 1998........ -- -- -- -- -- --
Forfeited during 1998........ (20,660) 10.77 (20,000) 10.53 (13,000) 10.17
------- -------- -------
Outstanding at December 31,
1998....................... 47,210 10.72 135,282 9.50 110,000 8.98
======= ======== =======
All outstanding options were exercisable at December 31, 1998.
Weighted-average fair value
of options granted during
1998....................... N/A $ 7.94 $ 9.22
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
1995 DIRECTORS
1985 OPTION PLAN 1995 OPTION PLAN OPTION PLAN
-------------------- --------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,
1997....................... 94,965 $11.01 125,000 $10.48 88,000 $10.39
Granted during 1997.......... -- -- -- -- 27,000 8.76
Exercised during 1997........ -- -- -- -- -- --
Forfeited during 1997........ (27,095) 11.67 (21,500) 10.48 (11,000) 10.39
------- -------- -------
Outstanding at December 31,
1997....................... 67,870 10.74 103,500 10.48 104,000 9.96
======= ======== =======
All outstanding options were exercisable at December 31, 1997.
Weighted-average fair value
of options granted during
1997....................... N/A N/A $ 8.76
====== ====== ======
</TABLE>
The status of the options outstanding at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
REMAINING
EXERCISE PRICE NUMBER CONTRACTUAL LIFE
- -------------- ------- ----------------
<S> <C> <C>
$15.90 11,250 .1 Years
10.88 11,000 1.1 Years
8.32 24,960 3.8 Years
10.31 128,500 6.3 Years
11.17 21,000 7.3 Years
9.81 1,782 8.1 Years
8.16 16,000 8.3 Years
9.78 10,000 8.6 Years
9.75 8,000 9.3 Years
8.74 10,000 9.7 Years
7.88 50,000 9.9 Years
</TABLE>
A-20
<PAGE> 53
7. COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The statement
is effective for fiscal years beginning after December 15, 1997. Information for
prior periods has been restated to conform to the statement. The adoption of
this statement had no impact on the Corporation's financial position,
consolidated results of operations or cash flows.
Other comprehensive income is comprised of the following:
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Year Ended December 31, 1996:
Foreign currency translation adjustment.................. $ (35,731) $ 12,506 $ (23,225)
Minimum pension liability adjustment..................... (115,018) 40,256 (74,762)
--------- --------- ---------
$(150,749) $ 52,762 $ (97,987)
========= ========= =========
Year Ended December 31, 1997:
Foreign currency translation
Adjustment............................................... $ (46,851) $ 16,398 $ (30,453)
Reclassification adjustment resulting from sale of
foreign entity......................................... 421,914 (147,670) 274,244
Minimum pension liability adjustment..................... 365,296 (127,854) 237,442
--------- --------- ---------
$ 740,359 $(259,126) $ 481,233
========= ========= =========
Year Ended December 31, 1998:
Minimum pension liability adjustment..................... $(373,344) $ 130,670 $(242,674)
========= ========= =========
</TABLE>
8. EARNINGS PER SHARE
The following shows the weighted-average number of shares used in computing
earnings per share and the effect on weighted-average number of shares of
diluted potential common stock:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average number of common shares used in
earnings per common share.............................. 15,662,886 15,758,205 16,169,162
Effect of dilutive securities:
Stock options........................................ 7,134 8,863 19,598
---------- ---------- ----------
Weighted average-number of common shares used in
earnings per common share -assuming dilution........... 15,670,020 15,767,068 16,188,760
========== ========== ==========
</TABLE>
Options on approximately 190,500 shares, 222,750 shares and 72,345 shares
were not included in computing earnings per common share -- assuming dilution
for the years ended December 31, 1998, 1997 and 1996, respectively, because
their effects were antidilutive.
9. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
In 1995 the Corporation acquired a 49.0% equity interest in Kiefel
Technologies, Inc. ("Kiefel"). Kiefel designs, manufactures and distributes
thermoforming and radio frequency welding machines and related machinery and
tools. The Corporation's investment in Kiefel was sold during 1998. The
Corporation recognized, as its share of Kiefel's net income, $327,864 for 1998,
$186,989 for 1997 and $19,071 for 1996.
A-21
<PAGE> 54
10. LEASES
The Corporation and its Subsidiaries lease various plant and warehouse
facilities along with various equipment. Leases for the plant and warehouse
facilities and leases for machinery and equipment generally require the payment
of appropriate taxes, insurance and maintenance costs. The leases are cancelable
within a limited period of time.
Rental expense was $466,826 for 1998, $508,890 for 1997 and $670,496 for
1996.
11. SIGNIFICANT CUSTOMER
Net sales to divisions and subsidiaries of Ford Motor Company amounted to
$45.9 million (28.2% of net sales) in 1998, $44.1 million (27.0% of net sales)
in 1997 and $44.2 million (25.8% of net sales) in 1996.
Receivables at December 31, 1998, 1997 and 1996, from Ford Motor Company
were $7.2 million, $6.3 million and $5.0 million, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation estimates that each category of financial instruments,
including cash, trade receivables and payables, investments and debt
instruments, approximate current value at December 31, 1998 and 1997.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash payments for interest............................. $ 642 $ 8,482 $ 2,976
========== ========== ==========
Cash payments for income taxes......................... $6,564,640 $4,758,603 $5,310,200
========== ========== ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENT ACTIVITIES
In 1996, notes receivable of $654,794 were received as part of the proceeds
from the sale of property and equipment.
14. DIVESTITURE AND DISCONTINUED OPERATIONS
On July 31, 1997, the Corporation sold substantially all of the former
consumer products business segment of the Corporation, identified as Melnor
Inc., including the stock of Melnor's wholly owned subsidiary, Melnor Canada,
Ltd., to GH Acquisition Corp. The Corporation received approximately $22.0
million in cash for the sale. In 1998, $2.5 million of this amount was returned
to the purchaser since the business did not meet certain operating result
thresholds.
The loss on disposal of the segment of $3,674,046 (net of income tax
benefit of $1,825,954) represented the loss from the disposal of substantially
all assets of the business along with expenses associated with the disposal
activities, including severance costs, professional fees and potential variances
in projected operations of the business during future fiscal periods.
Losses from the discontinued operations of this business are shown
separately in the accompanying income statements. Income tax benefits applicable
to the years ended December 31, 1997 and 1996, were $428,489 and $1,907,254,
respectively.
Net sales for this business were $21,646,807 for the seven months ended
July 31, 1997, and $40,145,222 for the year ended December 31, 1996. These
amounts are excluded from net sales reported in the accompanying income
statements.
A-22
<PAGE> 55
15. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
The Corporation and its Subsidiaries are parties to various pending
judicial proceedings arising in the ordinary course of business, including a
proceeding involving the New Jersey facility formerly occupied by the
Corporation's discontinued consumer products subsidiary. Management and its
legal counsel have reviewed the possible outcome of pending proceedings and have
determined that any liabilities which may result from current proceedings are
not reasonably likely to have a material effect on the Corporation's financial
condition or results of operations.
ENVIRONMENTAL MATTERS
The Corporation continues to modify, on an ongoing, regular basis, certain
of its processes which may have an environmental impact. The Corporation's
efforts in this regard include the removal of many of its underground storage
tanks and the reduction or elimination of certain chemicals and wastes in its
operations. Although it is very difficult to quantify the potential impact of
compliance with environmental protection laws, the Corporation's financial
statements reflect the cost of these ongoing modifications. Management believes
that the continuing costs to the Corporation of environmental compliance will
not result in a material adverse effect on its future financial condition or
results of operations.
FACILITIES ADDITION
The Corporation has committed to the construction of an additional
laminating facility at its Winchester, Virginia, location. The total outlay for
the facility is expected to be approximately $4.0 million. The facility is
expected to be placed in service during the second quarter of 1999.
YEAR 2000 READINESS
The Corporation is heavily dependent on computer processing in the conduct
of its business activities. Failure of these systems could have a significant
impact on the Corporation's operations.
In 1997, the Corporation began an assessment of its potential exposure to
business interruption due to year 2000 computer software and hardware failures.
The Corporation's MIS department has made substantial progress in identifying
areas of concern. Throughout 1998, the department identified, tested and began
modifying those systems determined to be susceptible to Year 2000 operating
failures. They have made significant progress and expect to have all systems
tested and modified well before the end of 1999. Other personnel of the
Corporation have been charged with the responsibility of reviewing software and
hardware utilized in the operation of the Corporation's manufacturing equipment.
Their review of this software and hardware internally and with the
representatives of the creators of this software and hardware have revealed no
material deficiencies which could jeopardize the operation of the Corporation's
direct manufacturing equipment.
The Corporation has also initiated communications with suppliers and major
customers to determine if any problems exist in connection with electronic
interfaces. Since there are no guarantees that O'Sullivan will be able to rely
on others to have their systems converted in a timely manner for Year 2000
compliance, the Corporation has been developing a strategy to continue business
transactions with customers and suppliers in the event of interface disruptions.
The Corporation's cost of identifying and modifying programs is expected to
have an immaterial effect on future operating results since, for several years,
it has had a plan to regularly upgrade the software and hardware for the
Corporation's primary operating systems. This plan has caused the systems to be
continually reviewed and modified as business conditions warrant. Incremental
costs to resolve Year 2000 issues are expected to be less than $500,000.
A-23
<PAGE> 56
16. SEGMENT INFORMATION
The Corporation operates in one business segment; the manufacture and
distribution of calendered plastics products for the automotive and specialty
plastics manufacturing industries. All operating revenues of the Corporation are
derived from this business activity. Substantially all corporate assets are
utilized in the manufacturing and distribution activities of the calendering
operations.
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This pronouncement established accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. The statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The adoption
of this statement is not expected to have a material impact on the Corporation's
results of operations.
18. SUPPLEMENTAL FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED 1998
-------------------------------------------------------------------------
1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............ $41,946,284 $42,142,539 $39,529,682 $39,560,195 $163,178,700
Gross profit......... $ 6,864,445 $ 7,803,118 $ 6,759,473 $ 7,307,145 $ 28,734,181
Net income from:
Continuing
operations...... $ 2,964,361 $ 3,452,735 $ 2,300,621 $ 2,871,744 $ 11,589,461
Discontinued
operations...... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
$ 2,964,361 $ 3,452,735 $ 2,300,621 $ 2,871,744 $ 11,589,461
----------- ----------- ----------- ----------- ------------
Earnings per share:
Continuing
operations...... $ .19 $ .22 $ .15 $ .18 $ .74
Discontinued
operations...... -- -- -- -- --
----------- ----------- ----------- ----------- ------------
$ .19 $ .22 $ .15 $ .18 $ .74
----------- ----------- ----------- ----------- ------------
Dividends declared... $ .08 $ .08 $ .08 $ .08 $ .32
Market price per
share
High............... 11 1/4 12 3/4 12 1/8 11 3/4 12 3/4
Low................ 9 3/4 10 5/8 10 5/8 10 9 3/4
</TABLE>
A-24
<PAGE> 57
<TABLE>
<CAPTION>
QUARTER ENDED 1997
-------------------------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net sales............ $40,463,805 $44,706,832 $38,828,516 $39,600,247 $163,599,400
Gross profit......... $ 6,092,585 $ 7,689,004 $ 5,934,913 $ 5,906,090 $ 25,622,592
Net income (loss)
from:
Continuing
operations...... $ 2,498,007 $ 3,417,321 $ 2,871,432 $ 27,098 $ 8,813,858
Discontinued
operations...... (274,030) (166,801) (3,467,762) (359,046) (4,267,639)
----------- ----------- ----------- ----------- ------------
Net income (loss).... $ 2,223,977 $ 3,250,520 $ (596,330) $ (331,948) $ 4,546,219
----------- ----------- ----------- ----------- ------------
Earnings (loss) per
share:
Continuing
operations...... $ .16 $ .22 $ .18 $ -- $ .56
Discontinued
operations...... (.02) (.01) (.22) (.02) (.27)
----------- ----------- ----------- ----------- ------------
$ .14 $ .21 $ (.04) $ (.02) $ .29
----------- ----------- ----------- ----------- ------------
Dividends declared... $ .08 $ .08 $ .08 $ .08 $ .32
Market price per
share
High............... 10 3/4 9 11/16 11 11 11
Low................ 8 7 15/16 8 3/8 9 7/8 7 15/16
</TABLE>
A-25
<PAGE> 58
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors of O'Sullivan Corporation
We have audited the accompanying consolidated balance sheets of O'Sullivan
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1998, 1997 and 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of O'Sullivan
Corporation and Subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years ended December 31, 1998,
1997 and 1996, in conformity with generally accepted accounting principles.
/s/ YOUNT, HYDE & BARBOUR, P. C.
Winchester, Virginia
January 22, 1999
A-26
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the Corporation's Directors and Director
nominees, see pages 4 through 7 of the Corporation's Definitive Proxy Statement
dated March 26, 1999 which pages are incorporated herein by reference. For
information concerning the compliance by directors, officers and beneficial
owners of more than 10% of the Corporation's stock with the requirement of
Section 16(a) of the Securities Exchange Act of 1934, see page 7 of the
Corporation's Definitive Proxy Statement dated March 26, 1999, which page is
incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the executive officers of O'Sullivan
Corporation at December 31, 1998 are listed below. All officers are elected by
the Board of Directors for a one year term. There are no family relationships
among officers or any other arrangement or understanding between any officer and
any other person pursuant to which the officer was elected.
<TABLE>
<CAPTION>
SERVED AS
NAME AGE OFFICE OFFICER SINCE
---- --- --------------------- -------------
<S> <C> <C> <C>
John S. Campbell 48 President 1986
C. Bryant Nickerson 52 Secretary & Treasurer 1986
</TABLE>
Mr. John S. Campbell was appointed as President and Chief Operating Officer
in August, 1998 succeeding James T. Holland. Mr. Campbell previously served as a
Vice President beginning in 1986. He has been employed by the Corporation since
1973 and has been involved in both the sales and manufacturing operations of the
calendered plastics products business of the Corporation.
Mr. Nickerson has been employed by the Corporation since 1973 serving in
various capacities within the corporate financial area. He has served as
Controller and Treasurer and Chief Accounting Officer before being elected as
Secretary, Treasurer and Chief Financial Officer in 1995.
OTHER OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
SERVED AS
NAME AGE OFFICE OFFICER SINCE
---- --- -------------- -------------
<S> <C> <C> <C>
William O. Bauserman 55 Vice President 1987
Ewen A. Campbell 51 Vice President 1993
John P. Crowther 48 Vice President 1998
James L. Tremoulis 45 Vice President 1986
Robert C. Westfall 56 Vice President 1979
</TABLE>
Mr. Bauserman has been employed by the Corporation since 1968 and has
served as a Vice President since 1987. Mr. Bauserman has been employed in
various capacities within the data processing and management information
services areas during his tenure with the Corporation. Mr. Ewen A. Campbell has
an extensive background in chemistry and plastics compounding. He has been
employed by the Corporation since 1991 in the areas of compounding and research
and development activities. He has served as a Vice President since 1993. Mr.
Ewen Campbell and Mr. John Campbell are not related.
Mr. Crowther has been employed by the Corporation since 1995 as a sales
representative to automotive-related customers of the Corporation. Prior to that
time he was employed by a business that served as a
A-27
<PAGE> 60
manufacturer's representative to the automotive industry for the Corporation. He
was elected as a Vice President in January, 1998.
Mr. Tremoulis has served in various capacities in the sales area for
calendered plastics products since his employment by the Corporation in 1980. He
was elected as a Vice President in 1986.
Mr. Westfall has been employed by the Corporation since 1965. He was a
chemist, the Quality Control Director and a Plant Manager for the Corporation
prior to being elected as a Vice President of Research and Development in 1979.
ITEM 11. EXECUTIVE COMPENSATION
See Pages 8 through 14 of the Corporation's Definitive Proxy Statement
dated March 26, 1999, which pages are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See Pages 3 through 7 of the Corporation's Definitive Proxy Statement dated
March 26, 1999, which pages are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no transactions during 1998 that would be applicable for
disclosure under this item.
A-28
<PAGE> 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C> <C>
(a).(1) Financial Statements Page(s)
Included in Part II, Item 8, of this report:
Report of Independent Auditors...................................... 34
Consolidated Balance Sheets at December 31, 1998 and 1997........... 11
Consolidated Statements of Income for the Years Ended December 31, 12
1998, 1997 and 1996.................................................
Consolidated Statements of Cash Flows for the Years Ended December 13-14
31, 1998, 1997 and 1996.............................................
Consolidated Statements of Stockholders' Equity for the Years Ended 15-16
December 31, 1998, 1997 and 1996....................................
Notes to Consolidated Financial Statements.......................... 17-33
(a).(2) Financial Statement Schedules
Included in Part IV of this report:
Report of Independent Auditors on Financial Statement Schedule...... 41
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1998, 1997 and 1996.................................... 42
(a).(3) Exhibits
3.1 O'Sullivan Corporation Amended and Restated Articles of
Incorporation, including the Articles of Amendment, dated
April 30, 1985, filed with the State Corporation Commission
of Virginia on May 6, 1985, adopted by stockholders of
O'Sullivan Corporation at the annual meeting held April 30,
1985. (Incorporated by reference to the March 31, 1985,
Quarterly Report on Form 10-Q of the Corporation.)
3.2 O'Sullivan Corporation Bylaws as amended to January 29,
1985. (Incorporated by reference to the March 31, 1985,
Quarterly Report on Form 10-Q of the Corporation.)
3.3 O'Sullivan Corporation Amended and Restated Articles of
Incorporation dated April 29, 1989, filed with the State
Corporation Commission dated April 29, 1989, adopted by
stockholders of O'Sullivan Corporation at the annual meeting
held April 25, 1989. (Incorporated by reference to the March
31, 1989 Quarterly Report on Form 10-Q of the Corporation.)
3.4 O'Sullivan Corporation Bylaws as amended to January 26,
1998. (Incorporated by reference to the Annual Report on
Form 10-K for the Year Ended December 31, 1997.)
10.1 Compensatory arrangement with executive officers of the
registrant. See Pages 8 through 14 of the Corporation's
Definitive Proxy Statement dated March 26, 1999 which pages
are incorporated herein by reference.
10.2 Form of Employment Continuity Agreement between the
Registrant and James T. Holland, John S. Campbell, C. Bryant
Nickerson, William O. Bauserman, Ewen A. Campbell, Dee S.
Johnston, Michael M. Meissner, James L. Tremoulis, Robert C.
Westfall and John P. Crowther. (Incorporated by reference to
the Annual Report on Form 10-K for the Year Ended December
31, 1996.)
</TABLE>
A-29
<PAGE> 62
<TABLE>
<S> <C> <C> <C>
10.3 The O'Sullivan Corporation 1995 Stock Option Plan filed as
exhibit 99.1 to the Corporation's Form S-8 registration
statement (Registration Number 033-58895) filed with the
Commission on April 28, 1995 and incorporated herein by
reference.
10.4 The O'Sullivan Corporation 1995 Outside Directors Stock
Option Plan filed as exhibit 99.2 to the Corporation's Form
S-8 registration statement (Registration Number 033-58895)
filed with the Commission on April 28, 1995 and incorporated
herein by reference.
10.5 1985 Incentive Stock Option Plan. Amended and Restated as of
July 27, 1993. (Incorporated by reference to the Annual
Report on Form 10-K for the Year Ended December 31, 1994.)
10.6 Severance Agreement between O'Sullivan Corporation and James
T. Holland, President and Chief Executive Officer.
(Incorporated by reference to the Annual Report on Form 10-K
for the Year Ended December 31, 1997.)
21. Subsidiaries of the Registrant -- filed herewith
23. Consent of Independent Auditors -- filed herewith
24. Powers of Attorney -- filed herewith
27. Financial Data Schedule -- filed herewith
(b). Reports on Form 8-K
There were no reports filed on Form 8-K for the quarter ended
December 31, 1998.
(c). Index to Exhibits................................................... 45
</TABLE>
A-30
<PAGE> 63
INDEPENDENT AUDITOR'S REPORT
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of O'Sullivan Corporation
The examination referred to in our opinion dated January 22, 1999 of the
consolidated financial statements as of December 31, 1998 and 1997 and for the
three years ended December 31, 1998, 1997 and 1996 included the related
supplemental financial schedule as listed in Item 14(a) 2, which, when
considered in relation to the basis financial statements, present fairly in all
material respects the information shown therein.
/s/ YOUNT, HYDE & BARBOUR, P.C.
A-31
<PAGE> 64
SCHEDULE II
O'SULLIVAN CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------- ------------ ---------------------------- ------------ -----------
ADDITIONS
----------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER RECOVERIES BALANCE AT
DESCRIPTION YEAR EXPENSE ACCOUNTS (DEDUCTIONS) END OF YEAR
----------- ------------ ---------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
1998:
Allowance for Doubtful
Accounts................. $570,150 $1,106,250 $-- $(953,761)(A) $722,639
======== ========== == ========= ========
1997:
Allowance for Doubtful
Accounts................. $573,769 $ -- $-- $ (3,619)(A) $570,150
======== ========== == ========= ========
1996:
Allowance for Doubtful
Accounts................. $470,684 $ 77,000 $-- $ 26,085(A) $573,769
======== ========== == ========= ========
</TABLE>
- ---------------
Note (A) -- Write-offs of uncollectible accounts, net of recoveries.
A-32
<PAGE> 65
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
March 26, 1999 O'SULLIVAN CORPORATION
- ----------------
Date By: /s/ C. BRYANT NICKERSON
--------------------------------------------------------
C. Bryant Nickerson
Secretary, Treasurer and
Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on the dates given.
<TABLE>
<S> <C>
ARTHUR H. BRYANT, II* March 26, 1999
- ----------------------------------------------------- --------------
Arthur H. Bryant, II, Date
Chairman and Director
/s/ JOHN S. CAMPBELL March 26, 1999
- ----------------------------------------------------- --------------
John S. Campbell, President, Chief Executive Date
Officer and Director
/s/ C. BRYANT NICKERSON March 26, 1999
- ----------------------------------------------------- --------------
C. Bryant Nickerson, Secretary, Treasurer Date
and Chief Financial Officer
C. HUGH BLOOM, JR. * March 26, 1999
- ----------------------------------------------------- --------------
C. Hugh Bloom, Jr., Director Date
JOHN C. O. BRYANT * March 26, 1999
- ----------------------------------------------------- --------------
John C. O. Bryant, Director Date
ROBERT L. BURRUS, JR. * March 26, 1999
- ----------------------------------------------------- --------------
Robert L. Burrus, Jr., Director Date
MAX C. CHAPMAN, JR. * March 26, 1999
- ----------------------------------------------------- --------------
Max C. Chapman, Jr., Director Date
JAMES T. HOLLAND * March 26, 1999
- ----------------------------------------------------- --------------
James T. Holland, Director Date
R. MICHAEL MCCULLOUGH * March 26, 1999
- ----------------------------------------------------- --------------
R. Michael McCullough, Director Date
STEPHEN P. MUNN * March 26, 1999
- ----------------------------------------------------- --------------
Stephen P. Munn, Director Date
TIMOTHY J. SANDKER * March 26, 1999
- ----------------------------------------------------- --------------
Timothy J. Sandker, Director Date
LEIGHTON W. SMITH, JR. * March 26, 1999
- ----------------------------------------------------- --------------
Leighton W. Smith, Jr., Director Date
*By: /s/ JOHN S. CAMPBELL
----------------------------------------------------
John S. Campbell
Attorney-In-Fact
</TABLE>
A-33
<PAGE> 66
ANNEX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from____________to____________
Commission file number 1-4438
O'SULLIVAN CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Virginia 54-0463029
- ----------------------------------------------------- -----------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1944 Valley Avenue
PO Box 3510
Winchester, Virginia 22601
- ----------------------------------------------------- -----------------------------------------------------
(Address of principal (Zip code)
executive offices)
</TABLE>
540-667-6666
------------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of April 30, 1999 there were 15,594,813 shares of Common Stock, Par Value $1,
outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 67
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................. $ 33,308,221 $ 35,361,408
Receivables............................................... 31,701,716 26,285,798
Inventories............................................... 24,188,923 23,411,945
Deferred income tax assets................................ 1,385,149 1,307,151
Other current assets...................................... 1,392,679 2,379,394
------------ ------------
Total current assets........................................ $ 91,976,688 $ 88,745,696
------------ ------------
Property, Plant and Equipment............................... $ 44,919,141 $ 45,039,233
------------ ------------
Other Assets................................................ $ 9,024,653 $ 9,114,073
------------ ------------
Total assets................................................ $145,920,482 $142,899,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 12,693,916 $ 11,187,082
Accrued expenses.......................................... 6,472,901 6,435,752
------------ ------------
Total current liabilities................................... $ 19,166,817 $ 17,622,834
------------ ------------
Other Long-Term Liabilities................................. $ 6,181,694 $ 6,254,471
------------ ------------
Deferred Income Tax Liabilities............................. $ 1,172,767 $ 1,429,370
------------ ------------
Commitments and Contingencies............................... $ -- $ --
------------ ------------
Stockholders' Equity
Common stock, par value $1.00 per share; authorized
30,000,000 shares...................................... $ 15,594,867 $ 15,594,982
Additional paid-in capital................................ 1,409,472 1,410,372
Retained earnings......................................... 102,637,539 100,829,647
Accumulated other comprehensive income.................... (242,674) (242,674)
------------ ------------
Total stockholders' equity.................................. $119,399,204 $117,592,327
------------ ------------
Total liabilities and stockholders' equity.................. $145,920,482 $142,899,002
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-1
<PAGE> 68
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales................................................... $42,888,866 $41,946,284
Cost of products sold....................................... 35,041,549 35,081,839
----------- -----------
Gross profit................................................ $ 7,847,317 $ 6,864,445
----------- -----------
Operating expenses
Selling and warehousing................................... $ 1,618,230 $ 1,427,662
General and administrative................................ 1,711,585 1,533,175
----------- -----------
$ 3,329,815 $ 2,960,837
----------- -----------
Income from operations...................................... $ 4,517,502 $ 3,903,608
----------- -----------
Other income
Interest income........................................... $ 403,344 $ 508,535
Other, net................................................ 42,360 279,487
----------- -----------
$ 445,704 $ 788,022
----------- -----------
Income before income taxes.................................. $ 4,963,206 $ 4,691,630
Income taxes................................................ 1,907,748 1,727,269
----------- -----------
Net income.................................................. $ 3,055,458 $ 2,964,361
=========== ===========
Net income per common share, basic and diluted.............. $ .20 $ .19
=========== ===========
Dividends per common share.................................. $ .08 $ .08
=========== ===========
Average shares outstanding.................................. 15,594,951 15,742,975
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-2
<PAGE> 69
O'SULLIVAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income.................................................. $ 3,055,458 $ 2,964,361
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 1,753,575 1,538,700
Provision for doubtful accounts........................... -- 20,000
Deferred income taxes..................................... (334,601) (377,141)
(Gain) on disposal of assets.............................. (48,122) (45,298)
Unremitted (income) from joint venture.................... -- (247,522)
Changes in assets and liabilities:
Receivables............................................ (5,415,918) (3,363,542)
Inventories............................................ (776,978) (539,089)
Other current assets................................... 986,715 1,487,506
Accounts payable....................................... 1,506,834 439,035
Accrued expenses....................................... 37,149 957,014
Other operating assets and long-term liabilities....... 69,836 35,426
Postemployment benefits and deferred compensation...... (142,613) (141,365)
------------ ------------
Net cash provided by operating activities................... $ 691,335 $ 2,728,085
------------ ------------
Cash Flows from Investing Activities
Purchase of property, plant and equipment................... $ (1,617,658) $ (1,987,736)
Proceeds from disposal of assets............................ 118,536 553,168
Payments received from non-operating notes receivable....... 3,750 52,924
Change in other assets...................................... (569) 60,340
------------ ------------
Net cash (used in) investing activities..................... $ (1,495,941) $ (1,321,304)
------------ ------------
Cash Flows from Financing Activities
Purchase of common stock.................................... $ (1,015) $ (1,873)
Cash dividends paid......................................... (1,247,566) (1,259,408)
------------ ------------
Net cash (used in) financing activities..................... $ (1,248,581) $ (1,261,281)
------------ ------------
Increase (decrease) in cash and cash equivalents............ $ (2,053,187) $ 145,500
Cash and cash equivalents at beginning of period............ 35,361,408 35,444,138
------------ ------------
Cash and cash equivalents at end of period.................. $ 33,308,221 $ 35,589,638
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
B-3
<PAGE> 70
O'SULLIVAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of O'Sullivan Corporation ("O'Sullivan" or "the Corporation") and its
wholly owned Subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation. Certain information and footnote
disclosure normally included in financial statements prepared in accordance with
generally accepted accounting principles have not been included in these
statements. These statements should be read in conjunction with the financial
statements notes and other disclosures included in the Corporation's 1998 Annual
Report to Stockholders and Form 10-K.
In the opinion of management of the Corporation, the unaudited consolidated
financial statements contain all material adjustments (consisting only of normal
recurring accruals and adjustments) necessary to fairly present the
Corporation's financial position as of March 31, 1999 and December 31, 1998 and
the results of its operations and cash flows for the three months ended March
31, 1999 and 1998. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of the operating results for the full
year.
Certain amounts for 1998 have been reclassified to reflect comparability with
account classifications for 1999.
NOTE B. SUPPLEMENTARY BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Receivables Trade receivables............................... $ 32,451,293 $ 27,008,437
Less allowance for doubtful accounts...................... 749,577 722,639
------------ ------------
$ 31,701,716 $ 26,285,798
============ ============
</TABLE>
Net receivables from a major automotive customer were $8.4 million at March 31,
1999 and $7.2 million at December 31, 1998.
<TABLE>
<S> <C> <C>
Inventories Finished goods.................................. $ 5,629,054 $ 4,971,465
Work in process........................................... 5,192,001 5,708,598
Raw materials............................................. 9,232,287 9,110,258
Supplies.................................................. 4,135,581 3,621,624
------------ ------------
$ 24,188,923 $ 23,411,945
============ ============
</TABLE>
<TABLE>
<S> <C> <C>
Property, Plant and Equipment Land.......................... $ 1,564,741 $ 1,558,382
Buildings................................................. 32,234,450 32,049,426
Machinery and equipment................................... 65,797,461 64,357,301
Transportation equipment.................................. 4,070,761 4,070,761
------------ ------------
$103,667,413 $102,035,870
Less accumulated depreciation............................. 58,748,272 56,996,637
------------ ------------
$ 44,919,141 $ 45,039,233
============ ============
Accrued Expenses
Accrued compensation...................................... $ 2,573,536 $ 2,590,716
Employee benefits......................................... 783,399 1,090,660
Dividends payable......................................... 1,245,723 1,245,769
Income taxes payable...................................... 961,440 --
Other accrued expenses.................................... 908,803 1,508,607
------------ ------------
$ 6,472,901 $ 6,435,752
============ ============
</TABLE>
B-4
<PAGE> 71
O'SULLIVAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Other Long-Term Liabilities
Deferred compensation..................................... $ 3,874,338 $ 4,005,363
Employee benefits......................................... 1,403,549 1,333,713
Postemployment benefits................................... 903,807 915,395
------------ ------------
$ 6,181,694 $ 6,254,471
============ ============
</TABLE>
NOTE C. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Earnings for the three months ended March 31, 1998 include $247,522 as the
Corporation's share of income for the first three months of 1998 for Kiefel
Technologies, Inc., in which O'Sullivan Corporation at that time owned a 49%
interest. The investment in Kiefel Technologies was sold in the fourth quarter
of 1998.
NOTE D. EARNINGS PER SHARE
The following shows the weighted average number of shares used in computing
earnings per share and the effect on weighted average number of shares of
diluted potential common stock.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1999 1998
----------- ------------
<S> <C> <C>
Weighted average number of common shares used in earnings
per common share.......................................... 15,594,951 15,742,975
Effect of dilutive securities:
Stock options............................................. 8,382 7,393
----------- -----------
Weighted average number of common shares used in earnings
per common share-assuming dilution........................ 15,603,333 15,750,368
=========== ===========
</TABLE>
Options on approximately 190,500 and 222,750 shares were not included in
computing earnings per common share-assuming dilution for the three months ended
March 31, 1999 and 1998, respectively, because their effects were antidilutive.
NOTE E. SEGMENT INFORMATION
The Corporation operates in one business segment; the manufacture and
distribution of calendered plastics products for the automotive and specialty
plastics manufacturing industries. All operating revenues of the Corporation are
derived from this business activity. Substantially all Corporate assets are
utilized in the manufacturing and distribution activities of the calendering
operations.
NOTE F. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Cash payments for interest.................................. $ -- $ --
=========== ===========
Cash payments for income taxes.............................. $ 322,202 $ 194,645
=========== ===========
</TABLE>
B-5
<PAGE> 72
O'SULLIVAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
The Corporation and its Subsidiaries are involved in legal proceedings
incidental to their normal business activities. While the outcome of these
proceedings cannot be completely predicted, the Corporation does not believe the
ultimate resolution of any existing matters will have a material adverse effect
on its financial position or results of operations.
ENVIRONMENTAL MATTERS
The Corporation has a policy to pro-actively address its environmental
responsibilities. It has made a concerted effort for many years to address
potential environmental issues in its manufacturing operations by changing
processes and utilizing advanced technologies to remediate environmental matters
as they come to management's attention. The Corporation has recorded liabilities
for all material remediation costs that are probable in the estimation of
management and can be reasonably estimated. Management is not aware of any
environmental costs that would be expected to have a material adverse effect on
the Corporation's financial condition or results of operations. However, it is
possible that future events and circumstances could cause the recorded estimates
for environmental costs to be exceeded by the final outcome of future events.
B-6
<PAGE> 73
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
O'Sullivan Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated condensed balance sheet of
O'Sullivan Corporation and Subsidiaries as of March 31, 1999, and the related
consolidated condensed statements of income and cash flows for the three-month
periods ended March 31, 1999 and 1998. These condensed financial statements are
the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of O'Sullivan Corporation and Subsidiaries as of
December 31, 1998, and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated January 22, 1999, we expressed an unqualified
opinion on those financial statements based on our audit. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998 is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
May 11, 1999
B-7
<PAGE> 74
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS (FIRST QUARTER, 1999 VERSUS FIRST QUARTER, 1998)
O'Sullivan Corporation's consolidated net sales were $42.9 million for the
first quarter of 1999 and $41.9 million for the first quarter of 1998. The sales
increase over the first quarter of 1998 was $1.0 million or 2.2%. Sales of
automotive-related products improved considerably for the first quarter of 1999
when compared to 1998's first quarter, increasing by approximately 10%. The
increase reflects a combination of improvements in sales in the automotive
industry and new business programs procured by the Corporation. Sales of
industrial products continue to decline due primarily to the intense pricing
competition in the markets served, but also due to reduced production demands
during this quarter from major customers in the industrial products area.
The gross margin was 18.3% for the first quarter of 1999 and 16.4% for the
first quarter of 1998. The improvement in the gross margin was due to
manufacturing efficiency improvements and lower raw material costs.
Selling and warehousing expenses were 3.8% of net sales for the first
quarter of 1999 and 3.4% for the first quarter of 1998. The increased costs for
1999 resulted from increased selling-related compensation costs. General and
administrative expenses were 4.0% of net sales for the first quarter of 1999 and
3.7% for the first quarter of 1998. The increased costs for 1999 were mainly a
result of increased administrative compensation costs and outside professional
fees.
Income tax expense was $1.9 million for the first quarter of 1999 and $1.7
million for the first quarter of 1998. The increase in the provision for income
taxes resulted from the higher level of pre-tax income for the first quarter of
1999. The Corporation's effective tax rate for the first quarter of 1999 was
38.4% compared to 36.8% for the first quarter of 1998. The increase in the
effective rate for the 1999 period is primarily a result of a decrease in
recognized income from the joint venture investment, which is recorded net of
tax, compared to the first quarter of 1998.
Net other income decreased by approximately $340 thousand compared to the
first quarter of 1998. The net decrease resulted from less interest income, due
to lower earnings rates on invested funds, and the absence of joint venture
earnings in 1999. These earnings were $248 thousand for the first quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided net cash of $691 thousand for the first
quarter of 1999 compared to net cash provided by operating activities of $2.7
million for the first quarter of 1998. The decline in cash provided by operating
activities for the two periods resulted from the greater increase in receivables
from December 31, 1998 to March 31, 1999 when compared to the same period for
1998. The increase reflects the increase in sales for the first quarter of 1999
over 1998 and changes in payment terms primarily due to competitive market
conditions.
Capital outlay was $1.6 million for the first quarter of 1999 and $2.0
million for the first quarter of 1998. Current capital expenditures are
primarily to provide additional capacity and modernize present equipment to
produce products for which orders currently exist. Total capital outlay for 1999
is expected to be between $8 and $10 million.
The Corporation has in place a $50 million line of credit to provide
capital to finance capital outlay and/or acquisitions.
Management believes that net cash flow from operating activities, along
with available financing capabilities will be adequate to meet the Corporation's
funding requirements for 1999.
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that
B-8
<PAGE> 75
are date-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to manufacture products, acquire or ship inventory, process transactions, send
invoices or engage in other normal business activities. Due to the significance
of computer processing in the conduct of the Corporation's business activities,
failure of these systems could have a materially adverse effect on the
Corporation. In addition, the failure of vendor computer systems could cause
interruption of deliveries of key supplies or utilities, which might result in
similar material adverse effects. Because of the complexity of the issues and
the number of parties involved, O'Sullivan cannot reasonably predict with
certainty the nature or likelihood of such impacts.
In 1997, the Corporation began an assessment of its potential exposure to
business interruption due to Year 2000 computer hardware and software failures.
The Corporation's MIS department identified areas of concern and since 1997 has
been addressing both the software and hardware issues of concern in relation to
Year 2000 readiness. The department identified, tested and modified those
systems determined to be susceptible to year 2000 operating failures. At this
time virtually all material internal systems have been modified to be Year 2000
compliant.
The Corporation's cost of identifying and modifying programs is expected to
have an immaterial effect on future operating results since, for several years,
it has had a plan to regularly upgrade the software and hardware for the
Corporation's primary operating systems. This plan has caused the systems to be
continually reviewed and modified as business conditions warrant. Incremental
costs incurred to resolve Year 2000 issues are expected to be less than
$500,000. Any additional costs to be incurred are expected to be immaterial.
In addition, the Corporation has initiated communications with suppliers
and major customers to determine, to the extent possible, if any problems exist
in connection with electronic interfaces. Since there are no guarantees that
O'Sullivan will be able to rely on others to have their systems converted in a
timely manner, the Corporation has been developing a strategy to continue
business transactions with customers and suppliers in the event of interface
disruptions.
To prepare for the reasonably likely worst-case scenario, O'Sullivan has
developed a contingency plan to mitigate the effects on its operations in case
certain of its systems or suppliers fail to perform as planned. The contingency
plan consists of providing all required resources to repair internal systems
should they fail at critical times, as well as establishing additional
inventories and back-up procedures in the event suppliers are unable to deliver
raw materials and services in a timely manner.
The costs of the project and the date on which the Corporation plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ from those plans currently anticipated.
Specific factors that could cause such material differences include, but are not
limited to, the availability of personnel trained in Year 2000 issues, the
ability of third-party vendors to correct their hardware and software, the
ability of significant customers to remedy their Year 2000 issues and similar
circumstances.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation currently does not have market risk sensitive instruments.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of O'Sullivan Corporation was held on
April 28, 1999, for the purpose of electing a board of directors and approving
the appointment of independent auditors. Proxies for the meeting were solicited
pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in
B-9
<PAGE> 76
opposition to management's solicitation. All of management's nominees for
directors as listed in the proxy statement were elected.
<TABLE>
<CAPTION>
PROXY VOTE PROXY VOTE PROXY VOTE
NAME OF DIRECTOR FOR AGAINST ABSTAIN
---------------- ---------- ---------- ----------
<S> <C> <C> <C>
C. Hugh Bloom, Jr........................................ 12,736,379 1,300 36,430
Arthur H. Bryant, II..................................... 12,717,893 19,786 36,430
John C. O. Bryant........................................ 12,734,842 1,000 38,267
Robert L. Burrus, Jr..................................... 12,733,911 3,768 36,430
John S. Campbell......................................... 12,737,459 220 36,430
Max C. Chapman, Jr....................................... 12,737,479 200 36,430
James T. Holland......................................... 12,732,930 2,912 38,267
R. Michael McCullough.................................... 12,735,515 327 38,267
Stephen P. Munn.......................................... 12,737,352 327 36,430
Timothy J. Sandker....................................... 12,736,252 1,427 36,430
Leighton W. Smith, Jr.................................... 12,734,415 1,427 38,267
</TABLE>
The proposal for approving Yount, Hyde and Barbour, P.C. as independent
auditors for 1999 was approved by the following proxy vote:
For 12,737,218
Against 18,061
Abstain 18,830
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. 27 Article 5 of Regulation S-X, Financial Data Schedule for
the first quarter, 1999 Form 10-Q.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended March 31, 1999.
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<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
O'SULLIVAN CORPORATION
/s/ JOHN S. CAMPBELL
-------------------------------------
John S. Campbell
President and Chief Executive Officer
/s/ C. BRYANT NICKERSON
-------------------------------------
C. Bryant Nickerson
Secretary, Treasurer
and Chief Financial Officer
May 12, 1999
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<PAGE> 78
ANNEX C
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 2, 1999, (the "Agreement"),
by and among THE GEON COMPANY, a Delaware corporation ("Parent"), TGC
ACQUISITION CORPORATION, a Virginia corporation and a wholly-owned subsidiary of
Parent ("Sub"), and O'SULLIVAN CORPORATION, a Virginia corporation (the
"Company").
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have approved the acquisition of the Company by Parent on the terms and subject
to the conditions set forth in this Agreement;
WHEREAS, in contemplation thereof it is proposed that Sub will make a
tender offer (the "Offer") to purchase all the issued and outstanding shares of
common stock, $1.00 par value, of the Company ("Common Stock"), subject to the
terms and conditions of this Agreement, at a price per share of Common Stock of
$12.25 net to the seller in cash (the "Offer Price") and, if less than all of
the issued and outstanding shares of Common Stock are tendered and the Offer is
completed, Sub will merge with the Company in the manner hereinafter described;
WHEREAS, the Directors of the Company have unanimously determined that each
of the Offer and the Merger (as hereinafter defined) are fair to, and in the
best interests of, the holders of Common Stock, approved the Offer and the
Merger and recommended the acceptance of the Offer and approval and adoption of
this Agreement by the stockholders of the Company;
WHEREAS, in order to induce Parent and Sub to enter into this Agreement,
the Company's Board of Directors has taken action to eliminate any requirement
under the Trust Agreement for O'Sullivan Corporation Salary Continuation
Agreements, with First Union National Bank as trustee and dated as of November
18, 1997 (the "Salary Continuation Agreements Trust") that the Salary
Continuation Agreements Trust be fully funded for all current benefit
obligations upon a change of control of the Company; and
WHEREAS, as a further inducement for Parent and Sub to enter into this
Agreement, Arthur H. Bryant II, Magalen O. Bryant and John C. O. Bryant have,
simultaneously with the execution of this Agreement, entered into share tender
agreements with Parent and Sub (the "Share Tender Agreements"), pursuant to
which they have agreed to tender into the Offer all of the shares of Common
Stock held by them.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
THE OFFER
1.1 THE OFFER. Provided that (a) this Agreement shall not have been
terminated in accordance with Article VI hereof, (b) the Share Tender Agreements
shall have been executed simultaneously with this Agreement and (c) the Board of
Directors has taken action to eliminate any requirement that the Salary
Continuation Agreements Trust be fully funded for all current benefit
obligations upon a change of control of the Company, and so long as none of the
events set forth in Annex A hereto (the "Tender Offer Conditions") shall have
occurred and are continuing, as promptly as practicable, but in no event later
than the fifth business day after the public announcement of the execution of
this Agreement, Sub shall commence the Offer. The obligations of Sub to accept
for payment and promptly to pay for any shares of Common Stock tendered shall be
subject only to the Tender Offer Conditions, any of which may be waived by
Parent and Sub; provided, however, that, without the consent of the Company, Sub
shall not waive the condition that there shall have been validly tendered and
not validly withdrawn prior to the expiration of the Offer a number of shares of
Common Stock which represent at least 70% of the total voting power of all
shares of capital stock of the Company outstanding on a fully diluted basis (the
"Minimum Condition"). The Tender Offer Conditions are for the sole benefit of
Parent and Sub and may be asserted by Parent and Sub regardless of the
circumstances giving rise to any such Tender Offer Condition and, subject to the
preceding sentence, may be waived by Parent and Sub in whole or in part. Sub
expressly
C-1
<PAGE> 79
reserves the right to modify the terms of the Offer, including, without
limitation, except as provided below, to extend the Offer beyond any scheduled
expiration date; provided, however, without the consent of the Company, Sub
shall not (i) reduce the number of shares of Common Stock to be purchased in the
Offer, (ii) reduce the Offer Price, (iii) modify or add to the conditions set
forth in Annex A or (iv) change the form of consideration payable in the Offer.
Notwithstanding the foregoing, the Offer may not be extended beyond any
scheduled expiration date unless any of the Tender Offer Conditions shall not
have been satisfied; provided, however, (i) even if the Tender Offer Conditions
have not been satisfied, the Offer may not be extended beyond the three month
anniversary of the date of commencement of the Offer and (ii) if the Tender
Offer Conditions have been satisfied, then the Offer may be extended for an
additional five business days so long as at the time of such extension, all
conditions to Sub's obligations to purchase shares of Common Stock pursuant to
the Offer are irrevocably waived.
1.2 COMPANY ACTIONS. The Company hereby consents to the Offer and the
Merger and represents that (a) its Board of Directors (at a meeting duly called
and held) has (i) determined by the unanimous vote of the Directors that each of
the Offer and the Merger is fair to, and in the best interests of, the holders
of Common Stock, (ii) approved the Offer, the Merger, this Agreement and the
Share Tender Agreements, (iii) recommended acceptance of the Offer and approval
and adoption of this Agreement by the stockholders of the Company and (iv) taken
all other action necessary to render Articles 14 and 14.1 of the Virginia Stock
Corporation Act (the "VSCA") inapplicable to the Offer and the Merger; and (b)
Bowles Hollowell Conner, a Division of First Union Capital Markets Corp.
("Bowles Hollowell Conner"), has delivered to the Board of Directors of the
Company its opinion that the consideration to be received by the holders of
Common Stock pursuant to the Offer and the Merger is fair to the holders of
Common Stock from a financial point of view, subject to the usual and customary
assumptions and qualifications contained in such opinion. The Company shall file
with the Securities and Exchange Commission (the "Commission"), as soon as
practicable on the date of the commencement of the Offer a
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
containing the recommendations referred to in clause (a) of the preceding
sentence; provided, however, that such recommendations may be withdrawn,
modified or amended in accordance with Section 4.7. Parent, Sub and their
counsel shall be given a reasonable opportunity to review and comment upon the
Schedule 14D-9 prior to its filing with the Commission. The Company agrees to
provide Parent and its counsel with any comments the Company or its counsel may
receive from the Commission or its staff with respect to the Schedule 14D-9
promptly after the receipt of such comments and shall provide Parent and its
counsel an opportunity to participate, including by way of discussions with the
Commission or its staff, in the response of the Company to such comments. The
Schedule 14D-9 will comply in all material respects with the provisions of
applicable federal securities laws and, on the date filed with the Commission
and on the date first published, sent or given to the Company's stockholders,
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representation is made by the Company with
respect to information supplied by Parent or Sub for inclusion in the Schedule
14D-9. The Company, Parent and Sub each agrees promptly to correct any
information provided by it for use in the Schedule 14D-9 if and to the extent
that it shall have become false or misleading in any material respect and the
Company further agrees to take all steps necessary to cause the Schedule 14D-9
as so corrected to be filed with the Commission and disseminated to the
Company's stockholders, in each case as and to the extent required by applicable
federal securities laws. In connection with the Offer, the Company will promptly
furnish (or cause to be furnished) Sub with mailing labels, security position
listings and any available listing or computer list containing the names and
addresses of the record holders of the Common Stock as of the most recent
practicable date and shall furnish (or cause to be furnished) Sub with such
additional information (including, but not limited to, updated lists of holders
of Common Stock and their addresses, mailing labels and lists of security
positions) and such other assistance as Sub or its agents may reasonably request
in communicating the Offer to the Company's stockholders. Subject to the
requirements of applicable law, and except for such steps as are necessary to
disseminate the Offer Documents and any other documents necessary to consummate
the Merger, Parent and Sub and their agents shall hold in confidence the
information contained in any such labels, listings and files, will use such
information only in connection with the Offer and the Merger and, if this
Agreement shall be terminated, will, upon request, deliver, and will use their
best efforts to cause their agents to deliver, to the Company all copies of such
information then in their possession or control.
C-2
<PAGE> 80
1.3 COMPOSITION OF THE BOARD OF DIRECTORS. Promptly upon the acceptance for
payment of, and payment by Sub in accordance with the Offer for, at least 70% of
the outstanding shares of common Stock pursuant to the Offer (the "Offer
Closing"), Sub shall be entitled to designate such number of directors on the
Board of Directors of the Company, rounded up to the next whole number, as will
give Sub, subject to compliance with Section 14(f) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), representation on such Board of
Directors equal to at least that number of directors which equals the product of
the total number of directors on the Board of Directors (giving effect to the
directors elected pursuant to this sentence) multiplied by the percentage that
such number of shares of Common Stock so accepted for payment and paid for or
otherwise acquired or owned by Sub or Parent bears to the number of shares of
Common Stock outstanding and the Company and its Board of Directors shall, at
such time, take any and all such action needed to cause Sub's designees to be
appointed to the Company's Board of Directors (including to cause directors to
resign). At all times before the Effective Time, Parent, Sub and the Company
shall use their reasonable efforts to ensure that at least two members of the
Company's Board of Directors, as constituted on the date hereof, remain on the
Company's Board of Directors, except to the extent that no such individuals or
their appointees agree to serve as directors (the "Continuing Directors"). In
the event that one or more Continuing Directors resign from the Company's Board
of Directors, Parent, Sub and the Company shall permit the remaining, or in the
case of the resignation of all Continuing Directors, the resigning, Continuing
Director or Continuing Directors to appoint his or their successors in his or
their reasonable discretion. The Company shall take all action requested by
Parent which is reasonably necessary to effect any such election, including
mailing to its stockholders the Information Statement containing the information
required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated
thereunder, and the Company agrees to make such mailing with the mailing of the
Schedule 14D-9 so long as Sub shall have provided to the Company on a timely
basis all information required to be included in the Information Statement with
respect to Sub's designees. In furtherance thereof, the Company will increase
the size of the Company's Board of Directors, or use its reasonable efforts to
secure the resignation of directors, or both, as is necessary to permit Sub's
designees to be elected to the Company's Board of Directors. As of the Offer
Closing, the Company, if so requested by Parent or Sub, will use its reasonable
efforts to cause persons designated by Sub to constitute the same percentage of
each committee of such board, each board of directors of each subsidiary of the
Company and each committee of each such board (in each case to the extent of the
Company's ability to elect such persons).
1.4 ACTION BY DIRECTORS. Following the election or appointment of the
Parent's designees pursuant to Section 1.3 and prior to the Effective Time, and,
so long as there shall be at least one Continuing Director, if requested by a
majority of the Continuing Directors, such designees shall abstain from acting
upon, and the approval of a majority of the Continuing Directors shall be
required to authorize, any termination of this Agreement by the Company, any
amendment of this Agreement requiring action by the Board of Directors of the
Company, any extension of time for the performance of any of the obligations or
other acts of Parent of Sub under this Agreement and any waiver of compliance
with any of the covenants, agreements or conditions under this Agreement for the
benefit of the Company, unless no such individuals or their appointees agree to
serve as Continuing Directors.
1.5 OFFER DOCUMENTS, SCHEDULE 14D-1 AND PROXY/INFORMATION STATEMENT. The
Offer will be conducted in accordance with the applicable provisions, and rules
and regulations of the Commission, under the Exchange Act. The documents
pursuant to which the Offer will be made, including a Tender Offer Statement on
Schedule 14D-1 and Offer to Purchase and related letter of transmittal
(collectively, the "Offer Documents"), will comply in all material respects with
the Exchange Act, and the rules and regulations thereunder and any other
applicable laws. If at any time prior to the expiration or termination of the
Offer any event occurs which should be described in an amendment or supplement
thereto, Sub will file and disseminate, as required, an amendment or supplement
which complies in all material respects with the Exchange Act and the rules and
regulations thereunder and any other applicable laws. The Company and its
counsel shall be given a reasonable opportunity to review and comment upon the
Offer Documents prior to their filing with the Commission. The Company agrees
that any information supplied by the Company for inclusion in the Offer
Documents will not, at the time the Offer Documents are first published, sent or
given to the Company's stockholders, contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company
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will promptly correct any information provided by it for inclusion in the Offer
Documents if and to the extent that such information becomes false or misleading
in any material respect, and Parent and Sub will take all steps necessary to
cause the Offer Documents as so corrected to be filed with the Commission and as
so corrected to be disseminated to the Company's stockholders, in each case as
and to the extent required by the Exchange Act. The information supplied or to
be supplied by Parent and Sub for inclusion in the proxy or information
statement, as applicable, to be prepared in connection with the Merger, if
required (the "Proxy/Information Statement") and the Schedule 14D-9 of the
Company will not, as of the date of such Proxy/Information Statement or Schedule
14D-9, as applicable, contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made, in light
of the circumstances under which they are made, not misleading. Parent and Sub
each agrees to promptly correct any information provided by it in the Proxy/
Information Statement and the Schedule 14D-9 of the Company, as applicable, if
and to the extent that such information becomes false or misleading in any
material respect.
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER. (a) Subject to the terms and conditions of this Agreement,
at the time of the Closing (as defined in Section 2.10 hereof), Articles of
Merger (the "Articles of Merger") shall be duly prepared, executed and
acknowledged by Sub and the Company in accordance with the VSCA and shall be
filed on the Closing Date (as defined in Section 2.10 hereof). The Merger of Sub
and the Company (the "Merger") shall become effective upon the issuance of the
Certificate of Merger by the State Corporation Commission of the Commonwealth of
Virginia in accordance with the provisions and requirements of the VSCA. The
date and time when the Merger shall become effective is hereinafter referred to
as the "Effective Time".
(b) At the Effective Time, Sub shall be merged with and into the Company
and the separate corporate existence of Sub shall cease, and the Company shall
continue as the surviving corporation under the laws of the Commonwealth of
Virginia under the name of "O'Sullivan Corporation" (the "Surviving
Corporation").
(c) From and after the Effective Time, the Merger shall have the effects
set forth in Section 13.1-721 of the VSCA.
2.2 CONVERSION OF STOCK. At the Effective Time:
(a) Each share of Common Stock then issued and outstanding (other than any
shares of Common Stock which are held by the Company as treasury shares or
otherwise or, directly or indirectly, by Parent or any direct or indirect
subsidiary of Parent (including Sub), all of which shall be cancelled and none
of which shall receive any payment with respect thereto) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and represent the right to receive an amount in cash, without interest,
equal to the price paid for each share of Common Stock pursuant to the Offer
(the "Merger Consideration").
(b) Each share of common stock, par value $1.00 per share of Sub then
issued and outstanding shall, by virtue of the Merger and without any action on
the part of the holder thereof, become one fully paid and nonassessable share of
common stock, $1.00 par value, of the Surviving Corporation.
2.3 SURRENDER OF CERTIFICATES. (a) Concurrently with or prior to the
Effective Time, Parent shall designate a bank or trust company located in the
United States to act as paying agent (the "Paying Agent") for purposes of making
the cash payments contemplated hereby. As soon as practicable after the
Effective Time, Parent shall cause the Paying Agent to mail and/or make
available to each holder of a certificate theretofore evidencing shares of
Common Stock (other than those which are held by the Company as treasury shares
or otherwise or, directly or indirectly by Parent or any direct or indirect
subsidiary of Parent (including Sub)) a notice and letter of transmittal
advising such holder of the effectiveness of the Merger and the procedure for
surrendering to the Paying Agent such certificate or certificates which
immediately prior to the Effective Time represented outstanding Common Stock
(the "Certificates") in exchange for the Merger Consideration deliverable in
respect thereof pursuant to this Article II. Upon the surrender for cancellation
to the Paying Agent of such Certificates, together with a letter of transmittal,
duly executed and completed in accordance with the instructions thereon, and any
other items
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specified by the letter of transmittal, the Paying Agent shall promptly pay to
the Person (as defined in Section 7.13 hereof) entitled thereto the Merger
Consideration deliverable in respect thereof. Until so surrendered, each
Certificate shall be deemed, for all corporate purposes, to evidence only the
right to receive upon such surrender the Merger Consideration deliverable in
respect thereof to which such Person is entitled pursuant to this Article II. No
interest shall be paid or accrued in respect of such cash payments.
(b) If the Merger Consideration (or any portion thereof) is to be delivered
to a Person other than the Person in whose name the Certificates surrendered in
exchange therefore are registered, it shall be a condition to the payment of the
Merger Consideration that the Certificates so surrendered shall be properly
endorsed or accompanied by appropriate stock powers and otherwise in proper form
for transfer, that such transfer otherwise be proper and that the Person
requesting such transfer pay to the Paying Agent any transfer or other taxes
payable by reason of the foregoing or establish to the satisfaction of the
Paying Agent that such taxes have been paid or are not required to be paid.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the Person claiming such
Certificate to be lost, stolen or destroyed, the Paying Agent will issue in
exchange for such lost, stolen or destroyed Certificate the Merger Consideration
deliverable in respect thereof as determined in accordance with Article II,
provided that the Person to whom the Merger Consideration is paid shall, as a
condition precedent to the payment thereof, give the Surviving Corporation a
bond in such sum as it may direct or otherwise indemnify the Surviving
Corporation in a manner satisfactory to it against any claim that may be made
against the Surviving Corporation with respect to the Certificate claimed to
have been lost, stolen or destroyed.
2.4 PAYMENT. Concurrently with or immediately prior to the Effective Time,
Parent or Sub shall deposit in trust with the Paying Agent cash in United States
dollars in an aggregate amount equal to the product of (i) the number of shares
of Common Stock outstanding immediately prior to the Effective Time on a fully
diluted basis (other than shares of Common Stock which are held by the Company
as treasury shares or otherwise or, directly or indirectly by Parent or any
direct or indirect subsidiary of Parent (including Sub)) and (ii) the Merger
Consideration (such amount being hereinafter referred to as the "Payment Fund").
The Payment Fund shall be invested by the Paying Agent as directed by Parent in
direct obligations of the United States, obligations for which the full faith
and credit of the United States is pledged to provide for the payment of
principal and interest, commercial paper rated of the highest quality by Moody's
Investors Services, Inc. or Standard & Poor's Ratings Group or certificates of
deposit, bank repurchase agreements or bankers' acceptances of a commercial bank
having at least $100,000,000 in assets (collectively, "Permitted Investments")
or in money market funds which are invested in Permitted Investments, and any
net earnings with respect thereto shall be paid to Parent as and when requested
by Parent. The Paying Agent shall, pursuant to irrevocable instructions, make
the payments referred to in Section 2.2(a) hereof out of the Payment Fund. The
Payment Fund shall not be used for any other purpose except as otherwise agreed
to by Parent. Promptly following the date which is three months after the
Effective Time, the Paying Agent shall return to Parent all cash, certificates
and other instruments in its possession that constitute any portion of the
Payment Fund (other than net earnings on the Payment Fund which shall be paid to
Parent) and the Paying Agent's duties shall terminate. Thereafter, each holder
of a Certificate may surrender such Certificate to the Surviving Corporation and
(subject to applicable abandoned property, escheat and similar laws) receive in
exchange therefor the Merger Consideration, without interest, but shall have no
greater rights against the Surviving Corporation or Parent than may be accorded
to general creditors of the Surviving Corporation or Parent under applicable
law. Notwithstanding the foregoing, neither the Paying Agent nor any party
hereto shall be liable to a holder of shares of Common Stock for any Merger
Consideration delivered to a public official pursuant to applicable property,
escheat and similar laws.
2.5 NO FURTHER RIGHTS OF TRANSFERS. At and after the Effective Time, each
holder of a Certificate shall cease to have any rights as a stockholder of the
Company, except for, in the case of a holder of a Certificate (other than shares
to be cancelled pursuant to Section 2.2(a) hereof), the right to surrender his
or her Certificate in exchange for payment of the Merger Consideration, and no
transfer of shares of Common Stock shall be made on the stock transfer books of
the Surviving Corporation. Certificates presented to the Surviving Corporation
after the Effective Time shall be cancelled and exchanged for cash as provided
in this Article II. At the close of
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business on the day of the Effective Time the stock ledger of the Company with
respect to Common Stock shall be closed.
2.6 STOCK OPTION AND OTHER PLANS. Each outstanding stock option to purchase
Common Stock (an "Option") heretofore granted under the Company's 1995 Stock
Option Plan, 1995 Outside Directors Stock Option Plan or 1985 Incentive Stock
Option Plan or any other employee, director or other stock option plan now or
formerly maintained by the Company (collectively, the "Option Plans"), whether
or not vested or exercisable, shall be deemed to be cancelled immediately prior
to the Effective Time and shall no longer be exercisable for the purchase of
shares of Common Stock. The holder of each Option shall receive a payment in
cash (subject to any applicable withholding taxes) at the Effective Time (the
"Cash Payment") equal to the product of (x) the total number of shares of Common
Stock subject to such Option, whether or not then vested or exercisable, and (y)
the excess, if any, of the Merger Consideration over the exercise price per
share of Common Stock subject to such Option. Prior to the Effective Time, the
Board of Directors of the Company (or, if appropriate, any committee or
subcommittee thereof) shall take such further action as may be necessary or
appropriate for the cancellation of the Options and payment of the Cash Payment.
The Option Plans and any other plan, program or arrangement providing for the
issuance or grant of any other interest in respect of the capital stock of the
Company or any subsidiary (collectively, with the Option Plans, referred to as
the "Stock Plans") shall be terminated by the Company effective as of the
Effective Time. The Company will take all steps to ensure that neither the
Company nor any of its subsidiaries is or will be bound by any Options or other
options, warrants, rights or agreements which would entitle any Person, other
than Parent or its affiliates, to own any capital stock of the Surviving
Corporation or any of its subsidiaries or to receive any payment in respect
thereof. The Company will use its best efforts to obtain all necessary consents
to ensure that as of the Effective Time, the only rights of the holders of
Options in respect of such Options will be to receive the Cash Payment in
cancellation and settlement thereof.
2.7 ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION. Subject to
Section 4.11(a), the articles of incorporation of Sub in effect immediately
prior to the Effective Time, shall be the articles of incorporation of the
Surviving Corporation after the consummation of the Merger until amended in
accordance with applicable law.
2.8 BY-LAWS OF THE SURVIVING CORPORATION. Subject to Section 4.11(a), the
by-laws of Sub in effect immediately prior to the Effective Time, shall be the
by-laws of the Surviving Corporation after the consummation of the Merger until
amended in accordance with applicable law.
2.9 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. At the Effective
Time, the directors of Sub immediately prior to the Effective Time shall be the
directors of the Surviving Corporation, until their successors are duly elected
or appointed and qualified in accordance with applicable law. At the Effective
Time, the officers of Sub immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, until their successors are duly elected
or appointed and qualified in accordance with applicable law.
2.10 CLOSING. The closing of the Merger (the "Closing") shall take place at
the offices of Thompson Hine & Flory LLP, Cleveland, Ohio, as soon as
practicable after the last of the conditions set forth in Article V hereof is
fulfilled or waived (subject to applicable law) but in no event later than the
fifth business day thereafter, or at such other time and place and on such other
date as Parent and the Company shall mutually agree (the "Closing Date").
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to Parent and Sub as follows:
(a) DUE ORGANIZATION, GOOD STANDING AND CORPORATE POWER. Each of the
Company and its subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and each such corporation has all requisite corporate power
and authority to own, lease and operate its properties and to carry on its
business as now being conducted. Each of the Company and its subsidiaries
is duly qualified or licensed to do business and is in good standing in
each
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jurisdiction in which the property owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except in such jurisdictions where the failure to be so qualified or
licensed and in good standing is not reasonably likely to have a material
adverse effect on the business, properties, assets, liabilities,
operations, results of operations, condition (financial or otherwise) or
prospects (the "Condition") of the Company and its subsidiaries taken as a
whole. The Company has made available to Parent and Sub complete and
correct copies of the Articles of Incorporation and By-Laws of the Company
and its subsidiaries, in each case as amended to the date of this
Agreement.
(b) AUTHORIZATION AND VALIDITY OF AGREEMENT. The Company has the
corporate power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement by the Company, and the consummation by it of the transactions
contemplated hereby, have been duly authorized and approved by its Board of
Directors and no other corporate action on the part of the Company is
necessary to authorize the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby (other than the approval of this Agreement and the
Merger by the holders of at least 70% of the shares of Common Stock). This
Agreement has been duly executed and delivered by the Company and is a
valid and binding obligation of the Company enforceable against the Company
in accordance with its terms, except to the extent that its enforceability
may be subject to applicable bankruptcy, insolvency, reorganization,
moratorium and similar laws affecting the enforcement of creditors' rights
generally and general equitable principles.
(c) CAPITALIZATION.
(i) The authorized capital stock of the Company consists of
30,000,000 shares of Common Stock. As of the date of this Agreement,
15,594,687 shares of Common Stock are issued and outstanding and 301,242
shares of Common Stock are reserved for issuance pursuant to outstanding
Options granted under the Stock Plans. All issued and outstanding shares
of Common Stock have been validly issued and are fully paid and
nonassessable, and are not subject to, nor were they issued in violation
of, any preemptive rights. Except as set forth in this Section 3.1(c) or
on Schedule 3.1(c) (i) of the disclosure letter to this Agreement (the
"Disclosure Letter"), (i) there are no shares of capital stock of the
Company authorized, issued or outstanding and (ii) there are not as of
the date hereof, and at the Effective Time there will not be, any
outstanding or authorized options, warrants, rights, subscriptions
claims of any character, agreements, obligations, convertible or
exchangeable securities, or other commitments, contingent or otherwise,
relating to Common Stock or any other shares of capital stock of the
Company, pursuant to which the Company is or may become obligated to
issue shares of Common Stock, any other shares of its capital stock or
any securities convertible into, exchangeable for, or evidencing the
right to subscribe for, any shares of the capital stock of the Company.
The Company has no authorized or outstanding bonds, debentures, notes or
other indebtedness with respect to which the holders thereof have the
right to vote (or convertible or exchangeable into or exercisable for
securities having the right to vote) with the stockholders of the
Company or any of it subsidiaries on any matter ("Voting Debt"). As of
the Effective Time, the Surviving Corporation will have no obligation to
issue, transfer or sell any shares of Common Stock of the Surviving
Corporation pursuant to any Employee Plan (as hereinafter defined) or
otherwise. Schedule 3.1(c)(i) of the Disclosure Letter lists, as of the
date of this Agreement, the number of shares of Common Stock subject to,
and the exercise price of, each outstanding Option. The Company has made
available to Parent and Sub complete and correct copies of the Stock
Plans and the forms of option agreement used with respect to each Option
Plan.
(ii) Schedule 3.1 (c) (ii) of the Disclosure Letter lists all of
the Company's subsidiaries. All of the outstanding shares of capital
stock of each of the Company's subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable, are not subject
to, nor were they issued in violation of, any preemptive rights, and are
owned, of record and beneficially, by the Company, free and clear of all
liens, claims, security interests, charges, encumbrances, options or
claims whatsoever ("Encumbrances"). No shares of capital stock of any of
the Company's subsidiaries are reserved for issuance and there are no
outstanding or authorized options, warrants, rights, subscriptions,
claims of any
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character, agreements, obligations, convertible or exchangeable
securities, or other commitments, contingent or otherwise, relating to
the capital stock of any subsidiary of the Company, pursuant to which
such subsidiary is or may become obligated to issue any shares of
capital stock of such subsidiary or any securities convertible into,
exchangeable for, or evidencing the right to subscribe for, any shares
of such subsidiary. Except for the subsidiaries listed on Schedule
3.1(c)(ii) of the Disclosure Letter, the Company does not own, directly
or indirectly, any capital stock or other equity interest in any Person
or have any direct or indirect equity or ownership interest in any
Person and neither the Company nor any of its subsidiaries is subject to
any obligation or requirement to provide funds for or to make any
investment (in the form of a loan, capital contribution or otherwise) to
or in any Person. The Company's subsidiaries have no Voting Debt.
(d) CONSENTS AND APPROVALS; NO VIOLATIONS. Except as disclosed in
Schedule 3.1(d) of the Disclosure Letter and assuming (i) the filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), are made and the waiting period thereunder has
been terminated or has expired, (ii) the requirements of the Exchange Act
relating to the Proxy/Information Statement and the Offer are met, (iii)
the filing of the Articles of Merger and other appropriate merger
documents, if any, as required by the VSCA, is made and (iv) approval of
this Agreement and the Merger by the holders of at least 70% of the
outstanding shares of Common Stock is obtained, the execution and delivery
of this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby will not: (1) violate any provision of the
articles of incorporation or by-laws of the Company or any of its
subsidiaries, each as amended; (2) violate any statute, ordinance, rule,
regulation, order or decree of any court or of any governmental or
regulatory body, agency or authority applicable to the Company or any of
its subsidiaries or by which any of their respective properties or assets
may be bound; (3) require any filing with, or permit, consent or approval
of, or the giving of any notice to, any governmental or regulatory body,
agency or authority; or (4) result in a violation or breach of, conflict
with, constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or
acceleration) under, or result in the creation of any Encumbrance upon any
of the properties or assets of the Company or any of its subsidiaries
under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, license, franchise, permit, agreement, lease,
franchise agreement or other instrument or obligation to which the Company
or any of its subsidiaries is a party, or by which it or any of their
respective properties or assets may be bound except, in the case of clauses
(2), (3) and (4) above, for any such filing, permit, consent, approval or
violation, which is not reasonably likely to have a material adverse effect
on the Condition of the Company and its subsidiaries, taken as a whole, and
is not reasonably likely to prevent or materially delay consummation of the
transactions contemplated by this Agreement.
(e) COMPANY REPORTS AND FINANCIAL STATEMENTS.
(i) Since January 1, 1998, the Company has filed all material
forms, reports, statements and other documents required to be filed by
it with the Commission, including without limitation (a) all Annual
Reports on Form 10-K, (b) all Quarterly Reports on Form 10-Q, (c) all
proxy statements relating to meetings of stockholders (whether annual or
special), (d) all Current Reports on Form 8-K and (e) all other reports,
schedules, registration statements and other documents required to be
filed with the Commission. All of the documents filed by the Company
with the Commission during such period, including all exhibits contained
or incorporated by reference in such documents, are collectively
referred to as the "Commission Filings." The Commission Filings, as
amended to date, (i) were prepared in all material respects in
accordance with the requirements of the Securities Act of 1933, as
amended, or the Exchange Act, as the case may be, and (ii) did not at
the time they were filed contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Company
has, prior to the date of this Agreement, made available to Parent true
and complete copies of all Commission Filings.
(ii) Each of the consolidated balance sheets of the Company and its
consolidated subsidiaries as of the end of the fiscal years ended
December 31, 1998 and 1997 and the consolidated statements of
operations, consolidated statement of stockholders' equity and
consolidated statements of cash flows
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for the fiscal years ended December 31, 1998 and 1997 included in the
Commission Filings, were prepared in accordance with generally accepted
accounting principles (as in effect when prepared) applied on a
consistent basis (except as may be indicated therein or in the notes or
schedules thereto) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the results of operations and
changes in financial position for the periods then ended.
(f) ABSENCE OF CERTAIN CHANGES.
(i) Except as previously disclosed in the Commission Filings or as
otherwise disclosed in Schedule 3.1(f) or Schedule 3.1(k) of the
Disclosure Letter or as otherwise contemplated by this Agreement, since
December 31, 1998 (i) there has not been any material adverse change in
the Condition of the Company and its subsidiaries taken as a whole; (ii)
the businesses of the Company and each of its subsidiaries have been
conducted only in the ordinary course, the Company and its subsidiaries
have not engaged in any material transaction or entered into any
material agreement outside of the ordinary course of business and, to
the knowledge of the Company, neither the Company nor any of its
subsidiaries has incurred any material liabilities (direct, contingent
or otherwise) ; (iii) there has been no declaration, setting aside or
payment of any dividend or other distribution with respect to the Common
Stock or any other capital stock of the Company (except for regular
quarterly dividends) or any repurchase, redemption or other acquisition
by the Company of any shares of Common Stock or other capital stock of
the Company; (iv) there has not been any material amendment of any term
of any outstanding security of the Company; and (v) there has not been
any change in any method of accounting or accounting practice by the
Company, except for any such change required because of a concurrent
change in generally accepted accounting principles.
(ii) Furthermore, except as disclosed in Schedule 3.1(f) of the
Disclosure Letter, since December 31, 1998, there has not been any (a)
grant of any severance or termination pay or stay-in-place bonus to any
director or officer of the Company or any of its subsidiaries, (b)
entering into of any employment, deferred compensation or other similar
agreement (or any material amendment to any such existing agreement)
with any director or officer of the Company or any of its subsidiaries,
(c) increase in benefits payable under any existing severance or
termination pay or stay-in-place bonus policies or agreements with any
director or officer of the Company or any of its subsidiaries, except as
provided under any Employee Plan, contract, agreement or arrangement, or
(d) increase in compensation, bonus or other benefits payable to any
director or officer of the Company or any of its subsidiaries, except
for normal annual adjustments that are not unusual in nature or amount
or except as provided under any Employee Plan, contract, agreement or
arrangement listed in the Disclosure Letter.
(g) PERMITS; COMPLIANCE. Except as is disclosed in Schedule 3.1(g) of
the Disclosure Letter, the Company is in possession of all franchises,
grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary to own,
lease and operate its properties and to carry on its business in
substantially the manner as now being conducted, other than those of which
the failure of the Company to be in possession is not reasonably likely to
have a material adverse effect on the Condition of the Company and its
subsidiaries taken as a whole (collectively, the "Company Permits"). Except
as set forth in Schedule 3.1(g) of the Disclosure Letter, the Company is
not in conflict with, or in default or violation of, (a) any federal, state
or foreign law applicable to the Company or by which any of its properties
are bound or subject or (b) any of the Company Permits, other than
conflicts, defaults or violations that are not reasonably likely to have a
material adverse effect on the Condition of the Company and its
subsidiaries taken as a whole. Except as set forth in Schedule 3.1(g) of
the Disclosure Letter, since January 1, 1999, the Company has not received
any notification with respect to possible material conflicts, defaults or
violations of any federal, state, local or foreign law applicable to the
Company or by which any of its properties are bound or subject that have
not been cured without any further material liability or obligation.
(h) LITIGATION. Except as disclosed in the Commission Filings or in
Schedule 3.1(h) of the Disclosure Letter, there is no action, suit,
proceeding at law or in equity, or any arbitration or any administrative or
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other proceeding by or before (or to the best knowledge of the Company any
investigation by) any governmental or other instrumentality or agency,
pending, or, to the best knowledge of the Company, threatened, against or
affecting the Company or any of its subsidiaries, or any of their
properties or rights which, individually or in the aggregate, is reasonably
likely to have a material adverse effect on the Condition of the Company
and its subsidiaries taken as a whole. Except as disclosed in the
Commission Filings or in Schedule 3.1(h) of the Disclosure Letter, neither
the Company nor any of its subsidiaries is subject to any judgment, order
or decree entered in any lawsuit or proceeding which could have a material
adverse effect on the Condition of the Company and its subsidiaries taken
as a whole or on the ability of the Company or any subsidiary to conduct
its business as presently conducted or are reasonably likely to prevent or
delay consummation of the Offer or the Merger.
(i) EMPLOYEE BENEFIT PLANS.
(i) Schedule 3.1(i) of the Disclosure Letter lists all "employee
benefit plans" within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"), including, without limitation, all
retirement, savings and other pension plans, all health, severance,
insurance, disability and other employee welfare plans and all
incentive, vacation, accrued leave, sick pay, sick leave and other
similar plans, all bonus, stock option, stock purchase, restricted
stock, incentive, profit-sharing, deferred compensation, supplemental
retirement, unemployment benefit, severance and other employee benefit
plans, programs or arrangements (whether or not insured) and all
material employment, termination, severance, stay-in-place bonus or
compensation agreements, in each case for the benefit of, or relating to
current or former employees or current or former directors of the
Company, whether or not in writing or exempt from the provisions of
ERISA, that the Company or any of its subsidiaries maintain, contribute
to or are otherwise a party to ("Employee Plans"). For purposes of all
of the representations contained in this Section 3.1 (i), the term
"subsidiaries" shall include all employers (whether or not incorporated)
that are by reason of common control treated together with the Company
or any of its subsidiaries as a single employer within the meaning of
Section 414 of the Internal Revenue Code of 1986, as amended, and the
rules and regulations thereunder (the "Code").
(ii) All Employee Plans have been maintained and operated in all
material respects in compliance with their terms and the requirements
prescribed by all applicable statutes, orders or governmental rules or
regulations with respect thereto, and the Company and its subsidiaries
have performed all material obligations required to be performed by them
under, and are not in any material respect in default under or in
violation of, any of the Employee Plans.
(iii) Except as set forth in Schedule 3.1(i) of the Disclosure
Letter, each Employee Plan intended to be qualified under Section 401(a)
of the Code has heretofore been determined by the Internal Revenue
Service to so qualify, and each trust created thereunder has heretofore
been determined by the Internal Revenue Service to so qualify, and each
trust created thereunder has heretofore been determined by the Internal
Revenue Service to be exempt from tax under the provisions of Section
501(a) of the Code and, to the best knowledge of the Company and its
subsidiaries, nothing has occurred since the date of the most recent
determination that would be reasonably likely to cause any such Employee
Plan or trust to fail to qualify under Section 401(a) or 501(a) of the
Code.
(iv) Neither the Company nor any of its subsidiaries have incurred
any material liability to the Pension Benefit Guaranty Corporation
("PBGC") under Section 4001 ET SEQ. of ERISA, and no condition exists
that could reasonably be expected to result in the Company or any of its
subsidiaries incurring material liability under Title IV of ERISA,
either singly or as a member of any trade or business, whether or not
incorporated, under common control of or affiliated with the Company,
within the meaning of Section 414(b), (c), (m) or (o) of the Code. All
premiums payable to the PBGC have been paid when due.
(v) The Company has made available to Parent copies of all material
documents in connection with each Employee Plan including, without
limitation (where applicable), (a) all Employee Plans as in effect on
the date hereof, together with all amendments thereto; (b) all current
summary plan
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descriptions, if applicable; (c) all current trust agreements,
declarations of trust and other documents establishing other funding
arrangements (and all amendments thereto and the latest financial
statements thereof); (d) the most recent Internal Revenue Service
determination letter, if applicable; (e) annual reports required to be
filed within the last year pursuant to ERISA or the Code with respect to
the Employee Plans; and (f) the most recently prepared financial
statements.
(vi) Neither the Company nor any of its subsidiaries has engaged in
any non-exempt prohibited transaction (within the meaning of Section
4975 of the Code or Section 406 of ERISA) with respect to any Employee
Plan that would subject any of them to a material tax, penalty or
liability under ERISA or the Code.
(vii) Full payment has been made of all amounts which the Company
or any of its subsidiaries is required, under applicable law or under
any Employee Plan, to have paid as contributions thereto as of the last
day of the most recent fiscal year of such Employee Plan ended prior to
the date hereof and as of the date hereof.
(viii) There are no actions, suits or claims pending, or to the
best knowledge of the Company, threatened or anticipated (other than
routine claims for benefits) with respect to any Employee Plan.
(ix) Except as set forth on Schedule 3.1(i) of the Disclosure
Letter, no Employee Plan provides for the payment of severance or any
other benefits upon the termination of an employee's employment.
(j) TAXES. The Company has filed or caused to be filed, within the
times and in the manner prescribed by law, all United Stated federal,
state, local and foreign tax returns and tax reports ("Tax Returns") which
are required to be filed by, or with respect to, and are material to, the
Company or any of its subsidiaries. Such Tax Returns reflect accurately all
material liability for taxes of the Company and its subsidiaries for the
periods covered thereby. All material federal, state, local and foreign
income, profits, franchise, sales, use, occupancy and excise taxes and
other material taxes, assessments, duties, fees, levies, imports or other
governmental charges (including any interest and penalties thereon)
("Taxes") payable by, or due from, the Company or any of its subsidiaries
have been fully paid or adequately disclosed and fully provided for on the
financial statements of the Company and its subsidiaries in accordance with
generally accepted accounting principles. No audit or other examination,
pending or, to the best knowledge of the Company, threatened litigation or
appeal of any Tax Return or Tax liability of the Company or any of its
subsidiaries is currently in progress (or to the best knowledge of the
Company scheduled to be conducted as of the date hereof). There are no
outstanding agreements or waivers extending the statutory period of
limitation applicable to any Tax Return of the Company or any of its
subsidiaries. Except as provided in Schedule 3.1(j) of the Disclosure
Letter, neither the Company nor any of its subsidiaries has been included
in any "consolidated", "unitary" or "combined" Tax Return provided for
under the laws of the United States, any foreign jurisdiction or any state
or locality for any taxable period for which the statute of limitations has
not expired. All material Taxes which the Company or any of its
subsidiaries were required by law to withhold in connection with amounts
paid or owing to any employee or independent contractor have been timely
paid over to the proper authorities to the extent due and payable. Except
as provided in Schedule 3.1(j) of the Disclosure Letter, there are no tax
sharing, allocation, indemnification or similar agreements in effect as
between the Company or any predecessor or affiliate thereof and any other
party (including any of their predecessors or affiliates) under which the
Company or any of the Company's subsidiaries are liable or could be liable
for any Taxes or other claims of any party.
(k) LIABILITIES. Except as set forth in the Commission Filings or as
disclosed in Schedule 3.1(k) of the Disclosure Letter or as otherwise
contemplated by this Agreement, neither the Company nor any of its
subsidiaries has any material outstanding claims, liabilities or
indebtedness, contingent or otherwise, that would be required to be
disclosed in the Company's consolidated financial statements prepared in
accordance with generally accepted accounting principles applied on a
consistent basis, other than liabilities incurred subsequent to December
31, 1998 in the ordinary course of business. Neither the Company nor any of
its subsidiaries is in default in respect of the material terms and
conditions of any indebtedness or other agreement.
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(l) BROKER'S OR FINDER'S FEE. Except for Bowles Hollowell Conner
(whose fees and expenses will be paid by the Company in accordance with the
Company's agreement with such firm, a true and correct copy of which has
been provided to Parent), no agent, broker, Person or firm acting on behalf
of the Company is, or will be, entitled to any fee, commission or broker's
or finder's fees from any of the parties hereto, or from any Person
controlling, controlled by, or under common control with any of the parties
hereto, in connection with this Agreement or any of the transactions
contemplated hereby.
(m) ENVIRONMENTAL LAWS AND REGULATIONS. Except as disclosed in the
Commission Filings or in Schedule 3.1(m) of the Disclosure Letter or as
would not, individually or in the aggregate, have a material adverse effect
on the Condition of the Company and its subsidiaries taken as a whole, (i)
the Company and its subsidiaries are in compliance with all Environmental
Laws; (ii) Hazardous Substances requiring remediation under any
Environmental Law have not been released or disposed of on any real
property owned or operated by the Company or any subsidiary of the Company;
(iii) the Company and its subsidiaries are not subject to liability for any
notice of off-site disposal or contamination; (iv) the Company and its
subsidiaries have not received notice of any Environmental Claims under any
Environmental Law; and (v) there are no facts, conditions, occurrences or
circumstances regarding the Company, its subsidiaries or any property owned
or operated by the Company or its subsidiaries that could reasonably be
expected (a) to form the basis of any Environmental Claim against the
Company, its subsidiaries or any property owned or operated by the Company
or its subsidiaries, or (b) to cause such property to be subject to any
restrictions on the ownership, use, or transferability of any such property
under any Environmental Law. "Environmental Law" means any applicable law,
regulation, order or decree relating to Hazardous Substances or the
protection of human health or the environment. "Hazardous Substance" means
any hazardous or toxic material, substance, waste, pollutant or contaminant
as defined under any Environmental Law, in any concentration, including,
without limitation, any petroleum or petroleum products, friable asbestos
or polychlorinated biphenyls. "Environmental Claims" means any and all
administrative, regulatory or judicial actions, suits, demand letters,
claims, liens, notices of noncompliance or violation of, investigations or
proceedings relating in any way to any Environmental Law (hereinafter
"claims"), including without limitation, (i) any and all Claims by
governmental or regulatory authorities for enforcement, clean-up, removal,
response, remedial or other actions or damages pursuant to any applicable
Environmental Law and (ii) any and all Claims by any third party seeking
damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Substances or arising from
alleged injury or threat of injury to human health, safety or the
environment.
(n) STATE TAKEOVER STATUTES; NO STOCKHOLDER RIGHTS PLAN. The Board of
Directors of the Company has approved the Offer, the Merger, this Agreement
and the Share Tender Agreements and such approval is sufficient to render
inapplicable to the Offer, the Merger, this Agreement and the Share Tender
Agreements the provisions of Articles 14 and 14.1 of the VSCA. The Company
does not have a stockholder rights plan or "poison pill," but the Company's
Amended and Restated Articles of Incorporation, as amended, contain a
provision (which the Company does not believe constitutes such a plan or
"poison pill") requiring a super-majority stockholder vote to approve
certain matters such as the Merger.
(o) OPINION OF FINANCIAL ADVISOR. The Company has received the opinion
of Bowles Hollowell Conner to the effect that, as of the date of this
Agreement, the consideration to be received in the Offer and the Merger by
the Company's stockholders is fair to the Company's stockholders from a
financial point of view, subject to the usual and customary assumptions and
qualifications contained in such opinion, and a complete and correct signed
copy of such opinion has been, or promptly upon receipt thereof will be,
delivered to Parent.
(p) MATERIAL CONTRACTS. Except as set forth in Schedule 3.1(p) of the
Disclosure Letter or as disclosed in the Commission Filings, neither the
Company nor any of its subsidiaries is a party to, or is bound by (a) any
material agreement, indenture or other instrument relating to the borrowing
of money by the Company or any of its subsidiaries or the guarantee by the
Company or any of its subsidiaries of any such obligation relating to the
borrowing of money or (b) any other contract or agreement or amendment
thereto that (i) should be or should have been filed as an exhibit to a
Form 10-K filed by the Company with the Commission or (ii) places any
material restrictions on the right of the Company or any of its
subsidiaries
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to engage in any material business activity currently conducted
(collectively, the "Company Contracts"). Neither the Company nor any of its
subsidiaries is in material default under any of the Company Contracts,
and, to the knowledge of the Company, there has not occurred any event
that, with the lapse of time or the giving of notice or both, would
constitute such a material default under any of the Company Contracts.
(q) LABOR. Except as set forth on Schedule 3.1(q) of the Disclosure
Letter, the Company is not a party to or bound by any collective bargaining
agreement respecting its employees, nor, to the knowledge of the Company,
is there existing or contemplated any threat of any strike, organized
walkout or other organized work stoppage or labor organizational effort by
any employees of the Company.
(r) VOTE REQUIRED. The only vote of the holders of any class or series
of capital stock of the Company necessary to approve the Merger is the
affirmative vote of the holders of at least 70% of the outstanding shares
of Common Stock. There is no vote of the holders of any class or series of
capital stock of the Company necessary in order for Sub to commence and
consummate the Offer.
(s) REAL AND PERSONAL PROPERTY.
(i) Schedule 3.1(s) of the Disclosure Letter lists all material
real property owned (the "Owned Real Property") or leased (the "Leased
Real Property") by the Company or any of its subsidiaries. Except as set
forth on Schedule 3.1(s) of the Disclosure Letter, the Company has (i)
good and valid title to all of the Owned Real Property, (ii) good and
valid title to all of the tangible personal property recorded as an
asset in the consolidated financial statements of the Company as of
December 31, 1998, and not disposed of since that date in the ordinary
course of business, and (iii) a valid and existing leasehold interest in
all of the Leased Real Property, that, in the case of each of clauses
(i), (ii) and (iii) above, is free and clear of any Encumbrance other
than Permitted Encumbrances. For purposes of this Section 3.1(s),
"Permitted Encumbrances" means all (A) Encumbrances that do not
materially interfere with the use of, or materially diminish the value
of, the property subject thereto, (B) liens for taxes not yet due and
payable, (C) such Encumbrances as are shown in title policies or surveys
made available to Parent or Sub and (D) capital lease obligations
entered into in the ordinary course of business.
(ii) Except as set forth on Schedule 3.1(s) of Disclosure Letter,
the Owned Real Property and the Leased Real Property are, considering
the age of such property, in reasonably good condition, normal wear and
tear excepted, and are suitable in all material respects for their
present purposes. Except as set forth on Schedule 3.1(s) of the
Disclosure Letter, to the knowledge of the Company, none of the
buildings or improvements owned or leased by the Company or any of it
subsidiaries is subject to any material structural defect. The primary
business operations currently conducted on the owned Real Property and
the Leased Real Property are not in violation of applicable zoning laws
and regulations, except for violations that could not have a material
adverse effect on the Condition of the Company and its subsidiaries
taken as a whole. To the knowledge of the Company, the buildings and
other structures located on the Owned Real Property do not encroach on
the real property of any other Person, and, to the knowledge of the
Company, no building or structure of any other Person encroaches on any
of the Owned Real Property, except for encroachments that could not have
a material adverse effect on the Condition of the Company and its
subsidiaries taken as a whole. The buildings and structures on the Owned
Real Property have direct vehicular access (or indirect vehicular access
through valid and enforceable easements) to public roads and all
appropriate utilities necessary for the conduct of the business thereon
as it is presently conducted. The Company has made available to Parent
all owner's policies of title insurance as to Owned Real Property,
lessee's policies of title insurance as to Leased Real Property, and
related surveys that are in its possession.
(t) INTELLECTUAL PROPERTY RIGHTS.
(i) Schedule 3.1(t) of the Disclosure Letter lists each of the
following items: (i) material patents and applications therefor,
registrations of material trademarks (including service marks) and
applications therefor, and registration of material copyrights and
applications therefor that are owned by the Company or any of its
subsidiaries, (ii) unexpired material licenses relating to Intellectual
Property
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Rights that have been granted to or by the Company or any of its
subsidiaries, and (iii) all other material agreements of the Company or
any of its subsidiaries relating to Intellectual Property Rights. As
used in this Agreement, the term "Intellectual Property Rights" includes
patents, patent applications, trademarks, trademark applications,
service marks, service mark applications, copyrights, copyright
applications, and proprietary trade names, publication rights, computer
programs (including source codes and object codes), inventions, know
how, trade secrets, technology, processes and formulae.
(ii) Except as set forth in Section 3.1(t) of the Disclosure
Letter, the Company and its subsidiaries own or have the right to use
all of the material Intellectual Property Rights that are used in the
conduct of the business of the Company or its subsidiaries. Except as
set forth in Schedule 3.1(t) of the Disclosure Letter and to the
knowledge of the Company, such ownership and right to use are free and
clear of all Encumbrances and claims or rights to use of third parties.
The Company has no knowledge of any material allegations or claims that
any product or process manufactured, used, sold or under development by
or for the Company or its subsidiaries infringes on the Intellectual
Property Rights of any third party. Neither the Company nor any of its
subsidiaries has knowledge of any material challenge to the validity,
ownership or right to use or license by the Company of any of the
Intellectual Property Rights owned, used or licensed by the Company.
(u) INSURANCE. Schedule 3.1(u) of the Disclosure Letter lists, and the
Company has made available to Parent for review, current and complete
copies of, all insurance policies, binders and surety and fidelity bonds
relating to the Company and its subsidiaries (including, without
limitation, all policies or binders of casualty, general liability and
workers' compensation insurance, but excluding the owner's and lessee's
policies of title insurance referred to in Section 3.1(s)), all of which
are currently in full force and effect. To the knowledge of the Company,
all premiums and other amounts due and payable under each such policy,
binder and bond have been timely paid. To the knowledge of the Company,
neither the Company nor any of its subsidiaries is in default with respect
to any material provision contained in any such policy, binder or bond and
has not failed to give any notice of or present any material claim
thereunder as required under the terms of the policy. Except for claims set
forth on Schedule 3.1(u) of the Disclosure Letter, there are no material
outstanding unpaid claims under any such policy, binder or bond, and
neither the Company nor any of its subsidiaries has received any written
notice of cancellation or non-renewal of any such policy, binder or bond.
Except as set forth on Schedule 3.1(u) of the Disclosure Letter, neither
the Company nor any of its subsidiaries has received any written notice
from any of its insurance carriers that any insurance premiums paid by it
will be materially increased in the future as a result of the claims
experience of the Company or such subsidiary.
(v) INVENTORY. Since December 31, 1998, the inventory of the Company
and its subsidiaries has been maintained in the ordinary course of business
and consistent with the past practices of the Company and its subsidiaries.
(w) COMPUTER SOFTWARE AND DATABASES. The Company owns or has the right
to use pursuant to valid and existing licenses all of the material computer
software and databases necessary for the conduct of its business as
presently conducted ("Computer Software and Databases"). The Company has
undertaken a program to determine that the Computer Software and Databases,
and all computer hardware used by the Company and its subsidiaries, will
process dates correctly prior to, during, and after the calendar year 2000,
including but not limited to century recognition and calculations that
accommodate same century and multi-century formulas, date values, and
interface values and that reflect century changes ("Year 2000 Compliant").
The Company believes that it has taken reasonable steps to determine that
its vendors, customers and other Persons with whom it does a material
amount of business are Year 2000 Compliant.
3.2 REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB. Each of Parent and
Sub represents and warrants to the Company as follows:
(a) DUE ORGANIZATION; GOOD STANDING AND CORPORATE POWER. Each of
Parent and Sub is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which each is
incorporated and has the requisite corporate power and authority to carry
on its business as now being conducted. Each of Parent and Sub is duly
qualified or licensed to do business and is in good standing
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in each jurisdiction in which the nature of its business or the ownership
or leasing of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would not have a
material adverse effect on the Condition of Parent and its subsidiaries
taken as a whole. Parent has delivered to the Company complete and correct
copies of its certificate of incorporation and by-laws and the articles of
incorporation and by-laws of Sub, in each case as amended, to the date of
this Agreement.
(b) AUTHORIZATION AND VALIDITY OF AGREEMENT. Each of Parent and Sub
has full corporate power and authority to execute and deliver this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance
of this Agreement by Parent and Sub, and the consummation by each of them
of the transactions contemplated hereby, have been duly authorized by the
Boards of Directors of Parent and Sub. No other corporate action on the
part of either of Parent or Sub is necessary to authorize the execution,
delivery and performance of this Agreement by each of Parent and Sub and
the consummation of the transactions contemplated hereby (other than the
approval of this Agreement by the sole stockholder of Sub, if required by
the VSCA). This Agreement has been duly executed and delivered by each of
Parent and Sub and is a valid and binding obligation of each of Parent and
Sub, enforceable against each of Parent and Sub in accordance with its
terms, except to the extent that its enforceability may be subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar
laws affecting the enforcement of creditors' rights generally and general
equitable principles.
(c) CONSENTS AND APPROVALS; NO VIOLATIONS. Assuming (i) the filings
required under the HSR Act are made and the waiting period thereunder has
been terminated or has expired, (ii) the requirements of the Exchange Act
relating to the Proxy/Information Statement and the Offer are met, (iii)
the filing of the Articles of Merger and other appropriate merger
documents, if any, as required by the laws of the VSCA is made and (iv)
approval of the Merger by the sole stockholder of Sub if required by the
VSCA is received, the execution and delivery of this Agreement by Parent
and Sub and the consummation by Parent and Sub of the transactions
contemplated hereby will not: (1) violate any provision of the articles of
incorporation or by-laws of Parent or Sub, each as amended; (2) violate any
statute, ordinance, rule, regulation, order or decree of any court or of
any governmental or regulatory body, agency or authority applicable to
Parent or Sub or by which any of their respective properties or assets may
be bound; (3) require any filing with, or permit, consent or approval of,
or the giving of any notice to any governmental or regulatory body, agency
or authority; or (4) result in a violation or breach of, conflict with,
constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration)
under, or result in the creation of any Encumbrance upon any of the
properties or assets of the Parent, Sub or any of their subsidiaries under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, franchise, permit, agreement, lease or other instrument
or obligation to which Parent or Sub or any of their subsidiaries is a
party, or by which they or their respective properties or assets may be
bound except in the case of clauses (2), (3) and (4) above for any such
filing, permit, consent, approval or violation, which is not reasonably
likely to have a material adverse effect on the Condition of the Parent and
Sub, taken as a whole, and is not reasonably likely to prevent or
materially delay consummation of the transactions contemplated by this
Agreement.
(d) BROKER'S OR FINDER'S FEE. No agent, broker, Person or firm acting
on behalf of Parent or Sub is, or will be, entitled to any broker's or
finder's fees or similar fee or commission from any of the parties hereto,
or from any Person controlling, controlled by, or under common control with
any of the parties hereto, in connection with this Agreement or any of the
transactions contemplated hereby.
(e) FINANCING. Parent has sufficient funds available to purchase on a
fully diluted basis all the outstanding shares of Common Stock pursuant to
the Offer and the Merger and to pay all fees and expenses related to the
transactions contemplated by this Agreement.
(f) COMMON STOCK OWNERSHIP. As of the date hereof, none of Parent or
its subsidiaries beneficially owns (within the meaning of Rule 13d-3 under
the Exchange Act) any shares of Common Stock.
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(g) INTERIM OPERATIONS OF SUB. Sub was formed solely for the purpose
of engaging in the transactions contemplated hereby and has not engaged in
any business activities or conducted any operations other than in
connection with the transactions contemplated hereby.
ARTICLE IV
TRANSACTIONS PRIOR TO CLOSING DATE
4.1 ACCESS TO INFORMATION CONCERNING PROPERTIES AND RECORDS. During the
period commencing on the date hereof and ending on the Closing Date, the Company
shall, and shall cause each of its subsidiaries to, upon reasonable notice,
afford Parent and Sub, and their respective counsel, accountants, consultants
and other authorized representatives, reasonable access during normal business
hours to the employees, properties, books and records of the Company and its
subsidiaries in order that they may have the opportunity to make such
investigations as they shall reasonably request of the affairs of the Company
and its subsidiaries. The Company shall furnish as promptly as reasonably
practicable to Parent (a) a copy of each report, schedule, registration
statement and other document filed by it or its subsidiaries during such period
pursuant to the requirements of federal or state securities laws and (b) all
other information concerning its or its subsidiaries' business, properties and
personnel as Parent and Sub may reasonably request.
4.2 CONFIDENTIALITY. Information obtained by Parent and Sub pursuant to
Section 4.1 hereof shall be subject to the provisions of the Confidentiality
Agreement between the Company and Parent dated December 16, 1998 (the "Parent
Confidentiality Agreement").
4.3 CONDUCT OF THE BUSINESS OF THE COMPANY PENDING THE CLOSING DATE. The
Company agrees that, except as permitted, required or specifically contemplated
by, or otherwise described in, this Agreement or otherwise consented to or
approved in writing in advance by Parent, during the period commencing on the
date hereof and ending on the Closing Date:
(a) The Company and each of its subsidiaries will conduct their
respective operations only according to their ordinary and usual course of
business consistent with past practice and will use their reasonable best
efforts to preserve intact their respective business organizations, keep
available the services of their officers and employees and maintain
satisfactory relationships with licensors, suppliers, distributors, clients
and others having business relationships with them;
(b) Neither the Company nor any of its subsidiaries shall (i) make any
change in or amendment to its articles of incorporation or by-laws (or
comparable governing documents); (ii) issue or sell any shares of its
capital stock (other than in connection with the exercise of Options
outstanding on the date hereof) or any of its other securities, or issue
any securities convertible into, or options, warrants or rights to purchase
or subscribe to, or enter into any arrangement or contract with respect to
the issuance or sale of, any shares of its capital stock or any of its
other securities, or make any other changes in its capital structure; (iii)
sell or pledge or agree to sell or pledge any stock owned by it in any of
its subsidiaries; (iv) except for regular quarterly dividends, declare,
pay, set aside or make any dividend or other distribution or payment with
respect to, or split, combine, redeem or reclassify, any shares of its
capital stock; (v) enter into any contract or commitment with respect to
capital expenditures in excess of $1,000,000 or enter into any other
material contract except contracts in the ordinary course of business, it
being understood that the Company shall be permitted to make all capital
expenditures contemplated in its 1999 capital expenditure budget, (vi)
release or relinquish any material contract rights other than in the
ordinary course of business; (vii) adopt, enter into or amend in any
material respect any Employee Plan or non-employee benefit plan or program,
employment agreement, severance agreement, stay-in-place bonus agreement,
license agreement or retirement agreement, or, except in the ordinary
course of business and consistent with past practice or except as required
under any Employee Plan, contract, agreement or arrangement listed on
Schedule 3.1(i) of the Disclosure Letter, pay or commit to pay any bonus or
contingent or other extraordinary compensation to any employee or director
or increase in any manner the compensation or fringe benefits payable to
any employee or director; (viii) merge, consolidate or enter into a share
exchange with any other Person, acquire a material amount of capital stock
or assets of any other Person, or sell, lease, license, mortgage, pledge or
otherwise dispose of a
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material amount of assets to any other Person, except for the purchase or
sale of inventory in the ordinary course of business consistent, in all
material respects, with past practice; (ix) other than in the ordinary
course of business, transfer, lease, license, guarantee, sell, mortgage,
pledge, dispose of, encumber or subject to any lien, any assets or incur or
modify any indebtedness or other liability or issue any debt securities or
assume, guarantee or endorse or otherwise as an accommodation become
responsible for the obligations of any Person; (x) agree to the settlement
of any material claim or litigation; (xi) make any material tax election or
settle or comprise any material tax liability; (xii) make any material
change in its method of accounting or (xiii) agree, in writing or
otherwise, to take any of the foregoing actions; and
(c) The Company shall not, and shall not permit any of its
subsidiaries to, (i) take any action, engage in any transaction or enter
into any agreement which would cause any of the representations or
warranties set forth in Section 3.1 hereof to be untrue as of the Closing
Date or (ii) purchase or acquire, or offer to purchase or acquire, any
shares of capital stock of the Company.
4.4 PROXY/INFORMATION STATEMENT. If stockholder approval of the Merger is
required by law or the Company's Amended and Restated Articles of Incorporation
(as amended), as promptly as practicable, the Company will prepare and file a
preliminary Proxy/Information Statement with the Commission and will use its
best efforts to respond to the comments of the Commission in connection
therewith and to furnish all information required to prepare the definitive
Proxy/Information Statement (including, without limitation, financial statements
and supporting schedules and certificates and reports of independent public
accountants). Promptly after the expiration or termination of the Offer, if
required by the VSCA or the Company's Amended and Restated Articles of
Incorporation (as amended) in order to consummate the Merger, the Company will
cause the definitive Proxy/ Information Statement to be mailed to the
stockholders of the Company and, if necessary, after the definitive
Proxy/Information Statement shall have been so mailed, promptly circulate
amended, supplemental or supplemented proxy material and, if required in
connection therewith, resolicit proxies. The Company will not use any proxy
materials in connection with the meeting of its stockholders without Parent's
prior approval, which approval shall not be unreasonably withheld. The
Proxy/Information Statement will comply in all material respects with the
provisions of applicable federal securities laws and, on the date filed with the
Commission and on the date first sent to the Company's stockholders, shall not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representation is made by the Company with respect to
information supplied by Parent and Sub for inclusion in the Proxy/Information
Statement.
4.5 STOCKHOLDER APPROVAL. Promptly after the expiration or termination of
the Offer, if required by the VSCA or the Company's Amended and Restated
Articles of Incorporation (as amended) in order to consummate the Merger, the
Company, acting through its Board of Directors shall, in accordance with
applicable law, call a special meeting of the holders of Common Stock for the
purpose of voting upon this Agreement and the Merger and the Company agrees that
this Agreement and the Merger shall be submitted at such special meeting. The
Company shall use its reasonable efforts to solicit from its stockholders
proxies, and shall take all other action necessary and advisable, to secure the
vote of stockholders required by applicable law or the Company's Amended and
Restated Articles of Incorporation (as amended) to obtain the approval for this
Agreement. Subject to Section 4.7 of this Agreement, the Company agrees that it
will include in this Proxy/Information Statement the recommendation of its Board
of Directors that holders of Common Stock approve and adopt this Agreement and
approve the Merger. Parent will cause all shares of Common Stock owned by Parent
and its subsidiaries to be voted in favor of the Merger.
4.6 REASONABLE BEST EFFORTS. Subject to the terms and conditions provided
herein, each of the Company, Parent and Sub shall, and the Company shall cause
each of its subsidiaries to, cooperate and use their respective reasonable best
efforts to take, or cause to be taken, all appropriate action, and to make, or
cause to be made, all filings necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, their respective
reasonable best efforts to obtain, prior to the Closing Date, all licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and parties to contracts with the Company and its
subsidiaries as are necessary for consummation of the transactions contemplated
by this Agreement and to fulfill the conditions to
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the Offer and the Merger. The Company, Parent and Sub shall use their reasonable
efforts to consummate the Merger as promptly as practicable after the Offer
Closing.
4.7 NO SOLICITATION OF OTHER OFFERS. (a) From the date of this Agreement
until the Effective Time or the earlier termination of this Agreement in
accordance with Article VI, neither the Company nor any of its subsidiaries,
shall, directly or indirectly, take (and the Company shall not authorize or
permit its or its subsidiaries' officers, directors, employees, representatives,
consultants, investment bankers, attorneys, accountants or other agents or
affiliates, to so take) any action to (i) solicit, initiate, encourage or take
any other action to facilitate the submission of any Acquisition Proposal, or
(ii) participate in any way in discussions or negotiations with, or, furnish any
information (whether public or nonpublic), to any Person (other than Parent or
Sub) in connection with an Acquisition Proposal; provided, however, that the
Company may take any action described in clause (ii) above, if (A) such action
is taken in connection with an unsolicited Acquisition Proposal, (B) the Board
of Directors believes in its good faith judgment (based on the advice of its
financial and legal advisors) that failing to take such action would constitute
a breach of its fiduciary duties and (C) in the case of the disclosure of
nonpublic information relating to the Company in connection with an Acquisition
Proposal, the disclosure of such information is covered by a confidentiality
agreement that provides substantially the same protection to the Company as is
afforded by the Parent Confidentiality Agreement.
In addition, neither the Board of Directors of the Company nor any
committee thereof shall withdraw or modify in a manner adverse to Parent or Sub
the approval and recommendation of the Offer and this Agreement or approve or
recommend any Acquisition Proposal, provided that the Board of Directors (or a
committee thereof) may, prior to the acceptance for payment of shares of Common
Stock pursuant to the Offer, recommend to its stockholders an unsolicited
Acquisition Proposal and in connection therewith withdraw or modify its approval
or recommendation of the Offer or the Merger if (i) the Board of Directors of
the Company has determined in its good faith judgment (based on the advice of
its financial and legal advisors) that the unsolicited Acquisition Proposal is a
Superior Proposal, and (ii) simultaneously with such withdrawal, modification or
recommendation, the Company terminates this Agreement in accordance with Section
6.1(e) and pays to Parent the break-up fee in accordance with Section 6.3. Any
actions permitted under, and taken in compliance with, this Section 4.7 shall
not be deemed a breach of any other covenant or agreement of such party
contained in this Agreement. It is understood and agreed that for all purposes
of this Section 4.7 any actions taken by the Company or its subsidiaries or
their officers, directors, employees, representatives, consultants, investment
bankers, attorneys, accountants or other agents or affiliates prior to the date
hereof in soliciting, encouraging, initiating, facilitating or participating in
any discussions relating to any Acquisition Proposal shall not be construed to
render an Acquisition Proposal received after the date hereof a solicited
Acquisition Proposal.
The Company will promptly notify Parent orally and in writing of any
Acquisition Proposal or any inquiries with respect thereto. Any such written
notification will include the identity of the Person making such inquiry or
Acquisition Proposal and a description of the material terms of such Acquisition
Proposal (or the nature of the inquiry) and will indicate whether the Company is
providing or intends to provide the Person making the Acquisition Proposal with
access to nonpublic information relating to the Company or any of its
subsidiaries. The Company will, to the extent reasonably practicable, also
promptly inform Parent of any material change in the details (including
amendments or proposed amendments) of any such request or Acquisition Proposal.
In the event that the Board of Directors of the Company determines that an
Acquisition Proposal is a Superior Proposal and desires to terminate this
Agreement pursuant to Section 6.1(e), it will give Parent written notice of its
intention to terminate this Agreement no later than three business days in
advance of any date that it intends to terminate this Agreement. During that
three business day period, Parent will have the right, by giving written notice
to the Company, to match the terms of such Superior Proposal. If Parent notifies
the Company within such three business day period that it agrees to match the
terms of the Superior Proposal, the Company will forthwith cease any discussion
with the Person making the Superior Proposal, and Parent and the Company will
promptly incorporate the terms of the Superior Proposal in this Agreement.
Except for such amendments, the provisions of this Agreement (including the
provisions of this Section 4.7) will remain in full force and effect.
"Acquisition Proposal" shall mean any proposal or offer from any Person
relating to any direct or indirect acquisition or purchase of a substantial
amount of assets of the Company or any of its subsidiaries (other than investors
in the ordinary course of business) or of over 20% of any class of equity
securities of the Company or
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any of its subsidiaries or any tender offer or exchange offer that if
consummated would result in any Person beneficially owning more than 20% of any
class of equity securities of the Company or any of its subsidiaries, or any
merger, consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving the
Company and taken as a whole its subsidiaries other than the transactions
contemplated by this Agreement. "Superior Proposal" shall mean a bona fide
Acquisition Proposal on terms which a majority of the members of the Board of
Directors of the Company determines in its good faith judgment (based on the
advice of its financial and legal advisors) to be more favorable to the Company
and its stockholders than the transactions contemplated hereby.
(b) Immediately following the purchase of shares of Common Stock pursuant
to the Offer, the Company will request each Person which has heretofore executed
a confidentiality agreement in connection with its consideration of acquiring
the Company or any portion thereof other than Parent to return all confidential
information heretofore furnished to such Person by or on behalf of the Company.
(c) Nothing contained in this Section 4.7 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14e-2(a) promulgated under the Exchange Act or from making any disclosure to the
Company's stockholders if, in the opinion of the Board of Directors of the
Company, after consultation with counsel, failure to so disclose would be
inconsistent with its fiduciary duties to the Company's stockholders under
applicable law; provided that the Company does not, except as permitted by this
Section 4.7, withdraw or modify, or propose to withdraw or modify, its position
with respect to the Offer or the Merger or approve or recommend, or propose to
approve or recommend, any Acquisition Proposal.
4.8 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice
to Parent of: (a) any notice of, or other communication relating to, a material
default or event that, with notice or lapse of time or both, would become a
material default, received by the Company or any of its subsidiaries subsequent
to the date of this Agreement and prior to the Closing Date, under any material
contract to which the Company or any of its subsidiaries is a party or is
subject; (b) any material notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; (c) any action, suit, claim or proceeding commenced against
or, to the knowledge of the Company, any material threat of an action, suit,
claim or proceeding made against, or any pending investigation of the Company
that, if pending on the date of this Agreement, would have been required to be
disclosed in Schedule 3.1(h) of the Disclosure Letter or that relates to the
transactions contemplated by this Agreement; and (d) any material adverse change
in the Condition of the Company and its subsidiaries taken as a whole or the
occurrence of any event which is reasonably likely to result in any such change.
Each of the Company and Parent shall give prompt notice to the other party of
any notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the transactions
contemplated by this Agreement.
4.9 HSR ACT. The Company and Parent shall, within five business days from
the date of this Agreement, file Notification and Report Forms under the HSR Act
with the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and shall use their best
efforts to respond as promptly as practicable to all inquiries received from the
FTC or the Antitrust Division for additional information or documentation.
4.10 EMPLOYEE BENEFITS. Parent agrees that, during the period commencing at
the Effective Time and ending on the second anniversary thereof, the employees
(and former employees) of the Company and its subsidiaries will continue to be
provided with employee benefits and benefit plans no less favorable than those
in the aggregate provided by the Company and its subsidiaries as of the
Effective Time. Parent will, and will cause the Surviving Corporation to, honor
employee (or former employee) benefit obligations and contractual rights
existing as of the Effective Time and all employment, incentive and deferred
compensation or severance agreements, plans or policies adopted by the Board of
Directors of the Company (or any committee or subcommittee thereof) prior to the
date hereof in accordance with their terms, in each case to the extent disclosed
in the Disclosure Letter. Parent will provide employees of the Company and its
subsidiaries with credit for service with the Company or any of its subsidiaries
or predecessors prior to the Effective Time for purposes of determining
eligibility to participate vesting, benefits and benefit accrual under any
employee benefit plans of Parent or its subsidiaries. Employees of the Company
and its subsidiaries shall not be subject to pre-existing
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condition limitations, proof of insurability requirements, or any similar
conditions or requirements under health benefit plans maintained by Parent or
its subsidiaries that would delay commencement of an employee's participation in
or limit an employee's level of coverage under, any of the health benefit plans
of Parent or its subsidiaries. Subject to the action taken by the Board of
Directors with respect to the Salary Continuation Agreements Trust as set forth
in Section 1.1.(c) and from and after the Effective Time, the Surviving
Corporation shall assume and fully discharge, and Parent shall guarantee the
performance of, all obligations of the Company (and the Surviving Corporation)
under the salary continuation agreements listed on Appendix A of the Salary
Continuation Agreements Trust or on Schedule 3.1(i) of the Disclosure Letter
(the "Salary Continuation Agreements"). The Company, Parent and its subsidiaries
(including the Surviving Corporation) shall not amend or terminate any of the
Salary Continuation Agreements at any time, shall continue to make sufficient
cash deposits into the Salary Continuation Agreements Trust to permit the
trustee to pay all premiums required to be paid pursuant to life insurance
contracts held in the Salary Continuation Agreements Trust and shall not
directly or indirectly take any action that would in any way diminish or reduce
the cash surrender value of such life insurance contracts (including, but not
limited to, borrowing against the cash surrender value of the life insurance
contracts).
4.11 DIRECTORS' AND OFFICERS' INSURANCE; INDEMNIFICATION. (a) The articles
of incorporation and the by-laws of the Surviving Corporation shall contain the
provisions with respect to indemnification and exculpation from liability set
forth in the Company's Amended and Restated Articles of Incorporation (as
amended) and By-Laws on the date of this Agreement, which provisions shall not
be amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who on or prior to the Effective Time were directors, officers,
employees or agents of the Company, unless such modification is required by law.
(b) For six years from the Effective Time, Parent shall either (x) maintain
in effect the Company's current directors' and officers' liability insurance
covering those persons who are currently covered on the date of this Agreement
by the Company's directors' and officers' liability insurance policy (a copy of
which has been heretofore delivered to Parent) (the "Indemnified Parties");
provided, however, that in no event shall Parent be required to expend in any
one year an amount in excess of 200% of the annual premiums currently paid by
the Company for such insurance which the Company represents to be $107,000 for
the twelve month period ending December 31, 1999; and, provided, further, that
if the annual premiums of such insurance coverage exceed such amount, Parent
shall be obligated to obtain a policy with the greatest coverage available for a
cost not exceeding such amount and to give prompt written notice of any
reduction in the amount or scope of coverage resulting therefrom to the
directors and officers affected thereby; provided further, that Parent may
substitute for such Company policies, policies with at least the same coverage
containing terms and conditions which are no less advantageous and provided that
said substitution does not result in any gaps or lapses in coverage with respect
to matters occurring prior to the Effective Time or (y) cause the Parent's,
directors' and officers' liability insurance then in effect to cover those
persons who are covered on the date of this Agreement by the Company's
directors' and officers' liability insurance policy with respect to those
matters covered by the Company's directors' and officers' liability policy.
(c) Parent agrees, from and after the date of purchase of shares of Common
Stock pursuant to the Offer, to indemnify all Indemnified Parties to the fullest
extent permitted by applicable law with respect to all acts and omissions
arising out of such individuals' services as officers, directors, employees or
agents of the Company or any of its subsidiaries or as trustees or fiduciaries
of any plan for the benefit of employees, or otherwise on behalf of, the Company
or any of its subsidiaries, occurring prior to the Effective Time including,
without limitation, the transactions contemplated by this Agreement. Without
limitation of the foregoing, in the event any such Indemnified Party is or
becomes involved in any capacity in any action, proceeding or investigation in
connection with any matter, including without limitation, the transactions
contemplated by this Agreement, occurring prior to, and including, the Effective
Time, Parent, from and after the date of purchase of shares of Common Stock
pursuant to the Offer, will pay as incurred such Indemnified Party's legal and
other expenses (including the cost of any investigation and preparation)
incurred in connection therewith. Parent shall pay all expenses, including
attorneys' fees, that may be incurred by any Indemnified Party in enforcing this
Section 4.11 or any action involving an Indemnified Party resulting from the
transactions contemplated by this Agreement. If for any reason
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the indemnification provided for in this Section 4.11 is unavailable with
respect to any Indemnified Party or insufficient to hold him or her harmless
with respect to any such loss, claim, damage or liability, then Parent shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect (i) the relative economic interests of the Company and its affiliates on
the one hand and Parent on the other in connection with the Offer and the Merger
to which such loss, claim, damage or liability relates, (ii) the relative fault
of the Company and its affiliates on the one hand and Parent on the other with
respect to such loss, claim, damage or liability, and (iii) any other relevant
equitable considerations.
(d) This Section 4.11 shall survive the consummation of the Merger, is
intended to benefit the Company, Parent, the Surviving Corporation and the
Indemnified Parties, and shall be binding on all successors and assigns of
Parent and the Surviving Corporation.
4.12 FINANCING. Parent shall provide Sub with the funds necessary to
consummate the Offer and the Merger and the transactions contemplated hereby in
accordance with the terms hereof.
4.13 PARENT GUARANTEE. Parent hereby guarantees the performance of all of
Sub's obligations under this Agreement.
ARTICLE V
CONDITIONS PRECEDENT TO MERGER
5.1 CONDITIONS PRECEDENT TO OBLIGATION OF PARENT, SUB AND THE COMPANY. The
respective obligations of Parent and Sub, on the one hand, and the Company, on
the other hand, to effect the Merger are subject to the satisfaction or waiver
(subject to applicable law) at or prior to the Closing Date of each of the
following conditions:
(a) APPROVAL OF COMPANY'S STOCKHOLDERS. To the extent required by
applicable law or the Company's Amended and Restated Articles of
Incorporation (as amended), this Agreement and the Merger shall have been
approved and adopted by holders of at least 70% of the Common Stock of the
Company in accordance with applicable law (if required by applicable law)
or the Company's Amended and Restated Articles of Incorporation (as
amended);
(b) HSR ACT. Any waiting period (and any extension thereof) under the
HSR Act applicable to the Merger shall have expired or been terminated;
(c) INJUNCTIONS. No preliminary or permanent injunction or other order
shall have been issued by any court or by any governmental or regulatory
agency, body or authority which prohibits the consummation of the Offer or
the Merger and the transactions contemplated by this Agreement and which is
in effect on the Closing Date; provided, however, that, in the case of a
decree, injunction or other order, each of the parties shall have used
reasonable efforts to prevent the entry of any such injunction or other
order and to appeal as promptly as possible any decree, injunction or other
order that may be entered;
(d) PAYMENT FOR COMMON STOCK. Sub shall have accepted for payment and
paid for the shares of Common Stock tendered pursuant to the Offer; and
(e) STATUTES. No statute, rule, regulation, executive order, decree or
order of any kind shall have been enacted, entered, promulgated or enforced
by any court or governmental authority which prohibits the consummation of
the Offer or the Merger or has the effect of making the purchase of Common
Stock illegal.
5.2 CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY. The obligation of
the Company to effect the Merger is also subject to the satisfaction or waiver,
at or prior to the Closing Date, of the following condition:
(a) PERFORMANCE BY PARENT AND SUB. Each of the Parent and Sub shall
have performed in all material respects all obligations and agreements, and
complied in all material respects with all covenants and conditions,
contained in Sections 1.3 and 2.4 of this Agreement to be performed or
complied with by it prior to the Closing Date.
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ARTICLE VI
TERMINATION AND ABANDONMENT
6.1 TERMINATION. This Agreement may be terminated and the transactions
contemplated hereby may be abandoned, at any time prior to the Effective Time,
whether before or after approval of the Merger by the Company's stockholders:
(a) by mutual written consent of the Company, on the one hand, and of
Parent and Sub, on the other hand;
(b) by either Parent, on the one hand, or the Company, on the other
hand, if any governmental or regulatory agency shall have issued an order,
decree or ruling or taken any other action permanently enjoining,
restraining or otherwise prohibiting the acceptance for payment of, or
payment for, shares of Common Stock pursuant to the Offer or the Merger and
such order, decree or ruling or other action shall have become final and
nonappealable;
(c) by either Parent, on the one hand, or the Company, on the other
hand, if the Effective Time shall not have occurred within six months after
commencement of the Offer unless the Effective Time shall not have occurred
because of a material breach of any representation, warranty, obligation,
covenant, agreement or condition set forth in this Agreement on the part of
the party seeking to terminate this Agreement;
(d) by Parent, on the one hand, or the Company, on the other hand, if
the Offer is terminated or expires in accordance with its terms without Sub
having purchased any Common Stock thereunder due to a failure of any of the
conditions set forth in Annex A hereto to be satisfied, unless such
termination or expiration has been caused by or results from the failure of
the party seeking to terminate this Agreement to perform in any material
respect any of its respective covenants or agreements contained in this
Agreement;
(e) subject to the provisions of Section 6.3, by either Parent, on the
one hand, or the Company, on the other hand, if the Board of Directors of
the Company determines that an Acquisition Proposal will result in a
Superior Proposal and the Board believes (and has been advised by counsel)
that a failure to terminate this Agreement and enter into an agreement to
effect the Superior Proposal would constitute a breach of its fiduciary
duties;
(f) prior to the consummation of the Offer, by the Company, if (i) any
of the representations and warranties of Parent or Sub contained in this
Agreement were untrue or incorrect in any material respect when made or
have since become, and at the time of termination remain, incorrect in any
material respect, or (ii) Parent or Sub shall have breached or failed to
comply in any material respect with any of their respective obligations,
covenants or agreements under this Agreement, including, without
limitation, their obligation to commence the Offer within the time period
required by Section 1.1 of this Agreement; and
(g) by the Company, if Parent or Sub shall have terminated the Offer
prior to the Offer Closing, the Offer is terminated or expires without Sub
having purchased any shares of Common Stock or if Sub or Parent fails to
purchase validly tendered shares of Common Stock in violation of the terms
and conditions of the Offer or this Agreement.
6.2 EFFECT OF TERMINATION. In the event of the termination of this
Agreement pursuant to Section 6.1 hereof by Parent or Sub, on the one hand, or
the Company, on the other hand, written notice thereof shall forthwith be given
to the other party or parties specifying the provision hereof pursuant to which
such termination is made, and this Agreement shall become void and have no
effect, and there shall be no liability hereunder on the part of Parent, Sub or
the Company, except that Section 4.2, 6.3, 7.1 and this Section 6.2 hereof shall
survive any termination of this Agreement. Nothing in this Section 6.2 shall
relieve any part to this Agreement of liability for breach of this Agreement.
6.3 BREAK-UP FEE. (i) If this Agreement is terminated by the Company in
accordance with Section 6.1 (e); (ii) if the Board of Directors of the Company
fails to recommend, withdraws, modifies or changes its recommendation of the
Offer or the Merger in any respect adverse to Parent or Sub, or has resolved to
do so, for any reason other than a breach by Parent or Sub in any material
respect of its representations or warranties
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contained in this Agreement or a failure by Parent or Sub to perform in any
material respect any of its covenants or agreements contained in this Agreement;
or (iii) if, prior to the purchase of shares of Common Stock by Sub, the Company
violates its obligations under Section 4.7 in any material respect and
thereafter the Company enters into an agreement to effect a Superior Proposal,
then the Company shall pay to Parent in same day funds a fee of $5,000,000, in
the case of clause (i), within two business days after the termination of this
Agreement, in the case of clause (ii), within two business days after the
withdrawal, modification or change of the recommendation and, in the case of
clause (iii), within two business days after the execution of an agreement
referred to in such clause. Payment of the $5,000,000 fee by the Company shall
be Parent and Sub's exclusive remedy against the Company for any of the matters
referred to in clauses (i), (ii) or (iii) above.
ARTICLE VII
MISCELLANEOUS
7.1 FEES AND EXPENSES. All costs and expenses incurred in connection with
this Agreement and the consummation of the transactions contemplated hereby
shall be paid by the party incurring such costs and expenses.
7.2 REPRESENTATIONS AND WARRANTIES. The respective representations and
warranties of the Company, on the one hand, and Parent and Sub, on the other
hand, contained herein or in any certificates or other documents delivered prior
to or at the Closing shall not be deemed waived or otherwise affected by any
investigation made by any party. Each and every such representation and warranty
shall expire with, and be terminated and extinguished by, the Closing and
thereafter none of the Company, Parent or Sub shall be under any liability
whatsoever with respect to any such representation or warranty. This Section 7.2
shall have no effect upon any other obligation, covenant or agreement of the
parties hereto, whether to be performed before or after the Effective Time.
7.3 EXTENSION; WAIVER. Subject to the provisions of Section 1.1 hereof, at
any time prior to the Effective Time, the parties hereto, by action taken by or
on behalf of the respective Boards of Directors of the Company, Parent or Sub,
may (i) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein by any other applicable party or
in any document, certificate or writing delivered pursuant hereto by any other
applicable party or (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of any party to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
7.4 PUBLIC ANNOUNCEMENTS. The Company, on the one hand, and Parent and Sub,
on the other hand, agree to consult promptly with each other prior to issuing
any press release or otherwise making any public statement with respect to the
transactions contemplated hereby, and shall not issue any such press release or
make any such public statement prior to such consultation and review by the
other party of a copy of such release or statement, unless required by
applicable law. The Company will not issue any press release or make any public
statement that might constitute the commencement of the Offer without the prior
written consent of Parent.
7.5 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered in person or
mailed, certified or registered mail with postage prepaid, or sent by telex,
telegram or telecopier, as follows:
(a) if to the Company to it at:
O'Sullivan Corporation
1944 Valley Avenue
Winchester, VA 22601
Attention: Chief Financial Officer
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with a copy to:
McGuire, Woods, Battle & Boothe LLP
One James Center
901 East Cary Street
Richmond, VA 2321
Attention: Robert L. Burrus, Jr., Esq.
(b) if to either Parent or Sub, to it at:
The Geon Company
One Geon Center
Avon Lake, Ohio 44012-0122
Attention: Chief Executive Officer
with a copy to:
The Geon Company
One Geon Center
Avon Lake, Ohio 44012-0122
Attention: General Counsel
or to such other Person or address as any party shall specify by notice in
writing to each of the other parties. All such notices, requests, demands,
waivers and communications shall be deemed to have been received on the date of
delivery unless if mailed, in which case on the third business day after the
mailing thereof, except for a notice of a change of address, which shall be
effective only upon receipt thereof.
7.6 ENTIRE AGREEMENT. This Agreement, the Disclosure Letter, the Parent
Confidentiality Agreement and the Annex and other documents referred to herein
or delivered pursuant hereto, collectively contain the entire understanding of
the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings, oral and written, with
respect thereto.
7.7 BINDING EFFECT; BENEFIT; ASSIGNMENT. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights, interest or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other parties, which
consent shall not be unreasonably withheld in the case of an assignment to
another direct or indirect wholly-owned subsidiary of Parent for purposes of
avoiding recognition of taxable gain or loss for federal income tax purposes by
either Sub or the Company in connection with the Merger. It is understood and
agreed that any permitted assignment will not cause Parent or Sub to be relieved
of its obligations under this Agreement and that the Surviving Corporation
(whether the Surviving Corporation is Sub or any other direct or indirect
wholly-owned subsidiary) shall have all the obligations of the Surviving
Corporation specified in this Agreement. Nothing in this Agreement, expressed or
implied, is intended to confer on any Person other than the parties hereto or
their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, expect for
Sections 4.10 and 4.11, which are intended to be for the benefit of the persons
referred to therein, and may be enforced by such persons.
7.8 FURTHER ACTIONS. Each of the parties hereto agrees that, subject to its
legal obligations, it will use its reasonable best efforts to fulfill all
conditions precedent specified herein, to the extent that such conditions are
within its control, and to do all things reasonably necessary to consummate the
transactions contemplated hereby.
7.9 HEADINGS. The descriptive headings of the several Articles and Sections
of this Agreement are inserted for convenience only, do not constitute a part of
this Agreement and shall not affect in any way the meaning or interpretation of
this Agreement.
7.10 COUNTERPARTS. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original, and all of which together shall
be deemed to be one and the same instrument.
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7.11 APPLICABLE LAW. This Agreement and the legal relations between the
parties hereto shall be governed by and construed in accordance with the laws of
the Commonwealth of Virginia, without regard to the conflict or choice of laws
rules thereof.
7.12 SEVERABILITY. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, unenforceable or against its regulatory
policy, the remainder of the terms, provisions, covenants and restrictions
contained in this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
7.13 "PERSON" DEFINED. "Person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, a limited liability
company, an unincorporated organization, a group and a government or other
department or agency thereof.
IN WITNESS WHEREOF, each of Parent, Sub and the Company has caused this
Agreement to be executed by its respective officers thereunto duly authorized,
all as of the date first above written.
THE GEON COMPANY
By: /s/ Gregory L. Rutman
------------------------------------
Name: Gregory L. Rutman
Title: Vice President, General
Counsel and Secretary
TGC ACQUISITION CORPORATION
By: /s/ Donald P. Knechtges
------------------------------------
Name: Donald P. Knechtges
Title: Chairman, President and Chief
Executive Officer
O'SULLIVAN CORPORATION
By: /s/ John S. Campbell
------------------------------------
Name: John S. Campbell
Title: President and Chief Executive
Officer
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ANNEX A
TO
AGREEMENT AND PLAN OF MERGER
The capitalized terms used in this Annex A shall have the meanings set
forth in the Agreement to which it is annexed, except that the term "Merger
Agreement" shall be deemed to refer to the Agreement to which this Annex A is
appended and "Purchaser" shall be deemed to refer to Sub.
Notwithstanding any other provision of the Offer, Purchaser shall not be
required to accept for payment or, subject to any applicable rules and
regulations of the Commission, including Rule 14e-1c under the Exchange Act, pay
for any shares of Common Stock tendered and may terminate or amend the Offer in
accordance with the Merger Agreement and may postpone the acceptance of, and
payment for, shares of Common Stock, if (i) there shall not have been validly
tendered and not withdrawn prior to the expiration of the Offer a number of
shares of Common Stock which represent at least 70% of the total voting power of
all shares of capital stock of the Company outstanding on a fully diluted basis
(the "Minimum Condition"), (ii) any applicable waiting period under the HSR Act
shall not have expired or been terminated or (iii) at any time on or after the
date of the Merger Agreement and at or before the expiration date of the Offer
(as the same may be extended from time to time) any of the following shall
occur:
(a) any court or domestic government or governmental authority or
agency shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree or injunction or other
order or the Antitrust Division or the Federal Trade Commission has
indicated to Parent and the Company that it may seek to obtain a decree,
injunction or other order which (i) makes illegal, materially delays or
otherwise directly or indirectly materially restrains or prohibits the
Offer or the Merger, (ii) prohibits or materially limits the ownership or
operation by Parent or Purchaser of all or any material portion of the
business or assets of the Company or compels Parent or Purchaser to dispose
of all or any material portion of the business or assets of Parent or
Purchaser or the Company, or imposes any limitations on the ability of
Parent or Purchaser to conduct its business or own such assets, (iii)
imposes limitations on the ability of Parent or Purchaser effectively to
exercise full rights of ownership of the shares of Common Stock, including,
without limitation, the right to vote any shares of Common Stock acquired
or owned by Purchaser or Parent on all matters properly presented to the
Company's stockholders, (iv) requires divestiture by Parent or Purchaser of
any shares of Common Stock, or (v) otherwise materially adversely affects
the Condition of the Company and its subsidiaries taken as a whole;
(b) there shall have occurred (i) any general suspension greater than
24 hours of trading in, or limitation on prices for, securities on any
national securities exchange or in the over the-counter market, (ii) any
material change in United States or any other currency exchange rates or a
suspension of, or limitation on, the markets therefor, (iii) a declaration
of a banking moratorium or any suspension of payments in respect of banks
in the United States, or (iv) a declaration of war by the United States
having a material adverse effect on the Company or materially adversely
affecting (or materially delaying) the consummation of the Offer, or (v) in
the case of any of the situations described in clauses (i) through (iii)
inclusive existing at the date of commencement of the Offer, a material
acceleration or worsening thereof;
(c) all consents, registrations, approvals, permits, authorizations,
notices, reports or other filings required to be obtained or made by the
Company, Parent or Purchaser with or from any governmental or regulatory
entity in connection with the execution, delivery and performance of the
Merger Agreement, the Offer and the consummation of the transactions
contemplated by the Merger Agreement shall not have been made or obtained
and such failure could reasonably be expected to have a material adverse
effect on the Condition of the Company and its subsidiaries taken as a
whole or could be reasonably likely to prevent or materially delay
consummation of the transactions contemplated by the Merger Agreement;
(d) any representation or warranty made by the Company in the Merger
Agreement (i) (A) was untrue or incorrect in any material respect when made
or (B) has become untrue or incorrect in any material respect and (ii) at
the time of termination or amendment remains untrue or incorrect in any
material respect;
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(e) there shall have been a breach by the Company of any of its
covenants or agreements in any material respect contained in the Merger
Agreement;
(f) the Company's Board of Directors shall have withdrawn, modified or
amended in any respect adverse to Parent or Purchaser its recommendation of
the Offer or the Merger, or shall have resolved to do so; or
(g) the Merger Agreement shall have been terminated in accordance with
its terms;
which, in the reasonable judgment of Purchaser, in any such case and regardless
of the circumstances giving rise to any such condition, would make it
inadvisable to proceed with such acceptance for payment or payment.
The foregoing conditions are for the sole benefit of Purchaser and may be
asserted by Purchaser, or may be waived by Purchaser, in whole or in part at any
time and from time to time in its sole discretion; provided, however, that
without the consent of the Company, Parent and Purchaser shall not waive the
Minimum Condition.
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ANNEX D
BOWLES HOLLOWELL CONNER
June 2, 1999
Board of Directors
O'Sullivan Corporation
1944 Valley Avenue
Winchester, Virginia 22601
Dear Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of O'Sullivan Corporation ("O'Sullivan"), of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger, dated as of June 2, 1999 (the "Agreement"), among
O'Sullivan, The Geon Company ("Geon"), and TGC Acquisition Company, a
wholly-owned subsidiary of Geon. Pursuant to the Agreement, the stockholders of
O'Sullivan will receive $12.25 net in cash for each share of O'Sullivan Common
Stock, par value $1.00 per share. For purposes of this opinion, the
"Transaction" means the proposed acquisition of 100% of the outstanding shares
of O'Sullivan by Geon, the terms of which are more fully set forth in the
Agreement.
In arriving at our opinion, we have, among other things:
- Reviewed the Agreement, including the financial terms of the
Transaction;
- Reviewed certain historical business, financial, and other
information regarding O'Sullivan that was publicly available or
furnished to us by members of O'Sullivan management;
- Reviewed certain financial forecasts and other data provided to us
by members of O'Sullivan management relating to its business;
- Conducted discussions with members of O'Sullivan management with
respect to its business, financial, and other information, including
its business prospects and financial forecasts, and the effects of
the Transaction;
- Reviewed the current and historical market prices of O'Sullivan
Common Stock;
- Compared the financial position and operating results of O'Sullivan
with those of publicly traded companies we deemed relevant;
- Compared the financial terms of the Transaction with certain of the
financial terms of other similar transactions we deemed relevant;
and
- Conducted such other financial studies, analyses, and investigations
as we deemed appropriate.
In connection with our review, we have relied upon the accuracy and
completeness of the foregoing financial and other information, and we have not
assumed any responsibility for any independent verification of such information.
With respect to O'Sullivan's financial projections, we have assumed that they
have been reasonably prepared and reflect the best currently available estimates
and judgements of O'Sulllivan's management as to the expected future financial
performance of O'Sullivan. We have discussed O'Sullivan's financial projections
with management of O'Sullivan, but we assume no responsibility for and express
no view as to O'Sullivan's financial projections or the assumptions upon which
they are based. In arriving at our opinion, we have not conducted any physical
inspection of the properties or facilities of O'Sullivan and have not made or
been provided with any evaluations or appraisals of the assets or liabilities of
O'Sullivan.
In rendering our opinion, we have assumed that the Transaction will be
consummated on the terms described in the Agreement that we reviewed, without
any waiver of any material terms or conditions. Our opinion is necessarily based
on economic, market, financial, and other conditions and the information made
available to us as of the date hereof. Although subsequent developments may
affect this opinion, we do not have any obligation
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to update, revise, or reaffirm this opinion. Our opinion does not address the
relative merits of the Transaction and the other business strategies considered
by O'Sullivan's Board of Directors, nor does it address the Board of Directors'
decision to proceed with the Transaction.
Bowles Hollowell Conner is a division of First Union Capital Markets Corp.,
an investment banking firm and an affiliate of First Union Corporation. We have
been engaged to render financial advisory services to O'Sullivan in connection
with the Transaction and will receive a fee for such services which include the
delivery of this opinion. In the ordinary course of our business, we and our
affiliates may actively trade or hold the securities of O'Sullivan for our own
account or for the account of our customers and, accordingly, may at any time
hold a long or short position in such securities. We or our affiliates have in
the past provided investment banking and financial advisory services to
O'Sullivan unrelated to the proposed Transaction, for which services we have
received compensation.
Our advisory services and the opinion expressed herein are provided for the
benefit of the Board of Directors of O'Sullivan, and such opinion does not
constitute a recommendation as to how any stockholder of O'Sullivan should
respond to the offer by Geon or vote on the proposed Agreement. This opinion may
not be summarized, excerpted from or otherwise publicly referred to without
prior written consent, except that this opinion may be reproduced in full or
summarized in any proxy or information statement mailed or provided to the
stockholders of O'Sullivan or in any other filing made under the federal
securities laws. It is understood that Bowles Hollowell Conner hereby consents
to the use of this opinion as an exhibit to Schedule 14D-9 of O'Sullivan
relating to the Transaction.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the consideration to be received
by the stockholders of O'Sullivan in the Transaction is fair, from a financial
point of view.
Sincerely,
BOWLES HOLLOWELL CONNER
/s/ Brian P. McDonagh
Brian P. McDonagh
Managing Director
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