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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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: 1-12754
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1659062
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (417) 682-3322
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $1.00 per share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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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
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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. /X/
As of September 15, 1999, 16,086,329 shares of common stock of O'Sullivan
Industries Holdings, Inc. were outstanding, and the aggregate market value of
the voting stock held by non-affiliates of O'Sullivan Industries Holdings, Inc.
was $237,062,571, based on the New York Stock Exchange composite trading closing
price and using the definition of beneficial ownership contained in Rule
16a-1(a)(2) promulgated pursuant to the Securities Exchange Act of 1934 and
excluding shares held by directors and executive officers, some of whom may not
be held to be affiliates upon judicial determination.
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The Index to Exhibits begins on page 57.
Page 1 of 84
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PART I
ITEM 1. BUSINESS.
HISTORY AND OVERVIEW
O'Sullivan Industries Holdings, Inc., a Delaware corporation, is a
leading designer, manufacturer and distributer of ready-to-assemble furniture in
the United States. O'Sullivan was incorporated in November 1993 and acquired
O'Sullivan Industries, Inc. in February 1994, immediately prior to the sale of
its common stock in a public offering by TE Electronics Inc., a subsidiary of
Tandy Corporation. Prior to the Offerings, O'Sullivan Industries, Inc. operated
as a wholly owned subsidiary of TE. Subsequent to the Offerings, neither Tandy
nor TE has had any continuing ownership interest in O'Sullivan.
O'Sullivan owns manufacturing, warehouse and distribution facilities in
Lamar, Missouri, South Boston, Virginia and Cedar City, Utah. O'Sullivan
commenced operations at the Lamar, Missouri plant in 1965, and the South Boston,
Virginia facility became operational in 1989. We phased in production at the
Cedar City, Utah facility in the spring of 1995.
O'Sullivan Industries Holdings, Inc. is a holding company that owns
O'Sullivan Industries, Inc., a Delaware corporation. O'Sullivan Industries, Inc.
owns O'Sullivan Industries - Virginia, Inc., a Virginia corporation. Generally,
"O'Sullivan" refers to O'Sullivan Industries Holdings, Inc. and its
subsidiaries.
O'Sullivan engages in one industry segment: the design, manufacture and
sale of RTA furniture.
MERGER AGREEMENT
On March 24, 1999, O'Sullivan announced that members of its senior
management team, in conjunction with a financial buyer, had made a proposal
to O'Sullivan's Board of Directors to acquire O'Sullivan, subject to
requisite financing. On May 18, 1999, O'Sullivan announced that it had
entered into a definitive merger agreement with an investment group that
includes members of O'Sullivan's senior management and Bruckmann, Rosser,
Sherrill & Co., LLC.
Under the merger agreement, O'Sullivan will be the surviving entity
after the merger. Certain directors and members of senior management are
participating with BRS in the buyout of existing O'Sullivan stockholders. After
the completion of the merger, the management participants in the merger will own
a total of approximately 28.4% of the common stock of the surviving corporation.
BRS and its affiliates will own the balance.
Upon completion of the merger, each share of O'Sullivan common stock
becomes $17.50 in cash and one share of senior preferred stock of O'Sullivan.
However, some of the shares of O'Sullivan common stock and options to acquire
shares that are held by the management participants in the buyout will be
exchanged for equity interests in the surviving corporation. The management
participants in the buyout include 32 members of management, three directors and
an affiliate of a fourth director. BRS has advised O'Sullivan that affiliates of
BRS will own the balance of the equity. BRS has also advised O'Sullivan that
O'Sullivan Industries, Inc. will incur all but $25 million of debt borrowed to
finance the recapitalization and merger; the remainder will be borrowed by
O'Sullivan Industries Holdings, Inc. Under Delaware law, stockholders who do not
vote in favor of the merger transaction have the right to dissent from the
merger and receive the "fair value" of their shares in cash.
THE RTA FURNITURE SEGMENT
We are a leading designer, manufacturer and distributer of
ready-to-assemble furniture products, with over 45 years of experience. We sell
primarily to the rapidly growing home office and home entertainment markets. We
manufacture approximately 450 stock keeping units of ready-to-assemble furniture
at retail price points from $20 to $999. Our product offerings include
ready-to-assemble desks, computer workcenters, home
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entertainment centers, audio equipment racks, pantries and microwave oven carts.
We also manufacture a variety of other ready-to-assemble furniture for home
office, home entertainment and other home uses. We design our products to
provide high quality, value and ease of assembly by the consumer using
straight-forward, diagramed instructions.
We distribute our products primarily through office superstores,
including OfficeMax, Office Depot and Staples, discount mass merchants including
Wal-Mart, Target and Kmart, as well as through other retail channels. We own
three modern manufacturing facilities totaling over 2.1 million square feet that
are strategically located across the United States. This network of
manufacturing facilities positions us closer to our customers and reduces
freight costs. Freight costs represent a significant portion of total product
cost. For the fiscal year ended June 30, 1999, we had sales of $379.6 million,
EBITDA of $49.9 million and net income of $21.2 million.
The $3.1 billion ready-to-assemble segment of the North American
furniture market grew at a compound annual growth rate of 11.6% from 1990
through 1998. This was significantly faster than the 5.1% compound annual growth
rate of the total $57.9 billion domestic residential furniture market from 1990
to 1998. The market for residential furniture, which includes upholstered
furniture and wood furniture shipped fully assembled by the manufacturer, is
influenced by a variety of factors, including home sales, housing starts and
general economic conditions. We believe the faster growth of ready-to-assemble
furniture products is the result of changes in the needs of consumers, changes
in retail distribution channels and improvements in product quality.
- CHANGES IN THE NEEDS OF CONSUMERS. Consumer demand for personal
computers, which has been accelerating in part due to the rapid growth
of the Internet, and for larger screen televisions and related
equipment has driven the demand for more sophisticated
ready-to-assemble home office and home entertainment furniture. We
expect these trends to continue as the number of households owning
personal computers, home theaters and other audio and video equipment
expands.
- CHANGES IN RETAIL DISTRIBUTION CHANNELS. Office superstores and
discount mass merchants have altered the way many products are sold in
the United States. The ready-to-assemble furniture segment has been
positively impacted by the rapid growth and increased market share of
these retailers. These distribution channels accounted for over 50% of
the domestic sales of ready-to-assemble furniture in 1997.
- IMPROVEMENTS IN PRODUCT QUALITY. Improvements in equipment, software
and manufacturing processes have enabled the ready-to-assemble
furniture industry to produce higher quality, more durable products. As
a result of these improvements, ready-to-assemble furniture has become
more comparable in quality and durability to wood furniture shipped
fully assembled by the manufacturer but remains relatively less
expensive.
We believe that these trends will continue to drive the growth of the
ready-to-assemble segment of the retail furniture market.
COMPETITIVE STRENGTHS
We believe that we are able to compete effectively due to the following
strengths:
LEADING MARKET SHARE POSITION. We are the second largest North American
ready-to-assemble furniture manufacturer in terms of domestic sales, a position
that we have held for the last ten years. In calendar year 1998, our estimated
share of the ready-to-assemble furniture market was approximately 16%. Many of
our largest customers, including office superstores and discount mass merchants,
have substantial purchasing requirements across the country. We are able to
satisfy these requirements because of our large manufacturing capacity and our
innovative, high quality products.
LEADER IN PRODUCT QUALITY, INNOVATION AND DESIGN. We believe that we
are recognized as a leader in product quality, innovation and design in the
ready-to-assemble furniture industry. Our computer-aided design software and our
modern manufacturing processes enable us to develop more than 150 new products
per year.
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Consequently, about one-third of our products are new each year. Our
ability to innovate allows us to keep pace with changes in retailer and consumer
tastes and demands.
WELL-ESTABLISHED CUSTOMER RELATIONSHIPS. We have well established
relationships with many of the largest retailers of ready-to-assemble furniture
in the United States. These include office superstores like OfficeMax, Office
Depot and Staples. They also include national discount mass merchants, like
Wal-Mart, Target and Kmart. Over the past two years, we have also established
relationships with leading electronic superstores like Best Buy and Circuit
City. We believe we have a long history as a trusted vendor and have earned a
reputation for product quality and innovation, customer responsiveness and
manufacturing flexibility.
RECENT CAPACITY EXPANSION AND SYSTEM UPGRADES POSITION US FOR GROWTH.
We recently completed a $20 million capacity expansion program in our Virginia
plant. This expansion increased our total manufacturing capacity by
approximately 15%. We also recently completed a $13 million manufacturing
equipment upgrade in our Missouri plant. In addition, we recently completed an
upgrade of our management information systems. This upgrade included a
corporate-wide conversion to JD Edwards software. We also installed new
point-of-sale analytical software that allows our sales force to better analyze
sales trends and consumer preferences. In addition, we installed
Pro-engineering, a computer-aided design software package. This software
enhances our product design capabilities and reduces the time before newly
conceived products reach the market.
LOW COST, GEOGRAPHICALLY DIVERSIFIED MANUFACTURING OPERATIONS. We
believe that we are a low-cost ready-to-assemble furniture producer due to our
large scale, modern facilities and efficient manufacturing processes. We are the
only major ready-to-assemble furniture manufacturer with a plant in each of the
eastern, central and western regions of the United States. This allows our
plants to receive particleboard and fiberboard from the manufacturers located
nearest to them. Our network of manufacturing facilities positions us closer to
our customers. It also reduces shipping costs, which represent a significant
proportion of product cost. We are the only major ready-to-assemble furniture
manufacturer with a manufacturing facility in the western United States, the
fastest growing region of the nation for ready-to-assemble furniture sales.
EXPERIENCED MANAGEMENT TEAM WITH SIGNIFICANT EQUITY OWNERSHIP. Our
senior management team has extensive experience in the ready-to-assemble segment
of the furniture industry. Our top twelve executives have been with us for an
average of over 17 years. In addition, we have broadened our management's
expertise by hiring executives from other leading manufacturers. Management
participants in the recapitalization and merger will retain equity in O'Sullivan
valued at a total of $13.2 million in connection with the recapitalization and
merger. This retained equity includes an interest of approximately 28.4% in the
outstanding common stock of the surviving corporation. As a result of its
substantial equity interest, we believe the management participants in the
buyout will have significant incentive to continue to increase our sales and
profitability.
GROWTH STRATEGY. Sales of ready-to-assemble furniture, although
expanding more rapidly than sales of traditional casegood furniture, still
represent only about 5.7% of the overall domestic residential furniture market.
As the quality of ready-to-assemble furniture continues to improve, and office
superstores and discount mass merchants continue to expand, we expect
ready-to-assemble furniture to gain additional market share. The key elements of
our growth strategy are as follows:
CONTINUE TO DEVELOP A BROAD RANGE OF INNOVATIVE, HIGH QUALITY PRODUCTS.
We are dedicated to offering a broad range of high quality products at a variety
of retail prices. We believe that by maintaining a broad product line, we can
appeal to a greater number of consumers and penetrate a larger number of
distribution channels. We seek to drive demand for our products and maintain
profitability in an otherwise price-rigid environment by providing a steady
supply of high quality product introductions. In fiscal year 1999, we introduced
approximately 150 new products.
FURTHER PENETRATE EXISTING AND NEW, GROWING DISTRIBUTION CHANNELS.
Sales to office superstores and discount mass merchants, our core distribution
channels, have grown at a compound annual growth rate of 14.6% since fiscal year
1995 to over $250 million in fiscal year 1999. To increase sales to our existing
customer base, we have developed several initiatives. These initiatives include
dedicated product lines, enhanced customer
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service and tailored marketing programs. We have also focused on increasing
sales to other growing distribution channels. These channels include electronic
specialty retailers and home improvement centers. Many of these retailers are
increasing the ready-to-assemble furniture component of their product mix.
LOWER PRODUCTION COSTS. Producing ready-to-assemble furniture cost
effectively is vital to our competitive position. This belief was the premise
for our recently completed capital expansion and management information systems
upgrade. Our capital investments have increased our total manufacturing capacity
and we are currently standardizing selected manufacturing processes to further
reduce set-up downtime. New equipment and employee training have also improved
our inventory management, order fulfillment rates and production efficiency. In
addition, our JD Edwards and Pro-engineering software implementations have
improved our customer responsiveness and product design capability. We believe
that we have not yet fully realized the benefits of our capital expansion and
management information systems upgrade.
REMAIN COMMITTED TO CUSTOMER SERVICE. We are committed to providing
superior customer service to maintain strong relationships with our customers.
We strive to develop marketing strategies that are consistent with our
customers' needs and their position in the marketplace. The recent investments
we have made to improve our management information systems and increase our
manufacturing capacity should enable us to provide a higher level of customer
responsiveness, improve the look and quality of our products and enhance our
ability to forecast orders.
INDUSTRY OVERVIEW
GENERAL. The $3.1 billion domestic ready-to-assemble segment of the
retail furniture market is comprised of all sales of prefinished, or unfinished,
non-upholstered furniture purchased in component form and then assembled by the
consumer. Domestic ready-to-assemble furniture is generally made from particle
board or fiberboard laminated to replicate the appearance of different types of
wood or other surfaces. Through improvements in product quality, innovation and
assembly, ready-to-assemble furniture manufacturers today can offer a broad
array of products ranging from $20 television and video cassette recorder stands
to $999 computer workcenters. Although technological advances allow
ready-to-assemble furniture manufacturers to imitate the look and durability of
casegood furniture, ready-to-assemble furniture manufacturers are generally able
to sell at lower prices due to lower raw material, manufacturing and
transportation costs.
The ready-to-assemble segment of the retail furniture market has grown
at an 11.6% compound annual growth rate from 1990 to 1998, compared to the
compound annual growth rate of the United States gross domestic product of 5.0%
over the same period. We believe the growing popularity of ready-to-assemble
furniture products is the result of improvements in product quality, basic
structural changes in the retail distribution channels and increased demand
created by the changes in the needs of consumers.
IMPROVEMENTS IN PRODUCT QUALITY. During the past ten years,
ready-to-assemble furniture has evolved and improved dramatically. Industry
studies and publications indicate that consumers' attitudes regarding
ready-to-assemble furniture have followed suit to a large extent. Due to
improvements in the ready-to-assemble furniture manufacturing process, the
quality of ready-to-assemble furniture, while lower in cost, is now more
comparable to that of wood furniture shipped assembled by the manufacturer.
Ready-to-assemble furniture manufacturers are able to provide additional
competitive advantages relative to assembled wood furniture. These advantages
include a broader range of surfaces and colors, enhanced design to support the
most recent home office/entertainment equipment and immediate product
availability.
EXPANSION OF KEY CUSTOMERS. The growth in the office superstore and
mass merchant retail channels has fueled the growth of ready-to-assemble
furniture in the United States. These channels currently account for over 50% of
all ready-to-assemble furniture sales. Some mass merchants and office
superstores have announced that they will open new domestic stores in 1999.
These include about 105 stores for OfficeMax, 105 stores for Office Depot, 100
stores for Wal-Mart, 60 stores for Target and 150 stores for Staples. We
anticipate having our products included in the majority of these new stores.
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GROWTH IN HOME OFFICE FURNITURE. In 1998, sales of ready-to-assemble
home office furniture accounted for most of the overall home office furniture
sales in the United States. As the number of home office households and
households owning one or more personal computers continue to increase, we expect
the demand for home office furniture to increase as well. Home office households
are projected to grow at a compound annual growth rate of 7.4% from 1997 to
2002. Home office households with personal computers are projected to grow at a
compound annual growth rate of 11.0%, reaching 37.8 million by 2002.
Additionally, as the price of lower-end personal computers has steadily declined
below $1,000 in the past three years, computer ownership in median and lower
income households has increased significantly. Personal computer shipments in
1998 increased to an estimated 12.8 million units, up 16.4% from 11.0 million
units in 1997. The penetration rate of personal computers in U.S. households due
to declining prices and increased use of the Internet is expected to increase
from 43% in 1997 to 51% in 2001.
CONTINUING GROWTH AND INNOVATION IN THE HOME ENTERTAINMENT MARKET. The
demand for larger television sets and related audio and video equipment has
created increased demand for ready-to-assemble furniture. In 1998, an estimated
22.2 million televisions were sold in the United States. In 1998, television
sales increased 1.6%, to $6.1 billion from $6.0 billion in 1997. During this
period, the market for large screen televisions, defined as 32" or larger,
increased 57.1%, from $2.1 billion in 1997 to $3.3 billion in 1998. Sales of
large screen televisions for the first four months of 1999 were 30% higher than
during the same period in 1998. The surge in overall sales and sales of large
screen televisions has occurred in part due to a general price decline. For
example, prices for 32" screen televisions have dropped 40% since 1996. Many
entertainment centers sold over the past decade accommodate televisions with a
maximum screen size of 27". These entertainment centers need to be replaced by
new furniture products to accommodate larger screen televisions.
PRODUCT OVERVIEW. We group our product offerings into three distinct
categories:
- furniture for the home office, including desks, computer work centers,
bookcases, filing cabinets and computer storage racks;
- electronics display furniture, including home entertainment centers,
home theater systems, television and stereo tables and cabinets, and
audio and video storage racks; and
- home decor furniture, including microwave oven carts, pantries, living
room and recreation room furniture and bedroom pieces, including
dressers, night stands and wardrobes.
The following is a description of some of our products.
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PRODUCT DESCRIPTION KEY CUSTOMERS
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Living Dimensions....... Contemporary small office/home OfficeMax, Office Depot, Best
office and entertainment Buy, Office World, Circuit City,
furniture. Upscale features Service Merchandise
include Armortop(R)laminates and
Quickfit(TM) fastener system.
Ovations................ Transition style entertainment Best Buy, Circuit City,
furniture collection in both medium Montgomery Ward
Mystique Maple and light Snow Maple
finish.
Scandinavian............ Contemporary small office/home Office Depot, OfficeMax, Ames,
office and entertainment furniture Target, Best Buy
collection in medium Alder Finish.
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PRODUCT DESCRIPTION KEY CUSTOMERS
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Xpressions(TM).......... Generation X targeted home office Wal-Mart, Circuit City, Meijer,
and entertainment furniture Ames, Staples, Montgomery Ward
collection. Features include
mini-stereo system compatibility,
lavish media storage and youthful
high contrast, two-tone finish.
French Gardens.......... Country French style collection OfficeMax, Shopko, Montgomery Ward
with antique Odessa Pine finish.
Both home office and entertainment
products.
Carmel Valley(R)........ Transitional styled home office and Ames, Montgomery Ward, Service
entertainment furniture collection Merchandise, Best Buy
in a medium oak finish.
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PRODUCT DESIGN AND DEVELOPMENT
We believe we are an industry leader in product quality and
innovation. We are committed to the continuing development of unique furniture
that meets consumer needs. With over 50% of our sales to the home office market,
we believe we are recognized as one of the industry's premier producers of
contemporary home office ready-to-assemble furniture. As evidence of our
commitment to quality and innovation, in the past three years we introduced an
average over 150 products per year. In the ready-to-assemble furniture industry,
a new product can be a variation in color or styling of an existing product. By
providing a continuous supply of new product introductions, we are able to drive
demand for our products, which we believe will allow us to maintain our profit
margins in an otherwise price-rigid environment.
We maintain an in-house product design staff that collaborates with our
marketing personnel and customers to develop new products based on demographic
and consumer information. The product design professionals then work with our
engineering division to produce full-scale prototypes. The engineering staff
uses computer-aided design Pro-engineering software, which provides the latest
three-dimensional graphics capabilities. Pro-engineering software allows a
design engineer to accelerate the time-to-completion for a new product design.
This allows us to reduce the time before newly conceived products reach the
market. We then show our prototypes to our customers to gauge interest. If
initial indications of product appeal are favorable, we usually can commence
production within twelve weeks. In fiscal year 1999, we spent approximately
$800,000 on product design and development.
CUSTOMERS
Ready-to-assemble furniture is sold through a broad array of
distribution channels, including discount mass merchants, office superstores,
electronic superstores, national department stores and home centers. While the
ready-to-assemble segment historically has been dominated by discount mass
merchants like Wal-Mart, Target and Kmart, office superstores have quickly
become the second largest distribution channel. The office superstores are the
fastest growing channel with 21% of total 1997 ready-to-assemble furniture
sales. We have a leading market share position in both of the two major
distribution channels and longstanding relationships with key customers. In
fiscal year 1998, over 60% of our sales were made through the office superstore
and discount mass merchant channels. In that same period, sales to OfficeMax
accounted for 20.1% of our total sales and Office Depot accounted for 11.6% of
our total sales. Similar to other large ready-to-assemble furniture
manufacturers, our sales are fairly concentrated.
SALES AND MARKETING
We manage our customer relationships both through our in-house sales
force and a network of independent sales representatives. Key accounts like
OfficeMax and Office Depot are called on jointly by our
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sales force and independent sales representatives. Smaller customers are
serviced mainly by independent sales representatives, whose activities are
reviewed by our in-house sales force. As of June 30, 1999, we employed 15 people
in our sales department and 14 people in our marketing department.
We work extensively with our customers to meet their specific
merchandising needs. Through customer presentations and other direct feedback
from the customer and consumers, we identify the consumer tastes and profiles of
a particular retailer. With this information, we make product recommendations to
our customers. We maintain a close dialogue with customers to ensure that the
design and functional requirements of our products are fulfilled.
Our products are promoted by our customers to the public under
cooperative and other advertising agreements. Under these agreements, our
products are advertised in newspaper inserts and catalogs, among other
publications. We generally cover a portion of the customer's advertising
expenses if the customer places approved advertisements mentioning us and our
products by name. We may also provide support to some customers' advertising
programs. We generally do not advertise directly to consumers. We do, however,
advertise in trade publications to promote O'Sullivan as a producer of high
quality ready-to-assemble furniture.
We provide extensive service support to our customers. This support
includes designing and installing in-store displays, educating retailers' sales
forces and maintaining floor displays. We have been recognized for our
commitment to our retail partners and have earned several awards in recent
years. These awards include the 1998 Vendor of the Year award in the
ready-to-assemble furniture category from both Kmart and Shopko.
We participate in the eight-day furniture markets held in High Point,
North Carolina in April and October of each year. High Point is the principal
international market in the furniture industry. It attracts buyers from the
United States and abroad. We maintain over 16,000 square feet of leased showroom
space at High Point. We also maintain two other showrooms to market our product
lines. In addition, we participate in other trade shows, including the
international furniture show in Cologne, Germany.
MANUFACTURING
We operate three modern manufacturing facilities, which are described
more fully below. They are located in Lamar, Missouri, South Boston, Virginia
and Cedar City, Utah. In total, our facilities have over 2.1 million square
feet.
- LAMAR, MISSOURI: Opened in 1965, this facility has about 1.1 million
square feet. It is the largest of our three facilities and has the
capability to produce our entire product offering. This facility also
serves as our corporate headquarters.
- SOUTH BOSTON, VIRGINIA: Opened in 1989, our South Boston facility has
been expanded to approximately 480,000 square feet. This includes a
100,000 square foot expansion in 1993 and an additional 30,000 square
foot expansion in 1998. The South Boston facility has the capability
to manufacture substantially all of our products. As a part of our
expansion in 1998, we added a strip line, a laminator, a combi-former
machine and a new wrap line to the facility.
- CEDAR CITY, UTAH: This facility was opened in the spring of 1995. Our
newest plant encompasses about 530,000 square feet. It has about 25%
of the production capacity of our Lamar facility. We opened this
facility in Utah to be closer to western customers and particleboard
suppliers in order to reduce transportation costs. The building in
Cedar City is now utilizing approximately 50% of its available
manufacturing space. Consequently, it could accommodate substantial
capacity expansion.
We have invested approximately $60 million in capital improvements
to expand production capacity, increase manufacturing efficiency and install
a new corporate-wide JD Edwards management information system since the
beginning of fiscal year 1997. These efforts have provided significant
production improvements, including:
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- IMPROVED PRODUCT STYLING AND EFFICIENCY: We were one of the first
ready-to-assemble furniture manufacturers to utilize combi-former
machines. This fall, we expect to install our fourth combi-former
machine. These machines provide a significant advantage in product
styling by creating rounded and other curved edges on furniture parts.
- IMPROVED MANUFACTURING EFFICIENCY: Our new equipment is highly
automated and efficient. However, it is also complex and requires
extensive training. As our employees have become more familiar with the
new equipment, their productivity has improved. We expect these
improvements to continue.
- INCREASED MANUFACTURING FLEXIBILITY: The new equipment installed at our
South Boston, Virginia plant has provided expanded capacity and
manufacturing flexibility. As a result, the South Boston facility is
now capable of manufacturing a broader spectrum of parts. Some of these
parts were formerly manufactured only in our Lamar plant. We believe
that our expanded manufacturing capacity will increase manufacturing
flexibility, reduce freight costs and allow us to better serve East
Coast markets.
RAW MATERIALS
The materials used in our manufacturing operations include
particleboard, fiberboard, coated paper laminates, glass, furniture hardware and
packaging materials. Our largest raw material cost is particleboard. We purchase
all of our raw material needs from outside suppliers. We buy our particleboard
and fiberboard at market-based prices from several independent wood product
suppliers. We purchase other raw materials from a limited number of vendors.
These raw materials are generally available from other suppliers, although the
cost from alternate suppliers might be higher.
As is customary in the ready-to-assemble furniture industry, we do not
maintain long-term supply contracts with our suppliers. We do, however, have
long standing relationships with all of our key suppliers and encourage supplier
partnerships. Our supplier base is sufficiently diversified so that the loss of
any one supplier in any given commodity should not have a material adverse
effect on our operations. We have never been unable to secure needed raw
materials. However, there could be adverse effects on our operations and
financial condition if we are unable to secure necessary raw materials like
particleboard and fiberboard.
Because we purchase all of our raw materials from outside suppliers, we
are subject to fluctuations in prices of raw materials. For example, our results
of operations were significantly affected in fiscal year 1995 by higher
particleboard and fiberboard prices. Future increases in the price of raw
materials could again affect our results of operations.
COMPETITION
The residential furniture market is very competitive and includes a
large number of both domestic and foreign manufacturers. Our competitors include
manufacturers of both ready-to-assemble and assembled furniture. Although a
large number of companies manufacture ready-to-assemble furniture, the top five
ready-to-assemble furniture manufacturers accounted for an estimated 76% of the
domestic ready-to-assemble furniture market in 1998. Our top five competitors in
terms of market share of the ready-to-assemble segment are Sauder Woodworking,
Inc., Bush Industries, Inc., Dorel Industries, Inc., Mills Pride, and Creative
Interiors. Some of our competitors have greater sales volume and financial
resources.
We, along with some of our competitors, have continued to increase
production capacity significantly as the market for ready-to-assemble furniture
has grown. In fiscal year 1996, these increases in capacity created some surplus
in production capacity in the ready-to-assemble furniture industry. The current
increases in production capacity could again cause excess capacity and increased
competition if anticipated sales increases do not materialize. This could
adversely affect our margins and results of operations.
8
<PAGE>
PATENTS AND TRADEMARKS
We have a United States trademark registration and international
trademark registrations or applications for the use of the O'Sullivan(R) name on
furniture. We believe that the O'Sullivan name and trademark are well-recognized
and associated with high quality by both our customers and consumers and are
important to the success of our business. Our products are sold under a variety
of trademarks in addition to O'Sullivan. Some of these names are registered
trademarks. We do not believe that the other trademarks we own enjoy the same
level of recognition as the O'Sullivan trademark. We also do not believe that
the loss of the right to use any one of these other trademarks would be material
to our business. We hold a number of patents and licenses. None of these patents
and licenses are individually considered by us to be material to our business.
SHIPPING
We offer customers the choice of paying their own freight costs or
having us absorb freight costs. If we absorb the freight costs, our product
prices are adjusted accordingly. When we pay freight costs, we use independent
trucking companies with whom we have negotiated competitive transportation
rates.
BACKLOG
Our business is characterized by short-term order and shipment
schedules of generally less than two weeks. Accordingly, we do not consider
backlog at any given date to be indicative of future sales.
SEASONALITY
We generally experience a somewhat higher level of sales in the second
and third quarters of our fiscal year in anticipation of and following the
holiday selling seasons.
PROPERTIES
We own three manufacturing facilities. We also lease distribution
warehouses in Lamar, Missouri and South Boston, Virginia. We utilize space in
bonded warehouses in Markham, Ontario for our Canadian operations and
Oxfordshire, United Kingdom for our European customers.
INSURANCE
We maintain liability insurance at levels that we believe are adequate
for our needs. We believe these levels are comparable to the level of insurance
maintained by other companies in the furniture manufacturing business.
EMPLOYEES
As of June 30, 1999, we had approximately 2,500 employees. 64% of these
employees are located in Lamar. None of our employees are represented by a labor
union. We believe that we have good relations with our employees.
ENVIRONMENTAL AND SAFETY REGULATIONS
Our operations are subject to extensive federal, state and local
environmental laws, regulations and ordinances. Some of our operations require
permits. These permits are subject to revocation, modification and renewal by
governmental authorities. Governmental authorities have the power to enforce
compliance with their regulations. Violators may be subject to fines, injunction
or both. Compliance with these regulations has not in the past had a significant
effect on our earnings, capital expenditures or competitive position. We
anticipate increased federal and state environmental regulations affecting us as
a manufacturer, particularly regarding emissions and the use of various
materials in our production process. In particular, regulations to be issued
under the Clean Air Act Amendments of 1990 could subject us to new standards
regulating emissions of some air
9
<PAGE>
pollutants from our wood furniture manufacturing operations. We cannot at this
time estimate the impact of these new standards on our operations, future
capital expenditure requirements or the cost of compliance. We have applied for
air emission permits under Title V of the Clean Air Act Amendments of 1990.
Our manufacturing process creates by-products, including sawdust and
particleboard flats. At the South Boston facility, this material is given to a
recycler or disposed of in landfills. At the Lamar facility, the material has
been sent to a recycler and off-site disposal sites. Wood by-products generated
at the Cedar City facility are shipped to a local landfill. Our by-product
disposal costs were approximately $1.8 million for fiscal 1999, $1.2 million for
fiscal 1998, and $1.0 million for fiscal 1997.
Our manufacturing facilities ship waste products to various disposal
sites. If our waste products include hazardous substances and are discharged
into the environment, we are potentially liable under various laws. These laws
may impose liability for releases of hazardous substances into the environment.
These laws may also provide for liability for damage to natural resources. One
example of these laws is the federal Comprehensive Environmental Response,
Compensation and Liability Act. Generally, liability under this act is joint and
several and is determined without regard to fault. In addition to the
Comprehensive Environmental Response, Compensation and Liability Act, similar
state or other laws and regulations may impose the same or even broader
liability for releases of hazardous substances.
We have been designated as a potentially responsible party under the
Arkansas Remedial Action Trust Fund Act for the cost of cleaning up a disposal
site in Diaz, Arkansas. We entered into a DE MINIMIS buyout agreement with some
of the other potentially responsible parties. We have contributed $2,000 to date
toward cleanup costs under this agreement. The agreement subjects potentially
responsible parties to an equitable share of any additional contributions if
cleanup costs exceed $9 million. In this event, we would be liable for our share
of the excess. Cleanup expenses have approached $9 million. The state has
approved a plan providing that groundwater at the site be monitored. No further
remediation activity is necessary unless further problems are discovered. The
monitoring activities should not require the potentially responsible parties to
make additional payments. We believe that the amounts we may be required to pay
in the future, if any, relating to this site will be immaterial.
Our operations also are governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Act and related regulations. Additionally, some of our products must
comply with the requirements and standards of the United States Consumer
Products Safety Commission. We believe that we are in substantial compliance
with all of these laws and regulations.
ITEM 2. PROPERTIES.
O'Sullivan owns three manufacturing, warehouse and distribution
facilities. The Lamar, Missouri facility, which also serves as O'Sullivan's
headquarters, consists of approximately 1,094,000 square feet. The South Boston,
Virginia facility has approximately 480,000 square feet, and the Cedar City,
Utah facility has approximately 530,000 square feet.
O'Sullivan has minimal unused land at Lamar on which it could build new
production or warehouse facilities. It does have excess land at South Boston and
Cedar City which may be used for expansion.
O'Sullivan also leases space for showrooms in High Point, North
Carolina and Bentonville, Arkansas. It leases warehouse space in Lamar, Missouri
and South Boston, Virginia.
O'Sullivan's Canadian operations are in a leased facility in Markham,
Ontario. O'Sullivan's United Kingdom operations are in a leased facility in
Oxfordshire.
O'Sullivan considers its owned and leased facilities to be adequate for
the needs of O'Sullivan and believes that all of its owned and leased properties
are well maintained and in good condition.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
TANDY LITIGATION. Prior to the initial public offering in 1994 of our
common stock, we were owned by Tandy Corporation. As part of the initial public
offering, we entered into a tax sharing and tax benefit reimbursement agreement
with Tandy. The structure of the public offering increased the basis in our
assets for tax purposes. This basis increase reduces the amount of gain we
recognize upon sales of our assets and increases our annual tax deductions for
depreciation and amortization. This increase in deductions reduces the amount of
income tax that we pay. Under the tax sharing agreement, we agreed to pay
Tandy nearly all of the benefit we receive from this reduction in our taxable
income, as determined after taking into account all of our other deductible
expenses. The payment to Tandy under the tax sharing agreement was $9.7
million for fiscal 1999, $11.7 million for fiscal 1998 and $6.0 million for
fiscal 1997. This agreement will remain in effect until 2033. However, under
the terms of the tax sharing agreement, O'Sullivan and Tandy are expected to
negotiate a final payment and termination date of the agreement in 2009.
Since the initial public offering, in determining the payment to Tandy
under the tax sharing agreement, we have historically deducted our interest
expense. We will incur a significant increase in interest expense associated
with our higher debt levels in connection with the financing of the merger. On
June 29, 1999, Tandy filed a petition in the 352nd District Court of Texas in
Tarrant County. The petition alleges that any reduction in our tax benefit
payments from our increased interest expense incurred in financing the merger
would violate the tax sharing agreement.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against us. The motion argues that Tandy is entitled to a court order
requiring us to commence dispute resolution procedures under the tax sharing
agreement. Because we have made all the payments required under the tax sharing
agreement and because no merger has occurred, we believe that Tandy's lawsuit is
premature since there cannot be a dispute under the tax sharing agreement with
respect to the increased interest resulting from the merger until the merger is
completed. Alternatively, Tandy argues that it is entitled to a court order
preventing us from deducting the interest expense related to the merger from our
tax-sharing payments to Tandy. Tandy's argument is based on a letter to that
effect, dated June 22, 1999, from PricewaterhouseCoopers LLP to an officer of
Tandy. Tandy claims that the June 22, 1999 letter entitles it to the relief it
seeks since PricewaterhouseCoopers is our auditing firm. According to Tandy,
PricewaterhouseCoopers should necessarily be an acceptable arbiter to O'Sullivan
under the tax sharing agreement's dispute resolution provisions.
PricewaterhouseCoopers, however, did not issue the letter in its capacity as our
auditor or as a neutral arbiter, but rather at the request of Tandy. Moreover,
PricewaterhouseCoopers states in the letter that the letter "does not constitute
a tax opinion or legal advice."
We believe the PricewaterhouseCoopers letter does not entitle Tandy
to relief because, among other invalid assumptions supplied by Tandy, that
letter incorrectly assumes that OSI Acquisition, Inc. will incur the debt
used to finance the merger. The PricewaterhouseCoopers letter relies on an
opinion provided by Tandy's outside counsel. We have not seen that opinion.
In fact, the debt used to finance the merger will be incurred by O'Sullivan
Industries Holdings, Inc. and its operating subsidiary, O'Sullivan
Industries, Inc. In addition, we have received an opinion from our outside
counsel that supports our interpretation of the tax sharing agreement. A
hearing on the motion for summary judgment is scheduled for October 1, 1999.
We believe Tandy's lawsuit is without merit and intend to defend ourselves
vigorously.
We are and expect to continue to be in full compliance with the tax
sharing agreement after the recapitalization transactions. Although we
believe that our interpretation of the tax sharing agreement will ultimately
prevail over Tandy's interpretation, we cannot assure you of this. If Tandy
were to prevail, our increased interest expense following the merger would
not be taken into account in determining our annual payments to Tandy. For
example, if Tandy were to prevail based on current earnings estimates our
payments to Tandy would be approximately $5.0 million greater than we
currently anticipate over the next two fiscal years combined. However, if our
earnings are significantly less than current estimates, then the difference
between the amount we believe we would owe to Tandy and the amount Tandy
believes we would owe would be significantly greater. If necessary, we would
fund these increased payment obligations from cash flow from operations,
borrowings under the revolving credit agreement or other sources of capital.
11
<PAGE>
LITIGATION CHALLENGING THE MERGER. On May 18, 1999, five lawsuits were
filed as class actions by stockholders in the Delaware Court of Chancery seeking
to enjoin the merger or, in the alternative, to rescind the merger and recover
monetary damages. The complaints name as defendants O'Sullivan, all of its
directors and, in some cases, BRS. The complaints allege that our directors
breached their fiduciary duties by approving the merger. The complaints also
allege that the price terms of the merger are inadequate and unfair to
O'Sullivan's stockholders. In addition, the complaints allege that the
management participants in the buyout have conflicts of interest that have
prevented them from acting in the best interests of O'Sullivan's stockholders
and that make it inherently unfair for BRS and the management participants in
the buyout to acquire 100% of the O'Sullivan's stock. In the cases naming BRS as
a defendant, BRS is alleged to have aided and abetted the alleged breaches of
fiduciary duties. The defendants do not have to respond to the lawsuits until
after the plaintiffs have combined their complaints into one complaint. The
court issued an order on July 22, 1999 requiring the plaintiffs to combine their
complaints into one complaint. However, no date has been set by which the
defendants must move or answer in response to the combined complaint. We believe
that the claims are without merit and intend to defend the lawsuits vigorously.
In addition, we are a party to various pending legal actions arising in
the ordinary operation of our business. These include product liability claims,
employment disputes and general business disputes. We believe that these actions
will not have a significant negative effect on our operating results and
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of O'Sullivan
during the quarter ended June 30, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
O'Sullivan's common stock is traded on the New York Stock Exchange
under the symbol "OSU". The following table sets forth the high and low sale
prices of O'Sullivan's common stock, as reported by the New York Stock Exchange,
for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED High Low
------------------------- ---- ---
<S> <C> <C>
September 30, 1998 $ 14.06 $ 8.69
December 31, 1998 $ 11.19 $ 8.75
March 31, 1999 $ 15.31 $ 9.44
June 30, 1999 $ 19.25 $ 13.38
<CAPTION>
FISCAL 1998 QUARTER ENDED High Low
------------------------- ---- ---
<S> <C> <C>
September 30, 1997 $ 16.44 $ 11.75
December 31, 1997 $ 14.00 $ 9.25
March 31, 1998 $ 12.94 $ 9.38
June 30, 1998 $ 16.44 $ 12.44
</TABLE>
As of September 15, 1999, there were approximately 838 stockholders of
record. No dividends have been paid or declared since our initial public
offering in 1994.
We currently intend to retain all earnings to finance the development
of our operations and to repay the indebtedness we expect to incur in connection
with the merger. We do not anticipate paying cash dividends on our shares of
common stock in the near future. Our future dividend policy will be determined
by our Board of Directors on the basis of various factors, including but not
limited to our results of operations, financial condition, business
opportunities and capital requirements. The payment of dividends is subject to
the requirements of Delaware law, as well as restrictive financial covenants in
our debt agreements.
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<PAGE>
ITEM 6. SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION.
The selected historical consolidated results of operations and balance
sheet data for the five years ended June 30, 1999 are derived from O'Sullivan's
audited financial statements. This selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the "Consolidated Financial Statements
and Related Notes" included on the following pages.
<TABLE>
<CAPTION>
For the year ended June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA:
Net sales $ 379,632 $ 339,407 $ 321,490 $ 291,766 $ 269,306
Cost of sales 267,630 244,086 230,578 229,262 208,176
--------- --------- --------- --------- ---------
Gross profit 112,002 95,321 90,912 62,504 61,130
Selling, marketing and administrative 74,962 69,212 62,137 52,691 45,489
Merger related expenses 1,143 -- -- -- --
Restructuring charge -- -- -- 5,212 --
--------- --------- --------- --------- ---------
Operating income 35,897 26,109 28,775 4,601 15,641
Interest expense, net 2,844 2,468 2,327 3,831 2,382
--------- --------- --------- --------- ---------
Income before income tax provision 33,053 23,641 26,448 770 13,259
Income tax provision 11,900 8,742 10,050 433 5,038
--------- --------- --------- --------- ---------
Net income $ 21,153 $ 14,899 $ 16,398 $ 337 $ 8,221
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share
Basic $ 1.32 $ 0.91 $ 0.98 $ 0.02 $ 0.49
Diluted $ 1.30 $ 0.89 $ 0.96 $ 0.02 $ 0.49
Weighted Average Shares Outstanding
Basic 15,973 16,339 16,786 16,820 16,820
Diluted 16,330 16,715 17,056 16,822 16,820
Cash flow provided by operating activities $ 25,441 $ 27,209 $ 23,512 $ 25,345 $ 13,188
Cash flow used for investing activities (15,779) (28,359) (15,825) (4,403) (30,355)
Cash flow provided (used by) financing activities (7,732) (4,015) (1,218) (21,000) 17,334
EBITDA (1) $ 49,859 $ 37,669 $ 38,735 $ 13,836 $ 23,106
Depreciation and amortization 13,962 11,560 9,960 9,235 7,465
Capital expenditures 15,779 28,359 15,825 4,403 30,355
<CAPTION>
June 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 85,262 $ 72,893 $ 82,045 $ 71,136 $ 86,058
Total assets 266,967 250,314 232,607 212,317 228,477
Long-term debt 22,000 30,000 30,000 30,000 51,000
Stockholders' equity 185,136 163,670 156,790 141,615 140,624
</TABLE>
(1) EBITDA means earnings before interest expense and interest income, income
taxes, depreciation and amortization. EBITDA is presented here to provide
additional information about our operations. This item should be considered
in addition to, but not as a substitute for or superior to, operating
income, net income, cash flow and other measures of financial performance
prepared in accordance with generally accepted accounting principles.
EBITDA may differ in the method of calculation from similarly titled
measures used by other companies.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE MORE
DETAILED INFORMATION IN THE HISTORICAL FINANCIAL STATEMENTS, INCLUDING THE
RELATED NOTES THERETO, APPEARING ELSEWHERE IN THIS REPORT.
OVERVIEW.
The domestic ready-to-assemble furniture market has experienced
significant growth over the past several years and has emerged as a key
component of the overall U.S. home and office furnishings industry. Our company
is the second largest ready-to-assemble furniture manufacturer in the United
States in terms of domestic sales with over 45 years of experience. We design,
manufacture and distribute a broad range of RTA furniture products--bookcases,
cabinets, computer workcenters, desks, entertainment centers and stereo
racks--with retail prices ranging from $20 to $999. In recent years, we have
committed substantial resources to the development and implementation of a
diversified sales, marketing and product strategy in order to capitalize on
growth opportunities presented by emerging retail channels of distribution and
changes in consumer demographics and preferences. We have structured our
business to offer a wide variety of RTA furniture products through increasingly
popular retail distribution channels, including office superstores, discount
mass merchants, electronic superstores, department stores, home improvement
centers and home furnishings retailers. We continue to strive towards building
long-term relationships with quality retailers in existing and emerging high
growth distribution channels to develop and sustain our future growth.
In order to provide superior products and service to our demanding
customer base and maintain margin integrity, we have adopted the following three
pronged strategy:
- We introduce innovative products that redefine categories such as
entertainment centers and computer workcenters, thereby allowing us to replace
our existing retail footprint with new products that enable us to maintain or
improve gross margins. Examples of such innovative products include our
Cockpit(R) computer workcenters and Xpressions(TM) Mini-Audio Stand.
- We have developed an upscale brand, Intelligent Designs(R), that has
allowed us to penetrate the upper end of the ready-to-assemble furniture market.
Intelligent Designs products generally capture higher price points and generate
better gross margins.
- We strive continuously to improve our manufacturing systems and generate
higher productivity in order to lower costs and maintain or improve margins.
In fiscal 1998, we implemented several strategic business initiatives
including a $20 million capacity expansion program in our Virginia plant, which
increased our total manufacturing capacity by approximately 15%, and a $13
million manufacturing equipment upgrade in our Missouri plant. In addition, we
completed an upgrade of our management information systems, which included a
corporate-wide conversion to JD Edwards software, the installation of a new
point-of-sale analytical software that allows our sales force to analyze sales
trends and consumer preferences more accurately and the installation of
Pro-engineering, a computer-aided design software package which enhances our
product design capabilities and reduces the time before newly conceived products
reach the market. We believe that we have not yet fully realized the benefits of
our capital expansion and management information systems upgrade.
We purchase large quantities of raw materials including particleboard
and fiberboard. We are dependent on our outside suppliers for all of these raw
materials. Therefore, we are subject to changes in the prices charged by our
suppliers. In the past, our profits have been reduced by price increases of
these commodities.
In the fourth quarter of fiscal 1999, some of our particleboard
suppliers announced that they intended to pass price increases of approximately
3% on to their customers, including us. In fiscal 1999, we spent about $85.0
million on particleboard and fiberboard. Also, in fiscal 1999, the price we paid
for corrugated cartons decreased around 8% from July 1998 to March 1999. In
March 1999, some of our corrugated carton suppliers
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<PAGE>
announced that they intend to implement a price increase of approximately 8%. In
fiscal 1999, we purchased around $15.0 million of corrugated cartons.
We expect that these price increases, some of which were implemented in
the second calendar quarter of 1999, may be partially offset by other factors.
These factors include price decreases in other raw materials, our value
engineering program designed to reduce costs without compromising product
quality or appearance, increased productivity in our manufacturing operations
and higher selling prices. There can be no assurance, however, that these
efforts will reduce the effect of the price increases already implemented or any
future price increases.
RESULTS OF OPERATIONS.
The following table sets forth the approximate percentage of items
included in the Consolidated Statement of Operations and EBITDA relative to net
sales for the three-year period ended June 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
===== ===== =====
Cost of sales 70.5% 71.9% 71.7%
Gross margin 29.5% 28.1% 28.3%
Selling, marketing and administrative expenses 19.7% 20.4% 19.3%
Merger related expenses 0.3% -- --
Operating income 9.5% 7.7% 9.0%
Interest expense, net 0.7% 0.7% 0.7%
Income tax expense 3.1% 2.6% 3.2%
Net income 5.6% 4.4% 5.1%
Depreciation and amortization 3.7% 3.4% 3.1%
EBITDA (1) 13.1% 11.1% 12.1%
</TABLE>
(1) Excludes merger related expenses recognized in June 1999.
YEAR ENDED JUNE 30, 1999 COMPARED TO THE YEAR ENDED JUNE 30, 1998.
NET SALES. Net sales increased by $40.2 million, or 11.9%, to $379.6
million in fiscal 1999, up from $339.4 million in fiscal 1998. The increase in
net sales was primarily driven by a 10.9% increase in the number of units sold
and, to a lesser extent, a 1.0% increase in the average selling price. Strong
increases in net sales to the national discount mass merchant, electronic
specialty retailer and office superstore channels accounted for approximately
$44.3 million of the sales increase, offset by a $4.1 million decline in sales
to the regional mass merchant, department store/catalog showroom, home
improvement, original equipment manufacturer and export channels. Consumer
demand for our products was driven by market growth fueled by the robust growth
of the sub-$1,000 computer market, sales efforts targeted toward specific
rapidly growing customers, the success of new product introductions, additional
floor space and resources provided by retailers for ready-to-assemble furniture
and new store openings by certain retailers.
In March 1999, Service Merchandise Co., one of our largest customers,
filed for bankruptcy protection under Chapter 11. In addition, Montgomery Ward &
Co. recently exited Chapter 11 on August 2, 1999. If Service Merchandise,
Montgomery Ward or another major customer liquidates or ceases or substantially
reduces its purchases of products from us, we cannot assure you that we will be
able to replace these sales.
GROSS PROFIT. Our gross profit for fiscal year 1999 was $112.0 million,
an increase of $16.7 million, or 17.5%, from $95.3 million in fiscal 1998. This
increase was attributable to higher net sales and an improvement in the gross
profit margin, which increased by 140 basis points to 29.5% in fiscal 1999 from
28.1% in fiscal 1998. The increase in gross margin was primarily attributable to
increased unit sales and, to some extent, lower
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<PAGE>
material costs due to our on-going value-engineering program and improved
manufacturing productivity. These increases were somewhat offset by the increase
in net sales to discount mass merchants which normally has lower gross profit
margins.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses increased by $5.8 million, or 8.3%, to $75.0 million in
fiscal 1999, from $69.2 million in fiscal 1998. The increase in selling,
marketing and administrative expenses was due primarily to $3.2 million of
higher advertising and out-bound freight expense directly associated with higher
net sales levels and customer mix and $2.3 million in higher profit sharing and
incentive compensation costs resulting from our improved financial results.
These increases were partially offset by lower commission expense resulting from
management's emphasis on reducing costs, and to some extent lower bad debt
expense related to the purchase and initiation of credit insurance during fiscal
1999. As a percentage of sales, selling, marketing and administrative expenses
decreased by 70 basis points to 19.7% of sales in fiscal 1999 from 20.4% of
sales in fiscal 1998 primarily from improved economies of scale.
MERGER RELATED EXPENSES. In June 1999, we recorded merger related
expenses of $1.1 million pre-tax for accounting, legal, printing and investment
banking services associated with the pending merger. Additional merger related
expenses will be incurred during fiscal year 2000.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expenses increased $2.4 million, or 20.7%, to $14.0 million in fiscal 1999 from
$11.6 million in fiscal 1998. The increase in depreciation and amortization
expense was due to capital additions of $15.8 million in fiscal 1999 and $28.4
million in fiscal 1998. The expenditures were primarily for capacity expansion
in our Virginia plant and upgrading manufacturing equipment in our Missouri
plant.
OPERATING INCOME. Operating income, including merger related expenses,
increased by $9.8 million in fiscal 1999 compared to fiscal 1998. Excluding
merger related expenses, our operating income increased by $10.9 million, or
41.9%, to $37.0 million in fiscal 1999 from $26.1 million in fiscal 1998.
NET INTEREST EXPENSE. Net interest expense increased by $0.4 million to
$2.8 million in fiscal 1999. The increase was due largely to the refinancing of
our $10.0 million of industrial revenue bonds in the second quarter of this
fiscal year, which triggered a one-time charge of $0.3 million to pay the call
premium.
INCOME TAX EXPENSE. Income tax expense increased by $3.2 million, or
36.8%, to $11.9 million in fiscal 1999 from $8.7 million in fiscal 1998. Our
effective tax rate for fiscal 1999 was 36.0%, down slightly from 37.0% in fiscal
1998.
NET INCOME. As a result of the above factors, net income increased by
$6.3 million, or 42.3%, to $21.2 million in fiscal 1999 from $14.9 million in
fiscal 1998. Excluding merger related expenses, net income increased by $7.0
million to $21.9 million for fiscal 1999.
EBITDA. EBITDA, which we define as earnings before interest income and
interest expense, income taxes and depreciation and amortization, increased by
$12.2 million, or 32.3%, to $49.9 million in fiscal 1999. The increase in EBITDA
for fiscal 1999 was driven by increased sales volumes, productivity gains in our
three manufacturing plants, improved absorption of overhead costs associated
with increased net sales and increased year end finished inventory and the
success of our value analysis program. These gains were somewhat offset by
increased profit sharing and incentive compensation costs as well as higher
outbound freight and advertising expenses associated with sales volume increases
and customer mix.
YEAR ENDED JUNE 30, 1998 COMPARED TO THE YEAR ENDED JUNE 30, 1997.
NET SALES. Net sales increased $17.9 million, or 5.6%, to $339.4
million in fiscal year 1998, up from $321.5 million in fiscal 1997. The average
selling price per unit increased 13.1% in fiscal 1998, while the number of units
sold decreased by 5.9%, reflecting the growth in the office superstore channel,
which sells products with higher average price points. Sales decreases in the
national discount mass merchant, department store/catalog showroom, home
improvement, and original equipment manufacturer channels were more than
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<PAGE>
offset by increased sales through the office superstore, regional mass merchant,
electronic specialty retailer and export channels. These sales increases were
the result of targeted sales efforts toward the regional retail chains, the
addition of new customers in the electronics channel, and the continued success
of products in the office superstore channels.
The decrease in the national discount mass merchant channel was due to
the volatile order pattern of one major mass merchant in the fourth quarter of
fiscal 1997 and the first half of fiscal 1998. The decrease in the department
store/catalog showroom channel reflected the bankruptcy and subsequent
liquidation of Best Products Co., Inc. in September 1996. Lower sales through
the home improvement channel were a result of the largest home improvement
company's discontinuance of ready-to-assemble furniture products other than
storage products for the home. Original equipment manufacturer sales continued a
decline that began in fiscal 1995 because of a decreased emphasis on this lower
margin business.
In September 1996, one of our then-largest customers, Best Products
Co., Inc., filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code. Best Products Co., Inc. subsequently liquidated its assets and
ceased doing business. Sales to Best Products were zero in fiscal 1998 and $6.0
million in fiscal 1997.
In July 1997, another of our large customers, Montgomery Ward & Co.,
filed for bankruptcy protection under Chapter 11. Sales to Montgomery Ward were
down slightly overall in fiscal 1998 compared to fiscal 1997.
Montgomery Ward exited bankruptcy protection on August 2, 1999.
GROSS PROFIT. Our gross profit increased to $95.3 million in fiscal
1998 from $90.9 million in fiscal 1997 but decreased slightly as a percentage of
sales, to 28.1% from 28.3%. A change in customer mix favoring the office
superstore market over the national discount mass merchant channel provided
higher margins, which were offset by lost efficiencies from the installation of
new manufacturing software systems and the installation of new equipment,
including the related training of employees and adaptation of manufacturing
processes.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing and
administrative expenses were $69.2 million, or 20.4% of sales, in fiscal 1998,
compared with $62.1 million, or 19.3% of sales, in fiscal 1997. The increase was
due primarily to the higher advertising costs associated with our promotional
efforts with certain customers and higher outbound freight costs resulting from
a change in the freight program of a large customer. Fiscal 1997 expenses also
included bad debt expenses for the bankruptcies of Montgomery Ward & Co. and
Best Products Co., Inc.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization
expenses increased to $11.6 million in fiscal 1998 from $10.0 million in fiscal
1997. The increased expense resulted from capital additions of $28.4 million in
fiscal 1998 and $11.2 million during the second half of fiscal 1997. The
expenditures were primarily for manufacturing capacity expansion and increased
capabilities, as well as a major software system implementation.
OPERATING INCOME. Operating income decreased by $2.7 million to $26.1
million in fiscal 1998. The decrease was due primarily to manufacturing
inefficiencies associated with the installation of new manufacturing equipment,
training of employees on the new equipment, software systems installation, and
the related adaptation of manufacturing processes. Additionally, operating
income was reduced by higher advertising costs from promotional efforts with
certain customers and higher outbound freight costs due to a change in the
freight program of a large customer.
NET INTEREST EXPENSE. Net interest expense increased by $0.2 million to
$2.5 million in fiscal 1998. The increase was due primarily to lower cash
balances from increased capital expenditures and our stock repurchase program.
INCOME TAX EXPENSE. Our effective tax rate for fiscal 1998 was 37.0%,
down slightly from 38.0% in fiscal 1997.
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NET INCOME. Net income decreased by $1.5 million to $14.9 million in
fiscal 1998. The decrease was due primarily to lost manufacturing efficiencies
discussed above with respect to cost of sales and gross margin, as well as
higher promotional costs and increased outbound freight costs.
EBITDA. EBITDA decreased $1.1 million to $37.7 million in fiscal 1998.
Earnings were less in fiscal 1998 because of manufacturing inefficiencies
associated with the installation of new manufacturing software systems and
equipment and the related training of employees and adaptation of manufacturing
processes, as well as higher promotional costs with certain customers and
outbound freight costs.
BACKLOG.
Our business is characterized by short-term order and shipment
schedules of generally less than two weeks. Accordingly, we do not consider
backlog at any given date to be indicative of future sales.
LIQUIDITY AND CAPITAL RESOURCES.
HISTORICAL. As of June 30, 1999, we had cash and cash equivalents
amounting to $3.7 million. Net working capital was $85.8 million at June 30,
1999 compared to $72.9 million at June 30, 1998. The $12.9 million increase in
net working capital resulted primarily from increased investment in inventories
of $9.4 million. Forecasted fourth quarter sales to certain customers did not
materialize because these customers delayed purchases to decrease their
inventory. We believe this adjustment will be short term and that order patterns
should return to normal during the first quarter of fiscal 2000.
Cash provided by operating activities for fiscal 1999 amounted to $25.5
million, compared with $27.2 million in fiscal 1998. Net income increased $6.3
million compared with the prior year. Also, we incurred increased non-cash
charges for depreciation and amortization of $2.4 million over the prior year.
These increases were offset by the higher investment in inventories of $9.4
million compared to $2.6 million in fiscal 1998 and a decrease in accounts
payable of $0.2 million compared to an increase of $5.4 million in fiscal 1998.
We used the cash flow provided by operating activities primarily to fund capital
expenditures and to make our first annual payment of $4.0 million for long-term
debt.
As of June 30, 1999, we had total debt of $26.0 million. We issued
$20.0 million of 8.01% notes in a 1995 private placement to insurance companies.
These notes are payable in $4.0 million increments from fiscal 1999 to fiscal
2003, and we made our first $4.0 million payment in May 1999. Of the $16.0
million remaining on these notes, $12.0 million is classified as long-term and
$4.0 million is classified as the current portion of long-term debt. One of our
subsidiaries was the obligor on $10.0 million of 8.25% industrial revenue bonds
that were to mature on October 1, 2008. On October 1, 1998, we refinanced these
bonds with new, 10-year variable interest rate industrial revenue bonds. We
recognized the $0.3 million premium on the early retirement of the bonds as a
loss in our second quarter of fiscal 1999.
As of June 30, 1999, we had an unsecured $25.0 million revolving credit
facility with a bank that expires on February 28, 2001. As of June 30, 1999, we
had no borrowings outstanding under this facility.
On May 6, 1997, our Board of Directors authorized the purchase of up to
five percent of the outstanding shares of our common stock over a 24-month
period. We completed the purchases under the program in October 1998. Funding
for the purchases came from available working capital and existing borrowing
facilities.
We also purchase common stock for our employee benefit programs. During
fiscal 1999, we purchased approximately $2.8 million in common stock and
transferred $3.0 million to our employee benefit plans.
We use derivative financial instruments to reduce interest rate risks.
We do not hold or issue derivative financial instruments for trading purposes.
Effective October 1, 1998, we have a forward starting interest rate swap
agreement with a notional principal amount of $10.0 million. The effective date
of the agreement was October 1, 1998, and the termination date is October 1,
2008. We have contracted to pay a fixed rate of 7.13% and receive a floating
interest rate during the duration of the swap agreement. The swap has the effect
of hedging
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<PAGE>
our exposure to an increase in interest rates under our refinanced industrial
revenue bonds. We have designated this swap as a hedge against future cash flow
exposure.
The fair value of the forward starting swap agreement was approximately
$0.5 million at June 30, 1999. This amount represents the amount that we would
have to pay to terminate the swap. We have not recognized this amount in our
consolidated financial statements, because it is accounted for as a hedge.
RETIREMENT CHARGE. In October 1998, Mr. Daniel F. O'Sullivan, Chairman
of the Board of Directors and Chief Executive Officer, completed negotiations of
a retirement and consulting agreement with us contingent upon our hiring his
successor. In May 1999, the original retirement agreement was amended, removing
a contingency relating to the hiring of his successor. The retirement agreement
contains standard noncompetition provisions. The present value of all future
payments under this agreement have been capitalized and recorded as an
intangible asset. The noncompetition asset will be recognized on a straight line
basis over the term of the agreement with Mr. O'Sullivan commencing on the
earlier of his retirement or March 31, 2000. Based on a retirement date of March
31, 2000, the amortization period would be approximately 6.3 years. Payments
under this agreement will total approximately $2.2 million over the next seven
years.
FOLLOWING THE RECAPITALIZATION AND MERGER.
Following the recapitalization and merger, our primary liquidity
requirements will be to pay our debt, including our interest expense under the
senior credit facilities and our senior subordinated notes, to provide working
capital to make payments to Tandy under the tax sharing and tax benefit
reimbursement agreement and to make capital expenditures and possibly
acquisitions. BRS has advised us that, at June 30, 1999, on a pro forma basis
after giving effect to the transactions, our consolidated indebtedness would
have been $285.0 million, consisting of $125.0 million under the senior credit
facilities, $125 million in the senior subordinated notes issued by O'Sullivan
Industries, Inc., and $25.0 million in senior discount notes issued by
O'Sullivan and $10.0 million of variable rate industrial revenue bonds.
Capital expenditures for fiscal year 1999 were $15.8 million compared
to $28.4 million for fiscal year 1998. We have budgeted total capital
expenditures for fiscal 2000 of approximately $17.0 million. Our ability to make
capital expenditures is subject to certain restrictions under the senior credit
facilities.
Our principal source of cash to fund our liquidity needs will be net
cash from operating activities and borrowings under the senior credit
facilities. BRS has advised us that, the senior credit facilities are comprised
of a $40.0 million six-year revolving credit facility and a $125.0 million term
loan facility consisting of a $35 million six-year term loan and a seven and
one-half year $90.0 million term loan. The senior credit facilities are subject
to certain financial and operational covenants and other restrictions, including
among others, a requirement to maintain certain financial ratios and limitations
on our ability to incur additional indebtedness.
Our ability to make payments on and to refinance our indebtedness,
including these notes, and to fund planned capital expenditures and to make
payments to Tandy under the tax sharing and tax benefit reimbursement agreement
will depend on our ability to generate cash in the future. This ability, to some
extent, is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Based on our current
level of operations and anticipated cost savings and operating improvements, we
believe that our cash flow from operations, available cash and available
borrowings under our senior credit facilities will be adequate to meet our
liquidity needs for the foreseeable future.
We cannot assure you, however, that our business will generate
sufficient cash flow from operations, that we will realize operating
improvements on schedule or that future borrowings will be available to us under
our
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senior credit facilities in an amount sufficient to enable us to service our
indebtedness, including these notes, or to fund our other liquidity needs. We
may need to refinance all or a portion of our indebtedness, including these
notes, on or before maturity. We might not be able to refinance any of our
indebtedness, including our senior credit facilities and these notes, on
commercially reasonable terms or at all.
MANAGEMENT INFORMATION SYSTEMS AND THE IMPACT OF THE YEAR 2000.
Almost all companies must address whether their computer systems and
applications will recognize and process dates after December 31, 1999. In prior
years, many computer programs were written using two digits rather than four to
define the applicable year. These programs were written without considering the
impact of the upcoming change of the century and may experience problems
handling dates beyond the year 1999. This could cause computer applications to
fail, manufacturing operations to be disrupted, a temporary inability to process
transactions and create other erroneous results unless corrective measures are
taken.
We have established and developed a multi-step Year 2000 readiness plan
for our internal systems including computer hardware (mainframe and personal
computers), computer software, application programs, manufacturing equipment and
office equipment (phone and fax systems). The plan includes development of
corporate awareness, assessment of internal systems, assessment of customer and
vendor readiness, project planning, project implementation (including
remediation, upgrading and replacement), validation testing and contingency
planning. The readiness plan is reviewed approximately every two to three weeks
to determine progress and completion of various milestones.
In fiscal 1998, we completed the final rollout of an enterprise
software package to support our expanded sales and multiple plant, multiple
warehouse locations and replace an older non-compliant year 2000 system. The
vendor of the software package states that the software is Year 2000 compliant
except for minor issues for which remedial programming has been provided. We are
testing and implementing the remedial programming. We are continuing our testing
efforts to verify the vendor's statement of compliance and expect to complete
this testing about October 31, 1999. We are utilizing internal resources to
complete testing of the systems.
We have implemented electronic communications capabilities to ensure
that order, shipping and invoicing data for dates after December 31, 1999 can be
processed. This testing and verification is complete. We have successfully
tested Year 2000 data with the National Retail Federation and have received its
Year 2000 compliance certification. We are also processing Year 2000 compliant
order, shipping and invoicing data with certain of our electronic data
interchange customers. We will continue to test and implement Year 2000
compliant electronic communications with other customers as they update their
systems to Year 2000 capabilities.
We have reviewed critical business systems and have completed a review
of our computerized machinery and equipment for Year 2000 compliance issues. We
have reviewed about 1,900 pieces of equipment, and we have installed modified
software in the equipment we determined needed modifications to be Year 2000
compliant.
In addition, our ability to produce our products is dependent upon
timely receipt of raw materials. Accordingly, we have requested our suppliers to
provide information regarding their efforts to address Year 2000 compliance
issues. Every major supplier responded that it has evaluated and addressed its
Year 2000 compliance issues or is in the process of doing so. If a major
supplier does not resolve its Year 2000 compliance issues and is unable to
provide us with timely deliveries of quality materials after December 31, 1999,
we expect to locate and use alternative suppliers, although it is possible that
we may be unable to do so, or may be able to do so only at increased cost. For
example, if it is apparent that certain material vendors or transportation
companies may not achieve Year 2000 compliance, we intend to increase our raw
materials inventory for strategic materials necessary to continue production of
product for our customers.
Based upon current information, we estimate that aggregate amounts
expended to resolve Year 2000 issues should not exceed $500,000. These costs are
made up of approximately $225,000 for modification of information systems
software, which represents approximately 5% of the total information services
budget for fiscal 1999, and approximately $275,000 represents costs of upgrading
electronics for manufacturing and
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<PAGE>
communication equipment. We expect to fund these expenditures through available
cash from operations or through use of the bank revolver. All of these amounts
will be deducted from income at the time the liability is incurred. As of June
30, 1999, we have spent approximately $93,000 in connection with our compliance
plan.
We have developed the basics of a contingency plan to address
situations that may result if O'Sullivan or its vendors or customers are unable
to achieve Year 2000 readiness of critical operations. We are vulnerable to
external forces that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions. This is most likely the worse case scenario for
O'Sullivan involving the Year 2000. For example, if the electrical grid failed
for any of our manufacturing facilities, we would not be able to manufacture
product for our customers. If natural gas for winter heating failed or was
severely restricted, we would not be able to heat our buildings for our
employees and could affect the functioning of certain laminating equipment.
Anticipating the possibility of such failure or restriction, we plan to increase
our finished goods inventory for our customers. If some automated processes fail
in spite of our remediation efforts, we will resort to manual processes using
regular and, if necessary, temporary staffing in order to perform the additional
workload resulting from Year 2000 related malfunctions.
The costs of the project and the dates on which we believe we will
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. However, these expectations are
subject to uncertainties. If we do not identify and fix all Year 2000 problems
in critical operations, our results of operations and our financial condition
could be materially impacted. There can be no assurance that these estimates
will be achieved and actual results could differ materially from those
anticipated.
MARKET RISK.
Our market risk is affected by changes in interest rates, foreign
currency exchange rates, and certain commodity prices. Under our policies, we
may use natural hedging techniques and derivative financial instruments to
reduce the impact of adverse changes in market prices. We do not hold or issue
derivative instruments for trading purposes, and we have no material sensitivity
to changes in market rates and prices on our derivative financial instrument
positions.
We have market risk in interest rate exposure, primarily in the United
States. We manage interest rate exposure through our mix of fixed and floating
rate debt. Interest rate swaps may be used to adjust interest rate exposures
when appropriate based on market conditions. For qualifying hedges, the interest
differential of swaps is included in interest expense. We believe our foreign
exchange risk is not material.
Due to the nature of our product lines, we have material sensitivity to
some commodities. We manage commodity price exposures primarily through the
duration and terms of our vendor contracts. A 1.0% change in these commodity
prices would affect our earnings by approximately $0.7 million.
SEASONALITY.
Historically, we have generally experienced a somewhat higher level of
sales in the second and third quarters of our fiscal year in anticipation of and
following the holiday selling season.
INFLATION.
We do not believe that inflation has had a material effect on the
results of operations presented in these financials.
INCOME TAXES.
Prior to our initial public offering in 1994, we were owned by Tandy
Corporation. As part of the initial public offering, we entered into a tax
sharing and tax reimbursement agreement with Tandy. The structure of the public
offering increased our basis in our assets for tax purposes. This basis increase
raises our tax deductions for
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<PAGE>
depreciation and amortization each year. This reduces the amount of income taxes
we pay to the IRS. Under the tax sharing and tax benefit reimbursement
agreement, we agreed to pay Tandy nearly all of any benefit we receive from the
increased depreciation and amortization which reduces our taxable income, as
determined after taking into account all of our other deductible expenses, by
the increase in these deductions. This agreement will remain in effect after
the merger.
Since the initial public offering, in determining the benefit payment
to Tandy under the tax sharing and tax benefit reimbursement agreement, we have
deducted our interest expense. We will incur a significant increase in interest
expense associated with our higher debt levels in connection with the financing
of the merger. We believe that our increased interest expense should be taken
into account in determining the payments that we are required to make to Tandy.
LITIGATION.
On June 29, 1999, Tandy filed suit in a Texas court against us. The
suit relates to a potential reduction in our tax benefit payments to Tandy that
would result from our increased interest expense after the completion of the
merger. Tandy claims that this reduction would violate the tax sharing and tax
reimbursement agreement. Although we believe that our interpretation of the tax
sharing agreement will ultimately prevail over Tandy's interpretation, we cannot
assure you of this. If Tandy were to prevail, our increased interest expense
following the merger would not be taken into account in determining our annual
payments to Tandy. For example, based on current earnings estimates, our
payments to Tandy would be approximately $5.0 million greater than we currently
anticipated over the next two fiscal years combined. However, if our earnings
are significantly less than current estimates, then the difference between the
amount we believe we would owe to Tandy and the amount Tandy believes we would
owe would be significantly greater. If necessary, we would fund the increased
payment obligations from cash flow from operations, borrowing under the
revolving credit agreement, or other sources of capital.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION.
Certain portions of this Report, and particularly the Management's
Discussion and Analysis of Financial Condition and Results of Operation and the
Notes to the Consolidated Financial Statements in Part II of this report, the
portions of Item 1 in Part I captioned "Raw Materials," "Competition," "Working
Capital--Business and Credit Risk Concentrations" and "Environmental and Safety
Regulations" and Item 2 in Part I contain forward-looking statements. These
include information relating to cost savings, benefits, revenues and earnings
estimated to result from the merger. These statements can be identified by the
use of future tense or dates or terms such as "believe,""would," "expect,"
"anticipate" or "plan." These forward-looking statements involve risks and
uncertainties. Actual results may differ materially from those predicted by the
forward-looking statements. Factors and possible events which could cause
results to differ include:
- expected significant indebtedness that may limit our financial and
operational flexibility;
- costs or difficulties related to the merger are greater than expected;
- changes from anticipated levels of sales, whether due to future
national or regional economic and competitive conditions, customer
acceptance of existing and new products, or otherwise;
- pricing pressures due to excess capacity in the ready-to-assemble
furniture industry, as occurred in 1995, or customer demand in excess
of our ability to supply product;
- raw material cost increases, particularly in particleboard and
fiberboard, as occurred in 1994 and 1995;
- transportation cost increases;
- loss of or reduced sales to significant customers as a result of a
merger, acquisition, bankruptcy, liquidation or any other reason, as
occurred with the liquidation of Best Products in 1996 and could occur
with Service Merchandise Co., Inc. and Montgomery Ward & co., Inc.;
- actions of current or new competitors that increase competition with
our products or prices; o the consolidation of manufacturers in the
ready-to-assemble furniture industry;
- increased advertising costs associated with promotional efforts;
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<PAGE>
- failure by O'Sullivan or a major supplier or vendor to identify and
remedy all critical year 2000 compliance issues;
- pending or new litigation or governmental regulations such as the
pending litigation involving Tandy;
- other uncertainties which are difficult to predict or beyond our
control; and
- the risk that we incorrectly analyze these risks and forces, or that
the strategies we develop to address them could be unsuccessful.
Because these forward-looking statements involve risks and
uncertainties, actual results may differ significantly from those predicted in
these forward-looking statements. You should not place a lot of weight on these
statements. These statements speak only as of the date of this document or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable
to O'Sullivan or any person acting on our behalf are qualified by the cautionary
statements in this section. We will have no obligation to revise these
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is incorporated herein by
reference to the section entitled "Market Risk" in O'Sullivan's Management's
Discussion and Analysis of Results of Operations and Financial Condition (Part
II, Item 7).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Immediately following are the report of independent accountants, the
consolidated balance sheets of O'Sullivan Industries Holdings, Inc. and
subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the three years in the period ended June 30, 1999, and the notes
thereto.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
O'Sullivan Industries Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of O'Sullivan Industries Holdings, Inc. and its subsidiaries at June
30, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of O'Sullivan's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Fort Worth, Texas
August 4, 1999
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<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
June 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,740 $ 1,810
Trade receivables, net of allowance for doubtful
accounts of $2,416 and $2,289, respectively 63,268 61,548
Inventories, net 56,134 46,727
Prepaid expenses and other current assets 3,810 3,762
--------- ---------
Total current assets 126,952 113,847
Property, plant and equipment, net 96,684 93,378
Other assets 1,909 --
Goodwill, net of accumulated amortization 41,422 43,089
--------- ---------
Total assets $ 266,967 $ 250,314
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY:
---------
Current liabilities:
Accounts payable $ 11,416 $ 14,031
Current portion of long-term debt 4,000 4,000
Accrued liabilities 24,695 22,613
Income taxes payable 1,579 310
--------- ---------
Total current liabilities 41,690 40,954
Long-term debt, less current portion 22,000 30,000
Other non-current liabilities 1,909 --
Deferred income taxes 16,232 15,690
--------- ---------
Total liabilities 81,831 86,644
Commitments and contingent liabilities
(Notes 3 and 14)
Stockholders' equity:
Preferred stock; $1.00 par value, 20,000,000
shares authorized, none issued -- --
Common stock; $1.00 par value, 100,000,000
shares authorized, 16,819,950 issued 16,820 16,820
Additional paid-in capital 87,549 87,809
Retained earnings 89,470 68,317
Accumulated other comprehensive loss (43) (36)
Less common stock in treasury at cost, 770,962
shares in 1999; 798,231 shares in 1998 (8,660) (9,240)
--------- ---------
Total stockholders' equity 185,136 163,670
--------- ---------
Total liabilities and stockholders' equity $ 266,967 $ 250,314
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
25
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
<TABLE>
<CAPTION>
For the year ended June 30,
--------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 379,632 $ 339,407 $ 321,490
Costs and expenses:
Cost of sales 267,630 244,086 230,578
Selling, marketing and administrative 74,962 69,212 62,137
Merger related expenses 1,143 -- --
--------- --------- ---------
Total costs and expenses 343,735 313,298 292,715
--------- --------- ---------
Operating income 35,897 26,109 28,775
Other income (expense):
Interest expense (3,110) (2,847) (2,642)
Interest income 266 379 315
--------- --------- ---------
Income before income tax provision 33,053 23,641 26,448
Income tax provision 11,900 8,742 10,050
--------- --------- ---------
Net income $ 21,153 $ 14,899 $ 16,398
--------- --------- ---------
--------- --------- ---------
Earnings per common share:
Basic $ 1.32 $ 0.91 $ 0.98
Diluted $ 1.30 $ 0.89 $ 0.96
Weighted average common shares outstanding:
Basic 15,973 16,339 16,786
Diluted 16,330 16,715 17,056
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the year ended June 30,
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 21,153 $ 14,899 $ 16,398
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 13,962 11,560 9,960
Bad debt expense 524 1,581 3,178
Loss on disposal of assets 223 11 599
Deferred income taxes 481 414 1,000
Employee option amortization 749 749 749
Deferred compensation 160 -- --
Changes in current assets and liabilities:
Trade receivables (2,244) (4,468) (8,269)
Inventories (9,407) (2,569) (2,677)
Other assets 13 (335) (792)
Accounts payable, income taxes payable and other liabilities (173) 5,367 3,366
-------- -------- -------
Net cash flows provided by operating activities 25,441 27,209 23,512
-------- -------- -------
Cash flows used for investing activities:
Capital expenditures (15,779) (28,359) (15,825)
-------- -------- -------
Cash flows used for financing activities:
Repayment of long-term debt (14,000) -- --
Borrowings on long-term debt 10,000 -- --
Net addition to (repayment of) revolver (4,000) 4,000 --
Purchase of common stock for treasury (2,811) (11,584) (3,527)
Exercise of stock options 100 274 --
Sale of common stock to employee benefit plans 2,979 3,295 2,309
-------- -------- -------
Net cash flows used for financing activities (7,732) (4,015) (1,218)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents 1,930 (5,165) 6,469
Cash and cash equivalents, beginning of year 1,810 6,975 506
-------- -------- -------
Cash and cash equivalents, end of year $ 3,740 $ 1,810 $ 6,975
-------- -------- --------
-------- -------- -------
Supplemental cash flow information:
Interest paid $ 3,110 $ 2,847 $ 2,631
Income taxes paid 10,150 11,650 5,983
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common stock paid-in Retained Treasury stock comprehensive stockholders' Comprehensive
Shares Dollars capital Earnings Shares Dollars income (loss) equity income
------ --------- --------- --------- ------ -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 16,820 $ 16,820 $ 87,757 $ 37,020 -- $ -- $ 18 $ 141,615
Net income 16,398 16,398 $ 16,398
Other comprehensive
income (5) (5) (5)
Purchase of common
Stock (297) (3,527) (3,527)
Sale of common stock 198 203 2,111 2,309
------ --------- --------- --------- ---- -------- -------- --------- --------
Balance, June 30, 1997 16,820 16,820 87,955 53,418 (94) (1,416) 13 156,790 16,393
--------
--------
Net income 14,899 14,899 $ 14,899
Other comprehensive
income (49) (49) (49)
Purchase of common
stock (999) (11,584) (11,584)
Exercise of stock
options, net of
tax benefit (263) 38 582 319
Sale of common stock 117 257 3,178 3,295
------ --------- --------- --------- ---- -------- -------- --------- --------
Balance, June 30, 1998 16,820 16,820 87,809 68,317 (798) (9,240) (36) 163,670 14,850
--------
--------
Net income 21,153 21,153 $ 1,153
Other comprehensive
income (7) (7) (7)
Purchase of common
stock (258) (2,811) 555 (2,811)
Exercise of stock
options, net of
tax benefit (53) 14 205 152
Sale of common stock (207) 271 3,186 2,979
------ --------- --------- --------- ---- -------- -------- --------- --------
Balance, June 30, 1999 16,820 $ 16,820 $ 87,549 $ 89,470 (771) $ (8,660) $ (43) $ 185,136 $ 21,146
--------
--------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION.
O'Sullivan Industries Holdings, Inc. ("O'Sullivan"), a Delaware
corporation, is a domestic producer of ready-to-assemble ("RTA") furniture.
O'Sullivan's RTA furniture includes desks, computer tables, cabinets, home
entertainment centers, audio equipment racks, microwave oven carts and a wide
variety of other RTA furniture for use in the home, office and home office. The
products are distributed primarily through office superstores, discount mass
merchants, mass merchants (department stores and catalog showrooms), home
centers, electronics retailers, furniture stores, OEM and internationally.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of O'Sullivan and its wholly owned subsidiaries. All significant
intercompany transactions, balances and profits have been eliminated.
PERVASIVENESS OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses, and disclosure of gain and loss
contingencies at the date of the financial statements. Actual results could
differ from those estimates.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand
and all highly liquid investments with original maturities of three months or
less.
BUSINESS AND CREDIT RISK CONCENTRATIONS: The largest five customer
accounts receivable balances accounted for approximately 62% and 56% of the
trade receivable balance at June 30, 1999 and 1998, respectively. Credit is
extended to customers based on evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
dependent on each customer's financial condition. Therefore, O'Sullivan would be
exposed to a large loss if one of its major customers were not able to fulfill
its financial obligations. O'Sullivan maintains certain limited credit insurance
which helps reduce, but not eliminate, exposure to potential credit losses. In
addition, O'Sullivan monitors its exposure for credit losses and maintain
allowances for anticipated losses.
REVENUES: Revenue is recognized at the date product is shipped to
customers.
INVENTORIES: Inventories are stated at the lower of cost, determined
on a first-in, first-out (FIFO) basis, or market.
PROPERTY, PLANT AND EQUIPMENT: Depreciation and amortization of property,
plant and equipment is calculated using the straight-line method, which
amortizes the cost of the assets over their estimated useful lives. The ranges
of estimated useful lives are: buildings--30 to 40 years; machinery and
equipment--3 to 10 years; leasehold improvements--the lesser of the life of the
lease or asset. Maintenance and repairs are charged to expense as incurred.
Renewals and betterments which materially prolong the useful lives of the assets
are capitalized. The cost and related accumulated depreciation of property
retired or sold are removed from the accounts, and gains or losses on disposal
are recognized in the statement of operations.
AMORTIZATION OF EXCESS PURCHASE PRICE OVER NET TANGIBLE ASSETS OF
BUSINESSES ACQUIRED: Cost in excess of net assets acquired is amortized over a
40-year period using the straight-line method. Accumulated amortization at June
30, 1999 and 1998 approximated $26,419,000 and $24,752,000, respectively.
29
<PAGE>
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets (I.E., property, plant
and equipment and goodwill) held and used are reviewed for possible impairment
whenever events or changes in circumstances indicate that the net book value of
the asset may not be recoverable. O'Sullivan recognizes an impairment loss if
the sum of the expected future cash flows (undiscounted and before interest)
from the use of the asset is less than the net book value of the asset. The
amount of the impairment loss is measured as the difference between the net book
value of the assets and the estimated fair value of the related assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair value
of financial instruments approximates their recorded values due primarily to the
short-term nature of their maturities.
DERIVATIVES: O'Sullivan utilizes derivative financial instruments to
reduce interest rate risks. O'Sullivan does not hold or issue derivative
financial instruments for trading purposes. Amounts to be paid or received under
the agreement are accrued as interest rates change and are recognized over the
life of the agreement as adjustments to interest expense.
ADVERTISING COSTS: Advertising costs are expensed the first time the
advertising takes place. Cooperative advertising costs are accrued and expensed
when the related revenues are recognized. Advertising expense for fiscal 1999,
1998 and 1997 was $21,147,000, $19,625,000 and $15,248,000, respectively.
INCOME TAXES: Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss carryforwards and deferred tax liabilities for taxable temporary
differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE: Environmental remediation and
compliance expenditures that relate to current operations are expensed or
capitalized, as appropriate. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Liabilities are recognized when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated. Generally, the timing of these accruals coincides with completion of
a feasibility study or O'Sullivan's commitment to a formal plan of action. To
date, environmental expenditures have not been material, and management is not
aware of any material environmental related contingencies.
SIGNIFICANT FOURTH QUARTER ADJUSTMENTS: During the fourth quarter of
fiscal 1999, O'Sullivan recorded merger related expenses which are fully
described in Note 4. During the fourth quarter of fiscal 1997, bad debt charges
approximating $700,000, net of tax, were recorded due to the bankruptcy filing
of a major customer.
EARNINGS PER SHARE: Basic EPS excludes dilution and is computed by
dividing net income by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The dilutive effect of outstanding options issued by
O'Sullivan are reflected in diluted EPS using the treasury stock method. Under
the treasury stock method, options will only have a dilutive effect when the
average market price of common stock during the period exceeds the exercise
price of the options.
30
<PAGE>
The following is a reconciliation of the numerator and denominator used in
the basic and diluted EPS calculation:
<TABLE>
<CAPTION>
For the year ended June 30,
1999 1998 1997
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Income available to common stockholders (numerator) $21,153 $14,899 $16,398
------- ------- -------
------- ------- -------
Weighted average shares outstanding (basic EPS denominator) 15,973 16,339 16,786
Effect of dilutive stock options 357 376 270
------- ------- -------
Weighted average shares, plus assumed conversions (diluted EPS denominator) 16,330 16,715 17,056
------- ------- -------
------- ------- -------
</TABLE>
ACCOUNTING FOR STOCK-BASED COMPENSATION: O'Sullivan accounts for stock
based compensation pursuant to the intrinsic value based method of accounting as
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. O'Sullivan has made pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting defined in
FAS 123 had been applied. See Note 10.
COMPREHENSIVE INCOME: Effective July 1, 1998, O'Sullivan adopted Statement
of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE
INCOME. O'Sullivan has reported the components of comprehensive income in the
accompanying consolidated statement of changes in stockholders equity.
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. For O'Sullivan, other comprehensive income consists of foreign currency
translation adjustments. The tax benefit related to other comprehensive loss
approximated $4,000, $31,000 and $3,000 for the years ended June 30, 1999, 1998
and 1997, respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS: In June 1999, the FASB issued SFAS
No. 138, which delayed the effective date of SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Accordingly, O'Sullivan will
adopts SFAS No. 133 effective July 1, 2000. This new accounting standard will
require that derivative instruments be measured at fair value and recognized in
the balance sheet as either assets or liabilities, as the case may be. The
treatment of changes in the fair value of a derivative (I.E., gains and losses)
will depend on its use and designation. O'Sullivan will initially report gains
and losses on derivatives designated as hedges against the cash flow effect of a
forecasted transaction as a component of other comprehensive income and,
subsequently, reclassify the gains and losses into earnings when the forecasted
transaction affects earnings. If SFAS 133 had been adopted on July 1, 1998, the
net change in the interest swap would reduce other accumulated comprehensive
income at June 30, 1999 by $336,000 (a current period increase to comprehensive
income of $267,000 offset by an accumulated loss at June 30, 1998 of $603,000).
Management has no intention of retiring the swap prior to the retirement of the
bonds.
RECLASSIFICATIONS: Certain items in the prior years' financial
statements have been reclassified to conform with the current year's
presentation.
NOTE 3 - PENDING MERGER.
On March 24, 1999, O'Sullivan announced that members of its senior
management team, in conjunction with a financial buyer, had made a proposal to
O'Sullivan's Board of Directors to acquire O'Sullivan, subject to requisite
financing. On May 18, 1999, O'Sullivan announced that it had entered into a
definitive merger
31
<PAGE>
agreement with an investment group that includes members of O'Sullivan's senior
management and Bruckmann, Rosser, Sherrill & Co., LLC ("BRS").
Under the merger agreement, O'Sullivan will be the surviving entity after
the merger. Certain directors and members of senior management are participating
with BRS in the buyout of existing O'Sullivan stockholders. After the completion
of the merger, the management participants in the buyout will own a total of
approximately 28.4% of the common stock of the surviving corporation. BRS and
its affiliates will own the balance.
The merger agreement stipulates that each share of outstanding common stock
of O'Sullivan will be exchanged for $17.50 in cash and one share of senior
preferred stock with an initial liquidation value of $1.75 per share. Unpaid
dividends, accruing at the rate of 12% per annum, will be added to the
liquidation value during the period that the senior preferred stock is
outstanding. Some of the shares of O'Sullivan common stock and options held by
the management participants in the buyout will be exchanged for common stock,
junior preferred stock and options to acquire junior preferred stock of the
surviving company.
BRS has advised us that BRS and the management participants in the merger
will require approximately $370 million to complete the merger and pay related
fees and expenses. BRS has advised us that approximately $285 million will be
funded via debt proceeds. The completion of the merger is subject to stockholder
approval, requisite regulatory approvals, obtaining suitable financing and the
absence of material adverse changes in O'Sullivan's business.
NOTE 4 - MERGER RELATED EXPENSES.
O'Sullivan is expensing merger related costs as incurred in connection with
the pending merger discussed in Note 3. As a result, during the fourth quarter
of fiscal year 1999, O'Sullivan recognized certain merger related expenses of
approximately $1.1 million incurred for legal, accounting, printing and
investment banker fees. The merger related expenses have been included as a
separate line item in the accompanying consolidated statement of operations.
Additional merger related expenses will be incurred during fiscal year 2000.
NOTE 5 - INVENTORY.
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Finished goods $39,623 $26,892
Work in process 6,263 6,835
Raw materials 10,248 13,000
------- -------
$56,134 $46,727
------- -------
------- -------
</TABLE>
32
<PAGE>
NOTE 6 - PROPERTY, PLANT & EQUIPMENT.
Property, plant, and equipment consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Land $ 1,034 $ 1,034
Buildings and improvements 42,289 41,216
Machinery and equipment 111,505 92,950
Construction in progress 3,068 10,466
--------- ---------
157,896 145,666
Less: Accumulated depreciation (61,212) (52,288)
--------- ---------
$ 96,684 $ 93,378
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense was $12,295,000, $9,893,000 and
$8,293,000 for fiscal 1999, 1998, and 1997, respectively, of which $9,912,000,
$8,200,000, and $7,309,000 respectively, was included in cost of sales.
In fiscal 1999, equipment with a net book value of $273,000 was disposed of
for $50,000. In fiscal 1997, machinery and tooling with a net book value of
$743,000 was disposed of for $46,000 and a note receivable of $98,000. The loss
is classified as cost of sales in the accompanying consolidated statement of
operations.
NOTE 7 - ACCRUED LIABILITIES.
Accrued liabilities consists of the following:
<TABLE>
<CAPTION>
June 30,
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Accrued employee compensation $14,591 $11,467
Accrued advertising 9,055 9,402
Other current liabilities 1,049 1,744
------- -------
$24,695 $22,613
------- -------
------- -------
</TABLE>
NOTE 8 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS.
<TABLE>
<CAPTION>
June 30,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Revolving credit agreement $ -- $ 4,000
Senior notes 16,000 20,000
Industrial revenue bonds 10,000 10,000
-------- --------
Total debt 26,000 34,000
Less current portion of senior notes (4,000) (4,000)
-------- --------
Total long-term debt $ 22,000 $ 30,000
-------- --------
-------- --------
</TABLE>
33
<PAGE>
Aggregate annual principal payments subsequent to June 30, 1999 are summarized
as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 4,000
2001 4,000
2002 4,000
2003 4,000
2004 --
Thereafter 10,000
--------
$ 26,000
--------
--------
</TABLE>
REVOLVING CREDIT AGREEMENT - O'Sullivan has a variable-rate, unsecured
$25.0 million revolving credit facility with a bank that expires on February 28,
2001. As of June 30, 1999 there were no borrowings outstanding under this
facility.
SENIOR NOTES - O'Sullivan issued $20.0 million of 8.01% notes in a 1995
private placement to certain insurance companies. These notes are payable in
annual $4 million increments from fiscal 1999 to fiscal 2003. The first $4
million payment on the notes was made in May 1999. Of the $16 million remaining
on these notes, $12 million is classified as long-term and $4 million is
classified as the current portion of long-term debt.
Under the terms of the Note Purchase Agreements, O'Sullivan is required
to meet certain financial ratios, including a funded debt-to-earnings ratio
requirement, a minimum net worth requirement and an earnings to fixed charges
ratio requirement. The agreements also contain a prepayment penalty.
INDUSTRIAL REVENUE BONDS - A subsidiary of O'Sullivan was the obligor
on $10 million of 8.25% industrial revenue bonds ("IRB's") that were to mature
on October 1, 2008. On October 1, 1998, O'Sullivan refinanced these bonds with
new, ten year variable interest rate IRB's. The $300,000 premium on the early
retirement of the bonds was recognized as a loss in the second quarter of fiscal
1999 and is included in interest expense in the accompanying consolidated
statement of operations. Interest on the IRB's is paid quarterly. The loan is
secured by a $10.3 million standby letter of credit under the revolving credit
facility.
Effective October 1, 1998, O'Sullivan entered into a forward starting
interest rate swap agreement with a notional principal amount of $10 million
which terminates October 1, 2008. Pursuant to the agreement, O'Sullivan pays a
fixed rate of 7.13% and receives a floating interest rate for the duration of
the swap agreement (5.0% at June 30, 1999). The swap has the effect of hedging
O'Sullivan's exposure to an increase in interest rates under the refinanced
IRB's discussed above. O'Sullivan has designated the swap as a hedge against
future cash flow exposure. The fair value of this interest rate swap at June 30,
1999 was approximately $525,000. This amount represents the amount O'Sullivan
would have to pay to terminate the swap. This amount has not been recognized in
the accompanying consolidated financial statements since it is accounted for as
a hedge.
34
<PAGE>
NOTE 9 - INCOME TAXES.
The income tax provision consists of the following:
<TABLE>
<CAPTION>
For the year ended June 30,
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 10,890 $ 7,886 $ 9,955
State 529 442 473
-------- -------- --------
11,419 8,328 10,428
Deferred 481 414 (378)
-------- -------- --------
$ 11,900 $ 8,742 $ 10,050
-------- -------- --------
-------- -------- --------
</TABLE>
The following table reconciles O'Sullivan's federal corporate statutory rate and
its effective income tax rate:
<TABLE>
<CAPTION>
For the year ended June 30,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 1.6 1.7 1.7
Goodwill amortization 1.1 1.3 1.2
Other, net (1.7) (1.0) 0.1
Effective tax rate 36.0% 37.0% 38.0%
</TABLE>
<TABLE>
<CAPTION>
June 30,
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
DEFERRED TAX ASSETS:
ad debt reserve $ 895 $ 847
Insurance reserves 592 755
Accrued compensation 1,184 898
Other 154 93
-------- --------
Total deferred tax assets 2,825 2,593
-------- --------
DEFERRED TAX LIABILITIES:
Depreciation and amortization (16,318) (15,690)
Inventories (98) (39)
Other (372) (346)
-------- --------
Total deferred tax liabilities (16,788) (16,075)
-------- --------
Net deferred tax liability $(13,963) $(13,482)
-------- --------
-------- --------
REPORTED AS:
Current assets
(included in prepaid expenses and other current assets) $ 2,269 $ 2,208
Noncurrent liabilities-deferred income taxes (16,232) (15,690)
-------- --------
Net deferred tax liability $(13,963) $(13,482)
-------- --------
-------- --------
</TABLE>
In connection with the 1994 initial public offerings of O'Sullivan's
common stock, Tandy Corporation, TE Electronics Inc. and O'Sullivan entered into
a Tax Sharing and Tax Benefit Reimbursement Agreement. Pursuant to the tax
agreement, Tandy is primarily responsible for all U.S. federal income taxes,
state income taxes and foreign income taxes with respect to O'Sullivan for all
periods ending on or prior to the date of
35
<PAGE>
consummation of the Offerings and for audit adjustments to such federal income
and foreign income taxes. O'Sullivan is responsible for all other taxes owing
with respect to O'Sullivan, including audit adjustments to state and local
income and for franchise taxes.
O'Sullivan and Tandy made an election under Sections 338(g) and
338(h)(10) of the Internal Revenue Code with the effect that the tax basis of
O'Sullivan's assets was increased to the deemed purchase price of the assets. An
amount equal to such increase was included in income in the consolidated federal
income tax return filed by Tandy. This additional tax basis results in increased
income tax deductions and, accordingly, reduced income taxes payable by
O'Sullivan. Pursuant to the tax agreement, O'Sullivan pays Tandy nearly all of
the federal tax benefit expected to be realized with respect to such additional
basis. Amounts payable to Tandy pursuant to the tax agreement are recorded as
current federal income tax expense in the accompanying consolidated statements
of operations. Income tax expense thus approximates the amount which would be
recognized by O'Sullivan in the absence of the tax agreement. Although the
amount of the payment required to be made in a particular year under the tax
agreement may differ somewhat from the difference in that tax year between
O'Sullivan's actual taxes and the taxes that O'Sullivan would have owed had the
increase in basis not occurred, the aggregate amount of payments required to be
made by O'Sullivan to Tandy over the life of the tax agreement will not differ
materially from the difference over the life of the tax agreement between
O'Sullivan's actual taxes and the amount of taxes that O'Sullivan would have
owed had the increase in basis not occurred. Consequently, such payments should
have no effect on O'Sullivan's earnings and should not have a material effect on
its cash flow. The tax agreement provides for adjustments to the amount of tax
benefit payable in the event of certain material transactions, such as a
business combination or significant disposition of assets. During fiscal 1999,
1998 and 1997, $9.7 million, $11.7 million and $6.0 million, respectively, were
paid to Tandy pursuant to this agreement. See Note 14.
NOTE 10 - STOCK OPTIONS.
Under O'Sullivan's Amended and Restated 1994 Incentive Stock Plan,
designated officers, employees, employee directors and consultants of O'Sullivan
are eligible to receive awards in the form of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock grants
or performance awards. Annually, non-employee directors receive options to
purchase 2,000 shares of common stock (increased from 1,000 shares beginning in
fiscal 1998). The purchase price of common stock subject to an option shall not
be less than the market value of the stock on the date of the grant and for a
term not to exceed ten years. An aggregate of 2,000,000 shares of common stock
have been reserved for issuance under the Plan, no more than 300,000 of which
may be awarded as restricted stock or performance awards. In fiscal 1994,
O'Sullivan awarded restricted shares of common stock totaling 19,950 shares. The
restrictions on these shares lapsed in fiscal 1999.
In July 1996, the compensation committee granted, subject to
stockholder approval, options to purchase 625,250 shares of common stock to
O'Sullivan's officers and other key employees. Depending on whether certain
performance objectives were met, the options would become exercisable in
one-third increments on each of the first three anniversaries of the date of the
grant and would expire ten years after the date of the grant. To the extent
performance objectives were not met, the options would become exercisable on
August 10, 2003 and would expire September 10, 2003. As a result of O'Sullivan's
Company's performance in fiscal 1997, the options became exercisable over three
years through fiscal 1999 and will expire in July 2006. The stockholders
approved the grants in November 1996; accordingly, O'Sullivan recognized
compensation expense of approximately $2.2 million over the three year vesting
period, which amount was based on the difference between the exercise price and
the fair market value of common stock on the date of stockholder approval.
O'Sullivan recognized compensation expense of $749,000 in each of fiscal 1999,
fiscal 1998 and fiscal 1997 related to the granting of these options.
36
<PAGE>
Additionally, during fiscal 1997, the Board of Directors granted
options to purchase 284,150 shares of common stock that were not based on
performance objectives. Full vesting terms ranged from three to five years with
the options expiring ten years from the date of the grant. The exercise prices
for these options were equal to the fair market value on the respective dates of
grant; therefore, no compensation expense was recognized.
Summary of Stock Option Transactions
(share amounts in thousands)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998 June 30, 1997
--------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,544 $ 9.77 1,215 $ 7.61 324 $ 9.14
Grants 91 10.60 378 15.90 909 7.31
Exercised (14) 7.23 (38) 7.13 (1) 7.50
Canceled (28) 10.00 (11) 9.32 (17) 8.02
----- ----- -----
Outstanding at end of year 1,593 9.84 1,544 9.77 1,215 7.61
----- ----- -----
----- ----- -----
Exercisable at end of year 928 8.82 500 8.45 145 10.04
----- ----- -----
----- ----- -----
Weighted average fair value of
options granted during the year $ 5.38 $ 7.95 $ 6.53
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Shares Weighted Weighted
Range of Outstanding at Weighted Average Average Shares Average
Exercise Prices 6/30/99 Remaining Exercise Exercisable at Exercise
(000's) Contractual Life Price 6/30/99 (000's) Price
- ------------------- -------------- ---------------- -------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 6.18 - $7.59 1,001 6.9 years $ 7.21 704 $ 7.24
$ 7.60 - $9.49 9 6.7 years 8.65 7 8.49
$ 9.50 - $11.39 89 9.4 years 10.60 - -
$ 11.40 - $13.29 138 5.9 years 12.52 123 12.54
$ 13.30 - $15.192 10 8.2 years 13.38 3 13.38
$ 15.20 - $16.10 346 8.0 years 16.09 91 16.09
-------------- ---------------
$ 6.18 - $16.10 1,593 7.2 years $ 9.84 928 $ 8.82
-------------- ---------------
-------------- ---------------
</TABLE>
O'Sullivan has adopted the disclosure-only provisions of SFAS 123.
Accordingly, no compensation cost has been recognized for options granted except
as mentioned above. Had compensation cost for O'Sullivan's stock option plans
been determined based on the fair value at the grant date for awards in fiscal
1999, 1998 and fiscal 1997 in accordance with the provisions of FAS 123,
O'Sullivan's net income and net income per share would have been reduced to the
pro forma amounts indicated below (in thousands, except per share amounts):
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Net income As reported $ 21,153 $ 14,899 $ 16,398
Pro forma 19,765 13,729 15,521
Basic earnings per share As reported 1.32 0.91 0.98
Pro forma 1.23 0.85 0.92
Diluted earnings per share As reported 1.30 0.89 0.96
Pro forma 1.22 0.84 0.92
</TABLE>
We estimate the fair value of each option grant on the date of grant
using the Black-Scholes option-pricing model based upon the following weighted
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Risk-free interest rate 5.10% 6.24% 6.70%
Dividend yield None None None
Volatility factor 42.57% 37.56% 47.84%
Weighted average expected life (years) 6.0 6.6 6.8
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period. The effects of applying
SFAS 123 in this pro forma disclosure are not indicative of the impact on future
years as the pro forma amounts above do not include the impact of stock option
awards granted prior to fiscal 1996.
NOTE 11 - EMPLOYEE BENEFIT PLANS.
O'Sullivan maintains a stock purchase program that is available to most
employees. The stock purchase program (the "SPP"), as amended, allows a maximum
employee contribution of 5%, while O'Sullivan's matching contribution is 25%,
40% or 50% of the employee's contribution, depending on the length of the
employee's participation in the program. The matching contributions to the stock
purchase program were $700,000, $700,000 and $600,000 in fiscal years 1999, 1998
and 1997, respectively.
O'Sullivan also has a Savings and Profit Sharing Plan in which most
employees are eligible to participate. Under the savings or Section 401(k)
portion of the plan, employees may contribute from 1% to 15% of their
compensation (subject to certain limitations imposed by the Internal Revenue
Code), and O'Sullivan makes matching contributions equal to 50% of the first 5%
of eligible employee contributions. Under the profit sharing portion of the
plan, O'Sullivan may contribute annually an amount up to 7.5% of O'Sullivan's
pre-tax earnings, subject to Board approval. Employer matching contributions are
invested in O'Sullivan common stock. Employer matching contributions vest
immediately, while profit sharing contributions vest 100% when the employee has
five years of service with O'Sullivan. For fiscal 1999, 1998 and 1997,
O'Sullivan accrued approximately $2.5 million, $1.7 million and $2.0 million,
respectively, for the profit sharing portion of the plan. The matching
contributions to the savings portion of the plan were $800,000, $700,000 and
$600,000 in fiscal year 1999, 1998 and 1997 respectively.
Employees can direct the voting of O'Sullivan common stock attributable
to their Stock Purchase Program and Savings and Profit Sharing Plan accounts.
Effective July 1, 1997, O'Sullivan implemented its Deferred
Compensation Plan. This plan is available to employees of O'Sullivan deemed to
be "highly compensated employees" pursuant to the Internal Revenue Code.
O'Sullivan will make certain matching and profit sharing accruals to the
accounts of participants. All amounts deferred or accrued under the terms of the
plan represent unsecured obligations of O'Sullivan to the
38
<PAGE>
participants. Matching and profit sharing accruals under the this plan were not
material in fiscal 1999 or fiscal 1998.
NOTE 12 - TERMINATION PROTECTION AGREEMENTS.
O'Sullivan has entered into Termination Protection Agreements with most
of its officers. These Termination Protection Agreements, all of which are
substantially similar, have initial terms of two years which automatically
extend to successive one-year periods unless terminated by either party. If the
employment of any of these officers is terminated, with certain exceptions,
within 24 months following a change in control, the officers are entitled to
receive certain cash payments, as well as the continuation of fringe benefits
for a period of up to twelve months. Additionally, all benefits under the
Savings and Profit Sharing Plan and the Deferred Compensation Plan vest, all
restrictions on any outstanding incentive awards or shares of restricted common
stock will lapse and such awards or shares will become fully vested, all
outstanding stock options will become fully vested and immediately exercisable,
and O'Sullivan will be required to purchase for cash, on demand made within 60
days following a change in control, any shares of unrestricted common stock and
options for shares at the then current per-share fair market value. The
agreements as amended in February 1996 also provide one year of outplacement
services for the officer and that, if the officer moves more than 20 miles from
his primary residence in order to accept permanent employment within 36 months
after leaving O'Sullivan, O'Sullivan will, upon request, repurchase the
officer's primary residence at a price determined in accordance with the
agreement.
In March 1999, O'Sullivan entered into 24 Termination Protection
Agreements with its director-level managers, three of whom were promoted to
officers in July 1999. The Termination Protection Agreements (all of which are
substantially similar) have initial terms of two years which automatically
extend for successive one-year periods unless terminated by either party. If the
employment of any of these employees is terminated (with certain exceptions)
within twelve months following a "Change in Control," or in certain other
instances in connection with a Change in Control, the employees are entitled to
receive a cash payment equal to the total of six months salary and one-half of
their respective annual bonus (twelve months salary and an annual bonus amount
in certain instances). The employees would also be entitled to the continuation
of certain insurance benefits (life insurance, disability, medical, dental and
hospitalization benefits) for a period of up to six (or twelve) months. The
agreements also provide for outplacement services for the employee.
Under the Termination Protection Agreements, a "Change in Control" will
be deemed to have occurred if either (i) any person or group acquires beneficial
ownership of 15% of the voting securities of O'Sullivan, (ii)
39
<PAGE>
there is a change in the composition of a majority of the Board of Directors
within any two-year period which is not approved by certain of the directors who
were directors at the beginning of the two-year period; (iii) the stockholders
of O'Sullivan approve a merger, consolidation or reorganization involving
O'Sullivan; (iv) there is a complete liquidation or reorganization involving
O'Sullivan; or (v) O'Sullivan enters into an agreement for the sale or other
disposition of all or substantially all of the assets of O'Sullivan.
NOTE 13 - STOCKHOLDER RIGHTS PLAN.
O'Sullivan has adopted a Stockholder Rights Plan under which one right
(a "Right") was issued with respect to each share of common stock. Each Right
entitles the holder to purchase from O'Sullivan a unit consisting of one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, at a purchase price of $110 per Right, subject to
adjustment in certain events.
The Rights are currently attached to all certificates representing
outstanding shares of common stock, and separate certificates for the Rights
will be distributed only upon the occurrence of certain specified events. The
Rights will separate from the common stock and a "Distribution Date" will occur
upon the earlier of (i) ten days following a public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of common stock, or (ii) ten business days (or such
later date as may be determined by O'Sullivan's Board of Directors before the
Distribution Date occurs) following the commencement of a tender offer or
exchange offer that would result in a person becoming an Acquiring Person.
The Rights Plan was amended in March 1999 to change the Rights Agent
and to conform the plan to recent Delaware court decisions.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on February 1, 2004, unless earlier redeemed or
exchanged by O'Sullivan.
In the merger agreement discussed in Note 3 above, O'Sullivan agreed to
amend the stockholder rights plan so that OSI Acquisition, Inc. will not be an
Acquiring Person.
NOTE 14 - COMMITMENTS AND CONTINGENCIES.
O'Sullivan leases warehouse space, computers and certain other
equipment under operating leases. As of June 30, 1999, minimum future lease
payments for all noncancellable lease agreements were as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 1,611
2001 1,102
2002 753
2003 515
2004 338
Thereafter 66
-------
Total $ 4,384
-------
-------
</TABLE>
Amounts incurred by O'Sullivan under operating leases (including
renewable monthly leases) were $1,679,000, $1,367,000 and $936,000 in 1999, 1998
and 1997, respectively.
On May 18, 1999, five lawsuits were filed as class actions by
stockholders in the Delaware Court of Chancery seeking to enjoin the merger or,
in the alternative to rescind the merger and recover monetary damages (See Note
3). The complaints name as defendants O'Sullivan, all of its directors and, in
some cases, BRS. The complaints allege that O'Sullivan's directors breached
their fiduciary duties by approving the merger. The
40
<PAGE>
complaints also allege that the price terms of the merger are inadequate and
unfair to O'Sullivan's stockholders. In addition, the complaints allege that the
management participants in the buyout have conflicts of interest that have
prevented them from acting in the best interests of O'Sullivan's stockholders
and that make it inherently unfair for BRS and the management participants in
the buyout to acquire 100% of the O'Sullivan's stock. In the cases naming BRS as
a defendant, BRS is alleged to have aided and abetted breaches of fiduciary
duties. The defendants do not have to respond to the lawsuits after the
plaintiffs have combined their complaints into one complaint. The court issued
an order on July 22, 1999 requiring the plaintiffs to consolidate their
complaints into one complaint. However, no date has been set by which the
defendants must move or answer in response to the combined complaint. Management
believes that the claims are without merit and intends to vigorously defend the
lawsuit.
On June 29, 1999, Tandy filed suit in a Texas court against O'Sullivan.
The suit relates to a potential reduction in O'Sullivan's tax benefit payments
to Tandy that would result from increased interest expense after the completion
of the merger. Tandy claims that this reduction would violate the tax sharing
and tax reimbursement agreement.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit. The motion argues that Tandy is entitled to a court order requiring
O'Sullivan to commence dispute resolution procedures under the tax sharing
agreement. Because O'Sullivan has made all the payments required to be made
under the tax sharing agreement and because no merger has occurred, O'Sullivan
believes that Tandy's lawsuit is premature since there cannot be a dispute under
the tax sharing agreement with respect to the increased interest resulting from
the merger until the merger is completed. Alternatively, Tandy argues that it is
entitled to a court order preventing O'Sullivan from deducting the interest
expense related to the merger from O'Sullivan's tax-sharing payments to Tandy.
Tandy's argument is based on a letter to that effect, dated June 22, 1999, from
PricewaterhouseCoopers LLP to an officer of Tandy. The PricewaterhouseCoopers
letter relies on an opinion provided by Tandy's outside counsel. O'Sullivan has
not seen a copy of that opinion. Tandy claims that the June 22, 1999 letter
entitles it to the relief it seeks since PricewaterhouseCoopers is O'Sullivan's
auditing firm. According to Tandy, PricewaterhouseCoopers should necessarily be
an acceptable arbiter to O'Sullivan under the tax sharing agreement's dispute
resolution provisions. PricewaterhouseCoopers, however, did not issue the letter
in its capacity as O'Sullivan's auditor or as a neutral arbiter, but rather at
the request of Tandy. Moreover, PricewaterhouseCoopers states in the letter that
the letter "does not constitute a tax opinion or legal advice." O'Sullivan
believes the PricewaterhouseCoopers letter does not entitle Tandy to relief
because, among other invalid assumptions supplied by Tandy, that letter
incorrectly assumes that OSI Acquisition, Inc. will incur the debt used to
finance the merger. In fact, the debt used to finance the merger will be
incurred by O'Sullivan Industries Holdings, Inc. and its operating subsidiary,
O'Sullivan Industries, Inc. O'Sullivan has received an opinion from its outside
counsel that supports O'Sullivan's interpretation of the tax sharing agreement.
A hearing on the motion for summary judgment is scheduled for October 1, 1999.
O'Sullivan believes Tandy's lawsuit is without merit and intends to defend
itself vigorously.
In addition, O'Sullivan is a party to various legal actions arising in
the ordinary course of its business. O'Sullivan does not believe that any such
pending actions will have a material adverse effect on its results of operations
or financial position. O'Sullivan maintains liability insurance at levels which
it believes are adequate for its needs.
O'Sullivan's operations are subject to extensive federal, state and
local laws, regulations and ordinances relating to the generation, storage,
handling, emission, transportation and discharge of certain materials,
substances and waste into the environment. Permits are required for certain of
O'Sullivan's operations and are subject to revocation, modification and renewal
by governmental authorities. In general, compliance with air emission
regulations is not expected to have a material adverse effect on O'Sullivan's
business, results of operations or financial condition.
41
<PAGE>
O'Sullivan's manufacturing facilities ship waste product to various
disposal sites. O'Sullivan has been designated as a potentially responsible
party under the Arkansas Remedial Action Trust Fund Act in connection with the
cost of cleaning up one site in Diaz, Arkansas and has entered into a DE MINIMIS
buyout agreement with certain other potentially responsible parties, pursuant to
which it has contributed $2,000 to date toward cleanup costs. O'Sullivan
believes that amounts it may be required to pay in the future, if any, will be
immaterial.
In October 1998, Mr. Daniel F. O'Sullivan, Chairman of the Board of
Directors and Chief Executive Officer, completed negotiations of a retirement
and consulting agreement with O'Sullivan contingent upon the hiring of his
successor. In May 1999, the original retirement agreement was amended, removing
a contingency relating to the hiring of his successor. The retirement agreement
contains standard noncompetition provisions. The present value of all future
payments to Mr. O'Sullivan under this agreement have been capitalized and
recorded as an intangible asset. The noncompetition asset will be amortized on a
straight line basis over the term of the agreement with Mr. O'Sullivan
commencing on the earlier of his retirement or March 31, 2000. Based on a
retirement date of March 31, 2000, the amortization period would be
approximately 6.3 years. The noncompetition asset of $1.9 million, which
represents the present value of the future payments to be paid pursuant to the
agreement, and the corresponding liability of $1.9 million, are included in the
accompanying consolidated balance sheet.
During fiscal 1999, O'Sullivan also recorded compensation expense
equal to the intrinsic value of Mr. O'Sullivan's outstanding options in
conjunction with the acceleration of the vesting of Mr. O'Sullivan's unvested
options and the extension of the exercise period for all of Mr. O'Sullivan's
options. The compensatory charge related to the options, combined with the
associated legal and other costs, approximated $235,000.
NOTE 15 - SHARE REPURCHASE PROGRAM.
On May 2, 1997, the Board of Directors authorized the purchase of up to
five percent of the outstanding shares of O'Sullivan's common stock during the
next 24 months. Purchases were completed in October 1998, after spending
approximately $9.5 million for 840,000 shares.
NOTE 16 - MAJOR CUSTOMERS AND INTERNATIONAL OPERATIONS.
Sales to three customers exceeded 10% of net sales in at least one of
the prior three fiscal years. Sales to such customers as a percentage of net
sales were:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Customer A 20.9% 20.1% 17.1%
Customer B 13.1% 11.6% 12.3%
Customer C 7.6% 9.7% 12.0%
</TABLE>
There are no material foreign operations or export sales.
NOTE 17 - QUARTERLY OPERATING RESULTS - UNAUDITED (in thousands, except per
share data).
<TABLE>
<CAPTION>
Fiscal 1998 (By Quarter)
--------------------------------------
1 2 3 4
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $87,673 $97,786 $108,529 $85,644
Gross profit 24,893 28,099 32,809 26,201
Net income 3,715 4,733 7,732 4,974(a)
Basic earnings per common share 0.23 0.30 0.48 0.31
Diluted earnings per common share 0.23 0.29 0.47 0.30
Fiscal 1999 (By Quarter)
--------------------------------------
1 2 3 4
------- ------- -------- -------
Net sales $77,141 $85,524 $ 92,325 $84,417
Gross profit 22,738 23,386 24,653 24,544
Net income 3,603 3,424 3,814 4,058
Basic earnings per common share 0.22 0.21 0.24 0.25
Diluted earnings per common share 0.22 0.20 0.23 0.25
</TABLE>
(a) See Note 2 regarding significant fourth quarter adjustments.
42
<PAGE>
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.
The following sets forth certain information with respect to the
business experience of each Director of O'Sullivan during the past five years
and certain other directorships held by Director. References to service with
O'Sullivan in this section include service with O'Sullivan Industries, Inc. our
wholly owned subsidiary.
CLASS III DIRECTORS--TERM EXPIRING 1999.
WILLIAM C. BOUSQUETTE, 62, an independent financial consultant, was appointed a
director of O'Sullivan in December 1993. From January 1995 through December 31,
1996, Mr. Bousquette was the Senior Vice President and Chief Financial Officer
of Texaco, Inc., an integrated petroleum company. From January 1994 to January
1995 and from November 1990 to January 1993, he was Executive Vice President and
Chief Financial Officer of Tandy Corporation, a retailer of consumer electronics
products. From January 1993 to January 1994, he was Chief Executive Officer of
TE Electronics Inc., a subsidiary of Tandy. From 1983 until O'Sullivan's initial
public offerings in February 1994, Tandy and TE owned all of the stock of
O'Sullivan. Mr. Bousquette is also a director of Cyprus Amax Minerals Company, a
mining company; and InterTAN, Inc., a retailer of consumer electronics products
with locations in Canada, Australia and the United Kingdom.
STEWART M. KASEN, 60, was appointed President and Chief Executive Officer of
Factory Card Outlet, Inc. in May 1998; he has served as Chairman since 1997.
Factory Card Outlet is a retailer of special occasion merchandise which filed
for protection under Chapter 11 of the United States Bankruptcy Code in 1999.
Mr. Kasen was the Chief Executive Officer of Best Products Co., Inc., a chain of
retail stores, from October 1989 to April 1996. Best Products filed a petition
for bankruptcy under the United States Bankruptcy Code in September 1996, and
Best Products was subsequently liquidated. Mr. Kasen is also a director of
Markel Corporation, an underwriter of specialty insurance products; K2 Inc., a
manufacturer of sporting goods and recreational products; and The Elder-Beerman
Stores Corp., a regional department store. Mr. Kasen joined O'Sullivan's Board
of Directors in August 1996.
DANIEL F. O'SULLIVAN, 58, was named President, Chief Executive Officer and a
Director of O'Sullivan in November 1993 and became Chairman of the Board in
December 1993. He relinquished the position of President of O'Sullivan in July
1996 and resigned as Chief Executive Officer in October 1998. He served as
President of O'Sullivan Industries, Inc. from 1986 until July 1996, and was
appointed Chairman of the Board and Chief Executive Officer in 1994. He also
serves as Chairman of the Board and Chief Executive Officer of O'Sullivan
Industries -Virginia, Inc. Mr. O'Sullivan has been employed by O'Sullivan since
September 1962. Under the terms of his retirement and consulting agreement with
O'Sullivan, Mr. O'Sullivan is to retire as Chairman in March 2000.
CLASS I DIRECTORS--TERM EXPIRING 2000.
RICHARD D. DAVIDSON, 51, was named President and Chief Operating Officer of
O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan Industries -Virginia,
Inc. in July 1996. He was named a Director of O'Sullivan Industries and
O'Sullivan Industries - Virginia, Inc. in July 1996 and O'Sullivan Holdings in
August 1996. For more than five years prior to October 1995, he served as a
Senior Vice President of Sunbeam Corporation and as President of Sunbeam's
Outdoor Products Division.
43
<PAGE>
RONALD G. STEGALL, 51, has been President and Chief Executive Officer of
Arlington Equity Partners, a venture capital investment firm, since 1992. Mr.
Stegall is Chairman of the Board of InterTAN, Inc., a retailer of consumer
electronics products with locations in Canada, Australia and the United Kingdom,
and is a director of Hastings Entertainment, Inc., a retailer of books, audio
and video recordings and software, and Gadzooks, Inc. an apparel and accessory
retailer. From 1987 through 1991, he was Chairman and Chief Executive Officer of
BizMart, Inc., a chain of office products superstores subsequently sold to
OfficeMax, Inc. Mr. Stegall was appointed a director of O'Sullivan in July 1994.
CLASS II DIRECTORS--TERM EXPIRING 2001.
CHARLES G. HANSON, 86, retired on December 31, 1993 from his career as the
founder, President and Chief Executive Officer of Stuart Hall Co., a commercial
stationery manufacturer, following the sale of Stuart Hall to The Newell Co. He
is also a member of the Board of Trustees of the Eisenhower Medical Center and
the Barbara Sinatra Children's Center. Mr. Hanson was appointed a director of
O'Sullivan in March 1995.
THOMAS M. O'SULLIVAN, SR., 77, was appointed director of O'Sullivan in December
1993. He founded O'Sullivan Industries in 1954 and served as its President until
June 1986. He has been President of O'Sullivan Properties, Inc., a real estate
investment company, since December 1986.
TYRONE E. RIEGEL, 56, has been Executive Vice President of O'Sullivan
Industries, Inc. since July 1986 and a Director since March 1994. He was
appointed as Executive Vice President and a Director of O'Sullivan in November
1993. Mr. Riegel also serves as Executive Vice President and a Director of
O'Sullivan Industries - Virginia, Inc. Mr. Riegel has been employed by
O'Sullivan since January 1964.
EXECUTIVE OFFICERS.
O'Sullivan's executive officers, and their ages and positions with
O'Sullivan as of September 1, 1999, are as follows:
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE(1) POSITION(S)
<S> <C> <C> <C>
Daniel F. O'Sullivan 58 1969 Chairman of the Board
Richard D. Davidson 51 1996 President and Chief Operating Officer and Director
Tyrone E. Riegel 56 1969 Executive Vice President and Director
Phillip J. Pacey 34 1999 Vice President-Finance and Treasurer
Thomas M. O'Sullivan, Jr. 44 1993 Vice President-Sales
Rowland H. Geddie, III 45 1993 Vice President, General Counsel and Secretary
E. Thomas Riegel 55 1993 Vice President-Strategic Operations
James C. Hillman 54 1973 Vice President-Human Resources
Michael P. O'Sullivan 40 1995 Vice President-Marketing
Tommy W. Thieman 48 1999 Vice President-Manufacturing-Lamar
Stuart D. Schotte 37 1999 Vice President-Supply Chain Management
</TABLE>
- ----------
(1) Includes officer positions held with O'Sullivan Industries, Inc.
PHILLIP J. PACEY was appointed Vice President-Finance and Treasurer of
O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan Industries -Virginia,
Inc. in July 1999. From November 1995 until July 1999, he served as Treasurer of
O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan Industries - Virginia,
Inc. From 1994 until November 1995, Mr. Pacey served as Corporate Tax Manager of
Savannah Foods and Industries, Inc., a sugar refiner and marketer.
44
<PAGE>
THOMAS M. O'SULLIVAN, JR. has been Vice President-Sales of O'Sullivan,
O'Sullivan Industries, Inc. and O'Sullivan Industries - Virginia, Inc. since
1993. Mr. O'Sullivan has been employed by O'Sullivan since June 1979.
ROWLAND H. GEDDIE, III has been Vice President, General Counsel and
Secretary of O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan Industries
- -Virginia, Inc. since December 1993. He was appointed a Director of O'Sullivan
Industries, Inc. and O'Sullivan Industries - Virginia, Inc. in March 1994.
E. THOMAS RIEGEL has been Vice President-Strategic Operations of
O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan Industries -Virginia,
Inc. since November 1995. From June 1993 until November 1995, he was Vice
President-Marketing of O'Sullivan, O'Sullivan Industries, Inc. and O'Sullivan
Industries - Virginia, Inc. Mr. Riegel has been employed by O'Sullivan since May
1971.
JAMES C. HILLMAN has been Vice President-Human Resources of O'Sullivan
since November 1993 and of O'Sullivan Industries, Inc. since 1980. He also
serves as Vice President-Human Resources of O'Sullivan Industries - Virginia,
Inc. Mr. Hillman has been employed by O'Sullivan since May 1971.
MICHAEL P. O'SULLIVAN has been Vice President-Marketing of O'Sullivan,
Industries and O'Sullivan Industries - Virginia, Inc. since November 1995. He
served as National Sales Manager of O'Sullivan Industries, Inc. and O'Sullivan
Industries - Virginia, Inc. from July 1993 until November 1995. Mr. O'Sullivan
has been employed by O'Sullivan since 1984.
TOMMY W. THIEMAN was appointed Vice President-Manufacturing-Lamar in
July 1999 for O'Sullivan and O'Sullivan Industries, Inc. Since 1987, he has
served as the Plant Manager in Lamar. Mr. Thieman has been employed by
O'Sullivan since 1984.
STUART D. SCHOTTE was appointed Vice President-Supply Chain Management
in July 1999 for O'Sullivan , O'Sullivan Industries, Inc. and O'Sullivan
Industries - Virginia, Inc. From February 1998 to July 1999, Mr. Schotte served
as Controller for O'Sullivan Holdings, O'Sullivan Industries, Inc. and
O'Sullivan Industries -Virginia, Inc. From July 1996 until February 1998, Mr.
Schotte served as Director of Financial Analysis and Planning for Fast Food
Merchandisers, Inc. From October 1994 to July 1996, he was a certified public
accountant. From March 1993 to October 1994, he served as Corporate Controller
for Savannah Foods and Industries, Inc.
CERTAIN RELATIONSHIPS. Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr.
and Michael P. O'Sullivan are brothers. Tommy W. Thieman is the brother-in-law
of Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr. and Michael P. O'Sullivan.
Tyrone E. Riegel and James C. Hillman were, prior to the deaths of their
respective spouses, brothers-in-law of Daniel F. O'Sullivan, Thomas M.
O'Sullivan, Jr. and Michael P. O'Sullivan. Tyrone E. Riegel and E. Thomas Riegel
are brothers. Thomas M. O'Sullivan, Sr., a Director and the founder of
O'Sullivan, is the father of Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr. and
Michael P. O'Sullivan, is the father-in-law of Tommy W. Thieman and is the
former father-in-law of Tyrone E. Riegel and James C. Hillman.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table reflects the cash and non-cash compensation for the
chief executive officer of O'Sullivan and the four next most highly compensated
executive officers at June 30, 1998.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
---------------------- ------------
Securities All Other
Fiscal Salary Bonus Underlying Stock Compensation
Name and Principal Position Year ($) ($) Options (#)(2) ($)(3)
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan 1999 275,000 229,279 -- 44,107
Chairman of the Board 1998 273,269 74,856 80,000 35,939
1997 229,807 210,849 136,000 21,096
Richard D. Davidson 1999 225,000 174,263 -- 37,104
President and 1998 224,423 56,942 65,000 31,760
Chief Operating Officer 1997 205,961 178,809 100,000 18,119
Tyrone E. Riegel 1999 195,000 116,276 -- 35,009
Executive Vice President 1998 194,615 38,062 28,000 35,441
1997 184,856 121,268 84,500 26,503
Terry L. Crump(4) 1999 160,000 95,460 -- 28,576
Executive Vice President and 1998 159,423 31,284 28,000 27,366
Chief Financial Officer 1997 144,904 85,531 61,750 20,710
Thomas M. O'Sullivan, Jr. 1999 130,000 54,422 -- 24,222
Vice President-Sales 1998 129,615 17,922 12,000 23,660
1997 119,904 55,226 41,000 20,915
</TABLE>
- ----------
(1) For the years shown, the named officers did not receive any annual
compensation not properly categorized as salary or bonus, except for certain
perquisites and other personal benefits. The amounts for perquisites and other
personal benefits for the named officers are not shown because the aggregate
amount of such compensation, if any, for each of the Named Officers during the
fiscal year shown does not exceed the lesser of $50,000 or 10% of total salary
and bonus reported for such officer.
(2) Includes all options granted during fiscal years shown under the
O'Sullivan Incentive Stock Plan. No stock appreciation rights were granted with
any options.
46
<PAGE>
(3) In fiscal 1999, other compensation for the named officers
consisted of the following:
<TABLE>
<CAPTION>
STOCK DEFERRED
PURCHASE COMPENSATION
SPSP MATCHING PROGRAM PLAN MATCHING
GROUP LIFE AND PROFIT ("SPP") AND
INSURANCE AUTO SHARING MATCHING PROFIT SHARING
NAME PREMIUMS ALLOWANCE CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS
---- -------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan $ 3,150 $ -- * $ 11,474 $ 8,747 $ 20,737
Richard D. Davidson $ 2,016 $ 8,500 $ 11,474 $ 5,639 $ 9,495
Tyrone E. Riegel $ 3,150 $ 8,154 $ 11,474 $ 5,827 $ 6,405
Terry L. Crump $ 1,218 $ 8,154 $ 11,474 $ 3,826 $ 3,904
Thomas M. O'Sullivan, Jr. $ 490 $ 7,827 $ 10,909 $ 3,698 $ 1,656
</TABLE>
* Mr. Daniel F. O'Sullivan has the use of a company-owned automobile as
a perquisite.
The table does not include amounts payable in the event of a Change in
Control. See "Change in Control Protections".
(4) Mr. Crump resigned as an officer of O'Sullivan on August 31, 1999.
SEVERANCE AGREEMENTS.
In October 1998, O'Sullivan entered into a Retirement and Consulting
Agreement, Release and Waiver of Claims with Daniel F. O'Sullivan. Under the
retirement agreement, as amended in May 1999, Mr. O'Sullivan resigned as Chief
Executive Officer in October 1998 and is to retire as Chairman of the Board in
March 2000. Upon his retirement, O'Sullivan has agreed to pay Mr. O'Sullivan
$42,160 per month for 36 months and then to pay him $11,458 per month until
he reaches age 65. O'Sullivan will also provide Mr. O'Sullivan with health
insurance. Upon his retirement, Mr. O'Sullivan's unvested stock options will
vest and be exercisable for five years or until their earlier expiration. Mr.
O'Sullivan will provide consulting services, if requested, to O'Sullivan
until he reaches age 65, and has agreed not to compete with O'Sullivan during
the period he is a consultant.
In August 1999, O'Sullivan entered into a severance agreement with
Terry Crump, its Executive Vice President and Chief Financial Officer at the
time. Pursuant to the agreement, Mr. Crump resigned as an officer of O'Sullivan
effective August 31, 1999, although he remains an employee. In the Agreement,
O'Sullivan agreed to pay Mr. Crump the benefits he would receive under his
Termination Protection Agreement if the merger closes. If the merger does not
close, O'Sullivan will pay Mr. Crump one year's salary, will maintain his
medical and life insurance for up to one year and will pay for certain
outplacement services.
OPTION GRANTS IN THE LAST YEAR
During the fiscal year ended June 30, 1999, no options were granted to
the named officers.
47
<PAGE>
OPTION EXERCISES IN THE LAST YEAR
AND YEAR-END OPTION VALUES
The following table summarizes information on outstanding options to
purchase common stock held by the named officers as of June 30, 1999. No options
were exercised by officers or directors during the fiscal year ended June 30,
1999.
<TABLE>
<CAPTION>
VALUE OF VALUE OF
SHARES SHARES EXERCISABLE UNEXERCISABLE
NAME EXERCISABLE UNEXERCISABLE OPTIONS OPTIONS
@ 6/30/99 @ 6/30/99 @ 6/30/99 @ 6/30/99
<S> <C> <C> <C> <C>
Daniel F. O'Sullivan 139,248 124,052 $ 1,100,853 $ 601,479
Richard D. Davidson 78,657 86,343 644,122 398,882
Tyrone E. Riegel 94,030 54,470 784,092 341,565
Terry L. Crump 64,215 42,455 549,398 264,846
Thomas M. O'Sullivan, Jr. 48,563 22,437 351,016 142,046
</TABLE>
CHANGE IN CONTROL PROTECTIONS
O'Sullivan has termination agreements with its executive officers. If
the employment of a protected employee is terminated by us within a period of up
to 24 months after a change in control, the employee will be entitled to receive
various benefits. The completion of the merger is a change of control for
purposes of these agreements. These benefits include:
1. a cash payment equal to the current base salary and highest bonus
received in the previous years;
2. a cash payment equal to the bonus earned by the employee in the year
of termination, calculated on a pro rated basis on the date of
termination;
3. a cash payment equal to accrued and unpaid vacation pay;
4. a cash payment for an automobile allowance of 12 months;
5. continued life and health insurance coverage for up to 12 months;
6. a lump sum payment, adjusted for taxes, to the employee in an amount
equal to the protected employee's unvested profit sharing account in
the Savings and Profit Sharing Plan;
7. a cash payment based on the amount that the protected employee would
have received under our Deferred Compensation Plan had he continued to
work for O'Sullivan until he attained the age of 65;
8. all outstanding stock options vest and bonus become immediately
exercisable;
9. O'Sullivan will be required to purchase for cash any shares of
unrestricted common stock and options for shares at the fair market
value;
10. one year of outplacement services;
11. for certain executive officers, if the protected employee moves more
than 20 miles from his primary residence in order to accept permanent
employment within 36 months after leaving O'Sullivan, we will
repurchase employee's primary residence; and
12. if the executive officer is required to pay an excise tax under
Section 4999 of the Internal Revenue code of 1986, we will pay the
employee an additional amount to offset the effect of the tax.
The agreements for certain executive officers also provide for cash
payments in lieu of matching payments under the Stock Purchase Program and the
Savings and Profit Sharing Plan. The agreements for certain executive officers
also provide that, in some circumstances, they may voluntarily leave the
employment of
48
<PAGE>
O'Sullivan after a change in control and receive the benefits under the
protection agreements. These circumstances include:
- an adverse change in the executive's status, title or duties;
- a reduction in the executive's salary or bonus;
- relocation of the executive's office to a site which is more than 20
miles from its present location;
- a reduction in the executive's benefit levels;
- the insolvency or bankruptcy of O'Sullivan; or
- the executive leaves the employment of O'Sullivan for any reason
during the 60-day period beginning on the first anniversary of the
change in control
However, for purposes of the merger, each of the executive officers who
is a management participant in the buyout has waived his right to receive
benefits under the protection agreements in these circumstances, other than a
reduction in his salary or bonus.
The table below sets forth the total payments that may be received by
each of the named officers if these persons are terminated following the
completion of the merger. The values of non-cash benefits have been included on
the basis of their estimated fair value. These amounts do not include any
payments to be received for shares of O'Sullivan common stock or options to
acquire O'Sullivan common stock. These amounts also do not include payments
which we would make to offset the effect of excise taxes or to purchase any
executive officer's home. We have assumed for this purpose that the merger was
completed on September 30, 1999.
<TABLE>
<CAPTION>
OFFICER AMOUNT
------- -------
<S> <C>
Richard Davidson........................................... $ 611,457
President and Chief Operating Officer
Tyrone E. Riegel........................................... $ 474,132
Executive Vice President
Terry L. Crump............................................. $ 390,983
Executive Vice President and Chief Financial Officer
Thomas M. O'Sullivan, Jr................................... $ 298,452
Vice President-Sales
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the Compensation Committee are William C. Bousquette,
Stewart M. Kasen and Ronald G. Stegall. No member of the Compensation Committee
was an officer or employee of O'Sullivan Company or its subsidiaries during the
fiscal year ended June 30, 1999. None was formerly an officer of O'Sullivan or
any of its subsidiaries, except that Mr. Bousquette was a Vice President of
O'Sullivan Industries, Inc. from July 12, 1991 until February 7, 1994. In
addition, no executive officer of O'Sullivan serves on the board of directors or
the compensation committee of another entity where a committee member is
employed.
DIRECTORS' COMPENSATION
Directors of O'Sullivan who are not employees of O'Sullivan or its
subsidiaries are paid an annual retainer of $25,000. The chairmen of the
compensation committee and the audit committee each receive an additional $1,000
per year. Expenses of attendance at meetings are paid by O'Sullivan. No fees are
paid for
49
<PAGE>
attendance at Board or compensation or audit committee meetings. Employees of
O'Sullivan do not receive additional compensation for their service as a
director other than payment of expenses, if any, to attend a meeting.
Each non-employee director automatically receives nonqualified stock
options to purchase 2,000 shares of common stock on the first trading day in
September of each year that he or she serves as a director. The option exercise
price is set at the fair market value (as defined in the ISP) of a share of
common stock on the first trading day immediately preceding the date of grant.
The options vest in three equal increments on the first, second and third
anniversaries of the date of grant.
Effective July 1, 1997, O'Sullivan implemented its Stock Plan for
Directors, which was approved by the stockholders of O'Sullivan at the 1997
Annual Meeting. Under the plan, directors may elect to receive their fees and
retainers in common stock or restricted common stock rather than cash. Common
stock is distributed quarterly, and is priced at the average of the closing
prices on the last day of each month in a quarter. If a director elects to
receive restricted stock, the purchase price is the same as for unrestricted
common stock; the shares are issued in his name but are held in escrow by
O'Sullivan. Restrictions on restricted stock under the plan lapse upon the death
or disability of the director, retirement of the director at age 55 or older,
involuntary termination of service as a director, a vote of a majority of the
members of the Board other than the participating director or a change in
control of O'Sullivan. If a participating director ceases to be a director of
O'Sullivan for any other reason, the restricted stock issued to him is forfeited
to O'Sullivan.
During fiscal 1999, the Board established a special search committee
and a special committee. These new committees entailed substantial additional
responsibilities and time commitments on the directors serving on the
committees. Accordingly, the Board approved additional compensation for the
directors serving on the committees. Members of the special search committee
received one-time retainers of $5,000 each, plus $1,000 for each meeting
attended. Members of the special committee received a one-time retainer of
$5,000, a fee of $1,000 for each meeting attended in person and $500 for each
meeting attended by telephone conference. Additionally, Mr. Bousquette received
a $10,000 retainer for his substantial services as chairman of the special
committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company's
directors, Executives and any persons holding 10% or more of Common Stock are
required to report their ownership of the Company's securities and any change in
that ownership to the Securities and Exchange Commission and the New York Stock
Exchange. Specific due dates for these reports have been established and the
Company is required to report in this report any failure to file by these dates
during the fiscal year ended June 30, 1999. All of these filing requirements
were satisfied by the Company's directors and Executives during fiscal 1999.
50
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
BENEFICIAL OWNERSHIP OF COMMON STOCK.
To our knowledge, the following are the only persons who own more than
5% of the shares of O'Sullivan's common stock:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
<S> <C> <C>
Tweedy, Browne Company L.L.C. ........ 1,485,009 9.3%
TBK Partners, L.P.
Vanderbilt Partners, L.P. ............
52 Vanderbilt Avenue
New York, New York 10017
Reich and Tang Asset Management L.P.... 1,331,700 8.3%
600 Fifth Avenue
New York, New York 10020
Dimensional Fund Advisors, Inc. ...... 944,700 5.9%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
ICM Asset Management ................. 832,800 5.2%
601 W. Main Avenue, Suite 97
Spokane, WA 99201
</TABLE>
We had 16,086,329 shares of common stock outstanding on September 15,
1999. The following table provides information regarding the beneficial
ownership of O'Sullivan's common stock as of August 27, 1999 for:
- our executive officers;
- our directors; and
- all of our directors and executive officers as a group.
51
<PAGE>
Except under applicable community property laws, joint ownership and as
otherwise indicated, each stockholder identified in the table possesses sole
voting and investment power with respect to its or his shares.
<TABLE>
<CAPTION>
SAVINGS
SHARES OPTIONS AND
NAME BENEFICIALLY BENEFICIALLY PROFIT TOTAL PERCENT
OWNED OWNED PLAN SHARES OWNED
------------ ------------ ------- -------- -------
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan....................... 46,733 263,300 1,545 311,578 1.9%
Richard D. Davidson........................ 119,506 165,000 740 285,246 1.8%
Tyrone E. Riegel........................... 31,861 148,500 1,346 181,707 1.1%
Terry L. Crump............................. 23,460 106,670 834 130,806 *
Thomas M. O'Sullivan, Jr................... 36,211 71,000 2,841 110,052 *
Michael P. O'Sullivan...................... 27,946 67,500 4,337 99,783 *
Rowland H. Geddie, III..................... 11,118 71,000 4,634 86,752 *
E. Thomas Riegel........................... 13,152 71,000 2,439 86,591 *
Tommy W. Thieman........................... 18,070 31,500 4,292 53,862 *
Phillip J. Pacey........................... 9,361 24,000 2,757 36,118 *
Stuart D. Schotte.......................... 129 7,000 82 7,211 *
James C. Hillman........................... 22,592 71,000 3,959 97,551 *
William C. Bousquette...................... 14,224 9,000 0 23,224 *
Charles G. Hanson.......................... 25,000 8,000 0 33,000 *
Stewart M. Kasen........................... 8,417 7,000 0 15,417 *
Thomas M. O'Sullivan, Sr................... 167,084 9,000 0 165,084 1.1%
Ronald G. Stegall.......................... 0 9,000 0 9,000 *
Directors and executive officers as a group
(17 persons)............................ 574,863 1,129,470 29,829 1,744,140 10.1%
</TABLE>
- ----------
* Less than 1.0%
The shares for Mr. Daniel F. O'Sullivan include 500 shares owned by
his wife. Mr. O'Sullivan disclaims beneficial ownership of the shares held by
his wife.
The shares for Mr. Thomas M. O'Sullivan, Sr. include 154,738 shares
owned by O'Sullivan Properties, Inc. and 1,139 shares owned by his wife. Mr.
Thomas M. O'Sullivan, Sr. and his wife own all of the voting stock of O'Sullivan
Properties, Inc. Mr. O'Sullivan disclaims beneficial ownership of the shares
held by his wife.
The shares for Thomas M. O'Sullivan, Jr. include 4,995 shares he holds
as custodian for his minor son and 13,036 shares held by a limited partnership
in which he and his wife are general partners. Mr. O'Sullivan disclaims
beneficial ownership of the shares held by his son and the partnership.
The shares for Mr. Michael P. O'Sullivan include 9,567 shares he holds
as custodian for his minor children and 405 shares owned by his wife. Mr.
O'Sullivan disclaims beneficial ownership of the shares held by his minor
children and his wife.
The shares for Mr. James C. Hillman include 4,880 shares owned by his
son. Mr. Hillman disclaims beneficial ownership of the shares held by his son.
Some of the shares held in the Savings and Profit Plan may not be sold
by the plan participants prior to the stockholder's retirement or the
termination of his employment.
52
<PAGE>
Since all options to acquire shares of common stock will become
exercisable upon completion of the proposed merger of OSI Acquisition, Inc. into
O'Sullivan Holdings, we have treated all options as being beneficially owned.
These include options which are not presently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During fiscal 1999, Casey O'Sullivan, a son of Daniel F. O'Sullivan,
worked as a salesman successively for companies that provide O'Sullivan
corrugated boxes for its products. Sun Container provided O'Sullivan with
corrugated boxes with a sales price aggregating $401,000 during fiscal 1999, of
which $55,000 was supplied during the time Casey O'Sullivan was employed by Sun.
Bennet Packaging has long been one of O'Sullivan's suppliers; O'Sullivan paid
Bennett $5,790,000 during fiscal 1999, of which $2,936,000 was paid during the 6
months Casey O'Sullivan was an employee of Bennett. O'Sullivan has followed the
practice of awarding purchase orders for cartons for a model to the lowest
bidder for the carton.
O'Sullivan has in the past rented storage and office space from
O'Sullivan Properties, Inc. O'Sullivan Properties is controlled by Thomas M.
O'Sullivan, Sr. During fiscal 1999, O'Sullivan did not rent any space from
O'Sullivan Properties, but it paid O'Sullivan Properties $12,000 during fiscal
1999 in connection with the termination of a lease.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS
The following consolidated statements of O'Sullivan Industries
Holdings, Inc. and subsidiaries are filed as part of this report:
<TABLE>
<S> <C>
Report of Independent Accountants........................... 24
Consolidated Balance Sheets as of June 30, 1999 and 1998.... 25
Consolidated Statements of Operations for each of the
three years in the period ended June 30, 1999 ............. 26
Consolidated Statements of Cash Flows for each of the
three years in the period ended June 30, 1999.............. 27
Consolidated Statements of Changes in Stockholders'
Equity for each of the three years in the period ended
June 30, 1999.............................................. 28
Notes to Consolidated Financial Statements.................. 29
</TABLE>
(a)(2) FINANCIAL STATEMENTS SCHEDULES
Schedules have been omitted because they are not required or
are not applicable or the information required to be set forth therein
either is not material or is included in the financial statements or
notes thereto.
(a)(3) EXHIBITS:
A list of exhibits required to be filed as part of this report
is set forth in the Index to Exhibits, which immediately precedes such
exhibits, and is incorporated herein by reference.
53
<PAGE>
(b) Reports on Form 8-K
i) Current Report on From 8-K dated May 17, 1999 (Item 5 with
respect to information relating to Agreement and Plan of
Merger between O'Sullivan and OSI Acquisition, Inc.
ii) Amendment No. 1 to Current Report on Form 8-K/A dated June
17, 1999 (Item 5 with respect to amendment of Agreement and
Plan of Merger between O'Sullivan and OSI Acquisition, Inc.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 and 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, on the 28th day of
September, 1999.
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
By /S/ DANIEL F. O'SULLIVAN
-----------------------------------
Daniel F. O'Sullivan
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/S/ DANIEL F. O'SULLIVAN Chairman of the Board September 28, 1999
- -------------------------------
Daniel F. O'Sullivan
/S/ RICHARD D. DAVIDSON President and Chief Operating
- ------------------------------- Officer and Director September 28, 1999
Richard D. Davidson (PRINCIPAL EXECUTIVE OFFICER)
/S/ TYRONE E. RIEGEL Executive Vice President September 28, 1999
- ------------------------------- and Director
Tyrone E. Riegel
/S/ PHILLIP J. PACEY Vice President-Finance,
- ------------------------------- and Treasurer September 28, 1999
Phillip J. Pacey (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
/S/ WILLIAM C. BOUSQUETTE Director September 28, 1999
- -------------------------------
William C. Bousquette
/S/ CHARLES G. HANSON Director September 28, 1999
- -------------------------------
Charles G. Hanson
Director September 28, 1999
- -------------------------------
Stewart M. Kasen
/S/ THOMAS M. O'SULLIVAN, SR. Director September 28, 1999
- -------------------------------
Thomas M. O'Sullivan, Sr.
/S/ RONALD G. STEGALL Director September 28, 1999
- -------------------------------
Ronald G. Stegall
</TABLE>
55
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
--- ----------- ----
<S> <C> <C>
2.1 & 4.5 Agreement and Plan of Merger dated as of May 17, 1999
between OSI Acquisition, Inc. and O'Sullivan Industries,
Holdings, Inc. (incorporated by reference from Exhibit 2 to
Current Report on From 8-K dated May 17, 1999 (File No.
1-12754))
2.1a & 4.5a Agreement dated as of June 17, 1999 between O'Sullivan and
OSI Acquisition, Inc. awarding the Agreement and Plan of
Merger (incorporated by reference from Exhibit 2.2 to
Amendment No. 1 to Current Report on From 8-K dated June 17,
1999 (File No. 1-12754))
3.1 & 4.1 Certificate of Incorporation of O'Sullivan Industries
Holdings, Inc. (incorporated by reference from Exhibit 3.1
to Registration Statement on Form S-1 (File No. 33-72120))
3.2 & 4.2 By-laws of O'Sullivan (incorporated by reference from
Exhibit 3.2 to Registration Statement on Form S-1 (File No.
33-72120))
4.3 Specimen Stock Certificate of O'Sullivan (incorporated by
reference from Exhibit 4.1 to Amendment No. 3 to
Registration Statement on Form S-1 (File No. 33-72120))
4.4 Rights Agreement dated as of February 1, 1994 between
O'Sullivan and the First National Bank of Boston, as Rights
Agent (incorporated by reference from Exhibit 4.4 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 (File No. 1-12754))
4.4a First Amendment to Rights Agreement (incorporated by
reference from Exhibit 4.4a to Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1999 (File No. 1-12754))
*10.1 Amended and Restated O'Sullivan Industries Holdings, Inc.
1994 Incentive Stock Plan (incorporated by reference from
Exhibit 4.5 to the Registration Statement on Form S-8 (File
No. 333-21609))
*10.1a First Amendment to the Incentive Stock Plan (incorporated by
reference from Exhibit 4.5(a) to Registration Statement on
Form S-8 (File No. 333-21609))
*10.1b Second Amendment to the Incentive Stock Plan (incorporated
by reference from Exhibit 10.1b to Annual Report on Form
10-K for the year ended June 30, 1997 (File No. 1-12754))
*10.2 Form of Amended and Restated Termination Protection
Agreement between O'Sullivan and certain members of
management (incorporated by reference from Exhibit 10.2 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996 (File No. 1-12754))
*10.3 Form of Termination Protection Agreement between O'Sullivan
and certain members of management .......................... 60
10.4 O'Sullivan Industries Holdings, Inc. Stock Plan for
Directors (incorporated by reference from Exhibit 10.1 to
Quarterly Report on Form 10-Q for the quarter ended March
31, 1997 (File No. 1-12754))
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
--- ----------- ----
<S> <C> <C>
*10.5 O'Sullivan Industries Holdings, Inc. Deferred Compensation
Plan (the "DCP") (incorporated by reference from Exhibit
10.2 to Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1997 (File No. 1-12754))
*10.5a First Amendment to the DCP (incorporated by reference from
Exhibit 10.4a to Annual Report on Form 10-K for the year
ended June 30, 1997 (File No. 1-12754))
10.6 Amended and Restated Tax Sharing and Tax Reimbursement
Agreement dated as of June 19, 1997 between O'Sullivan and
Tandy Corporation and TE Electronics Inc. (incorporated by
reference from Exhibit 10.5 to Annual Report on Form 10-K
for the year ended June 30, 1997 (File No. 1-12754))
*10.7 Form of Indemnity Agreement between O'Sullivan and certain
directors and officers (incorporated by reference from
Exhibit 10.7 to Amendment No. 1 to Registration Statement on
Form S-1 (File No. 33-72120))
*10.8 Schedule of Director Fees (incorporated by reference from
Exhibit 10.8 to Annual Report on Form 10-K for the year
ended June 30, 1997 (File No. 1-12754))
*10.9 Retirement and Consulting Agreement, Release and Waiver of
Claims between O'Sullivan and Daniel F. O'Sullivan dated
October 16, 1998 (incorporated by reference from Exhibit 10
to Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1998 (File No. 1-12754))
*10.9a Amendment to Retirement Agreement dated as of May 16, 1999
between O'Sullivan and Daniel F.
O'Sullivan ................................................. 73
*10.10 Severance Agreement between O'Sullivan and Terry L. Crump
dated August 23, 1999 ...................................... 75
10.11 Composite Form of Note Purchase Agreement dated as of May
15, 1995 between O'Sullivan and each of New York Life
Insurance Company and New York Life Insurance and Annuity
Corporation (incorporated by reference from Exhibit 10.11 to
Annual Report on Form 10-K for the year ended June 30, 1995
(File No. 1-12754))
10.12 Amended and Restated Credit Agreement dated as of November
22, 1994, by and among O'Sullivan, O'Sullivan Industries,
Inc., O'Sullivan Industries - Virginia, Inc., The Boatmen's
National Bank of St. Louis and Wachovia Bank of Georgia,
N.A. (incorporated by reference from Exhibit 10.12 to Annual
Report on Form 10-K for the year ended June 30, 1997 (File
No. 1-12754))
10.12a First Amendment to Amended and Restated Credit Agreement
dated as of May 15, 1995 (incorporated by reference from
Exhibit 10.12a to Annual Report on Form 10-K for the year
ended June 30, 1997 (File No. 1-12754))
10.12b Second Amendment to Amended and Restated Credit Agreement
dated as of December 29, 1995 (incorporated by reference
from Exhibit 10.12b to Annual Report on Form 10-K for the
year ended June 30, 1997 (File No. 1-12754))
10.12c Third Amendment to Amended and Restated Credit Agreement
dated as of June 13, 1997 (incorporated by reference from
Exhibit 10.12c to Annual Report on Form 10-K for the year
ended June 30, 1997 (File No. 1-12754))
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
--- ----------- ----
<S> <C> <C>
10.12d Fourth Amendment to Amended and Restated Credit Agreement
dated as of March 30, 1999 (incorporated by reference from
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File No. 1-12754))
*10.13 Description of O'Sullivan's incentive compensation
plan ....................................................... 82
21 Subsidiaries of the Registrant (incorporated by reference
from Exhibit 21 to Annual Report on Form 10-K for the year
ended June 30, 1995 (File No. 1-12754))
23 Consent of Independent Accountants ......................... 83
27 Financial Data Schedule .................................... 84
</TABLE>
- ----------
* Each of these exhibits is a "management contract or compensatory plan
or arrangement."
Pursuant to item 601 (b) (4) (iii) of Regulation S-K, O'Sullivan has
not filed agreements relating to certain long-term debt of O'Sullivan
aggregating $10 million. O'Sullivan agrees to furnish the Securities and
Exchange Commission a copy of such agreements upon request.
58
<PAGE>
EXHIBIT 10.3
TERMINATION PROTECTION AGREEMENT
FOR MANAGER EMPLOYEES
OF
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
THIS AGREEMENT is made as of the 22nd day of March, 1999, by and
between the "Company" (as hereinafter defined) and ___________________________
(the "Manager").
WHEREAS, the Board of Directors of the Company (the "Board")
recognizes that the possibility of a "Change in Control" (as hereinafter
defined) exists and that the threat or the occurrence of a Change in Control can
result in significant distractions of its key management personnel because of
the uncertainties inherent in such a situation; and
WHEREAS, the Board has determined that it is essential and in the best
interest of the Company and its stockholders to retain the services of the
Manager in the event of a threat or occurrence of a Change in Control and to
ensure his continued dedication and efforts in such event without undue concern
for his personal financial and employment security; and
WHEREAS, in order to induce the Manager to remain in the employ of the
Company, particularly in the event of a threat or the occurrence of a Change in
Control, the Company desires to enter into this Agreement with the Manager to
provide the Manager with certain benefits in the event his employment is
terminated as a result of, or in connection with, a Change in Control and to
provide the Manager with the "Gross-Up Payment" (as hereinafter defined) and
certain other benefits whether or not the Manager's employment is terminated;
NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:
1. TERM OF AGREEMENT. This Agreement shall commence as of March 22,
1999 and shall continue in effect until March 22, 2001; PROVIDED, HOWEVER, that
commencing on March 22, 2000 and on each March 22 thereafter, the term of this
Agreement shall be automatically extended for one year unless either the Company
or the Manager shall have given written notice to the other at least 90 days
prior thereto that the term of this Agreement shall not be so extended; and
PROVIDED FURTHER, HOWEVER, that notwithstanding any such notice by the Company
not to extend, the term of this Agreement shall not expire prior to the
expiration of twelve months after the occurrence of a Change in Control, if such
Change in Control occurs during the term of this Agreement.
2. DEFINITIONS.
2.1 ACCRUED COMPENSATION. For purposes of this Agreement,
"Accrued Compensation" shall mean all amounts earned or accrued through the
"Termination Date" (as hereinafter defined) but not paid as of the Termination
Date including (i) base salary, (ii) reimbursement for reasonable and necessary
expenses incurred by the Manager on behalf of
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the Company during the period ending on the Termination Date, (iii) vacation
pay, if required by applicable law, and (iv) bonuses and incentive compensation
(other than the "Pro Rata Bonus" (as hereinafter defined)).
2.2 BASE AMOUNT. For purposes of this Agreement, "Base Amount"
shall mean the greater of the Manager's annual base salary (a) at the rate in
effect on the Termination Date or (b) at the highest rate in effect at any time
during the 90 day period prior to the Change in Control, and shall include all
amounts of his base salary that are deferred under the qualified and
non-qualified employee benefit plans of the Company, if any.
2.3 BONUS AMOUNT. For purposes of this Agreement, "Bonus Amount"
shall mean the highest annual bonus paid or payable to the Manager for any
fiscal year in respect of the three (3) full fiscal years ended prior to the
Change in Control, and shall include all amounts of his annual bonus that are
deferred under the qualified and non-qualified employee benefit plans of the
Company, if any.
2.4 CAUSE. For purposes of this Agreement, a termination of
employment is for "Cause" if the Manager (a) has been convicted of a felony; (b)
failed intentionally and continually substantially to perform his reasonably
assigned duties with the Company (other than a failure resulting from the
Manager's incapacity due to physical or mental illness) which failure continued
for a period of at least 30 days after a written notice of demand for
substantial performance has been delivered to the Manager specifying the manner
in which the Manager has failed substantially to perform; or (c) intentionally
engaged in conduct which is demonstrably and materially injurious to the
Company, monetarily or otherwise; PROVIDED, HOWEVER, that no termination of the
Manager's employment shall be for Cause as set forth in clause (b) above until
(x) there shall have been delivered to the Manager a copy of a written notice
setting forth that the Manager was guilty of the conduct set forth in clause (b)
and specifying the particulars thereof in detail; and (y) the Manager shall have
been provided an opportunity to be heard in person by the President of the
Company (with the assistance of the Manager's counsel if the Manager so
desires). No act, or failure to act, on the Manager's part, shall be considered
"intentional" unless the Manager has acted, or failed to act, with a lack of
good faith and with a lack of reasonable belief that the Manager's action or
failure to act was in the best interest of the Company.
2.5 CHANGE IN CONTROL. For purposes of this Agreement, a "Change
in Control" shall mean any of the following events:
(a) An acquisition (other than directly from the Company) of
any voting securities of the Company (the "Voting Securities") by any "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after
which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 15% or more of the combined voting power of
the Company's then outstanding Voting Securities; PROVIDED, HOWEVER, that in
determining whether a Change in Control has occurred, Voting Securities which
are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not
constitute an acquisition which would cause a Change in Control. A "Non-Control
Acquisition" shall mean an acquisition by
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(1) an employee benefit plan (or a trust forming a part thereof) maintained by
(x) the Company or (y) any corporation or other Person of which a majority of
its voting power or its equity securities or equity interest is owned directly
or indirectly by the Company (a "Subsidiary"); (2) the Company or any
Subsidiary; or (3) any Person in connection with a "Non-Control Transaction" (as
hereinafter defined).
(b) The individuals who, as of February 1, 1994, are members
of the Board (the "Incumbent Board"), cease for any reason to constitute at
least two-thirds of the Board; PROVIDED, HOWEVER, that if the election, or
nomination for election by the Company's stockholders, of any new director was
approved by a vote of at least two-thirds of the Incumbent Board, such new
director shall, for purposes of this Agreement, be considered as a member of the
Incumbent Board; PROVIDED FURTHER, HOWEVER, that no individual shall be
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest; or
(c) Approval by stockholders of the Company of:
(1) A merger, consolidation or reorganization involving
the Company, unless
(i) the stockholders of the Company, immediately
before such merger, consolidation or reorganization, own, directly or
indirectly immediately following such merger, consolidation or
reorganization, at least 60% of the combined voting power of the
outstanding voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation
or reorganization, and
(ii) the individuals who were members of the
Incumbent Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization constitute
at least two-thirds of the members of the board of directors of the
Surviving Corporation, and
(iii) no Person (other than the Company, any
Subsidiary, any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of 15% or
more of the then outstanding Voting Securities) has Beneficial
Ownership of 15% or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities, and
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(iv) a transaction described in clauses (i)
through (iii) shall herein be referred to as a "Non-Control
Transaction";
(2) A complete liquidation or dissolution of the
Company; or
(3) An agreement for the sale or other disposition of
all or substantially all of the assets of the Company to any Person
(other than a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person") acquired
Beneficial Ownership of more than the permitted amount of the outstanding Voting
Securities as a result of the acquisition of Voting Securities by the Company
which, by reducing the number of Voting Securities outstanding, increases the
proportional number of shares Beneficially Owned by the Subject Person, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of Voting Securities by the Company, and after
such share acquisition by the Company, the Subject Person becomes the Beneficial
Owner of any additional Voting Securities which increases the percentage of the
then outstanding Voting Securities Beneficially Owned by the Subject Person,
then a Change in Control shall occur.
(d) Notwithstanding anything contained in this Agreement to
the contrary, if the Manager's employment is terminated following the Effective
Date but within one (1) year prior to a Change in Control and the Manager
reasonably demonstrates that such termination (i) was at the request of a third
party who has indicated an intention or taken steps reasonably calculated to
effect a Change in Control and who effectuates a Change in Control (a "Third
Party") or (ii) otherwise occurred in connection with, or in anticipation of, a
Change in Control which actually occurs, then for all purposes of this
Agreement, the date of a Change in Control with respect to the Manager shall
mean the date immediately prior to the date of such termination of the Manager's
employment.
2.6 COMPANY. For, and its subsidiary purposes of this Agreement,
the "Company" shall mean O'Sullivan Industries Holdings, Inc. and shall include
their respective "Successors and Assigns" (as hereinafter defined).
2.7 DISABILITY. For purposes of this Agreement, "Disability"
shall mean a physical or mental infirmity which impairs the Manager's ability to
substantially perform his duties with the Company for a period of 180
consecutive days and the Manager has not returned to his full time employment
prior to the Termination Date as stated in the "Notice of Termination" (as
hereinafter defined).
2.8 EFFECTIVE DATE. For purposes of this Agreement, "Effective
Date" shall mean March 22, 1999.
2.9 (a) GOOD REASON. For purposes of this Agreement, "Good
Reason" shall mean the occurrence after a Change in Control of any of the events
or conditions described in Subsections (i) through (vi) hereof:
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(i) a reduction in the rate of the Manager's base
salary below the Base Amount or his target incentive compensation
below his highest target incentive compensation in effect at any time
during the 90 day period prior to the Change in Control or any failure
to pay the Manager any compensation or benefits to which her is
entitled within 15 days of the date notice of such failure to pay is
given to the Company and, in the case of any annual bonus, within 45
days following the end of the fiscal year pursuant to which such bonus
relates; or
(ii) the failure by the Company to continue in effect
(without reduction in reward opportunities and/or bonus potential for
comparable performance) the Company's bonus, unless such plan is
replaced with a plan that provides at least substantially equivalent
compensation, reward opportunities and/or bonus potential to the
Manager; or
(iii) the insolvency or the filing (by any party,
including the Company) of a petition for bankruptcy, of the Company,
which petition is not dismissed within 60 days; or
(iv) any material breach by the Company of any
provision hereof; or
(v) any purported termination of the Manager's
employment for Cause by the Company which does not comply with the
terms of Section 2.4 hereof; or
(vi) the failure of the Company to obtain an agreement,
satisfactory to the Manager, from any Successor or Assign of the
Company to assume and agree to perform this Agreement, as contemplated
in Section 6 hereof.
(b) Any event or condition described in this Section
2.9(a)(i) through (vi) which occurs following the Effective Date but within one
year prior to a Change in Control but which the Manager reasonably demonstrates
(i) was at the request of a Third Party or (ii) otherwise arose in connection
with, or in anticipation of, a Change in Control which actually occurs, shall
constitute Good Reason for purposes of this Agreement notwithstanding that it
occurred prior to the Change in Control.
2.10 NOTICE OF TERMINATION. For purposes of this Agreement,
following a Change in Control, "Notice of Termination" shall mean a written
notice of termination from the Company of the Manager's employment which
indicates the specific termination provision in this Agreement relied upon and
which sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Manager's employment under the provision
so indicated.
2.11 PRO RATA BONUS. For purposes of this Agreement, "Pro Rata
Bonus" shall mean an amount equal to the Bonus Amount multiplied by a fraction
the numerator of which is the number of days in the fiscal year through the
Termination Date and the denominator of which is 365.
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2.12 SUCCESSORS AND ASSIGNS. For purposes of this Agreement,
"Successors and Assigns" shall mean a corporation or other entity acquiring all
or substantially all the assets and business of the Company (including this
Agreement) whether by operation of law or otherwise.
2.13 TERMINATION DATE. For purposes of this Agreement,
"Termination Date" shall mean in the case of the Manager's death, his date of
death, in the case of Good Reason, the last day of his employment, and in all
other cases, the date specified in the Notice of Termination; PROVIDED, HOWEVER,
that if the Manager's employment is terminated by the Company for Cause or due
to Disability, the date specified in the Notice of Termination shall be at least
30 days from the date the Notice of Termination is given to the Manager,
provided that in the case of Disability the Manager shall not have returned to
the full-time performance of his duties during such period of at least 30 days.
3. TERMINATION OF EMPLOYMENT.
3.1 If, during the term of this Agreement, the Manager's
employment with the Company shall be terminated within twelve months following a
Change in Control, the Manager shall be entitled to the following compensation
and benefits:
(a) If the Manager's employment with the Company shall be
terminated (1) by the Manager other than for Good Reason; (2) by reason of the
Manager's death; or (3) by the Company for Cause or Disability, the Company
shall pay to the Manager the Accrued Compensation and, if such termination is
other than by the Company for Cause, a Pro Rata Bonus.
(b) If the Manager's employment with the Company shall be
terminated for any reason other than as specified in Section 3.1(a), the Manager
shall be entitled to the following:
(i) the Company shall pay the Manager all Accrued
Compensation and a Pro-Rata Bonus; and
(ii) the Company shall pay the Manager as termination
pay and in lieu of any further compensation for periods subsequent to
the Termination Date, in a single payment an amount (the "Termination
Amount") in cash equal to the sum of (A) the Base Amount and (B) the
Bonus Amount; and
(iii) for twelve months from the Termination Date (the
"Continuation Period"), the Company shall at its expense continue on
behalf of the Manager and his dependents and beneficiaries the life
insurance, disability, medical, dental and hospitalization benefits
provided to the Manager at any time during the 90-day period prior to
the Change in Control or at any time thereafter or (y) to other
similarly situated Managers who continue in the employ of the Company
during the Continuation Period; PROVIDED, HOWEVER, that the Manager
shall continue to pay the employee portion of any premiums for such
benefits. The coverage and benefits (including deductibles and
contributions by the Manager, if any) provided in this Section
3.1(b)(iii) during the Continuation Period shall be no less favorable
to the Manager and his dependents and
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beneficiaries, than the most favorable of such coverages and benefits
during the periods referred to above. If the Company is unable,
because of legal requirements governing its benefit plans, to provide
the Manager with continued coverage under its life insurance,
disability, medical, dental and hospitalization benefits required
hereunder, the Company shall either (a) provide such insurance and
benefits under separate plans or insurance policies at the Company's
expense; or (b) pay to the Manager an amount (grossed up for federal,
state and local income taxes, if such benefits were provided on a
pre-tax basis prior to the Change in Control) sufficient for him to
secure all such benefits, taking into account his age, health and
health experience and other factors that might affect the availability
and pricing of such benefits. The Company's obligation hereunder with
respect to the foregoing benefits shall be limited to the extent that
the Manager obtains any such benefits pursuant to a subsequent
employer's benefit plans, in which case the Company may reduce the
coverage of any benefits it is required to provide the Manager
hereunder as long as the aggregate coverages and benefits of the
combined benefit plans is no less favorable to the Manager than the
coverages and benefits required to be provided hereunder. This
Subsection (iii) shall not be interpreted so as to limit any benefits
to which the Manager, his dependents or beneficiaries may be entitled
under any of the Company's employee benefit plans, programs or
practices following the Manager's termination of employment, including
without limitation, retiree medical and life insurance benefits; and
(iv) the Company shall make the Manager whole for any
taxes owed by the Manager with respect to any benefit referenced in
Section 3(b)(iii) that was non-taxable to the Manager during the
90-day period prior to the Change in Control; and
(v) if the Manager is not vested in his profit sharing
account in the Savings Plan, the Company shall pay in a single payment
an amount equal to the quotient of (A) his non-vested profit sharing
account balance as of the Termination Date divided by (B) one (1)
minus the Tax Rate; and
(vi) the Company shall pay in a single payment an
amount equal to the present value of all benefits that would become
payable under executive benefit plans in which the Manager
participates at any time during the 90-day period prior to the Change
in Control, which plans are designed to provide deferred retirement
income for participants. If such a plan defines benefits payable in
terms of payment of an account balance payable upon leaving the
employment of the Company (whether in a lump sum or installments),
such balance shall be paid in a lump sum calculated pursuant to such
plan. Otherwise, the benefits payable under such plan shall be
determined by calculating retirement benefits payable under such plans
as though the Manager had continued to work for the Company, had then
retired from the Company at age 65 (assuming the Manager is not at
least age 65 on the Termination Date) (using as the discount rate the
yield on U.S. Five Year Treasury Notes on the Termination Date as
published in THE WALL STREET JOURNAL) and had received compensation
increases equal to the highest percentage increase in his compensation
for the three complete fiscal years of the Company immediately
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preceding the occurrence of the Change in Control; and such payment
shall be in lieu of any such benefits that would otherwise be paid
under such plans; and
(vii) the restrictions on any outstanding incentive
awards (including restricted stock and granted performance shares or
units) granted to the Manager including, but not limited to, awards
granted under the Company's Amended and Restated 1994 Incentive Stock
Plan, as amended, or under any other incentive plan or arrangement
shall lapse and such incentive awards shall become 100% vested, all
stock options and stock appreciation rights granted to the Manager
shall become immediately exercisable and shall become 100% vested, and
all performance units granted to the Manager shall become 100% vested;
and
(viii) the Company shall pay for twelve months of
outplacement services with an outplacement service selected by the
Company. The outplacement services provided shall be selected by the
Company as reasonably necessary or helpful in securing a new position.
If and when the Manager secures a new permanent (as opposed to
temporary or iterim) position, the Company may discontinue further
outplacement services.
(c) The amounts provided for in Sections 3.1(a) and
3.1(b)(i), (ii), (iv), (v), and (vi), shall be paid in a single lump sum cash
payment within five days after the Manager's Termination Date (or earlier, if
required by applicable law).
(d) The Manager shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Manager in any subsequent employment
except as provided in Section 3.1(b)(iii).
3.2 (a) The termination pay and termination benefits provided for
in this Section 3 shall be in lieu of any other severance or termination pay to
which the Manager may be entitled under any Company severance or termination
plan, program, policy or practice.
(b) The Manager's entitlement to any other compensation or
benefits (other than the Pro Rata Bonus and other than the termination pay and
termination benefits as provided under this Section 3) shall be determined in
accordance with the Company's employee benefit plans (including, the plans
listed on Appendix A) and other applicable programs, policies and practices then
in effect.
(c) The Company shall have the right to deduct from any
amount payable under this Agreement the amount equal to the federal, state and
local income taxes required by law to be withheld with respect to the amounts
payable hereunder.
(d) Notwithstanding anything contained in this Agreement to
the contrary, if any portion of the termination pay or termination benefits
provided for in this Section 3 and any other present or future plan of the
Company or other present or future agreement between the
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Manager and the Company would not be deductible by the Company for federal
income tax purposes by reason of application of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), then payment of that portion to
the Manager shall be deferred until the earliest date upon which payment thereof
can be made to the Manager without being non-deductible pursuant to Section 162
of the Code. In the event of such deferral, the Company shall pay interest to
the Manager on the deferred amount at 120% of the applicable federal rate
provided for in Section 1274(d)(1) of the Code.
4. NOTICE OF TERMINATION. Following a Change in Control, any purported
termination of the Manager's employment by the Company and/or the Employer shall
be communicated by Notice of Termination to the Manager. For purposes of this
Agreement, no such purported termination shall be effective without such Notice
of Termination.
5. EXCISE TAX PAYMENTS.
(a) In the event that any payment or benefit (within the
meaning of Section 280G(b)(2) of the Code), to the Manager or for his benefit
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise in connection with, or arising out of, his employment
with the Company or a change in ownership or effective control of the Company or
of a substantial portion of its assets (a "Payment" or "Payments"), would be
subject to the excise tax imposed by Section 4999 of the Code (or any successor
provision) or any interest or penalties are incurred by the Manager with respect
to such excise tax (such excise tax, together with any such interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), then
the Manager will be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by the Manager of all taxes
(including any interest or penalties, other than interest and penalties imposed
by reason of the Manager's failure timely to file a tax return or pay taxes
shown due on his return, imposed with respect to such taxes and the Excise Tax),
including any Excise Tax imposed upon the Gross-Up Payment, the Manager retains
an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. For purposes of determining the amount of the Gross-Up Payment, the
Manager shall be deemed to pay taxes at the Tax Rate applicable at the time of
payment of the Gross-Up Payment.
(b) An initial determination as to whether a Gross-Up
Payment is required pursuant to this Agreement and the amount of such Gross-Up
Payment shall be made at the Company's expense by an accounting firm selected by
the Company and reasonably acceptable to the Manager which is designated as one
of the six largest accounting firms in the United States (the "Accounting
Firm"). The Accounting Firm shall provide its determination (the
"Determination"), together with detailed supporting calculations and
documentation to the Company and the Manager within five days of the Termination
Date if applicable, or such other time as requested by the Company or by the
Manager (provided the Manager reasonably believes that any of the Payments may
be subject to the Excise Tax) and if the Accounting Firm determines that no
Excise Tax is payable by the Manager with respect to a Payment or Payments, it
shall furnish the Manager with a written opinion reasonably acceptable to the
Manager that no Excise Tax will be imposed with respect to any such Payment or
Payments. Within ten days of the delivery of the Determination
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to the Manager, the Manager shall have the right to dispute the Determination
(the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this
Paragraph 5(b) shall be paid by the Company to the Manager within five days of
the receipt of the Accounting Firm's determination. The existence of the Dispute
shall not in any way affect the Manager's right to receive the Gross-Up Payment
in accordance with the Determination. If there is no Dispute, the Determination
shall be binding, final and conclusive upon the Company and the Manager subject
to the application of Paragraph 5(c) below.
(c) As a result of the uncertainty in the application of
Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a
portion thereof) will be paid which should not have been paid (an "Excess
Payment") or a Gross-Up Payment (or a portion thereof) which should have been
paid will not have been paid (an "Underpayment"). An Underpayment shall be
deemed to have occurred (i) upon notice (formal or informal) to the Manager from
any governmental taxing authority that the Manager's tax liability (whether in
respect of the Manager's current taxable year or in respect of any prior taxable
year) may be increased by reason of the imposition of the Excise Tax on a
Payment or Payments with respect to which the Company has failed to make a
sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by
reason of determination by the Company (which shall include the position taken
by the Company, together with its consolidated group, on its federal income tax
return) or (iv) upon the resolution of the Dispute to the Manager's
satisfaction. If an Underpayment occurs, the Manager shall promptly notify the
Company and the Company shall promptly, but in any event, at least five days
prior to the date on which the applicable government taxing authority has
requested payment, pay to the Manager an additional Gross-Up Payment equal to
the amount of the Underpayment plus any interest and penalties (other than
interest and penalties imposed by reason of the Manager's failure to file timely
a tax return or pay taxes shown due on the Manager's return) imposed on the
Underpayment. An Excess Payment shall be deemed to have occurred upon a "Final
Determination" (as hereinafter defined) that the Excise Tax shall not be imposed
upon a Payment or Payments (or portion thereof) with respect to which the
Manager had previously received a Gross-Up Payment. A "Final Determination"
shall be deemed to have occurred when the Manager has received from the
applicable government taxing authority a refund of taxes or other reduction in
the Manager's tax liability by reason of the Excise Payment and upon either (x)
the date a determination is made by, or an agreement is entered into with, the
applicable governmental taxing authority which finally and conclusively binds
the Manager and such taxing authority, or in the event that a claim is brought
before a court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all appeals have been taken
and finally resolved or the time for all appeals has expired or (y) the statute
of limitations with respect to the Manager's applicable tax return has expired.
If an Excess Payment is determined to have been made, the amount of the Excess
Payment shall be treated as a loan by the Company to the Manager and the Manager
shall pay to the Company on demand (but not less than 10 days after the
determination of such Excess Payment and written notice has been delivered to
the Manager) the amount of the Excess Payment plus interest at an annual rate
equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code
from the date the Gross-Up Payment (to which the Excess Payment relates) was
paid to the Manager until the date of repayment to the Company.
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(d) Notwithstanding anything contained in this Agreement to the
contrary, in the event that, according to the Determination, an Excise Tax will
be imposed on any Payment or Payments, the Company shall pay to the applicable
government taxing authorities as Excise Tax withholding, the amount of the
Excise Tax that the Company has actually withheld from the Payment or Payments.
6. SUCCESSORS; BINDING AGREEMENT.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the Manager, the Company, its Successors and Assigns and the Company
shall require any Successor or Assign to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession or assignment had taken place.
(b) Neither this Agreement nor any right or interest hereunder
shall be assignable or transferable by the Manager, his beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Manager's
legal personal representative, heirs and beneficiaries.
7. FEES AND EXPENSES. The Company shall pay all legal fees and related
expenses (including the costs of experts, evidence and counsel) incurred by the
Manager as they become due as a result of (a) the Manager's termination of
employment (including all such fees and expenses, if any, incurred in contesting
or disputing any such termination of employment); (b) the Manager seeking to
obtain or enforce any right or benefit provided by this Agreement (including,
but not limited to, any such fees and expenses incurred in connection with (i)
the Dispute and (ii) the Gross-Up Payment whether as a result of any applicable
government taxing authority proceeding, audit or otherwise) or by any other plan
or arrangement maintained by the Company under which the Manager is or may be
entitled to receive benefits; and (c) the Manager's hearing before the Board as
contemplated in Section 2.4 of this Agreement; PROVIDED, HOWEVER, that the
circumstances set forth in clauses (a) and (b) (other than as a result of the
Manager's termination of employment under circumstances described in Section
2.5(d)) occurred on or after a Change in Control.
8. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement (including the Notice of
Termination) shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by certified mail, return receipt requested,
postage prepaid, addressed to the respective addresses last given by each party
to the other, provided that all notices to the Company shall be directed to the
attention of the Board with a copy to the Secretary of the Company. All notices
and communications shall be deemed to have been received on the date of delivery
thereof or on the third business day after the mailing thereof, except that
notice of change of address shall be effective only upon receipt.
9. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Manager's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company (except for any
severance or termination policies, plans,
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programs or practices) and for which the Manager may qualify, nor shall anything
herein limit or reduce such rights as the Manager may have under any other
agreements with the Company (except for any severance or termination agreement).
Amounts which are vested benefits or which the Manager is otherwise entitled to
receive under any plan or program of the Company shall be payable in accordance
with such plan or program, except as explicitly modified by this Agreement.
10. SETTLEMENT OF CLAIMS. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment or other right which the
Company may have against the Manager or others.
11. MISCELLANEOUS. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Manager and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreement or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not expressly set forth in this
Agreement.
12. GOVERNING LAW. THE VALIDITY, INTERPRETATION, CONSTRUCTION AND
PERFORMANCE OF THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MISSOURI WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF; PROVIDED, HOWEVER, THAT IN ANY
ACTION INVOLVING THE Manager AND THE COMPANY WITH RESPECT TO ANY CLAIM OR
ASSERTION THAT THE Manager'S EMPLOYMENT WAS PROPERLY TERMINATED FOR CAUSE, THE
COMPANY HAS THE BURDEN OF PROVING THAT THE Manager'S EMPLOYMENT WAS PROPERLY
TERMINATED FOR CAUSE.
13. FORUM. Any suit brought by the Manager under this Agreement may be
brought in the appropriate state or federal court for Barton County, Missouri,
or for the county wherein the Manager maintains his residence. Any suit brought
by the Company under this Agreement may only be brought in the county wherein
the Manager maintains his residence unless the Manager consents to suit
elsewhere.
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto and supersedes all prior agreements, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
Page 12 of 13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Manager has executed this
Agreement as of the day and year first above written.
ATTEST: O'SULLIVAN INDUSTRIES HOLDINGS, INC.
By:
- ----------------------------- -----------------------------------------
Rowland H. Geddie, III Richard D. Davidson
Secretary President and Chief Operating Officer
Page 13 of 13
<PAGE>
EXHIBIT 10.9A
AMENDMENT TO RETIREMENT AGREEMENT
SONNENSCHEIN NATH & ROSENTHAL
4520 MAIN STREET SUITE 1100
KANSAS CITY, MISSOURI 64111
(816) 932-4400
FACSIMILE
(816) 531-7545
MARK G. FLAHERTY
May 14, 1999
Mr. Dennis P. Wilbert
Blackwell Sanders Peper Martin LLP
2300 Main Street, Suite 1000
P.O. Box 419777
Kansas City, Missouri 64141-6777
Re: REVISED AMENDMENT TO RETIREMENT AND CONSULTING AGREEMENT
Dear Dennis:
Pursuant to our discussions and the requested revisions in your fax of
May 11, 1999, here is a revised proposed amendment to Dan's Retirement and
Consulting Agreement of October 16, 1998, and specifically in paragraph one,
should read as follows:
1. RETIREMENT
Retiree hereby resigns as Chief Executive Officer of Company, effective
immediately. Retiree further resigns as Chairman of the Board and Director
of Company and his employment as an employee of Company effective as of the
date of the appointment of his successor as Chief Executive Officer of
Company by the Special Selection Committee of the Board of Directors, or
such earlier date as may be occasioned by his death, disability, or his
unilateral Notice, in writing, of such earlier retirement date (the
"Retirement Date"). Retiree agrees that, even if none of the conditions
described in the preceding sentence have occurred, his resignation shall
become effective not later than the earlier of (a) the "Termination" of the
Agreement and Plan of Merger currently being negotiated between the Company
and a corporation to be formed by Bruckmann, Rosser, Sherrill & Co., Inc.
(provided that such agreement is executed on or prior to May 31, 1999) as
that term ("Termination") is defined in Article 8 of that Agreement and
Plan of Merger and (b) March 31, 2000. Pursuant to this Amendment but only
to become effective upon execution of this Amendment by Company,
<PAGE>
Retiree has signed and delivered to the Board of Directors a letter of
resignation in the form attached hereto as Exhibit A.
SONNENSCHEIN NATH & ROSENTHAL
Mr. Dennis P. Wilbert
May 14, 1999
Page 2
If this revised amendment is acceptable, please have an authorized officer
of the Company sign this amendment, per paragraph 20 of the Retirement and
Consulting Agreement, and return such original signature to me for my records.
Thank you for your attention to the matter.
Very truly yours,
SONNENSCHEIN NATH & ROSENTHAL
/S/ MARK G. FLAHERTY
------------------------------
Mark G. Flaherty
MGF:cml
cc: Dan O'Sullivan
Rowland H. Geddie
Agreed this 16TH day of MAY, 1999.
O'Sullivan Industries, Inc.
By: /S/ ROWLAND H. GEDDIE, III
--------------------------------------------
Its: VICE PRESIDENT, GENERAL COUNSEL & SECRETARY
--------------------------------------------
<PAGE>
EXHIBIT 10.10
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
1900 Gulf Street
Lamar, Missouri 64759-1899
Richard D. Davidson
President and Chief Operating Officer
August 23, 1999
Mr. Terry L. Crump
4706 Morningstar
Flower Mound, Texas 75028
Dear Terry:
You have expressed your desire to leave the full time employment of
O'Sullivan Industries Holdings, Inc. ("O'Sullivan") to return to the workforce
in Texas. This letter agreement will document our discussion concerning the
terms of your separation from O'Sullivan. Both you and O'Sullivan agree that
your last day of full time employment with O'Sullivan will be August 31, 1999.
In recognition of your service and commitment, and in consideration of the
agreements made by you in this letter agreement, O'Sullivan will make the
following arrangements for your benefit.
EMPLOYEE DUTIES.
You will remain an employee of O'Sullivan until the earlier of August 31,
2000 or until the closing of the Merger Agreement (as hereinafter defined). Your
duties will be to consult (via telephone) as requested with the officers and
employees of O'Sullivan on such matters as they may reasonably request. The
amount of time you are required to consult with O'Sullivan will not unreasonably
interfere with your search for a new position or with your duties at any
position you may secure.
BENEFITS IN THE EVENT OF A CHANGE IN CONTROL OF O'SULLIVAN.
O'Sullivan and you entered into a Termination Protection Agreement dated as
of February 1, 1996 (the "Termination Protection Agreement"). If a Change in
Control of O'Sullivan (as defined in the Termination Protection Agreement)
occurs on or before November 30, 1999 or pursuant to the Agreement and Plan of
Merger dated as of May 17, 1999
<PAGE>
Mr. Terry L. Crump -2- August 23, 1999
between O'Sullivan and OSI Acquisition, Inc., as the agreement may be amended
(the "Merger Agreement"), O'Sullivan will pay you
1. the benefits described in Sections 3.1(b)(i) through 3.1(b)(vii),
Section 3.1(b)(xii) and Section 5 of the Termination Protection
Agreement (O'Sullivan confirms that your Profit Sharing Account in
O'Sullivan's Savings and Profit Sharing Plan is vested); and
2. an amount in cash equal to the sum of (a) the balance in your Deferred
Compensation Plan account as of August 31, 1999 plus (b) an amount
equal to the amount contributed to your Deferred Compensation Plan
account for fiscal 1999 (including without limitation Profit Sharing
Contributions).
In addition, if a Change in Control occurs on or before November 30, 1999 or
pursuant to the Merger Agreement, any unvested employee stock options you hold
will vest immediately for the remainder of their respective terms, subject to
the next sentence. If the Change of Control involves an affiliate of Bruckmann,
Rosser, Sherrill & Co., L.P. ("BRS"), you agree to surrender all of your
employee stock options in exchange for the consideration described in Section
3.2(d) of the Merger Agreement.
The amounts described in the preceding paragraphs shall be in lieu of any
payment under the Termination Protection Agreement. The amounts described in the
preceding paragraphs will be paid at approximately the times specified in the
Termination Protection Agreement.
BENEFITS IN THE EVENT OF NO CHANGE IN CONTROL OF O'SULLIVAN BEFORE NOVEMBER 30,
1999 OR PURSUANT TO THE MERGER AGREEMENT.
In the event no Change in Control of O'Sullivan occurs on or before
November 30, 1999 or pursuant to the Merger Agreement:
1. O'Sullivan will pay you Accrued Compensation (as defined in the
Termination Protection Agreement) through August 31, 1999.
2. O'Sullivan will pay you (a) $3,000 per month from September 1999
through August 2000; and (b) a lump sum payment of $124,000 on January
5, 2000.
3. Your accounts in O'Sullivan's Stock Purchase Program, Savings and
Profit Sharing Plan and Deferred Compensation Plan will be distributed
to you in accordance with the terms of the respective plans.
O'Sullivan confirms that it will contribute to your accounts in the
Savings and Profit Sharing Plan and Deferred Compensation Plan your
profit sharing contribution for the year ended June 30, 1999. 1.
<PAGE>
Mr. Terry L. Crump -3- August 23, 1999
4. All of your employee stock options not vested at August 31, 1999 will
terminate. The Compensation Committee of the Board of Directors has
agreed to delay the termination date of your vested stock options to
August 31, 2000. If a Change in Control involving an affiliate of BRS
occurs, you agree to surrender all of your employee stock options in
exchange for the consideration described in Section 3.2(d) of the
Merger Agreement.
5. O'Sullivan will agree to continue medical and life insurance coverage
for you and your dependents (as defined in O'Sullivan's Health
Protection Plan) for twelve months from August 31, 1999 at the active
employee rate. Thereafter, you will be entitled to continue your
medical and life insurance coverage under COBRA at the applicable
COBRA premium rate established by O'Sullivan's Human Resources
Department. You should contact Jim Hillman to arrange for payment of
the premiums for these coverages if you desire them. Your medical and
life insurance coverage will terminate if you become covered under
another medical or life insurance plan prior to the end of the
prescribed period.
6. O'Sullivan will make available to you up to $8,500 in fees and
expenses used towards outplacement services with Right Associates or
another outplacement firm of your choice. O'Sullivan will also pay for
your telephone costs in your Texas office until the earlier of August
31, 2000 or you accept employment with another firm.
7. O'Sullivan will maintain for your benefit the director and officer
liability insurance equivalent to that it is required to maintain for
its outside directors pursuant to Section 6.8 of the Merger Agreement.
TIMING OF PAYMENTS.
Your participation in all other benefits will end effective August 31,
1999. If you sign this letter agreement and the periods specified in the last
two paragraphs of this letter have elapsed, O'Sullivan will make the applicable
payments at the times specified above. Accrued Compensation will be paid to you
reasonably promptly after September 1, 1999. Further, you will be entitled to
the outplacement services specified in numbered paragraph 6 above. Your accounts
in the O'Sullivan Stock Purchase Program, Savings and Profit Sharing Plan and
Deferred Compensation Plan will be distributed to you at the times specified in
the respective plans. The remainder of the payments due hereunder, if any, will
be processed for payment as soon as practicable after the Change in Control or
cancellation of the Merger Agreement, whichever first occurs.
TAXES.
<PAGE>
Mr. Terry L. Crump -4- August 23, 1999
Regardless of whether a Change in Control occurs on or before November 30,
1999, O'Sullivan will withhold any taxes required by federal or state
governments from the payments described above.
In return for the payments outlined above, you agree to the following.
(A) You agree that you are not eligible for any severance benefits, or any
other amounts from O'Sullivan or its affiliates, other than those described
herein, including specifically any payments under the Termination Protection
Agreement.
(B) You will resign from all positions you hold with O'Sullivan and any of
its affiliates and will execute appropriate letters of resignation.
(C) In consideration of the above arrangements, you agree to release fully
and unconditionally O'Sullivan, its parent, subsidiaries and affiliates, their
successors and assigns, and each of their respective officers, directors and
employees (collectively, "O'Sullivan"), from any and all claims, demands, debts,
obligations, damages, costs, expenses, actions, causes of action or judgments of
any kind or character whatsoever, which you may have or claim to have against
them or any of them as of the date of this letter agreement, or which may be
hereafter claimed to arise out of any action, inaction, event or matter
occurring prior to the execution of this letter agreement, whether known or
unknown, and whether arising out of your employment with O'Sullivan or your
separation therefrom. You waive all claims against O'Sullivan and all damages,
if any, that might be recoverable arising out of any such claims, demands,
debts, obligations, damages, costs, expenses, actions, causes of action or
judgments. This release and waiver of all claims and damages includes, but is
not limited to, any tort or breach of express or implied contract or claim of
contractual restriction relating to your employment or discontinuation thereof,
any claim of wrongful discharge, slander, libel, intentional or negligent
infliction of emotional distress, and all rights under federal, state or local
law including but not limited to laws prohibiting race, sex, age, religion,
national origin, handicap, disability or other forms of discrimination,
including, but not limited to, Title VII of the Civil Rights Act of 1964, as
amended, the Age Discrimination in Employment Act, as amended ("ADEA"), any
state or local human rights laws, the Employee Retirement Income Security Act,
workers' compensation laws, the Consolidated Omnibus budget Reconciliation Act
and the National Labor Relations Act, as amended. You waive and release any
rights you may have under these and other laws, but do not waive any rights or
claims that may arise under the ADEA or otherwise after the date of execution of
this Agreement.
(D) By signing this letter agreement, you are waiving and giving up your
right, if any, to bring suit and collect damages or otherwise recover from
O'Sullivan for any alleged violation by any of them of any federal, state or
local statutes, ordinances or common laws, including but not limited to claims
under the ADEA and claims under other statutes and ordinances which bar
discrimination based on age, sex, race, color, national origin, religion,
handicap or veteran status. This letter agreement covers all claims in
connection with your employment and the termination
<PAGE>
Mr. Terry L. Crump -5- August 23, 1999
of your employment. This release and discharge does not apply to rights or
claims that arise after the date this letter agreement is executed.
(E) You agree to return any files, records, documents, plans, drawings,
equipment, software, pictures, spreadsheets and any other property belonging to
O'Sullivan which may be in your possession, other than the office furniture,
personal computer, monitor, printer and facsimile machine located in your Flower
Mound, Texas home office and the Sharp calculator located in your Lamar,
Missouri office. O'Sullivan will pay your out-of-pocket expenses involved in
returning such materials.
(F) You will not, for a period of two years after August 31, 1999, act as
an officer, director, employee, consultant or agent of any corporation
manufacturing or distributing (or planning to manufacture or distribute)
ready-to-assemble furniture, including without limitation Sauder Woodworking,
Bush Industries, Inc., Dorel Industries, Inc. or Mills Pride L.P., or any
successor to any of such companies. Notwithstanding the preceding sentence, you
may invest in the securities of any corporation whose securities are traded on a
national securities exchange or on NASDAQ if your ownership of such corporation
would be less than one percent of the outstanding voting stock of such
corporation.
(G) You will not, for a period of two years after August 31, 1999, directly
or indirectly, whether as an individual or on behalf of any other person, firm,
corporation, partnership, joint venture or other entity, solicit or endeavor to
entice away from O'Sullivan any employee employed by O'Sullivan. This paragraph
shall not be construed as prohibiting you from hiring an employee of O'Sullivan
who first contacts you with respect to employment.
(H) You agree not to disclose or communicate to any person or to use for
your benefit or the benefit of another person any confidential or proprietary
information concerning O'Sullivan or any of its affiliates, suppliers or
customers, including but not limited to specific processes, procedures, customer
lists, financial information, etc. which may be regarded as confidential.
(I) You acknowledge that you have freely entered into this Agreement and
that no representations or promises other than those stated herein have been
made to you. You are advised to consult with an attorney before signing this
letter agreement. By signing this letter agreement, you acknowledge that you
have had the opportunity to consult with your attorney, accountant or financial
advisor at your expense and that you have had at least 21 days in which to
consider this letter agreement.
<PAGE>
Mr. Terry L. Crump -6- August 23, 1999
(J) In the event of a material breach or threatened material breach by you,
O'Sullivan may cancel any remaining payments to you and cease any further
benefits. This will not be construed, however, to limit the remedies available
to O'Sullivan in the event of such breach and your release and waiver of claims
against O'Sullivan shall continue to be valid and in effect.
You and O'Sullivan agree not to make any disparaging or critical remarks
concerning each other or any of O'Sullivan's affiliates and will assist each
other in preserving and promoting their respective goodwill and other business
interests.
O'Sullivan and you agree that if a dispute arises regarding this letter
agreement, other than one involving a breach of paragraphs (F), (G) or (H), such
dispute shall be submitted to binding arbitration in Tulsa, Oklahoma. The
arbitration is to be conducted before an arbitrator mutually agreed upon by
O'Sullivan and you and pursuant to procedures to be mutually agreed upon by us.
However, if O'Sullivan and you cannot agree upon an arbitrator or the procedures
for the arbitration, the choice of an arbitrator and the procedures to be
followed in the arbitration shall be determined in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, except to
the extent the parties agree otherwise in writing. Missouri law, without
reference to its conflicts of law rules, shall govern the interpretation of this
agreement, whether in any such arbitration or otherwise. O'Sullivan and you
further agree that judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. The reasonable attorneys' fees
and expenses of appearing at the arbitration and preparing for the arbitration
proceeding, and the fees and expenses of the arbitrator shall be determined by
the arbitrator, who will be authorized to require the loser to pay the winner's
reasonable fees and expenses or to fairly apportion the attorneys' and
arbitrator's fees and expenses between the parties if both parties prevail on
some aspects of the dispute.
A breach of paragraphs (F), (G) or (H) above could result in irreparable
and continuing damage to O'Sullivan for which there will be no adequate remedy
at law, and in the event of such breach, O'Sullivan shall be entitled to
injunctive and other and further relief, including damages, attorneys' fees and
litigation costs, as may be proper. O'Sullivan may apply to any court of
competent jurisdiction for such relief and damages.
We encourage you to take this letter agreement home with you and to
consider it carefully for at least 21 days. If you have questions regarding this
letter agreement, please contact either Jim Hillman or Rowland Geddie. We
encourage you to discuss this letter agreement and the release language
contained in it with your attorney. In any event, you should thoroughly review
and understand the effect of this letter agreement and the release language
before signing it. You have 21 days in which to consider this letter agreement
and indicate whether you will sign this letter agreement.
<PAGE>
Mr. Terry L. Crump -7- August 23, 1999
Pursuant to the Older Workers Benefit Protection Act, this letter agreement
cannot become effective and enforceable until seven days following its
execution. Hence, the monies payable under this letter agreement may not be paid
until seven days have elapsed after you sign this letter agreement. For seven
days following your execution of this letter agreement, you may revoke it. If
you revoke this letter agreement, O'Sullivan will not owe you any money under
this agreement. If you do not revoke this letter agreement within seven days
after signing it, O'Sullivan will commence the payments hereunder.
Very truly yours,
O'SULLIVAN INDUSTRIES, INC.
By: /S/ RICHARD D. DAVIDSON
-------------------------------------
Richard D. Davidson
President and Chief Operating Officer
THIS AGREEMENT CONTAINS A BINDING
ARBITRATION PROVISION WHICH MAY
BE ENFORCED BY THE PARTIES.
Accepted and Agreed to this
23rd day of August, 1999
/S/ TERRY L. CRUMP
-----------------------------
Terry L. Crump
<PAGE>
EXHIBIT 10.13
O'SULLIVAN INDUSTRIES HOLDINGS, INC. INCENTIVE COMPENSATION PLAN
O'Sullivan has an incentive compensation plan in which its executive
officers and certain other management employees of O'Sullivan participate. The
Compensation Committee recommends, and the Board of Directors adopts, the plan's
goals and target award levels, which can vary from year to year. The plan's
goals may include goals for O'Sullivan's earnings before interest, taxes,
depreciation and amortization, sales, efficient use of working capital and other
factors; each goal may have a different weighting. Individual goals may also
form a portion of the goal for each individual participant. For each goal, the
Board sets a threshold level, a target level and a maximum level. If the
threshold level is not achieved with respect to a goal, no award is made for
that goal. Individual target amounts are set by the Board as a percentage of
each executive officer's salary.
After the end of a fiscal year, O'Sullivan's achievement will be
measured with respect to each goal. Incentive compensation will be calculated
based upon results for the fiscal year compared with the goals. The calculations
will then be used to compute each participant's incentive compensation for the
fiscal year and will be paid to the participant.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-75556, 33-75438, 33-92904, 333-21609, 333-27635
and 333-28559) of O'Sullivan Industries Holdings, Inc. of our report dated
August 4, 1999 relating to the consolidated financial statements which appears
in this Form 10-K.
PricewaterhouseCoopers LLP
Fort Worth, Texas
September 28, 1999
- ----------
(1) EBITDA means earnings before interest expense and interest income,
income taxes, depreciation and amortization. EBITDA is presented here to provide
additional information about our operations. This item should be considered in
addition to, but not as a substitute for or superior to, operating income, net
income, cash flow and other measures of financial performance prepared in
accordance with generally accepted accounting principles. EBITDA may differ in
the method of calculation from similarly titled measures used by other
companies.
(1) Includes officer positions held with O'Sullivan Industries, Inc.
(1) For the years shown, the named officers did not receive any annual
compensation not properly categorized as salary or bonus, except for certain
perquisites and other personal benefits. The amounts for perquisites and other
personal benefits for the named officers are not shown because the aggregate
amount of such compensation, if any, for each of the Named Officers during the
fiscal year shown does not exceed the lesser of $50,000 or 10% of total salary
and bonus reported for such officer.
(2) Includes all options granted during fiscal years shown under the
O'Sullivan Incentive Stock Plan. No stock appreciation rights were granted with
any options.
(3) In fiscal 1999, other compensation for the named officers
consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
STOCK DEFERRED
PURCHASE COMPENSATION
SPSP MATCHING PROGRAM PLAN MATCHING
GROUP LIFE AND PROFIT ("SPP") AND
INSURANCE AUTO SHARING MATCHING PROFIT SHARING
NAME PREMIUMS ALLOWANCE CONTRIBUTIONS CONTRIBUTIONS CONTRIBUTIONS
---- -------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Daniel F. O'Sullivan $ 3,150 $ -- * $ 11,474 $ 8,747 $ 20,737
Richard D. Davidson $ 2,016 $ 8,500 $ 11,474 $ 5,639 $ 9,495
Tyrone E. Riegel $ 3,150 $ 8,154 $ 11,474 $ 5,827 $ 6,405
Terry L. Crump $ 1,218 $ 8,154 $ 11,474 $ 3,826 $ 3,904
Thomas M. O'Sullivan, Jr. $ 490 $ 7,827 $ 10,909 $ 3,698 $ 1,656
</TABLE>
* Mr. Daniel F. O'Sullivan has the use of a company-owned automobile as
a perquisite.
The table does not include amounts payable in the event of a Change in
Control. See "Change in Control Protections".
(4) Mr. Crump resigned as an officer of O'Sullivan on August 31, 1999.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'SULLIVAN INDUSTRIES HOLDINGS, INC. FOR THE
PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 3,740
<SECURITIES> 0
<RECEIVABLES> 65,684
<ALLOWANCES> 2,416
<INVENTORY> 56,134
<CURRENT-ASSETS> 126,952
<PP&E> 157,896
<DEPRECIATION> 61,212
<TOTAL-ASSETS> 265,058
<CURRENT-LIABILITIES> 41,179
<BONDS> 22,000
0
0
<COMMON> 16,820
<OTHER-SE> 167,094
<TOTAL-LIABILITY-AND-EQUITY> 265,058
<SALES> 379,632
<TOTAL-REVENUES> 379,632
<CGS> 267,630
<TOTAL-COSTS> 267,630
<OTHER-EXPENSES> 267,630
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,844
<INCOME-PRETAX> 31,144
<INCOME-TAX> 11,213
<INCOME-CONTINUING> 19,931
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,931
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.22
</TABLE>
