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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2002
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: 333-31282
O'SULLIVAN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-0923022
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1900 Gulf Street, Lamar, Missouri 64759-1899
(Address of principal executive offices) (ZIP Code)
(417) 682-3322
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-------- --------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
-------- ---------
As of February 10, 2003, 100 shares of common stock of O'Sullivan
Industries Holdings, Inc., par value $1.00 per share, were outstanding.
- --------------------------------------------------------------------------------
The Index to Exhibits is on page 30.
Page 1 of 32
PART I
ITEM 1. FINANCIAL STATEMENTS.
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
Assets December 31, June 30,
------ 2002 2002
--------- ---------
Current assets:
Cash and cash equivalents $ 8,968 $ 15,777
Trade receivables, net of allowance for doubtful accounts
of $4,414 and $4,101, respectively 37,762 37,035
Inventories, net 49,028 52,397
Prepaid expenses and other current assets 3,280 2,765
--------- ---------
Total current assets 99,038 107,974
Property, plant and equipment, net 76,188 79,144
Other assets 18,020 18,944
Goodwill, net of accumulated amortization 38,088 38,088
--------- ---------
Total assets $ 231,334 $ 244,150
========= =========
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 8,076 $ 10,887
Current portion of long-term debt 4,749 4,430
Accrued advertising 15,763 11,680
Accrued liabilities 10,513 18,388
--------- ---------
Total current liabilities 39,101 45,385
Long-term debt, less current portion 207,495 213,452
Other liabilities 2,590 2,570
Payable to parent 865 181
--------- ---------
Total liabilities 250,051 261,588
Commitments and contingent liabilities (Notes 3, 7, 8 and 9)
Stockholder's deficit:
Common stock, $1.00 par value; 100 shares authorized issued and
outstanding - -
Retained deficit (18,351) (17,133)
Accumulated other comprehensive loss (366) (305)
--------- ---------
Total stockholder's deficit (18,717) (17,438)
--------- ---------
Total liabilities and stockholder's deficit $ 231,334 $ 244,150
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
2
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Three months ended Six months ended
December 31, December 31,
-------------------------- -----------------------
2002 2001 2002 2001
------------ ----------- ----------- ---------
Net sales $ 79,111 $ 84,313 $ 150,668 $ 166,506
Cost of sales 59,384 62,649 110,968 124,374
------------ ----------- ----------- ---------
Gross profit 19,727 21,664 39,700 42,132
------------ ----------- ----------- ---------
Operating expenses:
Selling, marketing and administrative 11,538 13,130 23,536 27,238
------------ ----------- ----------- ---------
Operating income 8,189 8,534 16,164 14,894
Other income (expense):
Interest expense (5,506) (6,184) (11,281) (14,200)
Interest income 42 69 94 154
------------ ----------- ----------- ---------
Income before income tax provision 2,725 2,419 4,977 848
Income tax provision 3,098 846 6,195 296
------------ ----------- ----------- ---------
Net income (loss) $ (373) $ 1,573 $ (1,218) $ 552
============ =========== =========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
3
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six months ended
December 31,
----------------------------
2002 2001
------------ ------------
Cash flows provided by operating activities:
Net income (loss) $ (1,218) $ 552
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 6,572 7,029
Amortization of debt issuance cost 786 786
Amortization of debt discount 181 161
Interest rate collar (1,308) 927
Bad debt expense 579 1,017
Loss on disposal of assets 25 166
Accrual of special payment on options to purchase
Series A junior preferred stock 599 524
Changes in current assets and liabilities:
Trade receivables (1,306) 3,070
Inventories 3,369 5,483
Other assets (434) 356
Accounts payable, accrued liabilities and other
liabilities (6,815) 5,719
------------ ------------
Net cash provided by operating activities 1,030 25,790
------------ ------------
Cash flows used for investing activities:
Capital expenditures (2,704) (5,942)
------------ ------------
Cash flows used for financing activities:
Repayment of borrowings (5,819) (6,772)
Advances on intercompany payable 684 464
------------ ------------
Net cash flows used by financing activities (5,135) (6,308)
Net increase (decrease) in cash and cash equivalents (6,809) 13,540
Cash and cash equivalents, beginning of period 15,777 7,060
------------ ------------
Cash and cash equivalents, end of period $ 8,968 $ 20,600
============ ============
Non-cash financing activities:
Capital expenditures included in accounts payable $ (788) $ 321
The accompanying notes are an integral part of these consolidated
financial statements.
4
O'SULLIVAN INDUSTRIES, INC. AND SUBSIDIARIES
(a wholly owned subsidiary of O'Sullivan Industries Holdings, Inc.)
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDER'S DEFICIT
For the six months ended December 31, 2002
(in thousands)
Accumulated
other Total stock-
Retained comprehensive holders' Comprehensive
deficit loss deficit loss
---------- ----------------- ------------ ----------------
Balance, June 30, 2002 $ (17,133) $ (305) $ (17,438)
Net loss (1,218) (1,218) $ (1,218)
Other comprehensive loss (61) (61) (61)
----------- ----------------- ------------ ----------------
Balance, December 31, 2002 $ (18,351) $ (366) $ (18,717) $ (1,279)
========== ================= ============ ================
The accompanying notes are an integral part of these consolidated
financial statements.
5
O'SULLIVAN INDUSTRIES, INC.
(A WHOLLY OWNED SUBSIDIARY OF O'SULLIVAN INDUSTRIES HOLDINGS, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
NOTE 1--BASIS OF PRESENTATION
The unaudited consolidated financial statements of O'Sullivan
Industries, Inc. and subsidiaries ("O'Sullivan"), a wholly owned subsidiary of
O'Sullivan Industries Holdings, Inc. ("O'Sullivan Holdings"), included herein
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The financial statements should be read in conjunction with the
audited financial statements and notes thereto included in O'Sullivan's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002. The interim results
are not necessarily indicative of the results that may be expected for a full
year.
NOTE 2--DERIVATIVE FINANCIAL INSTRUMENTS
As required under O'Sullivan's senior credit facility, O'Sullivan
hedged one-half of its term loans with an initial notional amount of $67.5
million with a three-year, costless interest rate collar. The collar, which
expires in March 2003, is based on three-month LIBOR and has a floor of 6.43%
and a ceiling of 8.75%. O'Sullivan recorded a reduction of interest expense of
$724,000 and $274,000 for the quarters ended December 31, 2002 and December 31,
2001, respectively. These amounts represent the changes in fair value of the
interest rate collar. For the six months ended December 31, 2002 and December
31, 2001, O'Sullivan recognized additional (reduced) interest expense associated
with the interest rate collar of $(1.3 million) and $927,000, respectively. To
terminate this contract at December 31, 2002 and June 30, 2002, O'Sullivan would
have been required to pay the counter-party approximately $783,000 and $2.1
million, respectively. The fair value of the interest rate collar is included in
accrued liabilities in the accompanying consolidated balance sheets.
NOTE 3--NEW ACCOUNTING STANDARDS
In April 2001, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF No. 00-25, Vendor Income Statement Characterization of
Consideration Paid to a Reseller of the Vendor's Products. This issue addresses
the income statement classification of slotting fees, cooperative advertising
arrangements and buydowns. The consensus requires that certain customer
promotional payments that O'Sullivan previously classified as selling expenses
be classified as a reduction of revenue. O'Sullivan adopted EITF 00-25 effective
January 1, 2002 and reclassified certain selling, marketing and administrative
expenses as a reduction of net sales. Its adoption by O'Sullivan had no impact
on operating income or net income. As a result of the adoption of EITF 00-25,
for the quarter and six months ended December 31, 2001, $3.6 million and $7.7
million, respectively, was reclassified as a reduction in revenue rather than as
selling, marketing and administrative expense.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. This pronouncement, which is
effective for fiscal years beginning after December 15, 2001, addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of. O'Sullivan adopted this pronouncement
effective July 1, 2002. The adoption of SFAS 144 had no effect on O'Sullivan's
results of operations but did impact its balance sheet presentation as described
below.
In January 2001, O'Sullivan closed its Cedar City, Utah production
facility. O'Sullivan is actively attempting to sell the Utah land, building and
excess equipment as soon as practicable. Certain equipment has
6
been relocated to the Missouri and Virginia plants. Fixed assets with a net book
value of $20.3 million were valued at the lower of their carrying amount or fair
value less cost to sell, resulting in an impairment charge of approximately $8.7
million in the second quarter of fiscal 2001. The costs of the long-lived assets
held for sale and the associated accumulated depreciation have been reclassified
from property, plant and equipment to other assets on the accompanying
consolidated balance sheets. There are no other significant assets or
liabilities relating to the discontinued Utah operation. The fair value less
cost to sell is an estimate and the impairment may be adjusted in the future.
In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. This pronouncement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies EITF 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred
rather than the date of an entity's commitment to an exit plan and establishes
that fair value is the objective for initial measurement of the liability. The
provisions of this pronouncement are effective for exit or disposal activities
that are initiated after December 31, 2002. O'Sullivan does not believe SFAS 146
will have a material impact on its financial position or results of operations.
NOTE 4--SHIPPING AND HANDLING COSTS
O'Sullivan reports amounts billed to customers as revenue, the cost for
warehousing operations in cost of sales and freight out costs as part of
selling, marketing and administrative expenses. Freight out costs included in
selling, marketing and administrative expenses in the second quarters of fiscal
2003 and fiscal 2002 were approximately $1.5 million and $2.2 million,
respectively. Freight out costs in the six months ended December 31, 2002 and
2001 were $3.6 million and $4.5 million, respectively.
NOTE 5--INVENTORY
Inventory, net, consists of the following:
December 31, June 30,
2002 2002
--------------- -----------
(in thousands)
Finished goods $ 34,219 $ 39,199
Work in process 5,211 5,158
Raw materials 9,598 8,040
------------- ---------
$ 49,028 $ 52,397
============= =========
NOTE 6-CONDENSED CONSOLIDATING FINANCIAL INFORMATION
In November 1999 O'Sullivan issued $100 million of 13.375% Senior
Subordinated Notes due 2009. These notes were unsecured obligations of
O'Sullivan; however, they were guaranteed on an unsecured basis by its
subsidiary O'Sullivan Industries - Virginia, Inc. ("O'Sullivan Industries -
Virginia"). In fiscal 2000, O'Sullivan exchanged the notes issued in November
1999 for notes with substantially identical terms and associated guarantees. The
exchange notes have been registered under the Securities Act of 1933, as
amended.
O'Sullivan also is the obligor under a senior secured credit facility
totaling $175 million. This facility is secured by substantially all the assets
of O'Sullivan and its guarantor subsidiary O'Sullivan Industries - Virginia. The
credit facility is also guaranteed by O'Sullivan Holdings, O'Sullivan's parent.
Security for the credit facility includes first priority liens and security
interests in the stock of O'Sullivan and O'Sullivan Industries - Virginia.
7
The accompanying condensed consolidating financial information has been
prepared and presented pursuant to SEC rules and regulations. This information
is not intended to present the financial position, results of operations and
cash flows of the individual companies in accordance with generally accepted
accounting principles.
The financial information for O'Sullivan Furniture Factory Outlet, Inc.
is included in the consolidated results of O'Sullivan Industries. O'Sullivan
Furniture Factory Outlet, Inc. commenced operations in April 2002. Net sales and
net income for the three months ended December 31, 2002 were $268,000 and
$22,000, respectively. Net sales and net income for the six months ended
December 31, 2002 were $472,000 and $35,000, respectively. At December 31, 2002
and June 30, 2002, total assets were $220,000 and $191,000, respectively. Total
liabilities, excluding payables to affiliates, at December 31, 2002 and June 30,
2002 were $32,000 and $20,000, respectively.
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
Three months ended December 31, 2002
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ ------------- --------------- -----------------
Net sales $ 56,265 $ 22,846 $ - $ 79,111
Cost of sales 41,027 18,357 - 59,384
------------ ------------- --------------- -----------------
Gross profit 15,238 4,489 - 19,727
Operating expenses:
Selling, marketing and administrative 9,459 2,079 - 11,538
------------ ------------- --------------- -----------------
Operating income 5,779 2,410 - 8,189
Other income (expense):
Interest expense (5,378) (128) - (5,506)
Interest income 42 - - 42
------------ ------------- --------------- -----------------
Income before income tax provision 443 2,282 - 2,725
Income tax provision 2,647 451 - 3,098
------------ ------------- --------------- -----------------
Net income (loss) $ (2,204) $ 1,831 $ - $ (373)
============ ============= =============== =================
8
Three months ended December 31, 2001
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ -------------- --------------- -----------------
Net sales $ 58,087 $ 26,226 $ - $ 84,313
Cost of sales 42,940 19,709 - 62,649
------------ -------------- --------------- -----------------
Gross profit 15,147 6,517 - 21,664
Operating expenses:
Selling, marketing and administrative 9,566 3,564 - 13,130
------------ -------------- --------------- -----------------
Operating income 5,581 2,953 - 8,534
Other income (expense):
Interest expense (6,035) (149) - (6,184)
Interest income 69 - - 69
------------ -------------- --------------- -----------------
Income (loss) before income tax provision (385) 2,804 - 2,419
Income tax provision (benefit) (135) 981 - 846
------------ -------------- --------------- -----------------
Net income (loss) $ (250) $ 1,823 $ - $ 1,573
============ ============== =============== =================
Six months ended December 31, 2002
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ ------------- ---------------- -----------------
Net sales $ 108,613 $ 42,055 $ - $ 150,668
Cost of sales 78,038 32,930 - 110,968
------------ ------------- ---------------- -----------------
Gross profit 30,575 9,125 - 39,700
Operating expenses:
Selling, marketing and administrative 19,498 4,038 - 23,536
------------ ------------- ---------------- -----------------
Operating income 11,077 5,087 16,164
Other income (expense):
Interest expense (11,022) (259) - (11,281)
Interest income 94 - - 94
------------ ------------- ---------------- -----------------
Income before income tax provision 149 4,828 - 4,977
Income tax provision 4,505 1,690 - 6,195
------------ ------------- ---------------- -----------------
Net income (loss) $ (4,356) $ 3,138 $ - $ (1,218)
============ ============= ================ =================
9
Six months ended December 31, 2001
(in thousands)
---------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ -------------- --------------- ----------------
Net sales $ 117,425 $ 49,081 $ - $ 166,506
Cost of sales 88,175 36,199 - 124,374
------------ -------------- --------------- ----------------
Gross profit 29,250 12,882 - 42,132
Operating expenses:
Selling, marketing and administrative 19,763 7,475 - 27,238
------------ -------------- --------------- ----------------
Operating income 9,487 5,407 - 14,894
Other income (expense):
Interest expense (13,885) (315) - (14,200)
Interest income 154 - - 154
------------ -------------- --------------- ----------------
Income (loss) before income tax provision (4,244) 5,092 - 848
Income tax provision (benefit) (1,484) 1,780 - 296
------------ -------------- --------------- ----------------
Net income (loss) $ (2,760) $ 3,312 $ - $ 552
============ ============== =============== ================
CONDENSED CONSOLIDATING BALANCE SHEETS
December 31, 2002
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ -------------- ---------------- ----------------
ASSETS:
Current assets $ 85,421 $ 13,617 $ - $ 99,038
Property, plant and equipment, net 43,064 33,124 - 76,188
Other assets 17,920 100 - 18,020
Investment in subsidiary 41,638 - (41,638) -
Goodwill 38,088 - - 38,088
Receivable from parent - 26,043 (26,043) -
------------ -------------- ---------------- ----------------
Total assets $ 226,131 $ 72,884 $ (67,681) $ 231,334
============ ============== ================ ================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities $ 17,855 $ 21,246 $ - $ 39,101
Long-term debt 197,495 10,000 - 207,495
Payable to affiliates 26,908 - (26,043) 865
Other liabilities 2,590 - - 2,590
Stockholder's equity (deficit) (18,717) 41,638 (41,638) (18,717)
------------ -------------- ---------------- ----------------
Total liabilities and stockholder's
equity (deficit) $ 226,131 $ 72,884 $ (67,681) $ 231,334
============ ============== ================ ================
10
June 30, 2002
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ -------------- --------------- -----------------
ASSETS:
Current assets $ 92,556 $ 15,418 $ - $ 107,974
Property, plant and equipment, net 45,049 34,095 - 79,144
Other assets 18,842 102 - 18,944
Investment in subsidiary 39,012 - (39,012) -
Goodwill 38,088 - - 38,088
Receivable from parent - 20,309 (20,309) -
------------ -------------- --------------- -----------------
Total assets $ 233,547 $ 69,924 $ (59,321) $ 244,150
============ ============== =============== =================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities $ 24,473 $ 20,912 $ - $ 45,385
Long-term debt 203,452 10,000 - 213,452
Payable to affiliates 20,490 - (20,309) 181
Other liabilities 2,570 - - 2,570
Stockholder's equity (deficit) (17,438) 39,012 (39,012) (17,438)
------------ -------------- --------------- -----------------
Total liabilities and stockholder's
equity (deficit) $ 233,547 $ 69,924 $ (59,321) $ 244,150
============ ============== =============== =================
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Six months ended December 31, 2002
(in thousands)
---------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------- ------------- -------------- -----------------
Net cash flows provided (used) by operating activities $ (5,674) $ 6,704 $ - $ 1,030
------------- ------------- -------------- -----------------
Investing activities:
Capital expenditures (1,733) (971) - (2,704)
Repayment of intercompany payable 5,733 - (5,733) -
------------- ------------- -------------- -----------------
Net 4,000 (971) (5,733) (2,704)
------------- ------------- -------------- -----------------
Financing activities:
Advances on intercompany payable 684 (5,733) 5,733 684
Repayment of borrowings (5,819) - - (5,819)
------------- ------------- -------------- -----------------
Net (5,135) (5,733) 5,733 (5,135)
------------- ------------- -------------- -----------------
Cash and cash equivalents:
Net decrease in cash and cash equivalents (6,809) - - (6,809)
Cash and cash equivalents, beginning of
period 15,773 4 - 15,777
------------- ------------- -------------- -----------------
Cash and cash equivalents, end of period $ 8,964 $ 4 $ - $ 8,968
============= ============= ============== =================
11
Six months ended December 31, 2001
(in thousands)
----------------------------------------------------------------
O'Sullivan
O'Sullivan Industries - Consolidating
Industries Virginia Adjustments Consolidated
------------ ------------ --------------- ------------------
Net cash flows provided by operating activities $ 17,400 $ 8,390 $ - $ 25,790
------------ ------------ --------------- ------------------
Investing activities:
Capital expenditures (3,446) (2,496) - (5,942)
Repayment of intercompany payable 5,894 - (5,894) -
------------ ------------ --------------- ------------------
Net 2,448 (2,496) (5,894) (5,942)
------------ ------------ --------------- ------------------
Financing activities:
Advances on intercompany payable 464 (5,894) 5,894 464
Repayment of borrowings (6,772) - - (6,772)
------------ ------------ --------------- ------------------
Net (6,308) (5,894) 5,894 (6,308)
------------ ------------ --------------- ------------------
Cash and cash equivalents:
Net increase in cash and cash
equivalents 13,540 - - 13,540
Cash and cash equivalents, beginning of
period 7,056 4 - 7,060
------------ ------------ --------------- ------------------
Cash and cash equivalents, end of period $ 20,596 $ 4 $ - $ 20,600
============ ============ =============== ==================
NOTE 7--INCOME TAXES
O'Sullivan is included in the consolidated federal income tax return
filed by O'Sullivan Holdings. In accordance with the intercompany tax allocation
policy between O'Sullivan and O'Sullivan Holdings, O'Sullivan remits to
O'Sullivan Holdings an amount equal to its current tax liability calculated as
if O'Sullivan filed a separate tax return.
O'Sullivan recorded tax expense of $3.1 million and $6.2 million for
the three months and six months ended December 31, 2002 that included a
valuation allowance of $2.4 million and $5.0 million, respectively.
Prior to O'Sullivan Holdings' initial public offering in 1994, it was
owned by RadioShack Corporation (then named Tandy Corporation). In connection
with the 1994 initial public offering of O'Sullivan Holdings' common stock,
RadioShack Corporation, its subsidiary TE Electronics Inc. and O'Sullivan
Holdings entered into a Tax Sharing and Tax Benefit Reimbursement Agreement.
Pursuant to the tax sharing agreement, RadioShack is primarily responsible for
all U.S. federal income taxes, state income taxes and foreign income taxes with
respect to O'Sullivan for all periods ending on or prior to the date of
consummation of the offering and for audit adjustments to such federal income
and foreign income taxes. O'Sullivan Holdings is responsible for all other taxes
owing with respect to O'Sullivan, including audit adjustments to state and local
income and for franchise taxes.
RadioShack and O'Sullivan made an election under Sections 338(g) and
338(h)(10) of the Internal Revenue Code with the effect that the tax basis of
O'Sullivan's assets was increased to the deemed purchase price of the assets. An
amount equal to such increase was included in income in the consolidated federal
income tax return filed by RadioShack. This additional tax basis results in
increased income tax deductions and, accordingly, reduced income taxes payable
by O'Sullivan. Pursuant to the tax sharing agreement, O'Sullivan Holdings pays
RadioShack nearly all of the federal tax benefit expected to be realized with
respect to such additional basis. Since O'Sullivan Holdings' initial public
offering by RadioShack in 1994, the benefits of the tax deductions under the tax
sharing agreement have been accounted for as income taxes. Amounts payable to
RadioShack pursuant to the tax
12
sharing agreement are recorded as current federal income tax expense in
O'Sullivan's consolidated statements of operations. As those benefits reduced
O'Sullivan's federal income tax obligations, payments were made to RadioShack as
opposed to the IRS.
O'Sullivan is incurring significantly higher interest expense
associated with its higher debt levels in connection with the financing of the
November 1999 recapitalization and merger. O'Sullivan Holdings believed that
this increased interest expense, and certain expenses incurred to consummate the
recapitalization and merger, should be taken into account in determining the
payments O'Sullivan Holdings is required to make to RadioShack under the tax
sharing agreement. RadioShack claimed O'Sullivan Holdings could not deduct the
additional interest and expenses in determining the tax sharing payments.
On June 29, 1999, RadioShack filed a complaint against O'Sullivan
Holdings in the District Court of Texas in Tarrant County. RadioShack's
complaint sought a court order compelling O'Sullivan Holdings to submit to a
dispute resolution process. O'Sullivan Holdings argued that no dispute existed
because at that time the recapitalization and merger had not closed. On October
8, 1999, the court ordered O'Sullivan Holdings to commence dispute resolution
procedures before an arbitrator, according to the terms of the tax sharing
agreement. Mediation efforts failed to resolve the issue. Arbitrators were
selected to hear the dispute, the arbitration was heard in October 2001 and
briefing of the issue followed.
In March 2002, the arbitration panel ruled in favor of RadioShack on
this issue, concluding that the interest expense arising from the
recapitalization and merger is not deductible in calculating the payments due
from O'Sullivan Holdings to RadioShack under the tax sharing agreement.
Following the issuance of the opinion, O'Sullivan Holdings reached a
settlement of the dispute with RadioShack. Under the settlement, O'Sullivan
Holdings paid RadioShack $21.5 million in May 2002 to cover all amounts due
through December 31, 2001; RadioShack waived interest on the payments and its
attorneys' fees. O'Sullivan Holdings agreed to make future payments under the
tax sharing agreement without deducting interest on indebtedness incurred in the
recapitalization and merger. For the six months ended June 30, 2002, O'Sullivan
Holdings paid RadioShack $6.2 million. For the three months and six months ended
December 31, 2002, O'Sullivan Holdings paid RadioShack $3.1 million and $6.2
million, respectively.
O'Sullivan funded the back payment and subsequent payments from cash on
hand. O'Sullivan expects to fund future payments from cash on hand or borrowings
under its senior credit facility.
O'Sullivan amended its senior credit facility as a result of the
arbitration settlement. The amendment excludes from the definition of
consolidated fixed charges $27.0 million of the total paid by O'Sullivan
pursuant to the tax sharing agreement through the period ended June 30, 2002.
As a result of the arbitration and settlement, O'Sullivan Holdings
has to make payments to RadioShack before all of O'Sullivan's deductions on its
federal income tax return reduce federal taxes. In effect, O'Sullivan
contractually prepays tax benefits to RadioShack that may be recovered from
reduced federal income tax liabilities in the future.
O'Sullivan has recorded the $33.9 million in payments pursuant to the
settlement agreement as a deferred tax asset. O'Sullivan has a net deferred tax
asset of approximately $18.0 million at December 31, 2002. Under SFAS 109,
Accounting for Income Taxes, O'Sullivan must determine if it is more likely than
not that the net deferred tax assets will be realized as reductions in tax
liabilities in the future. At December 31, 2002 (O'Sullivan files federal income
tax returns on a calendar year basis), O'Sullivan had a net operating loss
carryforward for federal income tax purposes of approximately $73.0 million. In
2009, when substantially all of the tax deductions are expected to have been
taken, O'Sullivan Holdings and RadioShack are to negotiate a settlement of the
then present value of the realizable tax benefits O'Sullivan has yet to deduct.
13
Pursuant to SFAS 109, management projected O'Sullivan's expected future
taxable income utilizing operating performance O'Sullivan achieved in fiscal
2002 assuming O'Sullivan's performance would be no better or worse over an
extended period of time. Such projections indicate that O'Sullivan will not have
taxable income until 2009 when substantially all the tax benefit deductions have
been taken. At that point, the projections indicate that the net operating
losses existing at that time would be utilized before they expire. However,
O'Sullivan currently has and is expected to have taxable losses for a number of
years in the future and SFAS 109 requires objective evidence to support the more
likely than not conclusion. Projections over a long time frame are inherently
uncertain, and O'Sullivan cannot provide objective evidence that its operations
in 2009 and beyond will produce sufficient taxable income. As a result,
O'Sullivan has provided a valuation allowance on its net deferred tax assets of
$18.0 million at December 31, 2002 and will continue to provide an allowance as
those net deferred tax assets grow into the future until sufficient objective
evidence exists about future results of operations which supports the reversal
of all or part of the valuation allowance.
NOTE 8--RELATED PARTY TRANSACTIONS
O'Sullivan entered into a management services agreement with Bruckmann,
Rosser, Sherrill & Co., Inc. ("BRS") for strategic and financial advisory
services on November 30, 1999. The fee for these services is the greater of (a)
1% of O'Sullivan's consolidated cash flow (as defined in the indenture related
to the O'Sullivan Industries senior subordinated notes) or (b) $300,000 per
year. Under the management services agreement, BRS can also receive
reimbursement for expenses which are limited to $50,000 a year by the senior
credit facility.
The senior credit facility and the management services agreement both
contain certain restrictions on the payment of the management fee. The
management services agreement provides that no cash payment for the management
fee can be made unless the fixed charge coverage ratio (as defined in the
indenture relating to the O'Sullivan senior subordinated notes) for O'Sullivan's
most recently ended four full fiscal quarters would have been at least 2.0 to
1.0. All fees and expenses under the management services agreement are
subordinated to the senior subordinated notes.
The management fees and reimbursable expenses of $116,000 and $122,000
recognized in the second quarter of fiscal years 2003 and 2002, respectively,
are included in selling, marketing and administrative expense in the
accompanying consolidated statements of operations. Management fees and expenses
for the six months ending December 31, 2002 and 2001 were $233,000 and $220,000,
respectively. O'Sullivan paid BRS $713,000 in the first quarter of fiscal 2003
for the balance owed through June 30, 2002 and an additional $305,000 as a
prepayment of the fiscal 2003 management fee. The prepaid balance at December
31, 2002 was $66,000 and is included in prepaid expenses and other current
assets on the consolidated balance sheet. The amount due BRS at June 30, 2002
approximated $719,000 and is included in accrued liabilities on the consolidated
balance sheet.
NOTE 9--COMMITMENTS AND CONTINGENCIES
Tax Sharing Agreement with RadioShack. Future tax sharing agreement
payments are contingent on taxable income. (See Note 7.) The maximum payments
are fiscal 2003, including $6.2 million paid through December 31, 2002 -- $11.0
million; fiscal 2004 -- $9.9 million; fiscal 2005 -- $10.5 million; fiscal 2006
- -- $11.3 million; and thereafter -- $41.4 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
We are a leading ready-to-assemble furniture manufacturer in North
America with over 45 years of experience. We design, manufacture and distribute
a broad range of RTA furniture products--computer workcenters, desks,
entertainment centers, audio stands, bookcases and cabinets--with retail prices
ranging from $20 to $999. We have committed substantial resources to the
development and implementation of a diversified
14
sales, marketing and product strategy in order to capitalize on opportunities
presented by large retail channels of distribution and changes in consumer
demographics and preferences. We have structured our business to offer a wide
variety of RTA furniture products through popular retail distribution channels,
including office superstores, discount mass merchants, electronic superstores,
home improvement centers and home furnishings retailers. We continue to strive
towards building long-term relationships with quality retailers in existing and
emerging high growth distribution channels to develop and grow our business.
Our sales declined 6.2% in the second quarter of fiscal 2003 and 9.5%
for the first six months of fiscal 2003. This decline continued the sales
decreases experienced by us in fiscal 2001 and fiscal 2002. Our sales declined
for several reasons:
-> the lack of growth in sales of personal computers, which
reduced the need for computer desks and workcenters;
-> increasing competition from imported furniture, particularly
from China;
-> the slowdown of economic growth and consumer spending in the
United States;
-> liquidations and bankruptcies by a number of customers,
including Montgomery Ward, Ames and Kmart;
-> inventory reductions by our customers;
-> the decline in price of the average unit sold, reflecting a
trend toward more promotional merchandise and increased
competition; and
-> the retrenchment in business capital outlays, which reduced
purchases of office furniture.
These factors will continue to affect our business throughout the remainder of
fiscal 2003.
As a result of the lower sales levels, coupled with the outcome of the
arbitration proceedings with RadioShack in fiscal 2002, we incurred a net loss
of $373,000 for the second quarter of fiscal 2003 compared with net income of
$1.6 million for the second quarter of fiscal 2002. For the first half of fiscal
2003, our net loss was $1.2 million compared to a net income of $552,000 for the
first half of fiscal 2002. Operating income declined to $8.2 million in the
second quarter for fiscal 2003 from $8.5 million in fiscal 2002. For the first
half of fiscal 2003, our operating income was $16.2 million, compared with $14.9
million in the first half of fiscal 2002.
We purchase large quantities of raw materials, including particleboard
and fiberboard. We are dependent on our outside suppliers for all of our raw
materials. Therefore, we are subject to changes in the prices charged by our
suppliers. In fiscal 2000, our operating income was reduced by price increases
for these commodities. In fiscal 2001, particleboard and fiberboard prices
declined, increasing our operating income in the latter portion of the year.
Industry pricing for particleboard was flat to slightly lower in fiscal 2002,
and prices declined in the first half of fiscal 2003 from the fourth quarter of
fiscal 2002. Prices for fiberboard increased in the fourth quarter of fiscal
2002, but remained flat for the first half of fiscal 2003. We did, however,
experience a price increase from several suppliers of another commodity in the
second quarter of fiscal 2003. We cannot assure you that raw material prices
will not increase in the future. If the demand for particleboard increases,
prices may also increase.
Several manufacturers, including O'Sullivan, have excess manufacturing
capacity due to the current decline in sales in the RTA furniture segment and
increasing imports. This excess capacity is causing increased competition that
is expected to continue, and perhaps to intensify, through the remainder of
fiscal 2003. This adversely affected our margins and results of operations in
fiscal 2002, and is continuing to affect sales, margins and results of
operations in fiscal 2003.
15
While we have confidence in the long-term future of the RTA furniture
industry, given our current sales trends in this economic environment, we expect
gross sales in the third quarter of fiscal 2003 will be about 15% lower than
sales in the third quarter of fiscal 2002. We anticipate our fiscal 2003 third
quarter operating income will decline approximately 20% to 30% from the fiscal
2002 third quarter. We cannot yet predict when our sales will return to a
pattern of sales growth.
RadioShack Arbitration
Prior to O'Sullivan Holdings' initial public offering in 1994, it was
owned by RadioShack Corporation (then named Tandy Corporation). In connection
with the 1994 initial public offering of O'Sullivan Holdings' common stock,
RadioShack Corporation, TE Electronics Inc. and O'Sullivan Holdings entered into
a Tax Sharing and Tax Benefit Reimbursement Agreement.
Pursuant to the tax sharing agreement, RadioShack and O'Sullivan made
an election under Sections 338(g) and 338(h)(10) of the Internal Revenue Code
with the effect that the tax basis of our assets was increased to the deemed
purchase price of the assets. This additional tax basis results in increased
income tax deductions and, accordingly, reduced income taxes payable by us.
Pursuant to the tax sharing agreement, O'Sullivan Holdings pays RadioShack
nearly all of the federal tax benefit expected to be realized with respect to
such additional basis. Since 1994, amounts payable to RadioShack pursuant to the
tax sharing agreement are recorded as current federal income tax expense in our
consolidated statements of operations. As those benefits reduced our federal
income tax obligations, payments were made to RadioShack as opposed to the IRS.
We are incurring significantly higher interest expense associated with
our higher debt levels in connection with the financing of our November 1999
recapitalization and merger. O'Sullivan Holdings believed that this increased
interest expense, and certain expenses incurred to consummate the
recapitalization and merger, should be taken into account in determining the
payments O'Sullivan Holdings is required to make to RadioShack under the tax
sharing agreement. RadioShack claimed O'Sullivan Holdings could not deduct the
additional interest and expenses in determining the tax sharing payments.
This disagreement was the subject of an arbitration hearing. In March
2002, the arbitration panel ruled in favor of RadioShack on this issue,
concluding that the interest expense arising from the recapitalization and
merger is not deductible in calculating the payments due from O'Sullivan
Holdings to RadioShack under the tax sharing agreement.
Following the issuance of the opinion, O'Sullivan Holdings reached a
settlement of the dispute with RadioShack. Under the settlement, O'Sullivan
Holdings paid RadioShack $21.5 million in May 2002 to cover all amounts due
through December 31, 2001; RadioShack waived interest on the payments and its
attorneys' fees. O'Sullivan Holdings agreed to make future payments under the
tax sharing agreement without deducting interest on indebtedness incurred in the
recapitalization and merger. For the six months ended June 30, 2002, O'Sullivan
Holdings paid RadioShack $6.2 million. For the three months and six months ended
December 31, 2002, O'Sullivan Holdings paid RadioShack $3.1 million and $6.2
million, respectively.
We funded the back payment and subsequent payments from cash on hand.
We expect to fund future payments from cash on hand or borrowings under our
senior credit facility. Payments under the tax sharing agreement for the
remainder of fiscal 2003 are expected to be about $4.8 million.
We amended our senior credit facility as a result of the arbitration
settlement. The amendment excludes from the definition of consolidated fixed
charges $27.0 million of the total paid by us pursuant to the tax sharing
agreement through the period ended June 30, 2002.
SEE "CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION."
16
RESULTS OF OPERATIONS
Net Sales. Net sales for the quarter ended December 31, 2002 decreased
by $5.2 million, or 6.2%, to $79.1 million from $84.3 million for the quarter
ended December 31, 2001. Net sales for the six months ended December 31, 2002
decreased by $15.8 million, or 9.5%, to $150.7 million from $166.5 million for
the six months ended December 31, 2001. Our sales declined in every major
channel due to the economic uncertainties in the United States and the other
reasons cited above. Most of the decline for the quarter and six months was due
to a decline in unit volume, although the average price per unit declined
slightly.
In January 2002, Kmart Corporation, which accounted for around 9% of
our gross sales in fiscal 2002, filed for Chapter 11 bankruptcy court
protection. As part of its reorganization, Kmart has closed 283 stores and has
announced that it plans to close an additional 316 stores. Kmart has secured
financing of $2 billion to help the company's cash flow while it restructures.
Kmart has filed a plan of reorganization to emerge from Chapter 11 in 2003. We
resumed shipments to Kmart on a post-petition basis after the filing and
anticipate significant sales to Kmart in the future. However, there can be no
assurance that we will ship as much to Kmart as we did in prior periods or that
Kmart will be successful in its restructuring efforts.
In August 2002, Ames Department Stores, Inc. decided to close all of
its stores and liquidate. We had anticipated sales to Ames would be less than 2%
of our gross sales in fiscal 2003.
Gross Profit. Gross profit decreased to $19.7 million, or 24.9% of
sales, for the three month period ended December 31, 2002, from $21.7 million,
or 25.7% of sales, for the comparable prior year quarter. The gross margin
percentage for the second quarter of fiscal 2003 declined primarily because of
lower sales and operating levels, partially offset by lower material costs,
particularly for particleboard. For the six months ended December 31, 2002,
gross profit declined to $39.7 million, or 26.3% of sales, from $42.1 million,
or 25.3% of sales. The gross profit percentage increased for the first half of
fiscal 2003 compared to the prior year period as lower material prices offset
the effects of lower sales and operating volumes.
Selling, Marketing and Administrative Expenses. Selling, marketing and
administrative expenses decreased to $11.5 million, or 14.6% of sales, for the
three month period ended December 31, 2002, from $13.1 million, or 15.6% of
sales, for the quarter ended December 31, 2001. Freight out expense declined
because of lower sales and a change in a major customer's program. Sales
commissions were also lower in fiscal 2003 due to lower sales levels and changes
in the commission structure. Legal fees were higher in fiscal 2002 due to the
RadioShack arbitration. Bad debt expense was also higher in fiscal 2002 because
of the Kmart bankruptcy.
For the six months ended December 31, 2002, selling, marketing and
administrative expenses decreased $3.7 million from $27.2 million in fiscal 2002
to $23.5 million in fiscal 2003. The major factors were a decrease in freight
out expense and sales commission due to the reasons stated above and lower
incentive compensation and profit sharing expenses because of our lower sales
and financial performance. Legal fees and bad debt expense were higher in fiscal
2002 because of the RadioShack arbitration and Kmart bankruptcy, respectively.
Depreciation and Amortization. Depreciation and amortization expenses
decreased to $3.3 million for the second quarter of fiscal 2003 compared to $3.6
million for the second quarter of fiscal 2002. For the six month periods ended
December 31, 2002 and 2001, depreciation and amortization expenses were $6.6
million and $7.0 million, respectively. Depreciation and amortization declined
because equipment placed into service during the twelve months ended December
31, 2002 was less than the amount of equipment that became fully depreciated
during the same time period.
Operating Income. Operating income decreased $345,000 to $8.2 million
for the quarter ended December 31, 2002 from $8.5 million in the quarter ended
December 31, 2001. Lower sales and operating levels were partially offset by
lower material costs and lower selling, marketing and administrative expenses in
the three months ended December 31, 2002. For the six months ended December 31,
2002, operating income increased $1.3 million over the six months ended December
31, 2001. Reduced raw material prices, incentive compensation
17
and profit sharing expense and lower freight out expense, commission costs,
legal fees and bad debt expense contributed to the increased operating income
during the first six months in fiscal 2003, partially offset by lower sales and
operating levels.
Net Interest Expense. Net interest expense decreased from $6.1 million
in the second quarter of fiscal 2002 to $5.5 million in the second quarter of
fiscal 2003. Net interest expense declined $2.9 million from $14.0 million for
the first half of fiscal 2002 to $11.2 million for the first half of fiscal
2003. Interest expense decreased due to the change in fair value of our interest
rate collar as well as our repayment of debt and lower variable interest rates
on a portion of our debt. The following table describes the components of net
interest expense.
Three months ended Six months ended
December 31, December 31,
-------------------------- --------------------------
(in thousands) (in thousands)
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest expense on senior credit
facility, industrial revenue bonds
and senior subordinated notes $ 5,746 $ 5,983 $ 11,622 $ 12,326
Interest income (42) (69) (94) (154)
Non-cash items:
Interest rate collar (724) (274) (1,308) 927
Amortization of debt discount 91 82 181 161
Amortization of loan fees 393 393 786 786
---------- ---------- ---------- ----------
Net interest expense $ 5,464 $ 6,115 $ 11,187 $ 14,046
========== ========== ========== ==========
Income Tax Provision. We recorded tax expense of $3.1 million for the
second quarter of fiscal 2003 that included an increase in the valuation
allowance of $2.4 million. For the first half of fiscal 2003, we recorded tax
expense of $6.2 million and a valuation allowance of $5.0 million. Since
O'Sullivan Holdings' initial public offering by RadioShack in 1994, the benefits
of the tax deductions under the tax sharing agreement have been accounted for as
income taxes. As those benefits reduced our federal income tax obligations,
payments were made to RadioShack as opposed to the IRS. Since the
recapitalization in 1999 and prior to the settlement of the arbitration
proceedings with RadioShack, O'Sullivan Holdings made an $800,000 payment to
RadioShack as we had little taxable income to utilize the tax deductions. These
deductions resulted in net operating losses for federal tax purposes for which
we recorded no deferred tax assets as such deductions were assets of RadioShack
under the tax sharing agreement.
As more fully described above, O'Sullivan Holdings can no longer
consider the increased interest costs in calculating the amounts due to
RadioShack. Therefore, O'Sullivan Holdings has to make payments to RadioShack
before all of our deductions on our federal income tax return reduce federal
taxes. In effect, as a result of the arbitration decision and settlement,
O'Sullivan Holdings will contractually prepay tax benefits to RadioShack that
may be recovered from reduced federal income tax liabilities in the future.
As a result of the arbitration decision and settlement, O'Sullivan
Holdings paid $21.5 million to RadioShack in May 2002 relating to periods
through December 31, 2001. O'Sullivan Holdings also paid RadioShack an
additional $6.2 million for the six months ended June 30, 2002 and $3.1 million
and $6.2 million for the three months and six months ended December 31, 2002,
respectively. We provided O'Sullivan Holdings the funds to make those payments.
We recorded these payments as a deferred tax asset. We have a net deferred tax
asset of approximately $18.0 million at December 31, 2002. At December 31, 2002
(we file federal income tax returns on a calendar year basis), we had a net
operating loss carryforward for federal income tax purposes of approximately
$73.0 million. In 2009, when substantially all of the tax deductions are
expected to have been taken, O'Sullivan Holdings and RadioShack are to negotiate
a settlement of the then present value of the realizable tax benefits we have
yet to deduct.
18
Pursuant to SFAS 109, we have provided a valuation allowance on our net
deferred tax assets of $18.0 million at December 31, 2002 and will continue to
provide an allowance as those net deferred tax assets grow into the future until
sufficient objective evidence exists about future results of operations which
supports the reversal of all or part of the valuation allowance. See Note 7 to
the accompanying consolidated financial statements.
Net Income (Loss). Our net income declined from $1.6 million in the
second quarter of fiscal 2002 to a net loss of $373,000 in fiscal 2003 due to
increased tax expense and lower sales and operating levels, partially offset by
lower material prices, lower selling, marketing and administrative expenses and
lower interest expense. We incurred a net loss of $1.2 million down $1.8 million
from income of $552,000 in the first half of fiscal 2003 due to increased tax
expense, partially offset by lower raw material costs, decreased selling and
administrative expenses and lower interest expense.
EBITDA. EBITDA, which we define as earnings before interest income and
interest expense, income taxes, depreciation and amortization, decreased by
$645,000 to $11.5 million for the quarter ended December 31, 2002 from $12.1
million for the prior year quarter. EBITDA for the fiscal 2003 second quarter
decreased primarily due to lower sales and operating levels, partially offset by
lower material costs and selling and administrative expenses. For the six months
ended December 31, 2002, EBITDA was $22.7 million, up $813,000 from the six
months ended December 31, 2001. The increase was due primarily to lower material
costs and lower selling and administrative expenses, partially offset by lower
sales and operating levels.
EBITDA is presented to provide additional information about our
operations. This item should be considered in addition to, but not as a
substitute for or superior to, operating income, net income, operating cash flow
and other measures of financial performance prepared in accordance with
generally accepted accounting principles. EBITDA may differ in the method of
calculation from similarly titled measures used by other companies. EBITDA
provides another measure of the operations of the business of O'Sullivan prior
to the impact of interest, taxes and depreciation. Further, EBITDA is a common
method of valuing highly leveraged companies such as O'Sullivan, and the measure
is a component of each of the financial covenants in our senior credit facility.
The following table reconciles net income (loss) to EBITDA for the
three months and six months ended December 31, 2002 and 2001.
Three months ended Six months ended
December 31, December 31,
------------------------- ---------------------------
(in thousands) (in thousands)
2002 2001 2002 2001
----------- ---------- ------------ ----------
Net income (loss) $ (373) $ 1,573 $ (1,218) $ 552
Income tax provision 3,098 846 6,195 296
Interest expense, net 5,464 6,115 11,187 14,046
----------- ---------- ------------ ----------
Operating income 8,189 8,534 16,164 14,894
Depreciation and amortization 3,308 3,608 6,572 7,029
----------- ---------- ------------ ----------
EBITDA $ 11,497 $ 12,142 $ 22,736 $ 21,923
=========== ========== ============ ==========
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash flows from operations and
borrowings under our senior secured credit facility, which is discussed below.
Our liquidity requirements will be to pay our debt, including interest expense
under the senior credit facility and notes, to pay RadioShack amounts due under
the tax sharing agreement and to provide for working capital and capital
expenditures. Decreased demand for our products could decrease our cash flow
from operations and the availability of borrowings under our credit facility.
19
Working Capital. As of December 31, 2002, cash and cash equivalents
totaled $9.0 million. Net working capital was $59.9 million at December 31, 2002
compared to $62.6 million at June 30, 2002.
Operating Activities. Net cash provided by operating activities for the
six months ended December 31, 2002 was $1.0 million compared to net cash
provided of $25.8 million for the six months ended December 31, 2001. Cash flow
from operations decreased year-over-year for the following reasons.
-> Accounts payable increased $1.2 million during the first half of
fiscal 2002 and declined $2.8 million during the first half of fiscal
2003. The change was due to differences in the timing of plant
shutdowns in the two years and to lower operating levels in fiscal
2003.
-> Profit sharing and incentive compensation payments during the first
half of fiscal 2003 were approximately $3.0 million higher than in
the first half of fiscal 2002 because of the respective prior year
financial results. Changes in the accrued balances for profit sharing
and incentive compensation decreased the cash provided by operations
an additional $730,000 in fiscal 2002 compared to fiscal 2003.
-> Trade receivables increased in fiscal 2003, reducing cash by $1.3
million, compared with a decrease of $3.1 million that provided cash
in fiscal 2002. The fiscal 2003 receivables increase was due to
higher sales levels in December 2002 compared to June 2002 sales.
-> Increases in accrued advertising provided net cash of $4.1 million in
fiscal 2003 compared to $5.7 million during fiscal 2002. The decrease
this year was due to lower sales and associated decreases in vendor
incentive programs. In addition, a particular customer changed its
pattern of claiming certain incentives, lowering accrued advertising.
-> In fiscal 2003, decreases in inventories provided $3.4 million of
cash, compared with $5.5 million in fiscal 2002.
-> During the first half of fiscal 2003, we paid RadioShack $6.2 million
under the tax sharing agreement.
-> In fiscal 2003, the liability associated with the interest rate
collar declined by $1.3 million as opposed to a $927,000 increase in
fiscal 2002.
Investing Activities. We invested $2.7 million for capital expenditures
for the six months ended December 31, 2002 compared to $5.9 million for the
prior year six month period. We currently estimate that the total capital
expenditure requirements for the remainder of the fiscal year will be
approximately $3.0 million to $5.0 million, which we expect to fund from cash
flow from operations or cash on hand. Our ability to make future capital
expenditures is subject to certain restrictions under our senior credit
facility.
Financing Activities. On November 30, 1999 we completed our merger and
recapitalization. Our consolidated indebtedness at December 31, 2002 was $216.7
million consisting of:
- $106.7 million in a senior secured credit facility consisting of a five
year $20.9 million term loan A, a seven and one-half year $85.8 million
term loan B and a $40.0 million revolving line of credit, with no
borrowings at December 31, 2002. The current portion of these term
loans was approximately $4.7 million at December 31, 2002. The
revolving line of credit has a $15.0 million sub-limit for letters of
credit, of which we are currently utilizing approximately $13.8
million.
- $100.0 million in 13-3/8% senior subordinated notes due 2009 issued
with warrants to purchase 6.0% of our common and Series B junior
preferred stock on a fully diluted basis. These warrants were assigned
a value of $3.5 million. These notes were issued at a price of 98.046%
providing $98.0 million in cash proceeds before expenses related to the
issuance.
20
- $10.0 million in variable rate industrial revenue bonds.
The reconciliation of consolidated indebtedness to recorded book value at
December 31, 2002 is as follows:
Original
Issue
Discount Warrants
Consolidated Current Net of Net of Recorded
Indebtedness Portion Accretion Accretion Book Value
------------- ----------- -------------- ------------- ------------
(in thousands)
Term loan A $ 20,917 $ (3,874) $ - $ - $ 17,043
Term loan B 85,796 (875) - - 84,921
------------- ----------- -------------- ------------- ------------
Senior secured credit 106,713 (4,749) - - 101,964
Senior subordinated note 100,000 - (1,601) (2,868) 95,531
Industrial revenue bonds 10,000 - - - 10,000
------------- ----------- -------------- ------------- ------------
Total $ 216,713 $ (4,749) $ (1,601) $ (2,868) $ 207,495
============= =========== ============== ============= ============
During the six months ended December 31, 2002, we made regularly
scheduled principal payments of $1.7 million against the term loans included in
our senior secured credit facility. We expect to fund principal and interest
payments on our debt from cash flow from operations, cash on hand or borrowings
under our revolver. Our borrowing availability under our credit facility was
approximately $23.9 million at December 31, 2002. Decreased demand for our
products could decrease our cash flow from operations and the availability of
borrowings under our credit facility. In October 2002, we paid an additional
$4.1 million of principal on the amounts outstanding under the senior credit
facility and increased the revolving credit line borrowings by $4.1 million. We
repaid the revolving credit line borrowings in November 2002.
The credit facility and notes are subject to certain financial and
operational covenants and other restrictions, including among others,
requirements to maintain certain financial ratios and restrictions on our
ability to incur additional indebtedness. The financial covenants contained in
the credit facility, as amended, are as follows:
-> Our consolidated leverage ratio must be less than 4.25. The ratio at
December 31, 2002 was 3.83. At June 30, 2003, our consolidated leverage
ratio must be less than 4.00.
-> Our consolidated interest coverage ratio must be greater than 2.00. The
ratio at December 31, 2002 was 2.26. At June 30, 2003, our consolidated
interest coverage ratio must be greater than 2.00.
-> Our consolidated fixed charge coverage ratio must be greater than 1.10.
The ratio at December 31, 2002 was 1.45. At June 30, 2003, our
consolidated fixed charge coverage ratio must be greater than 1.10.
-> Our senior debt coverage ratio must be less than 2.50. The ratio at
December 31, 2002 was 2.06. At June 30, 2003, our senior debt coverage
ratio must be less than 2.35.
-> Our consolidated EBITDA must be at least $53 million for the fiscal
year ending June 30, 2003.
EBITDA and consolidated interest expense as defined in the credit facility for
the twelve and six months ended December 31, 2002 were $56.6 million and $23.3
million, respectively. O'Sullivan Industries is the borrower under the credit
facility, so the covenants do not include the $21.0 million senior note of
O'Sullivan Holdings or interest on the note. Pursuant to an amendment to our
senior credit facility, $27.0 million of payments to RadioShack under the tax
sharing agreement through the period ending June 30, 2002 are excluded from the
definition of consolidated fixed charges and thus from calculations of the
consolidated fixed charge coverage ratio.
21
In addition, the agreements effectively prohibit the payment of
dividends on our stock.
At December 31, 2002, we were in compliance with all applicable debt
covenants. However, if our sales and earnings do not improve from the current
outlook, we may be in violation of certain of our covenants under the senior
credit facility at June 30, 2003. We are currently working with our lenders to
obtain a waiver or amendment of these covenants.
As required under the senior credit facility, we hedged one-half of our
term loans with an initial notional amount of $67.5 million with a costless
interest rate collar. The collar is based on three-month LIBOR with a floor of
6.43% and a ceiling of 8.75%. To terminate this contract at December 31, 2002,
we would have been required to pay the counter-party approximately $783,000. The
counter-party to our interest rate collar provides us with the payment amount
that would be required to terminate the collar as of the end of each quarter. We
recorded the change in fair value of the collar as increased or decreased
interest expense in the consolidated statements of operations and included the
resulting liability in accrued liabilities on the consolidated balance sheets.
See the overview section of this Management's Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of the impact
of the Settlement Agreement with RadioShack on our liquidity and financial
condition.
The following table illustrates our contractual obligations due in the
future:
Payments Due by Period
---------------------------------------------------------------
(in thousands)
Less
than 12 12-36 36-60 After
Contractual Obligations Total months months months 60 months
- ------------------------------------- ----------- ------------ ------------ ----------- ------------
Long-term debt $ 216,713 $ 4,749 $ 18,794 $ 83,170 $ 110,000
Tax benefit payments to
RadioShack(1)
Capital lease obligations - - - - -
Operating leases--unconditional 4,224 1,830 2,273 121 -
Other long-term obligations 558 200 358 - -
----------- ------------ ------------ ----------- ------------
Total contractual cash obligations $ 221,495 $ 6,779 $ 21,425 $ 83,291 $ 110,000
=========== ============ ============ =========== ============
(1) Payments to RadioShack are
contingent on taxable income. The
maximum payments are: $ 77,980 $ 9,654 $ 21,073 $ 24,632 $ 22,621
=========== ============ ============ =========== ============
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities.
On an on-going basis, we evaluate our estimates, including those
related to customer programs and incentives, bad debts, inventories, intangible
assets, income taxes, restructuring, asset impairments, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that we believe are reasonable under the circumstances. The results
of these estimates form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
22
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
-> We derive our revenue from product sales. We recognize revenue from
the sale of products when persuasive evidence of an arrangement
exists, the product has been delivered, the price is fixed and
determinable and collection of the resulting receivable is
reasonably assured. For all sales, we use purchase orders from the
customer, whether oral, written or electronically transmitted, as
evidence that a sales arrangement exists. Generally, delivery
occurs when product is delivered to a common carrier or private
carrier, with standard terms being FOB shipping point. We assess
whether the price is fixed and determinable based upon the payment
terms associated with the transaction. We assess collection based
on a number of factors, including past transaction history with the
customer and the creditworthiness of the customer. Collateral is
not requested from the customers.
-> We record estimated reductions to revenue for customer programs and
incentive offerings including special pricing agreements, price
protection, promotions and other volume-based incentives. Market
conditions could require us to take actions to increase customer
incentive offerings. These offerings could result in our estimates
being too small and reduce our revenues when the incentive is
offered.
-> We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
-> We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of
inventory and its estimated market value based upon assumptions
about future demand and market conditions. If actual market
conditions are less favorable than those projected by us,
additional inventory write-downs may be required. Obsolete and
slow-moving inventory reserves were approximately $5.4 million and
$4.9 million at December 31, 2002 and 2001, respectively.
-> We record our deferred tax assets at the amount that the asset is
more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for a valuation allowance, our
determinations can change. If we objectively determine it was more
likely than not we would be able to realize our deferred tax assets
in the future in excess of our recorded amount, we would reduce our
valuation allowance, increasing income in the period such
determination was made. Likewise, should we determine that we would
not be able to realize all or part of our recorded gross deferred
tax assets in the future, we would increase our valuation
allowance, decreasing income in the period such determination was
made.
-> We periodically review our long-lived assets, including property
and equipment, for impairment and determine whether an event or
change in facts and circumstances indicates their carrying amount
may not be recoverable. We determine recoverability of the assets
by comparing the carrying amount of the assets to the net future
undiscounted cash flows expected to be generated by those assets.
If the sum of the undiscounted cash flows is less than the carrying
value of the assets, an impairment charge is recognized. Adverse
economic conditions could cause us to record impairment charges in
the future.
-> We assess goodwill regularly for impairment by applying a
fair-value-based test, using the enterprise as the reporting unit.
If the book value of the reporting unit is below the fair value of
the reporting unit, there is no impairment loss. Adverse economic
conditions could cause us to record impairment charges in the
future.
-> In the second quarter of fiscal 2001, we recorded asset impairment
charges, employee termination benefits and other exit costs
totaling $10.5 million related to a business restructuring plan to
reduce
23
production capacity and operating expenses. The restructuring plan
included closing our Cedar City, Utah facility and a reduction in
our staff at our Lamar, Missouri facility. The asset impairment
charges related to land, building and equipment located in Cedar
City, Utah. The land and building and a limited amount of equipment
are still for sale. If market conditions deteriorate further,
additional write-downs on the land, building and equipment may be
necessary.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION.
Certain portions of this Report, and particularly the Notes to the
Consolidated Financial Statements and the Management's Discussion and Analysis
of Financial Condition and Results of Operations, contain forward- looking
statements. These statements can be identified by the use of future tense or
dates or terms such as "believe," "would," "expect," "anticipate" or "plan."
These forward-looking statements involve risks and uncertainties. Actual results
may differ materially from those predicted by the forward-looking statements.
Factors and possible events which could cause results to differ include:
- loss of liquidity due to the arbitration panel's opinion in
RadioShack Corporation v. O'Sullivan Industries Holdings,
Inc.;
- significant indebtedness that may limit our financial and
operational flexibility;
- changes from anticipated levels of sales, whether due to
future national or regional economic and competitive
conditions, including new domestic or foreign entrants into
the industry, customer acceptance of existing and new
products, terrorist attacks or otherwise, as we are
experiencing now;
- pricing pressures due to excess capacity in the
ready-to-assemble furniture industry, as occurred in 1995 and
is occurring again now, or customer demand in excess of our
ability to supply product;
- raw material cost increases, particularly in particleboard and
fiberboard, as occurred in 1994 and 1995 and to a lesser
extent in fiscal 2000;
- transportation cost increases, due to higher fuel costs or
otherwise;
- loss of or reduced sales to significant customers as a result
of bankruptcy, liquidation, merger, acquisition or any other
reason, as occurred with the liquidation of Montgomery Ward in
fiscal 2001, the liquidation of Ames in 2002 and with the
reorganization of Service Merchandise Co., Inc. in 2000;
- actions of current or new competitors, foreign or domestic,
that increase competition with our products or prices;
- the consolidation of manufacturers in the ready-to-assemble
furniture industry;
- increased advertising costs associated with promotional
efforts;
- increased interest rates;
- pending or new litigation or governmental regulations such as
the recently settled arbitration involving RadioShack;
- other uncertainties which are difficult to predict or beyond
our control; and
- the risk that we incorrectly analyze these risks and forces,
or that the strategies we develop to address them could be
unsuccessful.
See also the Risk Factors section in our annual report on Form 10-K for the year
ended June 30, 2002.
Because these forward-looking statements involve risks and
uncertainties, actual results may differ significantly from those predicted in
these forward-looking statements. You should not place a lot of weight on these
statements. These statements speak only as of the date of this document or, in
the case of any document incorporated by reference, the date of that document.
All subsequent written and oral forward-looking statements attributable
to O'Sullivan or any person acting on our behalf are qualified by the cautionary
statements in this section. We will have no obligation to revise these
forward-looking statements.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our market risk is impacted by changes in interest rates, foreign
currency exchange rates and certain commodity prices. Pursuant to our policies,
we may use natural hedging techniques and derivative financial instruments to
reduce the impact of adverse changes in market prices. We do not hold or issue
derivative instruments for trading purposes. A change in interest rates of one
percentage point would affect our cash interest expense by about $1.1 million
per year.
We have market risk in interest rate exposure, primarily in the United
States. We manage interest rate exposure through our mix of fixed and floating
rate debt. Interest rate swaps or collars may be used to adjust interest rate
exposures when appropriate based on market conditions. For qualifying hedges,
the interest differential of swaps is included in interest expense. We believe
that our foreign exchange risk is not material.
Due to the nature of our product lines, we have material sensitivity to
some commodities, including particleboard, fiberboard, corrugated cardboard and
hardware. We manage commodity price exposures primarily through the duration and
terms of our vendor contracts. A one percent change in our raw material prices
would affect our cost of sales by approximately $1.5 million annually.
As noted above, in fiscal 2000 we encountered price increases in
certain commodities, which reduced our gross margin. During fiscal 2001, prices
for these products declined, which helped gross margins. Prices for these and
other commodities will continue to fluctuate.
ITEM 4. CONTROLS AND PROCEDURES.
O'Sullivan maintains disclosure controls and procedures (as defined in
Rule 13a-14(c) of the Securities Exchange Act of 1934) that are designed to
ensure that information required to be disclosed in O'Sullivan's Exchange Act
reports is recorded, processed, summarized and reported accurately within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to O'Sullivan's Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management was necessarily
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
Within 90 days prior to the date of this report, O'Sullivan carried out
an evaluation, under the supervision and with the participation of O'Sullivan's
management, including O'Sullivan's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of O'Sullivan's
disclosure controls and procedures. Based on the foregoing, O'Sullivan's Chief
Executive Officer and Chief Financial Officer concluded that O'Sullivan's
disclosure controls and procedures were effective.
There have been no significant changes in O'Sullivan's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date O'Sullivan completed its evaluation. Therefore,
no corrective actions were taken.
25
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On September 24, 2002, Montgomery Ward, LLC, et al., Debtor in
Possession, filed suit against O'Sullivan in the United States Bankruptcy Court,
District of Delaware, alleging that payments made by Montgomery Ward within 90
days prior to its bankruptcy constituted preferential transfers under the
Bankruptcy Code that should be recovered from O'Sullivan by Montgomery Ward,
together with interest. The alleged payments aggregate $3.7 million. We received
the summons in this action on October 29, 2002.
We responded to the suit denying we received any preferential payments.
We plan to contest this litigation vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Messrs. Charles A. Carroll, Richard D. Davidson, Daniel F. O'Sullivan
and Harold O. Rosser were re- elected as directors as of November 14, 2002. We
did not solicit proxies. Each director received 100 votes; no votes were
withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits required to be filed as part of this Report is set
forth in the Index to Exhibits, which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K:
none
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
O'SULLIVAN INDUSTRIES, INC.
Date: February 13, 2003 By: /s/ Richard D. Davidson
--------------------------------------------
Richard D. Davidson
President and
Chief Executive Officer
Date: February 13, 2003 By: /s/ Phillip J. Pacey
--------------------------------------------
Phillip J. Pacey
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
27
CERTIFICATION
I, Richard D. Davidson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O'Sullivan Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Richard D. Davidson
-------------------------------------
Richard D. Davidson
President and Chief Executive Officer
28
CERTIFICATION
I, Phillip J. Pacey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of O'Sullivan Industries,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Phillip J. Pacey
-------------------------
Phillip J. Pacey
Senior Vice President and
Chief Financial Officer
29
INDEX TO EXHIBITS
Page
Exhibit No. Description No.
----------- ----------- ---
3.1 & 4.1 Amended and Restated Certificate of Incorporation of O'Sullivan
(incorporated by reference from Exhibit 2.4(a) to Appendix A to Proxy
Statement/Prospectus included in Registration Statement on Form
S-4 (File No. 333-81631))
3.2 & 4.2 Bylaws of O'Sullivan (incorporated by reference from Exhibit 3.2 to
Registration Statement on Form S-1 (File No. 33-72120))
4.3 Specimen Senior Preferred Stock Certificate of O'Sullivan
(incorporated by reference from Exhibit 3 to Registration
Statement on Form 8-A (File No. 0-28493))
4.4 Indenture dated as of November 30, 1999, by O'Sullivan Industries,
Inc., as Issuer, O'Sullivan Industries - Virginia, Inc., as
Guarantor, and Norwest Bank Minnesota, National Association, as
Trustee, relating to O'Sullivan Industries, Inc.'s $100,000,000
principal amount of 13.375% senior subordinated notes
(incorporated by reference to Exhibit 4.4 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999
(File No. 0-28493))
4.5 Warrant Agreement dated as of November 30, 1999 between O'Sullivan
Industries Holdings, Inc. and Norwest Bank Minnesota, National
Association, as Warrant Agent, relating to warrants to purchase
39,273 shares of O'Sullivan Industries Holdings, Inc. Series B
junior preferred stock, including form of warrant certificate
(incorporated by reference to Exhibit 4.5 to Quarterly Report on
Form 10-Q for the quarter ended December 31, 1999 (File No.
0-28493))
4.6 Warrant Agreement dated as of November 30, 1999 between O'Sullivan
Industries Holdings, Inc. and Norwest Bank Minnesota, National
Association, as Warrant Agent, relating to warrants to purchase
93,273 shares of O'Sullivan Industries Holdings, Inc. common
stock, including form of warrant certificate (incorporated by
reference to Exhibit 4.6 to Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (File No. 0-28493))
4.7 Amended and Restated Warrant Agreement dated as of January 31,
2000 between O'Sullivan Industries Holdings, Inc. and the holder
thereof relating to warrants to purchase 39,273 shares of
O'Sullivan Industries Holdings, Inc. Series B junior preferred
stock, including form of warrant certificate (incorporated by
reference to Exhibit 4.7 to Quarterly Report on Form 10-Q for the
quarter ended December 31, 1999 (File No. 0-28493))
4.8 Amended and Restated Warrant Agreement dated as of January 31,
2000 between O'Sullivan Industries Holdings, Inc. and the holder
thereof relating to warrants to purchase 93,273 shares of
O'Sullivan Industries Holdings, Inc. common stock, including form
of warrant certificate (incorporated by reference to Exhibit 4.8
to Quarterly Report on Form 10-Q for the quarter ended December
31, 1999 (File No. 0-28493))
99.1 Certificate of chief executive officer under Section 906 of the
Sarbanes-Oxley Act of 2002 31
99.2 Certificate of chief financial officer under Section 906 of the
Sarbanes-Oxley Act of 2002 32
30