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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, 1997
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
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1900 Gulf Street, Lamar, Missouri 64759-1899
(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:
Title of each class Name of each exchange 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
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. [ ]
As of September 15, 1997, 16,632,703 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 $207,868,787, 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.
Portions of the definitive proxy statement relating to the 1997 Annual
Meeting of Stockholders of O'Sullivan Industries Holdings, Inc., which will be
filed within 120 days of June 30, 1997, are incorporated by reference in Item
10, Item 11, Item 12 and Item 13 of Part III of this form.
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PART I
ITEM 1. BUSINESS
HISTORY AND OVERVIEW
O'Sullivan Industries Holdings, Inc., a Delaware corporation (the
"Company" or "O'Sullivan," which includes the Company's subsidiaries unless
otherwise indicated), is a leading manufacturer of ready-to-assemble ("RTA")
furniture in the United States. The Company was incorporated in November 1993
and acquired O'Sullivan Industries, Inc. ("Industries") in February 1994,
immediately prior to the sale of its common stock (the "Offerings") in a public
offering by TE Electronics Inc. ("TE"), a subsidiary of Tandy Corporation
("Tandy"). Prior to the Offerings, Industries operated as a wholly owned
subsidiary of TE. Subsequent to the Offerings, neither Tandy nor TE has any
continuing ownership interest in the Company.
The Company 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. The Company phased in
production at the Cedar City, Utah facility in the spring of 1995.
The Company is a holding company that owns O'Sullivan Industries, Inc., a
Delaware corporation. Industries owns O'Sullivan Industries - Virginia, Inc.,
a Virginia corporation ("O'Sullivan - Virginia").
The Company engages in one industry segment: the design, manufacture and
sale of ready-to-assemble furniture.
THE RTA FURNITURE INDUSTRY
RTA furniture is purchased in component form and then assembled by the
consumer. RTA furniture is sold at generally lower price points than assembled
furniture. Most RTA furniture is sold through mass merchants, office
superstores, department stores, home centers and catalog showrooms, where
consumers can receive the products immediately.
Producing RTA furniture involves laminating paper, vinyl or other
materials to particle board or fiberboard; cutting the laminated board to size;
processing the laminated board through a combination of edgebanding, boring,
softforming, embossing, ripsawing, routing, molding, wrapping or hotfoiling;
assembling components, as necessary; attaching outsourced items such as knobs
or other detail pieces, as necessary; and adding the components used for
assembly. At various intervals in the process, work in progress is held in
inventory until the next stage of production is available. A particular
product is not manufactured on a single production line; rather, each of its
components may undergo different processing steps on separate production lines.
PRODUCTS AND STYLES
The Company offers over 300 products which can be divided into several
categories, including home office, office and computer, electronics and home
decor furniture.
HOME OFFICE, OFFICE AND COMPUTER. Home office, office and computer
furniture includes desks, computer workcenters, bookcases, filing cabinets,
credenzas, tables, printer stands and computer storage racks.
ELECTRONICS. Electronics furniture includes home entertainment centers,
home theater systems, television and stereo tables and cabinets and audio and
video storage racks.
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HOME DECOR. Home decor furniture includes microwave oven carts, pantries
and other kitchen furniture; dining room, living room and recreation room
furniture; and bedroom pieces such as dressers, night stands and wardrobes.
SALES AND MARKETING
For information regarding the Company's sales, operating profits and
assets, see the consolidated financial statements of the Company included in
Part II of this report.
The Company has developed a diverse and extensive customer base.
O'Sullivan's top 50 customers comprised approximately 92% of its sales in
fiscal 1997. O'Sullivan groups most of its customers into eight major
categories: Office superstores, discount mass merchants, mass merchants
(department stores and catalog showrooms), home centers, electronics retailers,
furniture stores, original equipment manufacture ("OEM") and international.
The Company's products are sold throughout the United States and in
Canada, Mexico, Great Britain and to a smaller extent other countries. Export
sales were $22.5 million, $17.9 million and $14.4 million in fiscal 1997, 1996
and 1995, respectively. In fiscal 1997, international sales increased because
of the success of the Company's United Kingdom operations and the growth of
international office superstores. In fiscal 1996, export sales increased
primarily due to increased sales in international markets of close-out
merchandise.
OfficeMax, Inc., Office Depot, Inc. and Kmart Corporation accounted for
approximately 17.1%, 12.3% and 12.0%, respectively, of O'Sullivan's sales in
fiscal 1997. The Company's top five customers accounted for approximately 57%
of its sales during the same period. The loss of, or significant reductions in
orders from, any of these five customers could have a material adverse effect
on the Company.
As is customary in the RTA furniture industry, O'Sullivan does not have
long-term supply contracts with any of its customers. The Company has entered
into supply contracts with certain OEM customers, but these contracts have
simply provided for the delivery of a specified quantity of goods in accordance
with a specified price formula, and have not had a term in excess of one year.
MARKETING AND DISTRIBUTION. The Company's field sales organization
consists of independent sales representative organizations and sales managers.
The sales managers supervise the independent sales representatives and manage
the Company's relationship with certain of its customers.
The Company's products are promoted by its customers to the public
pursuant to cooperative and other advertising agreements. Under these
agreements, the Company covers a portion of the customer's advertising expenses
if the customer places approved advertisements mentioning the Company and its
products by name. The Company may also provide support to certain customers'
advertising programs. The Company generally does not advertise directly to
consumers, although it does advertise in trade publications to promote its
image as a producer of high quality RTA products.
The Company also participates in a variety of international and regional
furniture markets and trade shows, such as the semiannual international
furniture markets held in High Point, North Carolina.
PRODUCT DESIGN AND DEVELOPMENT
The Company continually introduces new or redesigned products to appeal to
changing consumer tastes and to satisfy customer needs. In-house furniture
designers develop product ideas in conjunction with the Company's marketing
personnel and customers. The Company's engineering department then produces
full-scale prototypes. The prototypes are displayed at High Point and other
trade shows or otherwise shown to customers to measure customer interest. If
the Company determines that a product will be successful, it commences
production. In addition, O'Sullivan sometimes develops a specific product at
the request of a
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customer. The Company expended approximately $0.7 million, $0.8 million and
$0.7 million for product design and development during fiscal 1997, 1996 and
1995, respectively.
MANUFACTURING
The Company manufactures its products in three facilities. The Lamar,
Missouri facility, which began production in 1965, encompasses approximately
1,015,000 square feet. The South Boston, Virginia facility, which was opened
in 1989, covers approximately 450,000 square feet. The Company phased in
production at the Cedar City, Utah facility in the spring of 1995. This
facility has approximately 530,000 square feet.
The Company uses state-of-the-art computer-aided design and computer-aided
manufacturing equipment and software to assist in the manufacturing process.
This equipment and software helps the Company develop conceptual designs,
production drawings, tooling patterns, quality assurance procedures and
customer instruction sheets more quickly. The Company continues to review and
invest in new machinery, equipment and software that will increase
manufacturing efficiency and reduce costs.
SHIPPING
The Company generally makes arrangements for the shipping of products to
its customers on a customer-by-customer basis. When the Company pays freight
costs, it uses independent trucking companies with which it has negotiated
competitive transportation rates.
RAW MATERIALS
The materials used in the Company's manufacturing operations include
particle board, fiberboard, coated paper laminates, glass, furniture hardware
and packaging materials.
The Company is dependent upon outside suppliers for all of its raw
material needs and is therefore subject to fluctuations in prices of raw
materials. In particular, the Company's results of operations were affected
significantly in fiscal 1995 by higher prices of particle board and fiberboard.
The Company buys its particle board and fiberboard at market-based prices from
a number of independent wood product suppliers. In 1995, prices for particle
board and fiberboard increased because demand for these materials increased
more quickly than the available supply. In fiscal 1995, the Company also
experienced increases in the prices of certain other raw materials, including
packaging materials and paper laminates. Packaging materials increased
principally because of price increases for corrugated cardboard. The cost of
imported paper laminates increased because of increases in raw material costs
and the decline of the United States dollar against the Japanese yen.
During fiscal 1996, the average purchase price for raw materials decreased
slightly from the high prices experienced in fiscal 1995. Lower costs
decreased the costs of materials as a percent of cost of goods sold in fiscal
1996, particularly in the last three quarters. In fiscal 1997, price declines
continued, and the lower material costs contributed significantly to the
increases in the Company's gross margins and results of operations.
Projections for fiscal 1998 do not indicate significant price increases in raw
materials; however, there can be no assurance that these projections will be
accurate, particularly in the latter quarters of fiscal 1998 or beyond. The
demand for raw materials may increase, which could result in higher prices.
There can be no assurance that the Company will be able to increase its sales
prices sufficiently or lower manufacturing costs to offset any cost increases
or to maintain its margins.
As is customary in the RTA furniture industry, the Company does not
maintain long-term supply contracts with its suppliers. It does, however, have
long continuous relationships with all of its key suppliers and encourages
supplier partnerships. The Company's supplier base is sufficiently diversified
so that loss of any one supplier in any given commodity should not have a
material adverse effect on the Company's operations. The Company has never been
unable to secure needed raw materials. There could be adverse effects on the
Company's operations and financial conditions should the Company be unable to
secure necessary raw materials such as particle board or fiberboard.
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The Company often purchases its raw materials of a certain type from a
limited number of vendors. These raw materials, however, are generally
available from other suppliers, although the cost from alternate suppliers
might be slightly higher.
BACKLOG
Because the Company's business is characterized by short-term order and
shipment schedules, generally less than two weeks, the Company does not
consider backlog at any given date to be indicative of future sales.
COMPETITION
The residential furniture market is highly competitive and includes a
large number of both domestic and foreign manufacturers. These manufacturers
include not only RTA furniture manufacturers, but also manufacturers of
assembled furniture. Although there are a large number of participants in the
highly competitive RTA furniture market, the market is relatively concentrated;
the top four RTA furniture manufacturers account for over 61% of the domestic
market. Certain of the Company's competitors in the residential furniture
market have greater sales volumes and greater financial resources than the
Company.
The Company and certain of the Company's RTA furniture competitors
completed expansion programs during the last three years pursuant to which they
increased significantly their manufacturing capacity. These increases in
capacity created some surplus in production capacity in the RTA furniture
industry. This extra capacity heightened competition in the industry and
pressured the Company's sales margins in fiscal 1996 through increased price
competition and decreased overhead absorption due to operating at less than
full capacity. As the Company's, and the industry's, sales of RTA furniture
increased in the last quarter of fiscal 1996 and in fiscal 1997, the increased
absorption of overhead improved the Company's capacity utilization and gross
margins. The Company and other manufacturers either recently expanded their
capacity or are in the process of doing so in anticipation of increased sales
of RTA furniture. If the anticipated sales increases do not materialize,
resulting excess capacity and heightened competition may again adversely affect
the Company's margins and results of operations.
Competition in the RTA furniture industry occurs principally (but not
necessarily in order of importance) in the areas of style, price, quality,
functionality, customer service and design.
SEASONALITY
The Company generally experiences a higher level of sales in the first and
second quarters of the fiscal year in anticipation of the back-to-school and
holiday selling seasons.
WORKING CAPITAL
The Company maintains a significant level of finished goods inventory in
order to be able to meet the rapid delivery requirements of its customers. The
addition of the Cedar City, Utah plant increased the level of inventories, but
the Company reduced its inventory levels during fiscal 1996 with careful
monitoring of inventory levels and production. The Company essentially
maintained the reduced level of inventories through fiscal 1997 even with a $30
million increase in net sales. The other major component of the Company's
current assets is accounts receivable, which results from the Company's selling
its products on credit terms negotiated between the Company and each of its
customers.
BUSINESS AND CREDIT RISK CONCENTRATIONS: The largest five customer
accounts receivable balances accounted for approximately 61% of the Company's
trade receivables balance at June 30, 1997. The Company's products are sold
primarily through large chains of retail stores, including office superstores,
discount mass merchants, mass merchants, home centers, electronics superstores
and furniture stores. Credit is extended to these customers based on
evaluation of the customer's financial condition, generally
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without requiring collateral. Exposure to losses on receivables is primarily
dependent on each customer's financial condition. Therefore, the Company would
be exposed to a large loss if one of its major customers were not able to
fulfill its financial obligations. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
In September 1996, one of the Company's largest customers, Best Products
Co., Inc. filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11"). It subsequently liquidated all of its assets
and ceased doing business. Sales to Best Products in fiscal 1997 and 1996
approximated $6 million and $20 million, respectively. There can be no
certainty that the Company will be able to replace these sales, particularly in
the first quarter of fiscal 1998 when substantially all of fiscal 1997 sales
occurred.
In July 1997, another large customer of the Company, Montgomery Ward &
Co., filed for bankruptcy protection under Chapter 11. The Company has
established an allowance for doubtful accounts to cover the anticipated bad
debt loss based on estimates from independent sources. The Company believes
this reserve to be adequate, but there is no certainty as to the collection of
the Company's receivables from Montgomery Ward. Further reserves may be
necessary as the reorganization proceeds.
On August 1, 1997, Montgomery Ward announced that it intends to close its
33 Lechmere stores and eleven Electric Avenue outlets. The Lechmere and
Electric Avenue stores currently sell RTA furniture. The Company recorded
fiscal 1997 sales to Lechmere approximating $1.7 million. The Company had no
direct sales in fiscal 1997 to Electric Avenue. The Company expects that
Montgomery Ward should be able to reorganize its operation under Chapter 11
protection and should continue to purchase products from the Company; however,
the level of purchases could decline as a result of any such reorganization or
otherwise.
EMPLOYEES
As of June 30, 1997, the Company had approximately 2,000 employees,
approximately 70% of whom were located in Lamar. None of O'Sullivan's
employees are represented by a labor union. The Company believes that its work
force is relatively stable when compared with furniture industry standards.
Over 700 of its employees have been with the Company for more than eight years
as of June 30, 1997. The Company believes that it has good relations with its
employees.
PATENTS AND TRADEMARKS
The Company has a United States trademark registration and international
trademark registrations or applications for the use of the O'Sullivan(R) name
on furniture. The Company believes that the O'Sullivan name and trademark are
well-recognized and associated with high quality by both its customers and
consumers. The Company's products are sold under a variety of trademarks in
addition to O'Sullivan, some of which are registered trademarks. These
trademarks include the Cockpit(R), Misty Shadows(R), Woodland Hills(R),
Pleasant Hill Collection(R), Kids' Town(R), Cherrywood Estate(R), Durafin(R),
Matchmakers(TM), Intelligent Designs(TM), Quick Fit(TM) and Armortop(TM). The
Company does not believe that the other trademarks it owns enjoy the same level
of recognition as the O'Sullivan trademark, or that the loss of the right to
use any one of these other trademarks would be material to its business. The
Company holds a number of patents and licenses, none of which are individually
considered material to its business.
ENVIRONMENTAL AND SAFETY REGULATIONS
The Company'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 the Company's
operations and are subject to revocation, modification and renewal by
governmental authorities.
Governmental authorities have the power to enforce compliance with their
regulations, and violators may be subject to fines, injunction or both.
Compliance with these regulations has not in the past had a
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material effect on the Company's earnings, capital expenditures or competitive
position. The Company anticipates increased federal and state environmental
regulations affecting it as a manufacturer, particularly regarding emissions
and the use of certain materials in the production process. In particular,
regulations currently being issued under the Clean Air Act Amendments of 1990
likely will subject the Company to new standards regulating emissions of
certain air pollutants from wood furniture manufacturing operations. The
Environmental Protection Agency's development of these standards is ongoing.
The Company cannot at this time estimate the impact of these new standards on
the Company's operations, future capital expenditure requirements or the cost
of compliance.
The Company's manufacturing process creates by-products such as sawdust
and particle board flats. At the South Boston facility, this material is given
to a recycler. 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. The Company's by-product disposal
costs were approximately $953,000, $850,000 and $625,000 for fiscal 1997, 1996
and 1995, respectively.
The Company's manufacturing facilities ship waste products to various
disposal sites. To the extent that such waste products include hazardous
substances that could be discharged into the environment at such disposal sites
or elsewhere, the Company is potentially subject to laws which provide for
responses to, and liability for, releases of hazardous substances into the
environment and liability for natural resource damages. One example of such
laws is the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"). Generally, liability under CERCLA is
joint and several and is determined without regard to fault. In addition to
CERCLA, similar state or other laws and regulations may impose the same or even
broader liability for releases of hazardous substances. The Company has been
designated as a potentially responsible party ("PRP") under one such state law,
the Arkansas Remedial Action Trust Fund Act, in connection with the cost of
cleaning up a disposal site in Diaz, Arkansas. The Company has entered into a
de minimis buyout agreement with certain other PRP's, pursuant to which it has
contributed $2,000 to date toward cleanup costs. Because O'Sullivan shipped
only 7,410 pounds of waste to the Diaz site, the Company was able to "buy out"
for the minimum price of $2,000. The agreement subjects de minimis PRP's to
liability for additional contributions if cleanup costs exceed $9 million. In
this event, the Company would be liable for an equitable share of the excess.
Cleanup expenses have approached $9 million. A plan has been approved by the
state providing that groundwater at the site be monitored, but that no further
remediation activities be undertaken. The monitoring activities should not
require an assessment of the PRP's. The Company believes that amounts it may
be required to pay in the future, if any, relating to this site will be
immaterial.
The Company's operations also are governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder. The Company believes that it
is in substantial compliance with all such laws and regulations.
ITEM 2. PROPERTIES
The Company owns three manufacturing, warehouse and distribution
facilities. The Lamar, Missouri facility, which also serves as the Company's
headquarters, consists of approximately 1,015,000 square feet. The South
Boston, Virginia facility has approximately 450,000 square feet, and the Cedar
City, Utah facility has approximately 530,000 square feet.
The Company 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.
The Company also leases space for showrooms in High Point, North Carolina
and Bentonville, Arkansas. It leases warehouse space in Joplin, Lamar and
Neosho, Missouri and South Boston, Virginia.
The Company's Canadian operations are in a leased facility in Markham,
Ontario. The Company's United Kingdom operations are in a leased facility in
Gloucestershire.
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The Company does not consider any of the leased facilities to be material
to its operations.
The Company considers its owned and leased facilities to be adequate for
the needs of the Company and believes that all of its owned and leased
properties are well maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal actions arising in the ordinary
course of its business. The Company does not believe that any such pending
actions will have a material adverse effect on its results of operations or
financial position.
On July 30, 1996, Fisher-Price, Inc. filed suit against Industries in the
Supreme Court of New York, Erie County, alleging breach of a License Agreement
between Industries and Fisher-Price. Pursuant to the License Agreement, the
Company was to have manufactured a line of furniture under the Fisher-Price
name. The suit alleged a failure to pay minimum royalties under the License
Agreement of $1,400,000. Industries paid Fisher-Price $75,000 to settle this
litigation, and the case was dismissed with prejudice on December 27, 1996.
EXECUTIVE OFFICERS
The Company's executive officers, and their ages and positions with the
Company as of September 1, 1997, are as follows:
NAME AGE OFFICER POSITION(S)
SINCE(1)
Daniel F. O'Sullivan 56 1969 Chairman of the Board and Chief Executive Officer
Richard D. Davidson 49 1996 President and Chief Operating Officer and Director
Tyrone E. Riegel 54 1969 Executive Vice President and Director
Terry L. Crump 47 1996 Executive Vice President and Chief Financial Officer
Thomas M. O'Sullivan, Jr. 42 1993 Vice President-Sales
Rowland H. Geddie, III 43 1993 Vice President, General Counsel and Secretary
E. Thomas Riegel 53 1993 Vice President-Strategic Operations
James C. Hillman 52 1973 Vice President-Human Resources
Michael P. O'Sullivan 38 1995 Vice President-Marketing
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(1)Includes officer positions held with Industries.
Daniel F. O'Sullivan was named President, Chief Executive Officer and a
Director of the Company in November 1993 and became Chairman of the Board in
December 1993. He relinquished the position of President of the Company in
July 1996. He served as President of Industries from 1986 until July 1996, and
was appointed Chairman of the Board and Chief Executive Officer in 1994. He
also serves as Chairman of the Board and Chief Executive Officer of O'Sullivan
- - Virginia. Mr. O'Sullivan has been employed by the Company since September
1962.
Richard D. Davidson was named President and Chief Operating Officer of the
Company and its subsidiaries in July 1996. He was named a Director of
Industries and O'Sullivan - Virginia in July 1996 and of the Company 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.
Tyrone E. Riegel has been Executive Vice President of Industries since
July 1986 and a Director since March 1994. He was appointed as Executive Vice
President and a Director of the Company in November 1993. Mr. Riegel also
serves as Executive Vice President and a Director of O'Sullivan - Virginia.
Mr. Riegel has been employed by the Company since January 1964.
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Terry L. Crump has been Executive Vice President and Chief Financial
Officer of the Company and its subsidiaries since July 1997. From January 1996
to July 1997, he served as Vice President-Finance and Chief Financial Officer
of the Company and its subsidiaries. He was appointed as a Director of
Industries and O'Sullivan - Virginia in January 1996. From August 1975 to
January 1996, Mr. Crump was employed by Tandy, a retailer of electronics
products. Mr. Crump held various positions with Tandy, including Vice
President and Controller of Tandy Retail Services and TE and Vice President and
Controller of Tandy Electronics manufacturing and wholesale divisions.
Thomas M. O'Sullivan, Jr. has been Vice President-Sales of the Company and
its subsidiaries since 1993. Prior to his appointment as Vice President-Sales,
Mr. O'Sullivan was the National Sales Manager for Industries and O'Sullivan -
Virginia. Mr. O'Sullivan has been employed by the Company since June 1979.
Rowland H. Geddie, III has been Vice President, General Counsel and
Secretary of the Company and its subsidiaries since December 1993. He was
appointed a Director of Industries and O'Sullivan - Virginia in March 1994.
From January 1993 through November 1993, Mr. Geddie was a contract attorney for
Tandy and TE. From May 1990 to February 1992, Mr. Geddie was Senior Counsel
for Houston Industries Incorporated, a holding company.
E. Thomas Riegel has been Vice President-Strategic Operations of the
Company and its subsidiaries since November 1995. From June 1993 until
November 1995, he was Vice President-Marketing of the Company and its
subsidiaries. Prior to his appointment as Vice President-Marketing, Mr. Riegel
was the National Marketing Manager for Industries and O'Sullivan - Virginia.
Mr. Riegel has been employed by the Company since May 1971.
James C. Hillman has been Vice President-Human Resources of the Company
since November 1993 and of Industries since 1980. He also serves as Vice
President-Human Resources of O'Sullivan - Virginia. Mr. Hillman has been
employed by the Company since May 1971.
Michael P. O'Sullivan has been Vice President-Marketing of the Company and
its subsidiaries since November 1995. He served as National Sales Manager of
the Company from July 1993 until November 1995. From July 1986 to July 1993,
Mr. O'Sullivan was Sales Manager-Office Products of the Company. Mr.
O'Sullivan has been employed by the Company since 1984.
CERTAIN RELATIONSHIPS. Daniel F. O'Sullivan, Thomas M. O'Sullivan, Jr.
and Michael P. O'Sullivan are brothers. 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 the Company, is the father of Daniel F.
O'Sullivan, Thomas M. O'Sullivan, Jr. and Michael P. O'Sullivan and is the
former father-in-law of Tyrone E. Riegel and James C. Hillman.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended June 30, 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company'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 the Company's common stock, as reported on the New York Stock Exchange, for
the periods indicated:
Fiscal 1997 Quarter Ended High Low
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June 30, 1997 $16.63 $12.50
March 31, 1997 $14.75 $10.50
December 31, 1996 $14.00 $ 8.63
September 30, 1996 $ 9.75 $ 6.88
Fiscal 1996 Quarter Ended High Low
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June 30, 1996 $ 8.25 $ 5.63
March 31, 1996 $ 6.88 $ 5.25
December 31, 1995 $ 8.13 $ 5.88
September 30, 1995 $ 9.25 $ 7.50
As of September 15, 1997, there were approximately 850 stockholders of
record. No dividends have been paid or declared subsequent to the closing of
the Offerings on February 2, 1994.
The Company currently intends to retain all earnings to finance the
development of its operations and to repurchase a portion of its outstanding
common stock. The Company does not anticipate paying cash dividends on its
shares of common stock in the near future. The Company's future dividend
policy will be determined by its Board of Directors on the basis of various
factors, including but not limited to the Company's 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 its debt agreements. In addition, the
Amended Credit Agreement has provisions specifying certain limitations on
dividends, investments and future indebtedness. At June 30, 1997, the Company
was in compliance with such covenants.
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ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated results of operations and balance
sheet data for the five years ending June 30, 1997 are derived from the
Company'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.
Year Ended June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share data)
Earnings Data:
Net sales $321,490 $291,766 $269,306 $270,729 $245,465
Cost of sales 230,578 229,262 208,176 200,930 174,067
-------- -------- -------- -------- --------
Gross profit 90,912 62,504 61,130 69,799 71,398
Selling, marketing and administrative
expenses 62,137 52,691 45,489 45,291 41,033
Restructuring charge - 5,212 - - -
-------- -------- -------- -------- --------
Operating income 28,775 4,601 15,641 24,508 30,365
Interest expense, net 2,327 3,831 2,382 1,286 910
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting principle 26,448 770 13,259 23,222 29,455
Income tax provision 10,050 433 5,038 9,128 11,016
-------- -------- -------- -------- --------
Income before cumulative effect of change
in accounting principle 16,398 337 8,221 14,094 18,439
Cumulative effect of change in accounting
principle(1) - - - 2,025 -
-------- -------- -------- -------- --------
Net income $ 16,398 $ 337 $ 8,221 $ 16,119 $ 18,439
======== ======== ======== ======== ========
Earnings per common share(2)
Primary $ 0.96 $ 0.02 $ 0.49
Fully diluted $ 0.95 $ 0.02 $ 0.49
Weighted Average Shares Outstanding(2)
Primary 17,019 16,820 16,820
Fully diluted 17,292 16,822 16,820
June 30,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $ 82,045 $71,136 $86,058 $76,433 $53,456
Total assets 232,607 212,317 228,477 197,204 161,969
Long-term debt 30,000 30,000 51,000 28,000 10,515
Stockholders' equity(3) 156,790 141,615 140,624 132,756 118,601
- --------------
(1)In the first quarter of fiscal 1994, the Company adopted Statement of
Financial Accounting Standard No. 109, "Accounting for Income Taxes."
(2)Historical earnings per share are not presented for periods prior to
July 1, 1994, as the historical capital structure of the Company prior to the
Company's initial public offering is not comparable with the current capital
structure.
(3)The historical stockholders' equity on June 30, 1994 through 1997
represents the Company's capital structure as affected by the Company's initial
public offering. The historical stockholders' equity on June 30, 1993
represents Tandy Corporation's net investment in the Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net sales for fiscal 1997 increased $29.7 million or 10.2%, to $321.5
million from $291.8 million for fiscal 1996. The average selling price per
unit was virtually unchanged in fiscal 1997, with the additional sales revenue
due to an increase in the number of units sold. Increased sales through the
discount mass merchant channel accounted for the majority of the year-to-year
sales increase. The Company also experienced healthy gains in the office
products and export channels offset by decreased sales through the catalog
showroom, original equipment manufacturer ("OEM") and furniture/specialty
distribution channels. The sales decrease in the catalog showroom distribution
channel was due to the bankruptcy of Best Products Co., Inc. in September 1996.
OEM sales continued the decline which began in fiscal 1995 because of a lack
of emphasis on lower-margin OEM business.
In September 1996, one of the Company's largest customers, Best Products
Co., Inc., filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11"). It subsequently liquidated its assets
and ceased doing business. Sales to Best Products in fiscal 1997 and 1996
approximated $6 million and $20 million, respectively. There can be no
certainty that the Company will be able to replace these sales, particularly in
the first quarter of fiscal 1998 when the majority of fiscal 1997 sales
occurred.
In July 1997, another large customer of the Company, Montgomery Ward &
Co., filed for bankruptcy protection under Chapter 11. Montgomery Ward
subsequently announced that it intends to close its 33 Lechmere stores and 11
Electric Avenue outlets. The Lechmere and Electric Avenue stores sell
ready-to-assemble furniture. The Company recorded fiscal 1997 sales to
Lechmere approximating $1.7 million but had no direct sales to Electric Avenue.
The Company expects that Montgomery Ward will be able to reorganize its
operation under Chapter 11 protection and will continue to purchase products
from the Company; however, the level of purchases could decline as a result of
any such reorganization or otherwise.
In the event that Montgomery Ward or any other major customer ceases or
substantially reduces its purchases from the Company, there can be no certainty
that the Company will be able to replace these sales.
The Company's gross margin increased to $90.9 million in fiscal 1997 from
$62.5 million in fiscal 1996, and increased as a percentage of sales to 28.3%
in fiscal 1997 from 21.4% in the prior year. The Company's gross margin
improved because of lower material costs, decreased overhead on a per unit
basis due to increased volume and capacity utilization rates and improved
operating efficiency partially offset by a loss on sale of fixed assets, which
was primarily reported in cost of sales.
Selling, marketing and administrative expenses were $62.1 million or 19.3%
of sales, and $52.7 million or 18.1% of sales, respectively in fiscal 1997 and
1996. The increase in selling, marketing and administrative expenses, as a
percentage of sales, is due primarily to: (i) higher bad debt expense
associated with the bankruptcies discussed above; (ii) increased profit sharing
and incentive compensation costs associated with the Company's improved
financial results; and (iii) increased salaries and wages due to additional
management, marketing and MIS staff.
In the third quarter of fiscal 1996, the Company incurred a pre-tax
restructuring charge of $5.2 million ($3.2 million after-tax) for the
discontinuance and disposal of certain product lines and certain related
assets, for training costs associated with terminated employees at the Utah
facility and for costs to modify an international division. The restructuring
charge was part of a program to cut costs and better utilize working capital,
with proceeds from the program used to reduce debt and for other general
corporate purposes. The disposal of assets and modification of the
international division which began in fiscal 1996 were completed during fiscal
1997.
11
13
Interest expense decreased by $1.5 million to $2.3 million in fiscal 1997.
The decrease was due primarily to reduced borrowings caused by lower working
capital requirements and increased cash flow from operations.
The Company's effective tax rate for fiscal 1997 was 38.0% compared to
56.2% for fiscal 1996. The higher effective rate for fiscal 1996 reflects the
inter-relationship of certain non-deductible goodwill for tax purposes and
substantially reduced pre-tax income for that year.
Fiscal 1996 Compared to Fiscal 1995
Net sales for fiscal 1996 increased $22.5 million, or 8.3%, to $291.8
million from $269.3 million for fiscal 1995. The average selling price per
unit increased in fiscal 1996, while the number of units sold remained
virtually unchanged. Excluding the OEM channel, sales through all principal
distribution channels increased, with the majority of the sales dollar
increases in the office superstore and catalog showroom channels. OEM sales
continued the decline which began in fiscal 1995 because of a lack of emphasis
on lower-margin OEM business.
The Company's gross margin increased to $62.5 million in fiscal 1996 from
$61.1 million in fiscal 1995, but decreased as a percentage of sales to 21.4%
in fiscal 1996 from 22.7% in the prior year. The Company's gross margin was
unfavorably impacted by pricing pressures due to excess capacity in the
ready-to-assemble furniture industry, increased overhead on a per unit basis
due to low capacity utilization rates and learning curve inefficiencies at the
Cedar City, Utah plant. These gross margin reductions were offset somewhat by
decreases in raw material costs, especially in the last half of the fiscal
year.
During the fourth quarter of fiscal 1996 the Company's gross profit margin
approximated 24% versus 21.8% for the third quarter ended March 31, 1996. This
increase from the third quarter and from the comparable quarter of fiscal 1995
reflected higher demand increasing capacity utilization rates thus lowering
overhead on a per unit basis, a shift in the product mix to higher margin
products, stabilization of raw material prices and the elimination of learning
curve inefficiencies at the Cedar City, Utah facility.
Selling, marketing and administrative expenses were $52.7 million, or
18.1% of sales, and $45.5 million, or 16.9% of sales, respectively, in fiscal
1996 and 1995. The increase in selling, marketing and administrative expenses
was due primarily to higher advertising costs associated with promotional
efforts with certain customers and higher outbound freight costs associated
with the change in the freight program of a large customer. The Company's
pricing program with the customer took the freight expense into account;
accordingly, the change in the freight program had little or no effect on
operating income.
The Company incurred a pre-tax restructuring charge of $5.2 million ($3.2
million after-tax) for the discontinuance and disposal of certain product lines
which received marginal acceptance in the marketplace ($4.0 million pre-tax),
certain related assets to manufacture these product lines ($0.4 million), the
costs associated with the initial training of terminated employees at the
Company's Utah facility ($0.4 million), and the costs to modify the business
structure of an international division ($0.4 million). The restructuring
charge was a result of a review of the Company's operations and is part of a
program to cut costs and better utilize working capital.
As of June 30, 1996, the inventory and related manufacturing equipment
associated with the discontinued product lines written down to the fully
reserved estimated net realizable value and the costs associated with the
initial training of terminated employees at the Company's Utah facility had
been written off. The remainder of the $5.2 million restructuring reserve,
amounting to $0.3 million, was classified as an accrued liability in the
accompanying consolidated balance sheet. The restructuring charge was included
as a separate line item in the accompanying consolidated results of operations
and statement of cash flows.
12
14
Interest expense increased by $1.4 million to $3.8 million in fiscal 1996.
The increase was due primarily to increased long-term borrowing related to the
Company's Utah facility as well as capitalized interest charges which reduced
fiscal 1995 expense by $529,000.
The Company's effective tax rate for fiscal 1996 was 56.2% compared to
38.0% for fiscal 1995. The increase in the effective rate reflects the
inter-relationship of certain non-deductible goodwill for tax purposes and
substantially reduced pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash and cash equivalents amounting
to $7.0 million and net working capital of $82.0 million compared to cash and
cash equivalents of $506,000 and working capital of $71.1 million at June 30,
1996. The $10.9 million increase in net working capital was attributable to
increased cash balances and increased investments in receivables and
inventories due to higher sales levels offset by an increase in income taxes
payable due to higher income levels and an increase in accrued liabilities.
Cash provided by operating activities for fiscal 1997 amounted to $23.5
million compared to $25.3 million in the comparable year period. Although the
Company had significantly higher net income in the current year, the decrease
in cash flows from operations resulted primarily from the large reduction in
inventories and restructuring charge in the prior year and an increased
investment in receivables for the current year due to increased sales levels.
The cash flow provided by operating activities was used primarily to fund
capital expenditures and the repurchase of stock pursuant to the stock
repurchase program and for employee benefit plans.
At June 30, 1997, the Company had long-term debt outstanding of $30.0
million: $10.0 million of industrial development revenue bonds that bear
interest at 8.25% and mature on October 1, 2008, and $20.0 million in private
placement debt with certain insurance companies at 8.01% due fiscal 2003.
The Company has an unsecured $25.0 million revolving credit facility with
a bank that expires on February 28, 2000. As of June 30, 1997, there were no
borrowings under the revolving line of credit. The Credit Facility also
includes a $10.8 million standby letter of credit established in favor of Tandy
Corporation ("Tandy"). The letter of credit indemnifies Tandy from its
obligations as guarantor of $10.0 million of industrial development revenue
bonds for which a subsidiary of the Company is the obligor. Tandy can draw
against the standby letter of credit only in the event that it must pay any
amounts with respect to the bonds.
The Credit Facility has several financial ratio covenants including the
maintenance of a minimum working capital ratio and a minimum net worth. In
addition, the Credit Facility has provisions specifying certain limitations on
dividends, investments and future indebtedness. The Company is currently in
compliance with all of its debt agreements.
On May 6, 1997, the Company announced that the Board of Directors had
authorized the purchase of up to five percent of the outstanding shares of its
common stock during the next 24 months. The actual number of shares
repurchased, the timing of the purchases and the prices paid for the shares
will be dependent upon future market conditions. Funding for the purchases is
expected to come from available working capital and existing borrowing
facilities. The program includes no specific pricing or timing targets and may
be suspended at any time or terminated prior to completion. As of June 30,
1997, the Company had purchased approximately 65,000 shares of its common stock
for $965,000.
The Company also purchases common stock for its employee benefit programs.
For the fiscal year, the Company purchased approximately $2.6 million in stock
and transferred $2.1 million, at cost, to its employee benefit plans.
Derivative financial instruments are utilized by the Company to reduce
interest rate risks. The Company does not hold or issue derivative financial
instruments for trading purposes. During fiscal 1997 the Company entered into
a forward starting interest rate swap agreement with a notional principal
amount of
13
15
$10 million. The effective date of the agreement is October 1, 1998 and the
termination date is October 1, 2008. The Company has contracted to pay a fixed
rate of 7.13% and receive a floating interest rate during the duration of the
swap agreement. The Company has the ability and intent to call its existing
$10.0 million of 8.25% industrial development revenue bonds commencing October
1, 1998 at a redemption premium of 103%. The bonds will be refinanced at the
then existing interest rates. Accordingly, the swap will have the effect of
hedging the Company against an increase in interest rates prior to the first
opportunity to refinance these bonds. Management has designated this swap as a
hedge of the future interest rate exposure of refinancing these bonds.
Amounts to be paid or received under the swap agreement will be accrued as
interest rates change and will be recognized over the life of the swap
agreement as adjustments to interest expense. Gains or losses on terminated
swaps will be recognized over the remaining life of the underlying obligation
as an adjustment to interest expense. The fair value of the forward starting
swap agreement approximated $122,000 at June 30, 1997 (representing the amount
the Company would have to pay to terminate the swap) and has not been
recognized in the Consolidated Financial Statements, since it is accounted for
as a hedge.
The Company believes that cash flow from operations, along with current
unused balances under existing credit agreements, will be sufficient to fund
the Company's operations in fiscal 1998, including the stock repurchase program
and capital expenditures, which are currently estimated at approximately $30.0
million to increase production capacity, improve productivity, enhance new
product development efforts and for replacement equipment. The Company
invested $15.8 million in capital expenditures during fiscal 1997 for new
machinery and equipment and the installation of new management systems and
related hardware and software.
SEASONALITY AND INFLATION
The Company generally experiences a higher level of sales in the first and
second quarters of the fiscal year in anticipation of the back-to-school and
holiday selling seasons.
The Company is dependent upon outside suppliers for all of its raw
material needs and, therefore, is subject to fluctuations in prices of raw
materials. In particular, the Company's results of operations were affected
significantly in fiscal 1995 by higher prices of particle board, fiberboard and
paper products. The Company had limited success in minimizing the effect of
these cost increases through improvements in production, pricing and product
redesign. During fiscal 1996, the average purchase price for raw materials
declined slightly, with additional price decreases in 1997. However, there can
be no assurance that these trends will continue. The demand for raw materials
may increase, which could result in higher prices. There can be no assurance
that the Company will be able to increase its prices or reduce its production
costs sufficiently to offset any cost increases or to maintain its margins.
INCOME TAXES
In connection with the initial public offerings of the Company's common
stock (the "Offerings"), Tandy, TE Electronics Inc. and the Company entered
into a Tax Sharing and Tax Benefit Reimbursement Agreement (the "Tax
Agreement"). Pursuant to the Tax Agreement, Tandy is responsible for all U.S.
federal income taxes, state income taxes and foreign income taxes with respect
to the Company for all periods ending on or prior to the date of consummation
of the Offerings and for audit adjustments to such federal income and foreign
income taxes. The Company is responsible for all other taxes owing with
respect to the Company, including audit adjustments to state and local income
and for franchise taxes.
The Company 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
the Company'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 the Company. Pursuant to the Tax Agreement, the Company pays Tandy an
amount that approximates the federal tax benefit expected to be realized with
14
16
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
approximated the amount which would be recognized by the Company 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 the Company's actual taxes and the taxes
that the Company would have owed had the increase in basis not occurred, the
aggregate amount of payments required to be made by the Company to Tandy over
the life of the Tax Agreement will not differ materially from the difference
over the life of the Tax Agreement between the Company's actual taxes and the
amount of taxes that the Company would have owed had the increase in basis not
occurred. Consequently, such payments should have no effect on the Company'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 1997, 1996 and 1995, $6.0
million, $0.0 million and $4.5 million, respectively, was paid to Tandy under
the Tax Agreement.
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 in Part II of this report and
the portions of Item 1 in Part I captioned "Raw Materials," "Competition" and
"Working Capital" contain forward-looking statements. These statements can be
identified by the use of future tense or dates or terms such as "believe,"
"expect," "anticipate" or "plan." Important factors could cause actual results
to differ materially from those anticipated by some of the statements made in
this report. Some of the factors include, among other things, 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; pending or future litigation; pricing pressures due to
excess capacity; raw material cost increases; transportation cost increases;
the inability of a major customer to meet its obligations; loss of significant
customers in connection with a merger or acquisition, bankruptcy or otherwise;
actions of current or new competitors; increased advertising costs associated
with promotional efforts; change of tax rates; change of interest rates; future
business decisions and other uncertainties, all of which are difficult to
predict and many of which are beyond the control of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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, 1997 and 1996, and the related consolidated
statements of operations, cash flows and changes in stockholders' equity for
each of the three years in the three year period ended June 30, 1997, and the
notes thereto.
15
17
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, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Kansas City, Missouri
August 15, 1997
16
18
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and June 30, 1996
(in thousands, except for share data)
Assets: 1997 1996
------- ---- ----
Current assets:
Cash and cash equivalents $ 6,975 $ 506
Trade receivables, net of allowance for doubtful accounts
of $3,158 and $1,225, respectively 58,661 53,570
Inventories:
Finished merchandise 29,840 26,031
Work in process 4,224 5,116
Raw materials 10,094 10,334
-------- --------
44,158 41,481
Prepaid expenses and other current assets 3,134 2,347
-------- --------
Total current assets 112,928 97,904
-------- --------
Property, plant and equipment, at cost:
Land 1,034 1,034
Buildings and improvements 39,195 38,469
Machinery and equipment 72,290 71,476
Construction in progress 7,047 1,849
-------- --------
119,566 112,828
Less accumulated depreciation and amortization (44,643) (44,838)
-------- --------
74,923 67,990
Goodwill, net of accumulated amortization 44,756 46,423
-------- --------
$232,607 $212,317
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Current liabilities:
Accounts payable $ 7,234 $ 11,046
Accrued employee compensation 10,527 8,215
Accrued advertising 7,482 5,059
Other accrued liabilities 1,472 1,681
Income taxes payable 4,168 767
-------- --------
Total current liabilities 30,883 26,768
-------- --------
Long-term debt 30,000 30,000
Deferred income taxes 14,934 13,934
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 87,968 87,775
Retained earnings 53,418 37,020
-------- --------
158,206 141,615
Less common stock in treasury at cost, 94,000 shares in 1997;
none in 1996 1,416 -
-------- --------
Total stockholders' equity 156,790 141,615
-------- --------
Commitments and contingencies (Notes 2, 5, 6, 9 and 12)
-------- --------
$232,607 $212,317
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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19
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30, 1997, 1996 and 1995
(in thousands, except for per share data)
1997 1996 1995
---- ---- ----
Net sales $ 321,490 $ 291,766 $ 269,306
Costs and expenses:
Cost of sales 230,578 229,262 208,176
Selling, marketing and administrative 62,137 52,691 45,489
Restructuring charge - 5,212 -
Interest, net 2,327 3,831 2,382
--------- --------- ---------
295,042 290,996 256,047
--------- --------- ---------
Income before income tax provision 26,448 770 13,259
Income tax provision 10,050 433 5,038
--------- --------- ---------
Net income $ 16,398 $ 337 $ 8,221
========= ========= =========
Earnings per common share:
Primary $ 0.96 $ 0.02 $ 0.49
Fully diluted $ 0.95 $ 0.02 $ 0.49
Weighted average common shares outstanding:
Primary 17,019 16,820 16,820
Fully diluted 17,292 16,822 16,820
The accompanying notes are an integral part of these consolidated financial
statements.
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20
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30, 1997, 1996 and 1995
(in thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 16,398 $ 337 $ 8,221
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 9,960 9,235 7,465
Loss on disposal of assets 599 - -
Deferred income taxes 1,000 157 407
Employee option amortization 749 - 690
Restructuring charge - 5,212 -
Changes in current assets and liabilities:
Trade receivables (5,091) (2,680) 178
Inventories (2,677) 7,364 (7,336)
Other assets (792) 1,945 182
Accounts payable, accrued liabilities and
income taxes payable 3,366 3,775 3,381
-------- -------- --------
Net cash provided by operating activities 23,512 25,345 13,188
-------- -------- --------
Cash flows used for investing activities:
Capital expenditures (15,825) (4,403) (30,355)
-------- -------- --------
Cash flows used for financing activities:
Borrowings under long-term debt agreements - - 21,735
Repayment of long-term debt - (21,000) -
Final settlement contingency - - (4,401)
Purchase of common stock for treasury (3,527) - -
Sale of common stock to employee benefit plans 2,309 - -
-------- -------- --------
Net cash flows provided (used) for financing activities (1,218) (21,000) 17,334
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,469 (58) 167
Cash and cash equivalents, beginning of year 506 564 397
-------- -------- --------
Cash and cash equivalents, end of year $ 6,975 $ 506 $ 564
======== ======== ========
Supplemental cash flow information:
Interest paid 2,631 3,843 2,092
Income taxes paid 5,983 (1,145) 5,167
The accompanying notes are an integral part of these consolidated financial
statements.
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21
O'SULLIVAN INDUSTRIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended June 30, 1997, 1996 and 1995
(in thousands)
Preferred stock Common stock Additional
--------------- ------------ paid-in Retained
Shares Dollars Shares Dollars capital earnings
------ ------- ------ ------- ------- --------
Balance, June 30, 1994 - $ - 16,820 $ 16,820 $ 87,474 $ 28,462
Net income 8,221
Final adjustment to Tandy
settlement (353)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1995 - $ - 16,820 $ 16,820 $ 87,121 $ 36,683
Net income 337
Foreign currency translation 18
Stock option cancellation,
net of taxes of $342 636
-------- -------- -------- -------- -------- --------
Balance, June 30, 1996 - $ - 16,820 $ 16,820 $ 87,775 $ 37,020
Net income 16,398
Foreign currency translation (5)
Purchase of common stock
Sale of common stock 198
-------- -------- -------- -------- -------- --------
Balance, June 30, 1997 - $ - 16,820 $ 16,820 $ 87,968 $ 53,418
======== ======== ======== ======== ======== ========
Treasury stock Total
-------------- stockholders'
Shares Dollars equity
------ ------- ------
Balance, June 30, 1994 - $ - $132,756
Net income 8,221
Final adjustment to Tandy
settlement (353)
-------- -------- --------
Balance, June 30, 1995 - $ - $140,624
Net income 337
Foreign currency translation 18
Stock option cancellation,
net of taxes of $342 636
-------- -------- --------
Balance, June 30, 1996 - $ - $141,615
Net income 16,398
Foreign currency translation (5)
Purchase of common stock (297) (3,527) (3,527)
Sale of common stock 203 2,111 2,309
-------- -------- --------
Balance, June 30, 1997 (94) $ (1,416) $156,790
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND BASIS OF PRESENTATION
O'Sullivan Industries Holdings, Inc., 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, mass merchants, catalog
showrooms, department stores, furniture stores and specialty retailers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand
and all highly liquid investments with maturities of three months or less when
purchased.
Business and Credit Risk Concentrations: The largest five customer
accounts receivable balances accounted for approximately 61% and 52% of the
Company's trade receivable balance at June 30, 1997 and 1996, respectively.
The Company's products are sold primarily through large chains of retail
stores, including office superstores, mass merchants, department stores,
furniture stores and specialty retailers. Credit is extended to these
customers based on evaluation of the customer's financial condition, generally
without requiring collateral. Exposure to losses on receivables is primarily
dependent on each customer's financial condition. Therefore, the Company would
be exposed to a large loss if one of its major customers were not able to
fulfill its financial obligations. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
Revenues: Revenue is recognized at the date of shipment of product 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 are 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 are
recognized in the statement of operations. Depreciation and amortization
expense was $8,293,000, $7,568,000 and $5,798,000 for fiscal 1997, 1996, and
1995, respectively, of which $7,309,000, $6,317,000 and $5,232,000,
respectively, has been included in cost of sales.
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, 1997 and 1996 approximated $23,085,000 and $21,418,000, respectively.
Impairment of Long-Lived Assets: In March 1995, the FASB issued FAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("FAS 121"), which is effective for fiscal years
beginning after December 15, 1995. Effective July 1, 1996, the Company adopted
FAS 121, which requires that long-lived assets (i.e., property, plant and
equipment and goodwill) held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the net book value of
the asset may not be recoverable. An impairment loss will be recognized 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. Generally,
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.
The adoption of this statement had no impact on the Company's results of
operations nor its financial position.
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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.
Advertising Costs: Advertising costs are expensed the first time the
advertising takes place. Advertising expense for fiscal 1997, 1996 and 1995
was $15,248,000, $12,961,000 and $10,254,000, 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 are recognized for
taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
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 recorded 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 the Company's commitment to a formal plan
of action. To date, environmental expenditures have not been material, and
management is not aware of any material environmental related contingencies.
Significant Fourth Quarter Adjustments: During the fourth quarter of
fiscal 1997, bad debt charges approximating $700,000, net of tax, were recorded
due to the bankruptcy filing of a major customer. In fiscal 1995 charges
aggregating $380,000, net of tax, were recorded during the fourth quarter to
record inventory adjustments.
Earnings Per Share: Earnings per share are computed based on the weighted
average number of shares outstanding plus common stock equivalents outstanding
during the period, if dilutive. In February 1997, the FASB issued FAS No. 128,
Earnings per Share ("FAS 128"), which is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Effective December 31, 1997, the Company will adopt FAS 128, which establishes
standards for computing and presenting earnings per share ("EPS") and will
retroactively restate EPS for the first quarter of fiscal 1998 at that time.
The statement requires dual presentation of basic and diluted EPS on the face
of the income statement for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes the effect of potentially dilutive securities, while diluted
EPS reflects the potential dilution that would have occurred if securities or
other contracts to issue common stock had been exercised, converted into, or
resulted in the issuance of common stock that had then shared in the earnings
of the entity. The pro forma EPS amounts shown below have been calculated
assuming the Company had already adopted the provisions of this statement:
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Earnings per Share Calculation
(in thousands, except for share data)
For the year ended June 30, 1997 For the year ended June 30, 1996
-------------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
BASIC EPS
Income available to common
stockholders 16,398 16,786 0.98 337 16,820 0.02
======= =======
EFFECT OF DILUTIVE SECURITIES
Stock-based compensation - 270 - 1
DILUTED EPS
Income available to common
stockholders, plus assumed
conversions 16,398 17,056 0.96 337 16,821 0.02
======= ======= ======= ======= ======= =======
Accounting for Stock-Based Compensation: In October 1995, the FASB issued
FAS No. 123, Accounting for Stock-Based Compensation ("FAS 123"), which is
effective for fiscal years beginning after December 15, 1995. Effective July
1, 1996, the Company adopted FAS 123 establishing financial accounting and
reporting standards for stock-based employee compensation plans. The
pronouncement defines a fair value based method of accounting for an employee
stock option or similar equity instrument and encourages all entities to adopt
that method of accounting for all of their employee stock option compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). Entities electing to remain with the
accounting in APB 25 must make 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. The Company has elected to account for stock-based employee
compensation plans under the intrinsic method pursuant to APB 25 and to make
the disclosures in its footnotes as required by FAS 123. See Note 7.
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.
Reclassifications: Certain items in the prior years' financial statements
have been reclassified to conform with the current year's presentation.
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NOTE 3 - RESTRUCTURING CHARGE
In March 1996 the Company adopted a business restructuring plan to cut
costs and better utilize working capital. The plan included the discontinuance
of certain product lines which had received marginal acceptance in the
marketplace, costs associated with the initial training of terminated employees
at the Company's Utah facility and the modification of the business structure
of an international division. A pre-tax charge of $5.2 million was recognized
in the third quarter of fiscal 1996 related to the restructuring plan. The
components of the restructuring charge and an analysis of the amounts charged
against the reserve are outlined in the table below:
Charges Charges
through Balance through Balance
Restructuring Charges Original June 30, June 30, June 30, June 30,
(in thousands) Reserve 1996 1996 1997 1997
--------------------- ------- ---- ---- ---- ----
Discontinued product lines(1) $ 4,155 $(4,117) $ 38 $ (38) $ -
Initial training costs of terminated employees(2) 387 (387) - - -
Impairment of fixed assets(3) 274 (274) - - -
Modification costs of international division(4) 396 (121) 275 (275) -
------- ------- ------- ------- --------
Total $ 5,212 $(4,899) $ 313 $ (313) $ -
======= ======= ======= ======= =======
- --------------
(1)Relates to certain product lines that have been discontinued and the
remaining inventory was written down to net realizable value.
(2)Certain manufacturing employees were terminated at the Utah facility
and the costs associated with the initial training of these employees was
written off.
(3)Represents the write off of certain machinery that was used to
manufacture the discontinued product lines.
(4)Represents the cost to modify the business structure of an
international division.
Proceeds through June 30, 1997, from the disposal of the discontinued
inventory approximated $1.5 million. The restructuring charge has been
included as a separate line item in the accompanying consolidated statement of
operations and consolidated statement of cash flows.
NOTE 4 - DISPOSITION OF FIXED ASSETS
During fiscal 1997, the Company disposed of certain machinery and tooling
with a net book value of $743,000 for aggregate proceeds of $46,000 and a note
receivable of $98,000, realizing a loss of $599,000, which has been primarily
classified as cost of sales in the accompanying consolidated statement of
operations.
NOTE 5 - LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
June 30,
-------------------------
1997 1996
---- ----
(in thousands)
Variable-rate revolving credit agreement $ - $ -
8.01% senior notes, due fiscal 2003 20,000 20,000
8.25% industrial development revenue bonds, due
fiscal 2009 10,000 10,000
------- -------
$30,000 $30,000
======= =======
The Company has a Credit Agreement with a bank. The Credit Agreement
includes a $25.0 million revolving line of credit (reduced from $30.0 million
on June 13, 1997) and a $10.8 million standby letter of credit indemnifying
Tandy Corporation ("Tandy") from its obligations as guarantor of the $10.0
million industrial development revenue bonds for which the Company is the
obligor. Tandy can draw against the standby letter
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of credit only in the event that it must pay any amounts with respect to the
industrial development revenue bonds.
The Credit Agreement has several financial ratio covenants including the
maintenance of a minimum working capital ratio and a minimum net worth. In
addition, the Credit Agreement has provisions specifying certain limitations on
dividends, investments and future indebtedness. In June 1997, the terms of the
Credit Agreement were amended. The amendment (a) extended the term of the
Credit Agreement through February 28, 2000; (b) reduced the bank's lending
commitment from $30 million to $25 million; and (c) facilitated the removal of
another bank from the Credit Agreement. At June 30, 1997, the Company was in
compliance with such covenants.
Borrowings under the Credit Agreement accrue interest at varying rates
based upon a Eurodollar based rate or the lead lending bank's prime lending
rate and upon the Company's debt ratio. The Company must pay a commitment fee
of 0.15% annually on the lending commitment. The obligation is paid quarterly.
Amounts advanced under the Credit Agreement are due on February 28, 2000.
In May 1995, the Company completed a private placement of $20 million
principal amount of senior notes. Under the terms of the Note Purchase
Agreements, the Company is required to meet certain financial ratio
requirements, including a funded debt-to-earnings ratio requirement, a minimum
net worth requirement and an earnings to fixed charges ratio requirement.
At June 30, 1997, the Company was in compliance with all of its debt
agreements.
Interest on the 8.25% industrial development revenue bonds is paid
semiannually. The loan is secured by the $10.8 million standby letter of
credit under the Credit Agreement.
Aggregate contractual principal payments for the next five fiscal years
subsequent to June 30, 1997 are summarized as follows: 1998 - None; 1999 -
$4,000,000; 2000 - $4,000,000; 2001 - $4,000,000; 2002 - $4,000,000; and
thereafter - $14,000,000.
Consolidated interest expense was $2,327,000, $3,831,000 and $2,417,000
for the years ended June 30, 1997, 1996 and 1995, respectively. The Company
capitalized interest in connection with the construction of its new
manufacturing facility in Utah in fiscal 1995 aggregating $529,000.
Derivative financial instruments are utilized by the Company to reduce
interest rate risks. The Company does not hold or issue derivative financial
instruments for trading purposes. During fiscal 1997, the Company entered into
a forward starting interest rate swap agreement with a notional principal
amount of $10.0 million. The effective date of the agreement is October 1,
1998 and the termination date is October 1, 2008. The Company has contracted
to pay a fixed rate of 7.13% and receive a floating interest rate during the
duration of the swap agreement. The Company has the ability and intent to call
its existing $10.0 million of 8.25% industrial development revenue bonds
commencing October 1, 1998 at a redemption premium of 103%. The bonds will be
refinanced at the then existing interest rates. Accordingly, the swap will
have the effect of hedging the Company against an increase in interest rates
prior to the first opportunity to refinance these bonds. Management has
designated this swap as a hedge of the future interest rate exposure of
refinancing these bonds.
Amounts to be paid or received under the swap agreement will be accrued as
interest rates change and will be recognized over the life of the swap
agreement as adjustments to interest expense. Gains or losses on terminated
swaps will be recognized over the remaining life of the underlying obligation
as an adjustment to interest expense. The fair value of the forward starting
swap agreement approximated $122,000 at June 30, 1997 (representing the amount
the Company would have to pay to terminate the swap) and has not been
recognized in the Consolidated Financial Statements, since it is accounted for
as a hedge.
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NOTE 6 - INCOME TAXES
The income tax provision consists of the following:
Year ended June 30,
-----------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Current:
Federal $ 9,955 $ 275 $4,324
State 473 1 307
------- ------ ------
10,428 276 4,631
Deferred (378) 157 407
------- ------ ------
$10,050 $ 433 $5,038
======= ====== ======
The following table reconciles the Company's federal corporate statutory
rate and its effective income tax rate:
Year ended June 30,
-------------------------
1997 1996 1995
---- ---- ----
Statutory rate 35.0% 34.0% 35.0%
State income taxes, net of federal benefit 1.7 - 1.7
Goodwill amortization 1.2 39.2 2.3
Other, net 0.1 (17.0) (1.0)
------ ------ ------
Effective tax rate 38.0% 56.2% 38.0%
====== ====== ======
The principal current and non-current deferred tax assets and liabilities
consist of the following at June 30, 1997 and 1996:
June 30,
-----------------------
1997 1996
---- ----
(in thousands)
Deferred tax assets:
Inventories $ 336 $ 573
Bad debt reserve 1,168 453
Insurance reserves 378 693
Other amounts expensed for financial reporting
purposes not yet deducted for tax 117 108
-------- --------
1,999 1,827
Deferred tax liabilities:
Depreciation and amortization 15,067 14,221
-------- --------
Net deferred tax liability $(13,068) $(12,394)
======== ========
Reported as:
Current assets (included in prepaid expenses
and other current assets) $ 1,866 $1,540
Noncurrent liabilities-deferred income taxes (14,934) (13,934)
-------- --------
Net deferred tax liability $(13,068) $(12,394)
======== ========
In connection with the initial public offerings of the Company's common
stock (the "Offerings"), Tandy, TE Electronics Inc. and the Company entered
into a Tax Sharing and Tax Benefit Reimbursement Agreement (the "Tax
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 the Company for all periods ending on or prior to the date of
consummation of the Offerings and for audit adjustments to such federal income
and foreign income taxes. The Company is responsible for all other taxes owing
with respect to the Company, including audit adjustments to state and local
income and for franchise taxes.
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The Company 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
the Company'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 the Company. Pursuant to the Tax Agreement, the Company pays Tandy an
amount that approximates the federal tax benefit expected to be realized with
respect to such additional basis. Amounts payable to Tandy pursuant to the Tax
Sharing 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 the Company 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 the Company's actual taxes and the taxes
that the Company would have owed had the increase in basis not occurred, the
aggregate amount of payments required to be made by the Company to Tandy over
the life of the Tax Agreement will not differ materially from the difference
over the life of the Tax Agreement between the Company's actual taxes and the
amount of taxes that the Company would have owed had the increase in basis not
occurred. Consequently, such payments should have no effect on the Company'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 1997, 1996 and 1995, $6.0
million, $0.0 million and $4.5 million, respectively, were paid to Tandy
pursuant to this agreement.
NOTE 7 - STOCK OPTIONS
Under the Company's Amended and Restated 1994 Incentive Stock Plan (the
"ISP"), designated officers, employees, employee directors and consultants of
the Company are eligible to receive awards in the form of incentive stock
options, nonqualified stock options, stock appreciation rights ("SAR's"),
restricted stock grants or performance awards. Annually, non-employee
directors receive options to purchase 1,000 shares of common stock (increased
to 2,000 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. Pursuant to
amendments to the ISP, 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. The Company has awarded
restricted shares of common stock totaling 19,950 shares.
During the first quarter of fiscal 1996, the Company canceled 1,150,500
options that had been granted in February 1994. Associated with these options,
compensation expense of $690,300 was recognized during fiscal 1995. As part of
the cancellation, the accumulated liability at June 30, 1995, approximating
$636,000, net of taxes, was reclassified to additional paid-in capital.
In July 1996, the Compensation Committee granted, subject to stockholder
approval, options to purchase 625,250 shares of common stock to the Company'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 the
Company's performance in fiscal 1997, the options will become exercisable over
three years and will expire in July 2006. The stockholders approved the grants
in November 1996; accordingly, the Company will recognize compensation expense
of approximately $2.2 million over the three year vesting period, which amount
is based on the difference between the exercise price and the fair market value
of common stock on the date of stockholder approval. The Company recognized
compensation expense of $749,000 in fiscal 1997 related to the granting of
these options.
Additionally, during fiscal 1997, the Board of Directors granted options
to purchase 284,150 shares of 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
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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)
June 30, 1997 June 30, 1996 June 30, 1995
----------------------- -------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 324 $9.14 1,275 $18.37 1,151 $19.00
Grants 909 7.31 242 7.34 124 12.57
Exercised 1 7.50 - - - -
Canceled 17 8.02 1,193 18.64 - -
------- ------ ------
Outstanding at end of year 1,215 7.61 324 9.14 1,275 18.37
======= ====== ======
Exercisable at end of year 145 $10.04 42 $12.57
======= ======
Weighted average fair value of options
granted during the year $ 6.53 $ 4.04
====== ======
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Range of Shares Remaining Average Shares Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 6/30/97 Life Price at 6/30/97 Price
$6.19 - 7.81 1,082 8.88 years $ 7.21 70 $ 7.31
$9.31 - 12.81 133 7.69 years 12.41 75 12.57
------- ------
$6.19 - 12.81 1,215 8.75 years $ 7.79 145 $10.04
======= ======
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"). Accordingly, no compensation cost has been recognized for options
granted except as mentioned above. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date
for awards in fiscal 1996 and fiscal 1997 in accordance with the provisions of
FAS 123, the Company'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):
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Year Ended June 30,
----------------------
1997 1996
---- ----
Net income As reported $16,398 $ 337
Pro forma 15,521 232
Primary earnings per share As reported 0.96 0.02
Pro forma 0.92 0.01
Fully diluted earnings per share As reported 0.95 0.02
Pro forma 0.91 0.01
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model based upon the following
assumptions: expected volatility of 47.30% to 51.16%; risk-free interest rate
ranging from 5.39% to 6.73%; expected lives of 6 or 7 years and no expected
dividend payments. 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 FAS No. 123 in this pro forma disclosure are not
indicative of future amounts as the pro forma amounts above do not include the
impact of stock option awards granted prior to fiscal 1996 and additional
awards are anticipated in future years.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company maintains stock purchase programs that have been available to
most employees during the three-year period ended June 30, 1997. Effective
July 1, 1995, the stock purchase program (the "SPP"), as amended, allows a
maximum employee contribution of 5%, while the Company'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 $0.6 million in fiscal 1997, $0.6 million in fiscal
1996 and $1.5 million in fiscal 1995.
Effective July 1, 1995, the Company implemented a new Savings and Profit
Sharing Plan (the "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 the Company makes matching
contributions equal to 50% of the first 5% of eligible employee contribution.
Under the profit sharing portion of the Plan, the Company may contribute
annually an amount up to 7.5% of the Company's pre-tax earnings, subject to
Board approval. Employees may direct the investment of profit sharing
contributions and employee contributions among five investment funds and a fund
investing in Company common stock. Employer matching contributions are
invested in Company common stock. All contributions are held in a trust by the
Plan trustee. Employer matching contributions vest immediately, while profit
sharing contributions vest 100% when the employee has five years of service
with the Company. For fiscal 1997 and 1996, the Company accrued approximately
$2.0 million and $1.3 million, respectively, for the profit sharing portion of
the Plan. The matching contributions to the savings portion of the Plan was
$0.6 million for both fiscal 1997 and 1996.
Employees can direct the voting of Company common stock attributable to
their SPP and Plan accounts. The failure of an employee to direct the Trustee
with respect to stock (other than stock attributable to employer matching
contributions in the Plan) is treated as an instruction that such stock is not
to be voted. If an employee fails to direct the voting of shares attributable
to employer matching contributions in the Plan, such shares will be voted in
the same proportion as the directed stock of other employees participating in
the Plan; provided, however, that in the case of a proxy contest, the
Administrative Committee of the Plan, or any
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investment manager appointed by the Administrative Committee, shall direct the
Trustee with respect to the voting of such stock.
NOTE 9 - TERMINATION PROTECTION AGREEMENTS
The Company has entered into Termination Protection Agreements with its
executive officers (collectively, the "Executives"). The 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 the Executives
is terminated, with certain exceptions, within 24 months following a change in
control, or in certain other instances in connection with a change in control,
the Executives 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 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 the Company 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 Executive and that, if the Executive moves more than 20 miles
from his primary residence in order to accept permanent employment within 36
months after leaving the Company, the Company will, upon request, repurchase
the Executive's primary residence at a price determined in accordance with the
Agreement.
NOTE 10 - STOCKHOLDER RIGHTS PLAN
The Company 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 the Company 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 the Company'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 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 the Company.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the ordinary
course of its business. The Company does not believe that any such pending
actions will have a material adverse effect on its results of operations or
financial position. The Company maintains liability insurance at levels which
it believes are adequate for its needs and comparable with levels maintained by
other companies in the furniture manufacturing business.
On July 30, 1996, Fisher-Price, Inc. filed suit against O'Sullivan
Industries, Inc. in the Supreme Court of New York, Erie County, alleging breach
of a License Agreement between O'Sullivan Industries, Inc. and Fisher-Price.
Pursuant to the License Agreement, the Company was to have manufactured a line
of furniture under the Fisher-Price name. The suit alleged a failure to pay
minimum royalties under the License Agreement of $1,400,000. In December 1996,
the Company paid Fisher-Price $75,000 to settle this litigation, and the case
was dismissed with prejudice on December 27, 1996.
30
32
The Company'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 the Company'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 the Company's business,
results of operations or financial condition.
The Company's manufacturing facilities ship waste product to various
disposal sites. The Company has been designated as a potentially responsible
party ("PRP") 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 PRP's, pursuant to which it has
contributed $2,000 to date toward cleanup costs. The Company believes that
amounts it may be required to pay in the future, if any, will be immaterial.
NOTE 12 - SHARE REPURCHASE PROGRAM
On May 2, 1997, the Board of Directors authorized the purchase of up to
five percent of the outstanding shares of the Company's common stock during the
next 24 months. The actual number of shares purchased, the timing of the
purchases and the prices paid for the shares will be dependent upon future
market conditions. The program includes no specific pricing nor timing targets
and may be suspended at any time or terminated prior to completion. As of
June 30, 1997, the Company had purchased 64,300 shares for $965,000 pursuant to
this program.
NOTE 13 - MAJOR CUSTOMERS AND INTERNATIONAL OPERATIONS
Sales to three customers exceeded 10% of net sales in the fiscal year
ended June 30, 1997. Sales to such customers as a percentage of net sales are
presented in the following table:
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Customer A 17.1% 15.6% 15.1%
Customer B 12.3% 12.5% 11.9%
Customer C 12.0% 7.4% 8.0%
There are no material foreign operations or export sales.
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NOTE 14 - QUARTERLY OPERATING RESULTS - UNAUDITED (in thousands, except per
share data)
Fiscal 1997 (By Quarter)
-----------------------------------
1 2 3 4
------- ------- -------- -------
Net sales $83,126 $80,593 $77,505 $80,266
Gross profit 22,552 23,626 22,322 22,412
Net income 3,476 4,574 3,895 4,453
Earnings per common share (primary) 0.21 0.27 0.23 0.26
Earnings per common share (fully diluted) 0.21 0.27 0.23 0.26
Fiscal 1996 (By Quarter)
-----------------------------------
1 2 3 4
------- ------- -------- -------
Net sales $74,774 $79,574 $67,430 $69,988
Gross profit 14,884 16,144 14,707 16,769
Restructuring charge - - 5,212 -
Net income (loss) 1,348 458 (2,942) 1,473
Earnings (loss) per common share (primary) 0.08 0.03 (0.17) 0.09
Earnings (loss) per common share (fully diluted) 0.08 0.03 (0.17) 0.09
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*
ITEM 11. EXECUTIVE COMPENSATION*
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT*
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*
*The information called for by Items 10, 11, 12 and 13, to the extent not
set forth under the caption "Executive Officers of the Company" in Part I of
this annual report, is or will be set forth in the definitive proxy statement
relating to the 1997 Annual Meeting of Stockholders of O'Sullivan Industries
Holdings, Inc. pursuant to the Securities and Exchange Commission's Regulation
14A. Such definitive proxy statement relates to a meeting of stockholders
involving the election of directors and the portions thereof called for by
Items 10, 11, 12 and 13 of Form 10-K are incorporated herein by reference
pursuant to Instruction G of Form 10-K.
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:
Report of Independent Accountants .............................................. 16
Consolidated Balance Sheets as of June 30, 1997 and 1996 ........................ 17
Consolidated Statements of Operations for the three years ended June 30, 1997 ... 18
Consolidated Statements of Cash Flows for the three years ended June 30, 1997 ... 19
Consolidated Statements of Changes in Stockholders' Equity for the three years
ended June 30, 1997 ............................................................. 20
Notes to Consolidated Financial Statements ...................................... 21
(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.
(b) Reports on Form 8-K
None.
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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, in the City of
Lamar, State of Missouri, on the 24th day of September, 1997.
O'SULLIVAN INDUSTRIES HOLDINGS, INC.
By /s/ Daniel F. O'Sullivan
--------------------------------
Daniel F. O'Sullivan
Chairman of the Board and
Chief Executive Officer
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.
/s/ Daniel F. O'Sullivan Chairman of the Board and September 24, 1997
- ------------------------------------- Chief Executive Officer
Daniel F. O'Sullivan (Principal Executive Officer)
/s/ Richard D. Davidson President and September 24, 1997
- ------------------------------------- Chief Operating Officer
Richard D. Davidson and Director
/s/ Tyrone E. Riegel September 24, 1997
- ------------------------------------- Executive Vice President
Tyrone E. Riegel and Director
/s/ Terry L. Crump Executive Vice President and September 24, 1997
- ------------------------------------- Chief Financial Officer
Terry L. Crump (Principal Financial and Accounting Officer)
/s/ William C. Bousquette Director September 24, 1997
-------------------------------------
William C. Bousquette
/s/ Charles G. Hanson Director September 24, 1997
- -------------------------------------
Charles G. Hanson
/s/ Stewart M. Kasen Director September 24, 1997
- -------------------------------------
Stewart M. Kasen
/s/ Thomas M. O'Sullivan, Sr. Director September 24, 1997
-------------------------------------
Thomas M. O'Sullivan, Sr.
/s/ Ronald G. Stegall Director September 24, 1997
- -------------------------------------
Ronald G. Stegall
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
3.1 & 4.1 Certificate of Incorporation of O'Sullivan Industries Holdings, Inc. (the
"Company") (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 the Company (incorporated by reference from Exhibit 3.2 to
Registration Statement on Form S-1 (File No. 33-72120))
4.3 Specimen Stock Certificate of the Company (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 the Company 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, 1994 (File
No. 1-12754))
*10.1 Amended and Restated O'Sullivan Industries Holdings, Inc. 1994 Incentive Stock
Plan (the "ISP") (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 ISP (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 ISP ...................................................... 37
*10.2 Form of Amended and Restated Termination Protection Agreement between the Company
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 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))
*10.4 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))
*10.4a First Amendment to the DCP ....................................................... 38
10.5 Amended and Restated Tax Sharing and Tax Reimbursement Agreement dated as of June
19, 1997 between the Company and Tandy Corporation and TE Electronics Inc. ....... 39
*10.7 Form of Indemnity Agreement between the Company 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 ........................................................ 56
10.9 Indenture of Trust dated as of October 1, 1988 between the Industrial Development
Authority of Halifax County, Virginia and Texas American Bank/Fort Worth, N.A.,
as Trustee (incorporated by reference from Exhibit 10.9 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-72120))
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
10.10 Agreement of Sale dated as of October 1, 1988 between the Industrial Development
Authority of Halifax County, Virginia and O'Sullivan Industries - Virginia, Inc.
(incorporated by reference from Exhibit 10.10 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-72120))
10.11 Composite Form of Note Purchase Agreement dated as of May 15, 1995 between the
Company 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
the Company, O'Sullivan Industries, Inc., O'Sullivan Industries - Virginia, Inc.,
The Boatmen's National Bank of St. Louis and Wachovia Bank of Georgia, N.A. ...... 57
10.12a First Amendment to Amended and Restated Credit Agreement dated as of May 15, 1995 107
10.12b Second Amendment to Amended and Restated Credit Agreement dated as of December
29, 1995 ......................................................................... 110
10.12c Third Amendment to Amended and Restated Credit Agreement dated as of June 13, 1997 114
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 ............................................... 120
27 Financial Data Schedule .......................................................... 121
- --------------
* Each of these exhibits is a "management contract or compensatory plan
or arrangement."
36