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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-12754
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1659062
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
(Address of principal executive offices) (ZIP Code)
(417) 682-3322
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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As of October 25, 1999, 16,092,405 shares of Common Stock of O'Sullivan
Industries Holdings, Inc., ,par value $1.00 per share, and associated preferred
stock purchase rights were outstanding.
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The Index to Exhibits is on page 17.
Page 1 of 25
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PART I
ITEM 1. FINANCIAL STATEMENTS.
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
<TABLE>
<CAPTION>
ASSETS: September 30, June 30,
1999 1999
------------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,373 $ 3,740
Trade receivables, net of allowance for
doubtful accounts of $2,265 and $2,416,
respectively 71,636 63,268
Inventories:
Finished merchandise 36,098 39,623
Work in process 6,178 6,263
Raw materials 13,426 10,248
-------- --------
55,702 56,134
Prepaid expenses and other current assets 4,128 3,810
-------- --------
Total current assets 142,839 126,952
Property, plant and equipment, at cost 160,943 157,896
Less accumulated depreciation and amortization (64,199) (61,212)
-------- --------
96,744 96,684
-------- --------
Other assets 1,909 1,909
Goodwill, net of accumulated amortization 41,005 41,422
-------- --------
Total assets $282,497 $266,967
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 17,908 $ 11,416
Current portion long-term debt 4,000 4,000
Accrued liabilities 24,989 24,695
Income taxes payable 4,510 1,579
-------- --------
Total current liabilities 51,407 41,690
Long-term debt, less current portion 22,000 22,000
Other non-current liabilities 1,909 1,909
Deferred income taxes 16,232 16,232
-------- --------
Total liabilities 91,548 81,831
Commitments and contingent liabilities (Note 7)
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 87,408 87,549
Retained earnings 94,698 89,470
Accumulated other comprehensive gain (loss) 162 (43)
Less common stock in treasury at cost, 728,455
and 770,962 shares, respectively (8,139) (8,660)
-------- --------
Total stockholders' equity 190,949 185,136
-------- --------
Total liabilities and stockholders' equity $282,497 $266,967
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1999 1998
-------- -------
<S> <C> <C>
Net sales $101,992 $87,673
Costs and expenses:
Cost of sales 72,231 62,780
Selling, marketing and administrative 20,546 18,373
Merger related expenses 630 --
-------- -------
Total costs and expenses 93,407 81,153
-------- -------
Operating income 8,585 6,520
Other income (expense):
Interest expense (494) (805)
Interest income 72 90
-------- -------
Income before income tax provision 8,163 5,805
Income tax provision 2,935 2,090
-------- -------
Net income $ 5,228 $ 3,715
-------- -------
-------- -------
Earnings per common share
Basic $ 0.33 $ 0.23
Diluted 0.31 0.23
Weighted average common shares outstanding
Basic 16,073 15,966
Diluted 16,658 16,275
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,228 $3,715
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,654 3,160
Bad debt expense 309 200
Loss on disposal of assets 3 31
Employee option amortization -- 187
Changes in current assets and liabilities:
Trade receivables (8,677) (5,151)
Inventories 432 (2,086)
Other assets (318) 115
Accounts payable, accrued liabilities and
income taxes payable 9,922 7,930
-------- -------
Net cash provided by operating activities 10,553 8,101
-------- -------
Cash flows used for investing activities:
Capital expenditures (3,300) (9,484)
-------- --------
Net cash used for investing activities (3,300) (9,484)
-------- --------
Cash flows from (used by) financing activities:
Addition to long-term debt -- 5,000
Purchase of common stock -- (1,618)
Exercise of stock options 366 136
Sale of common stock to employee benefit plans 14 777
-------- --------
Net cash flows provided by financing activities 380 4,295
-------- --------
Net increase in cash and cash equivalents 7,633 2,912
Cash and cash equivalents, beginning of period 3,740 1,810
-------- --------
Cash and cash equivalents, end of period $11,373 $4,722
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended September 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Accumulated
other
Additional comprehensive Total
Common stock paid-in Retained Treasury stock income stockholders' Comprehensive
Shares Dollars capital earnings Shares Dollars (loss) equity income
------ ------- --------- -------- ------ ------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1999 16,820 $16,820 $87,549 $89,470 (771) $(8,660) $(43) $185,136
Net income 5,228 5,228 $5,228
Other comprehensive income 205 205 205
Exercise of stock options,
net of tax benefit (141) 43 521 380
------ ------- ------- ------- ---- ------- ---- ----------- ----------
Balance, September 30, 1999 16,820 $16,820 $87,408 $94,698 (728) $(8,139) $162 $190,949 $5,433
------ ------- ------- ------- ---- ------- ---- ---------- ----------
------ ------- ------- ------- ---- ------- ---- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have
been prepared by O'Sullivan Industries Holdings, Inc. and subsidiaries
("O'Sullivan") in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and Article 10
of Regulation S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The financial statements should be read in conjunction with the
audited financial statements and notes thereto included in O'Sullivan's Annual
Report on Form 10-K for the fiscal year ended June 30, 1999. The interim results
are not necessarily indicative of the results which may be expected for a full
year.
NOTE 2 - EARNINGS PER SHARE
Earnings per share ("EPS") are computed utilizing a dual presentation
format or basic and diluted EPS. 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 for common stock during the period exceeds the exercise
price of the options.
The following is a reconciliation of the numerator and denominator used
in the basic and diluted EPS calculation:
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
Income available to common stockholders
(numerator) $ 5,228 $ 3,715
--------- --------
--------- --------
Weighted average shares outstanding
(basic EPS denominator) 16,073 15,966
Effect of dilutive securities--options 585 309
--------- --------
Weighted average shares, plus assumed
conversions (diluted EPS denominator) 16,658 16,275
--------- --------
--------- --------
</TABLE>
Options to purchase 351,500 additional shares of common stock at prices ranging
from $15.59 to $16.09 per share were outstanding but were not included in the
computation of diluted EPS for the three months ended September 1999, because
the options' exercise prices were greater than the average market price of the
common shares, and thus the effect would have been antidilutive.
6
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NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
Effective October 1, 1998, O'Sullivan has a forward starting
interest rate swap agreement with a notional principal amount of $10.0
million which terminates on October 1, 2008. Pursuant to the agreement,
O'Sullivan pays a fixed rate of 7.13% and receives a floating interest rate
during the duration of the swap agreement. The floating interest rate was
5.35% at September 30, 1999.
The swap has the effect of hedging O'Sullivan against future
increases in interest rates. Management has designated this swap as a hedge
against future cash flow exposure. The fair value of the forward starting
swap agreement approximated $367,000 at September 30, 1999. This amount
represents the amount O'Sullivan would have to pay to terminate the swap.
This amount has not been recognized in the consolidated financial statements,
since it is accounted for as a hedge.
O'Sullivan called its existing $10.0 million of 8.25% industrial
development revenue bonds on October 1, 1998 at a redemption price of 103%. The
$300,000 premium on the early retirement of the bonds was recognized as a loss
in O'Sullivan's second quarter of fiscal 1999 and was included in interest
expense. The Company refinanced these bonds with new, ten-year industrial
revenue bonds with a tax-exempt variable interest rate which is reset weekly.
Interest on the bonds is paid monthly. The bonds mature on October 1, 2008.
NOTE 4 - NEW ACCOUNTING STANDARDS
In June 1999, the FASB issued SFAS No. 138, which delayed the effective
date of SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. Accordingly, O'Sullivan will adopt SFAS No. 133 effective July 1,
2000. This new accounting standard will require that derivative instruments be
measured at fair value and recognized in the balance sheet as either assets or
liabilities, as the case may be. The treatment of changes in the fair value of a
derivative (I.E., gains and losses) will depend on its use and designation.
O'Sullivan will initially report gains and losses on derivatives designated as
hedges against the cash flow effect of a forecasted transaction as a component
of other comprehensive income and, subsequently, reclassify the gains and losses
into earnings when the forecasted transaction affects earnings. If SFAS 133 had
been adopted on July 1, 1999 the net change in the interest swap would reduce
other accumulated comprehensive income by $235,000 (a current period increase to
comprehensive income of $101,000 offset by an accumulated loss of $336,000).
NOTE 5 - 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 agreement with an investment group that includes members of
O'Sullivan's senior management and Bruckmann, Rosser, Sherrill & Co., LLC
("BRS"). The merger agreement was subsequently amended on October 18, 1999.
Under the amended merger agreement, O'Sullivan 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 27.1% of the common stock of the surviving corporation.
BRS and its affiliates will own the balance.
The amended merger agreement stipulates that each share of
outstanding common stock of O'Sullivan will be exchanged for $16.75 in cash
and one share of senior preferred stock with an initial liquidation value of
$1.50 per share. Unpaid dividends will accrue at the stated rate of 12.0% per
annum and will be accumulated and compounded at the same rate during the
period that the senior preferred stock is outstanding. Some of the shares of
O'Sullivan 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 O'Sullivan.
7
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O'Sullivan will require approximately $357.0 million to complete the
merger and pay related fees and expenses of which approximately $270.0
million will be funded via debt proceeds. The completion of the merger is
subject to stockholder approval, obtaining suitable financing and the absence
of material adverse changes in O'Sullivan's business.
NOTE 6 - MERGER RELATED EXPENSES
O'Sullivan is expensing certain merger related costs as incurred in
connection with the pending merger discussed in Note 5. For the three months
ended September 30, 1999, O'Sullivan recognized certain merger related
expenses of $630,000 incurred for legal, accounting, and printing services.
The merger related expenses have been included as a separate line item in the
accompanying consolidated statement of operations. Additional merger related
expenses will be incurred during the remainder of fiscal year 2000.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
TANDY LITIGATION
On June 29, 1999, Tandy Corporation filed a complaint against
O'Sullivan in the District Court of Texas in Tarrant County. The complaint
relates to a potential reduction in O'Sullivan's tax benefit payments to
Tandy that would result from increased interest expense after the completion
of the merger. Tandy claims that this reduction would violate the tax sharing
and tax reimbursement agreement. The complaint sought a court order
compelling O'Sullivan to submit to a dispute resolution process.
Alternatively, the complaint sought a declaratory judgment that after the
merger O'Sullivan must continue to make tax-sharing payments to Tandy as if
the merger had not occurred.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against O'Sullivan. 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 payments required 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 our tax-sharing payments to Tandy.
On October 8, 1999, the District Court ruled on Tandy's motion for
summary judgment. It found that the dispute resolution provision of the tax
sharing agreement was triggered, and ordered that O'Sullivan begin the
dispute resolution process according to the terms of the tax sharing
agreement. The District Court denied all other relief sought by Tandy. The
accounting or law firm which will serve as arbitrator in the dispute
resolution process, if the chief executive officers of O'Sullivan and Tandy
are unable to resolve the dispute, has not yet been selected.
8
<PAGE>
O'Sullivan is now and, after completion of the merger, expects to
continue to be in full compliance with the tax sharing agreement. O'Sullivan
believes that Tandy's position is without merit and the Company intends to
defend itself vigorously.
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
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 stockholders and that
make it inherently unfair for BRS and the management participants in the
buyout to acquire 100% of the O'Sullivan 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. A
consolidation order was signed on July 22, 1999 by the court. This order
requires 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 vigorously defend the lawsuits.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
NET SALES. Net sales for the quarter ended September 30, 1999
increased by $14.3 million, or 16.3%, to $102.0 million, up from $87.7
million for the quarter ended September 30, 1998. Strong increases in the
discount mass merchant and office superstore channels accounted for nearly
all of the sales increase. Sales increased principally due to higher unit
volume, while the average sales price increased slightly. The demographic
profile of new personal computer owners and the advent of second personal
computer households have made discount mass merchants effective retailers of
home office products. Office superstore furniture sales continue to benefit
from the growth of small businesses, especially home-based businesses.
In March 1999, Service Merchandise Co., one of our largest
customers, filed for bankruptcy protection under Chapter 11. Service
Merchandise announced that it expected to reorganize and continue operations.
It subsequently closed 122 under-performing stores, approximately one-third
of its pre-bankruptcy total. For fiscal 1999, our sales to Service
Merchandise were approximately 7% of our total net sales. We are currently
shipping to Service Merchandise while it operates under Chapter 11 bankruptcy
protection, which gives certain priority claims to vendors in the event of
liquidation. Our outstanding accounts receivable balance with respect to
Service Merchandise at September 30, 1999 was $1.6 million. There can be no
assurance that Service Merchandise will be able to continue its business, or,
if it does so, at what level it will continue its purchases from us. Our
sales to Service Merchandise during the first quarter of fiscal 2000 were
approximately $1.5 million lower than in the first quarter of fiscal 1999. We
expect this trend continue for the foreseeable future.
GROSS PROFIT. Gross profit increased to $29.8 million, or 29.2% of
sales, for the three month period ended September 30, 1999, from $24.9
million, or 28.4% of sales, for the comparable prior year quarter. The higher
gross margin was due to increased productivity in our manufacturing
operations as compared to the first quarter of fiscal 1999. In the prior year
we incurred higher labor and overhead costs associated with the
implementation of new manufacturing equipment and related adaptation of
manufacturing processes.
In the fourth quarter of fiscal 1999, certain key commodity
suppliers announced their intent to pass certain increases on to their
customers, including O'Sullivan. We were able to minimize the effect of
initial increases during the first quarter of fiscal 2000 through our value
analysis program and productivity gains in manufacturing. Additional price
increases will become effective during the second quarter of fiscal 2000. If
we are unable to mitigate any of these price increases, we currently
estimate these increases would reduce our gross margin by approximately $1.5
million during the last nine months of fiscal 2000. We believe that we can
partially offset the effect of such increases through the programs mentioned
above, as well as eventual inclusion of the higher costs in the selling price
of our products. However, there can be no assurance that we will be
successful in offsetting these potential price increases.
9
<PAGE>
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Selling, marketing
and administrative expenses increased to $20.5 million or 20.1% of sales, for
the three month period ended September 30, 1999, from $18.4 million, or 21.0%
of sales, for the three months ended September 30, 1998. The majority of the
dollar increase in selling, marketing and administrative expenses for the
quarter was due to increased sales levels. Advertising, out-bound freight and
commission expense increased as the sales activity increased. Profit sharing
and incentive compensation expenses also increased due to our higher profit
levels.
MERGER RELATED EXPENSES. O'Sullivan is expensing merger related
costs as incurred in connection with the pending merger between us and OSI
Acquisition, Inc. Merger related costs, consisting of legal, accounting and
printing services, totaled $630,000 during the three months ended September 30,
1999. 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.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
expenses increased $494,000 or 15.6% to $3.7 million in the three months
ended September 30, 1999, from $3.2 million in the three months ended
September 30, 1998. The increase in depreciation and amortization expense was
due primarily to the $18.0 million expansion of our South Boston, Virginia
manufacturing facility which was completed during the second quarter of
fiscal 1999.
OPERATING INCOME. Operating income, including merger related expenses,
increased by $2.1 million in the three months ended September 30, 1999, compared
to the same period in fiscal 1999. Excluding merger related expenses, our
operating income increased by $2.7 million, or 41.3%, to $9.2 million in the
first quarter of fiscal 2000 from $6.5 million in the first quarter of fiscal
1999.
NET INTEREST EXPENSE. Net interest expense of $422,000 for the
quarter ended September 30, 1999, decreased 41.0% compared to $715,000 during
the quarter ended September 30, 1998. Interest expense decreased primarily
due to lower levels of borrowings and to the refinancing of the industrial
revenue bonds in the second quarter of fiscal 1999. Higher income levels,
reduced capital expenditures and the completion of the share repurchase
program in October of 1998 have contributed to the decreased debt level.
NET INCOME. As a result of these factors, net income increased by
$1.5 million, or 40.7%, to $5.2 million in the quarter ended September 30,
1998. Excluding merger related expenses, net income increased by $1.9
million, or 50.8%, to $5.6 million in the three months ended September 30,
1999, from $3.7 million in the three months ended September 30, 1998.
EBITDA. EBITDA, which we define as earnings before interest income
and interest expense, income taxes, depreciation and amortization, increased
by $2.6 million, or 26.4%, to $12.2 million in the three months ended
September 30, 1999. The increase in EBITDA for the period was driven by
increased sales volumes, increased productivity in manufacturing operations
and the reduction of high labor and overhead costs associated with the
implementation of new manufacturing equipment and related adaptation of
manufacturing processes during the first quarter of fiscal 1999. These gains
were offset by increased costs associated with higher sales volume, primarily
advertising, outbound freight and commission expense. Profit sharing and
incentive compensation expenses were also higher as a result of the increased
profits.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL. As of September 30, 1999, we had cash and cash equivalents
of $11.4 million compared to $3.7 million at June 30, 1999. Net working capital
was $91.4 at September 30, 1999 and $85.3 million at June 30, 1999.
Cash provided by operating activities for the three months ended
September 30, 1999 amounted to $10.6
10
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million, compared with $8.1 million in the comparable prior year period. The
increase in cash flows resulted from increased net income of $1.5 million,
decreased inventories of $2.5 million and increased current liabilities of $1.8
million offset by higher receivables of $3.5 million resulting from the
increase in sales. Cash flow used for investing activities for the quarter
includes $3.3 million in capital expenditures compared to $9.5 million in the
prior year period.
As of September 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. We made the 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 debt 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 $300,000 premium on the
retirement of the bonds as a loss in our second quarter of fiscal 1999.
As of September 30, 1999 we had an unsecured $25.0 million revolving
credit facility with a bank that expires on February 28, 2001. As of September
30, 1999 we had no borrowings outstanding under this facility.
On May 5, 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.
Effective October 1, 1998 we have a forward starting interest rate
swap agreement with a notional principal amount of $10.0 million. The agreement
terminates on October 1, 2008. Pursuant to the agreement, we contracted to pay a
fixed rate of 7.13% and receive a floating interest rate during the duration of
the swap agreement. The floating interest rate was 5.35% at September 30, 1999.
The swap has the effect of hedging 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
$367,000 at September 30, 1999. This amount represents the amount 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.
FOLLOWING THE RECAPITALIZATION AND MERGER
Following the recapitalization and merger, our primary liquidity
requirements will be to service our debt, including our interest expense
under the debt incurred to finance the merger and to provide working capital,
to make payments to Tandy under the tax sharing and tax benefit reimbursement
agreement and to make capital expenditures and possible acquisitions. At
September 30, 1999, on a pro forma basis after giving effect to the
transactions, our consolidated indebtedness would have been $270.0 million.
Our indebtedness would consist of borrowings of $125.0 million under
O'Sullivan Industries, Inc.'s senior credit facilities, $110 million of
senior subordinated notes issued by O'Sullivan Industries, Inc., $25.0
million of senior discount notes issued by O'Sullivan Industries Holdings,
Inc. and the existing $10.0 million of variable rate industrial revenue bonds.
Capital expenditures for the three months ended September 30, 1999 were
$3.3 million compared to $9.5 million in the comparable prior year period. We
have budgeted total capital expenditures for fiscal 2000 of approximately $17.0
million. Our ability to make capital expenditures will be subject to certain
restrictions under the senior credit facilities.
Our principal source of cash to fund the liquidity needs will be net
cash from operating activities and borrowings under the senior credit
facilities. 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 $35.0 million six-year term loan and a seven and one-half
year $90.0 million term loan. Upon completion of the recapitalization,
letters of credit of approximately $12.6 million will be issued under the
letter of credit sub-facility. The senior credit facilities are subject to
certain financial
11
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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, 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 operational 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 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 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, on or before
maturity. We might not be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
YEAR 2000 COMPLIANCE
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 implemenation (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 November 30, 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 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
complaint.
In addition, our ability to produce our products is dependent upon
timely receipt of raw materials.
12
<PAGE>
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 $250,000. We expect to
fund these expenditures through available cash from operations. All of these
amounts will be deducted from income at the time the liability is incurred. As
of September 30, 1999, we have spent approximately $100,000 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 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 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in interest rates, foreign
currency exchange rates and certain commodity prices. Pursuant to our policies,
we may use natural hedging techniques and derivative financial 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 that our
foreign exchange risk is not material.
Due to the nature of our product lines, O'Sullivan has material
sensitivity to some commodities. We manage commodity price exposures primarily
through the duration and terms of our vendor contracts. A one percent change in
these commodity prices, assuming none of the increase could be passed on to
customers, would affect our after-tax earnings by approximately
$700,000 annually.
PART II -- OTHER INFORMATION
----------------------------
13
<PAGE>
ITEM 1. LEGAL PROCEEDINGS.
TANDY LITIGATION.
On June 29, 1999, Tandy filed a complaint against us in the District
Court of Texas in Tarrant County. Tandy's complaint sought a court order
compelling us to submit to a dispute resolution process. Alternatively, the
complaint sought a declaratory judgment that after the merger O'Sullivan must
continue to make tax-sharing payments to Tandy as if the merger had not
occurred.
On September 9, 1999, Tandy filed a motion for summary judgment in its
lawsuit against us. 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 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.
On October 8, 1999, the District Court ruled on Tandy's motion for
summary judgment. It found that the dispute resolution provision of the tax
sharing agreement was triggered, and ordered that we begin the dispute
resolution process according to the terms of the tax sharing agreement. The
District Court denied all other relief sought by Tandy. The accounting or law
firm which will serve as arbitrator in the dispute resolution process, if the
chief executive officers of O'Sullivan and Tandy are unable to resolve the
dispute, has not yet been selected.
We are now and, after completion of the merger, expect to continue to
be in full compliance with the tax sharing agreement. We believe that Tandy's
position is without merit and intend to defend ourselves vigorously.
ITEM 5. OTHER INFORMATION.
FORWARD LOOKING STATEMENTS
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION.
Certain portions of this Report, and particularly the Notes to the
Consolidated Financial Statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations, contain forward-looking
statements. These statements can be identified by the use of future tense or
dates or terms such as "believe,""would," "expect," "anticipate" or "plan."
These forward-looking statements involve risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements.
Factors and possible events which could cause results to differ include:
14
<PAGE>
- 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.;
- actions of current or new competitors that increase competition with
our products or prices;
- the consolidation of manufacturers in the ready-to-assemble furniture
industry;
- increased advertising costs associated with promotional efforts;
- 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 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
A list of exhibits required to be filed as part of this Report is set
forth in the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K:
None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
Date: October 29, 1999 By: /s/ Richard D. Davidson
------------------------------------
Richard D. Davidson
President and
Chief Operating Officer
Date: October 29, 1999 By: /s/ Phillip J. Pacey
------------------------------------
Phillip J. Pacey
Vice President - Finance and
Treasurer
(Principal Financial and Accounting
Officer)
16
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
October 18, 1999, between O'Sullivan Industries Holdings, Inc. and
OSI Acquisition, Inc. (incorporated by reference from Appendix A to
Proxy Statement/Prospectus included in Registration Statement on Form
S-4 (File No. 333-81631))
3.1 & 4.1 Certificate of Incorporation of O'Sullivan (incorporated by
reference from Exhibit 3.1 to Registration Statement on Form S-1
(File No. 33-72120))
3.2 & 4.2 Bylaws of O'Sullivan (incorporated by reference from Exhibit
3.2 to Registration Statement on Form S-1 (File No. 33-72120))
4.3 Specimen 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 Severance Agreement between Terry L. Crump and O'Sullivan
Industries Holdings, Inc. dated as of August 23,
1999................................................................................ 18
27 Financial Data Schedule............................................................. 25
</TABLE>
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.
17
<PAGE>
[LETTERHEAD OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.]
1900 Gulf Street
Lamar, Missouri 64759-1899
Direct Line: (417) 682-8248
Facsimile: (417) 682-8113
e-mail: [email protected]
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
<PAGE>
Mr. Terry L. Crump -2- August 23, 1999
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 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
<PAGE>
Mr. Terry L. Crump -3- August 23, 1999
your accounts in the Savings and Profit Sharing Plan and
Deferred Compensation Plan your profit sharing contribution
for the year ended June 30, 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
<PAGE>
Mr. Terry L. Crump -4- August 23, 1999
practicable after the Change in Control or cancellation of the Merger Agreement,
whichever first occurs.
TAXES.
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 uncondi tionally 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.
<PAGE>
Mr. Terry L. Crump -5- August 23, 1999
(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 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,
<PAGE>
Mr. Terry L. Crump -6- August 23, 1999
accountant or financial advisor at your expense and that you have had at least
21 days in which to consider this letter agreement.
(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
<PAGE>
Mr. Terry L. Crump -7- August 23, 1999
have 21 days in which to consider this letter agreement and indicate whether you
will sign this letter agreement.
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
30th day of August, 1999
/s/ Terry L. Crump
- ------------------------------------
Terry L. Crump
<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 SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,373
<SECURITIES> 0
<RECEIVABLES> 73,901
<ALLOWANCES> 2,265
<INVENTORY> 55,702
<CURRENT-ASSETS> 142,839
<PP&E> 160,943
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0
0
<COMMON> 16,820
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<SALES> 101,992
<TOTAL-REVENUES> 101,992
<CGS> 72,231
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<EPS-BASIC> .33
<EPS-DILUTED> .31
</TABLE>
