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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 28, 1998
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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: 333-37135
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Omega Cabinets, Ltd.
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(Exact name of registrant as specified in its charter)
Delaware 42-1423186
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification Number)
1205 Peters Drive, Waterloo, Iowa 50703
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(Address of principal executive offices)
(Zip Code)
(319) 235-5700
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Registrants telephone number, including area code)
Not Applicable.
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. Not Applicable.
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of March 28, 1998 and
December 27, 1997
Condensed Consolidated Statements of Income for the three months
ended March 28, 1998 and March 29, 1997
Condensed Consolidated Statements of Cash Flows for the three months
ended March 28, 1998 and March 29, 1997
Notes to Condensed Consolidated Financial Statements
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OMEGA CABINETS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 28 DECEMBER 27
1998 1997
(unaudited) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 72,602 $ 157,520
Accounts receivable 14,587,739 15,097,575
Inventories (Note 2) 11,903,655 11,496,588
Other current assets 3,123,600 3,302,918
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Total current assets 29,687,596 30,054,601
Property, plant and equipment 33,384,983 32,550,763
Less accumulated depreciation 5,859,625 5,298,501
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27,525,358 27,252,262
Deferred financing costs, net 5,847,612 5,853,666
Goodwill, net 52,498,342 52,858,262
Deferred income taxes 165,000 475,000
Other assets 707,486 852,507
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Total assets $116,431,394 $117,346,298
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 16,003,877 $ 14,303,600
Current portion of long-term debt 13,575,000 13,800,000
Total current liabilities 29,578,877 28,103,600
Long-term debt, less current portion 131,320,000 132,320,000
Other noncurrent liabilities 1,653 75,103
Stockholder's equity (deficit):
Common stock, $.01 par value; 10,000 shares
authorized; 1,000 shares issued and outstanding 10 10
Additional paid-in capital 62,935,425 62,835,425
Predecessor basis adjustment (11,031,662) (11,031,662)
Retained earnings (deficit) (Note 3) (96,372,909) (94,956,178)
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Total stockholder's equity (deficit) (44,469,136) (43,152,405)
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Total liabilities and stockholder's equity (deficit) $116,431,394 $117,346,298
</TABLE>
Note: The balance sheet at December 27, 1997 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
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Omega Cabinets, Ltd.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 28 MARCH 29
1998 1997
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<S> <C> <C>
Net sales $38,990,442 $35,463,542
Cost of goods sold 29,047,020 25,717,713
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Gross profit 9,943,422 9,745,829
Selling, general and administrative expenses (Note 4) 4,846,986 8,046,390
Amortization of goodwill 359,920 341,619
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Operating income 4,736,516 1,357,820
Interest expense 3,793,247 2,505,512
Income (loss) before income taxes 943,269 (1,147,692)
Income tax expense (benefit) 360,000 (450,000)
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Net income (loss) $ 583,269 $ (697,692)
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</TABLE>
See accompanying notes.
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Omega Cabinets, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 28 MARCH 29
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 583,269 $ (697,692)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,108,142 968,919
Noncash compensation expense - 4,058,000
Deferred income taxes 310,000 (1,060,000)
Changes in operating assets and liabilities:
Accounts receivable 509,836 (2,939,931)
Inventories (407,067) (1,281,186)
Other assets 324,339 35,842
Accounts payable, accrued expenses and other
liabilities 1,626,827 2,697,820
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Net cash provided by operating activities 4,055,346 1,781,772
INVESTING ACTIVITIES
Purchases of property, plant and equipment (834,220) (491,772)
Net cash used in investing activities (834,220) (491,772)
FINANCING ACTIVITIES
Payments for deferred financing costs (181,044) -
Payments of long-term debt (1,225,000) (2,250,000)
Proceeds from long-term debt - 960,000
Capital contribution by parent 100,000 -
Payment to parent to redeem common stock and
options at parent level (2,000,000) -
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Net cash used in financing activities (3,306,044) (1,290,000)
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Net decrease in cash (84,918) -
Cash at beginning of period 157,520 3,797
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Cash at end of period $ 72,602 $ 3,797
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</TABLE>
See accompanying notes.
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Omega Cabinets Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
March 28, 1998
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 28, 1998 are not
necessarily indicative of the results that may be expected for the year ended
January 2, 1999. For further information, refer to the Company's consolidated
financial statements and footnotes thereto for the year ended December 27, 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 28 DECEMBER 27
1998 1997
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<S> <C> <C>
Raw materials $ 5,117,175 $ 4,933,935
Work-in-process 4,163,622 3,910,231
Finished goods 2,622,858 2,652,422
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$11,903,655 $11,496,588
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</TABLE>
3. RETAINED EARNINGS
In March 1998, the Company's parent completed and paid a defined post-closing
adjustment of $2,000,000 for the redemption of stock and options in connection
with its 1997 merger and recapitalization. As with the original redemption cost
(all of which was pushed-down and reflected by the Company), the Company has
charged the amount to retained earnings during the 1998 first quarter.
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4. STOCK OPTION EXPENSE
Selling, general and administrative expenses include compensation expense
related to stock options, recognized in accordance with APB No. 25, of
$4,058,000 in the three months ended March 29, 1997 (none in the three months
ended March 28, 1998).
5. SUBSIDIARY DEBT GUARANTEE
The Company's senior subordinated notes in aggregate principal amount of
$100,000,000 are fully and unconditionally guaranteed by Panther Transport, Inc.
("Panther"), the Company's wholly-owned subsidiary. Separate financial
statements or summarized financial information for Panther have not been
presented since its operations are inconsequential and its accounts and
transactions represent less than 1% of each of the consolidated total assets,
liabilities, equity, net sales, operating income, and net income of the Company.
Management believes that the separate financial statements and summarized
financial information of Panther are not material to investors.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussions should be read in conjunction with the accompanying
Condensed Consolidated Financial Statements for the period ended March 28, 1998,
and the audited consolidated financial statements and Annual Report on Form 10-K
for the year ending December 27, 1997 of Omega Cabinets, Ltd. (the "Company").
1997 MERGER AND REFINANCING
As more fully described in the Company's 1997 Form 10-K, in June 1997 the
Company's parent entered into a merger and recapitalization transaction and
concurrently refinanced all outstanding long-term debt as of that date. All
merger and recapitalization transactions have been pushed down and are reflected
in the accounts of the Company. The merger was accounted for as a
recapitalization and, accordingly, did not impact the historical basis of the
Company's assets or liabilities.
RESULTS OF OPERATIONS
Net Sales for the three months ended March 28, 1998 ("first quarter 1998") were
$39.0 million compared to $35.5 million for the comparable period in 1997
("first quarter 1997"), an increase of 9.9%. Net sales of the Omega lines
(custom and semi-custom cabinetry and bath vanities) were $19.7 million in the
first quarter 1998 compared to $17.7 million for the first quarter 1997, an
11.3% increase. The combination of a 1997 fourth quarter Dynasty sales
promotion and an extensive dealer training program initiated in the second half
of 1997 is believed to have contributed to the 1998 first quarter sales increase
for Omega lines. Net sales of stock cabinetry were $19.3 million in the first
quarter 1998 compared to $17.7 million for the first quarter 1997, a 9.0%
increase. The increase was a result of an increase in dealer locations and
further product enhancements. The Company believes that net sales for the
balance of fiscal 1998 will continue to increase compared to prior year levels,
but at somewhat lower levels than the percentage increase reported in first
quarter 1998.
Gross Profit for the first quarter 1998 was $9.9 million compared to $9.7
million for the first quarter 1997, an increase of 2.0%. As a percentage of net
sales, gross profit declined to 25.5% in the first quarter 1998 from 27.5% in
the first quarter 1997, primarily as a result of higher material costs and the
timing of the annual holiday shutdown.
Selling, General and Administrative Expenses for the first quarter 1998 were
$4.8 million compared to $8.0 million for the first quarter 1997, a decrease of
39.8%. The decrease of $3.2 million is primarily attributable to non-cash
compensation expense for employee stock options granted of $4.1 million included
in the first quarter of 1997. Selling, general and administrative expenses,
without giving effect to the 1997 non-cash charges, would have been $4.8 million
in the first quarter of 1998 compared to $3.9 million in the first quarter 1997.
As a percentage of net sales, selling, general and
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administrative expenses (excluding the non-cash stock option expense) increased
to 12.4% in the first quarter 1998 from 11.2% in the first quarter 1997,
primarily due to the upgrade of sales and marketing areas to manage sales growth
and to improve customer support and training. Sales catalogs and literature were
updated and enhanced in the first quarter 1998.
Operating Income for the first quarter 1998 was $4.7 million, or 12.1% of net
sales compared to $1.4 million, or 3.8% of net sales, for the first quarter
1997. The increase in operating income for the first quarter 1998 was primarily
due to the non-cash compensation expense in 1997, which more than offset a lower
gross profit percent and higher selling, general and administrative expenses as
discussed above. Operating income, without giving effect to the non-cash stock
option expense referred to above, was $4.7 million, or 12.1% of net sales for
the first quarter 1998, compared to $5.4 million, or 15.3% of net sales, for
first quarter 1997. The primary reason for this decrease in operating income as
a percentage of net sales was the lower gross profit percentage and higher
selling, general and administrative expenses as discussed above.
Interest Expense for the first quarter 1998 was $3.8 million compared to $2.5
million for the first quarter 1997, an increase of 51.4%, primarily due to
increased borrowings associated with the 1997 recapitalization and related
transactions.
Income Taxes for the first quarter 1998 reflected approximately the same
effective tax rate as in the first quarter 1997.
Net Income (Loss) for the first quarter 1998 was a net income of $0.6 million
compared to a net loss of $0.7 million in the first quarter 1997. The increase
in net income for the first quarter 1998 compared to the first quarter 1997 was
primarily attributable to the non-cash compensation expense charged in the first
quarter 1997 and other factors described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital, capital expenditures and
debt service. The Company has financed these cash requirements primarily
through internally generated cash flow and funds borrowed under the Company's
credit facilities.
Net cash provided by operating activities for first quarter 1998 was $4.1
million compared to $1.8 million for first quarter 1997, an increase of $2.3
million. The increase was primarily due to changes in operating assets and
liabilities. Net income as adjusted for non-cash charges was $2.0 million for
the first quarter 1998 compared to $3.3 million for the first quarter 1997, due
to the factors described above. The decrease in working capital of $2.1 million
for the first quarter 1998 compared to an increase in working capital of $1.5
million for the first quarter 1997 was primarily due to a decrease in accounts
receivable for the first quarter 1998 compared to an increase for the first
quarter 1997.
The Company used cash in investing activities of $0.8 million in the first
quarter 1998 compared to $0.5 million in first quarter 1997.
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Cash used in financing activities was $3.3 million for the first quarter 1998
compared to $1.3 million for the first quarter 1997, due to an additional
payment of $2.0 million paid in the first quarter 1998 associated with the 1997
merger and refinancing.
The Company's ability to make scheduled payments of principal of, or to pay the
interest or premium, if any, on, or to refinance, its indebtedness, or to fund
planned capital expenditures will depend on its future performance, which, to a
certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond its control. Based
upon the current level of operations, management believes that cash flow from
operations and available cash, together with available borrowings under its
current credit facility, will be adequate to meet the Company's anticipated
future requirements for working capital, budgeted capital expenditures and
scheduled payments of principal and interest on its indebtedness, for the next
several years. There can be no assurance that the Company's business will
generate sufficient cash flow from operations or that future borrowings will be
available under its current bank credit facility in an amount sufficient to
enable the Company to service its indebtedness or make anticipated capital
expenditures.
As of March 26, 1998, the Company had additional borrowing availability under
its revolving facility of approximately $14.5 million. The Company's term
facility requires quarterly principal payments of approximately $0.6 million per
quarter currently, increasing at each anniversary. Subsequent payments will be
approximately $1.0 million, $1.4 million, $1.5 million, $1.9 million, and $2.3
million per quarter during the four quarter periods beginning in September 1998,
1999, 2000, 2001, 2002, respectively, with the balance due in the following two
quarters. The Company's revolving facility will mature in 2002 and has no
scheduled interim amortization.
FORWARD LOOKING STATEMENTS
When used in this quarterly report on Form 10-Q, the words "believes,"
"anticipates" and similar expressions are used to identify forward looking
statements. Such statements are subject to risks and uncertainties which could
cause actual results to differ materially from those projected. The Company
wishes to caution readers that the following important factors and others in
some cases have affected and in the future could affect the Company's actual
results and could cause the Company's results for 1998 to differ materially from
those expressed in any forward statements made by the Company: (i) economic
conditions in the remodeling and housing markets, (ii) availability of credit,
(iii) increases in interest rates, (iv) cost of lumber and other raw materials,
(v) inability to maintain state-of-the-art manufacturing facilities, (vi)
heightened competition, including intensification of price and service
competition, the entry of new competitors and the introduction of new products
by existing competitors, (vii) inability to capitalize on opportunities
presented by industry consolidation, (viii) loss or retirement of key executives
and (ix) inability to grow by acquisition of additional cabinetry manufacturers
or to effectively consolidate operations of businesses acquired.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT INDEX.
3.1 Certificate of Incorporation, as amended, of the Company*
3.2 By-laws of the Company*
4.1 Indenture dated as of July 24, 1997*
10.1 New Bank Credit Facility dated as of June 13, 1997*
10.2 Panther Security Agreement dated as of June 13, 1997*
10.3 Omega Security Agreement dated as of June 13, 1997*
10.4 Pledge Agreement dated as of June 13, 1997*
10.5 Collateral Assignment of Trademarks dated as of June 13, 1997*
10.6 Management Agreement dated June 13, 1997*
10.7 Financing Agreement dated June 13, 1997*
10.8 Deferred Compensation Plan dated June 13, 1997*
10.9 Rabbi Trust Agreement dated June 13, 1997*
10.10 Key Employment Agreement dated September 16, 1997*
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10.11 Key Severance Agreement dated April 24, 1997*
10.12 Moran Employment Agreement dated September 11, 1995, as amended June 13,
1997*
10.13 Moran Severance Agreement dated April 24, 1997*
10.14 Erlick Employment Agreement dated July 11, 1994*
10.15 Erlick Severance Agreement dated April 24, 1997*
10.16 Goebel Employment Agreement dated April 10, 1995, as amended June 13,
1997*
10.17 Goebel Severance Agreement dated April 24, 1997*
10.18 Hagan Employment Agreement dated April 10, 1995*
10.19 Hagan Severance Agreement dated April 24, 1997*
10.20 Schmidt Employment Agreement dated April 10, 1995*
10.21 Schmidt Severance Agreement dated April 24, 1997*
10.22 Deferred Non-Qualified Compensation Agreement dated June 28, 1997*
10.23 Company Bonus Plan*
10.24 Stockholders Agreement dated June 13, 1997*
10.25 Omega Holdings, Inc. Stock Option Plan*
10.26 Key Put Agreement dated June 13, 1997*
10.27 Goebel Put Agreement dated June 13, 1997*
27.1 Financial Data Schedules.
______________
* Incorporated by reference to the similarly numbered exhibit in the Company's
Registration Statement on Form S-4, No. 333-37135, filed October 3, 1997.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the first quarter ended March 28,
1998.
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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.
OMEGA CABINETS, LTD.
By: /s/ Henry P. Key
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Name: Henry P. Key
Title: Chief Executive Officer
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS PROVIDED BY ERNST & YOUNG, LLP AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> MAR-28-1998
<CASH> 72,602
<SECURITIES> 0
<RECEIVABLES> 16,465,739
<ALLOWANCES> 1,878,000
<INVENTORY> 11,903,655
<CURRENT-ASSETS> 29,687,596
<PP&E> 33,384,983
<DEPRECIATION> 5,859,625
<TOTAL-ASSETS> 116,431,394
<CURRENT-LIABILITIES> 29,578,877
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (44,469,146)
<TOTAL-LIABILITY-AND-EQUITY> 116,431,394
<SALES> 38,990,442
<TOTAL-REVENUES> 38,990,442
<CGS> 29,047,020
<TOTAL-COSTS> 29,047,020
<OTHER-EXPENSES> 5,206,906
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,793,247
<INCOME-PRETAX> 943,269
<INCOME-TAX> 360,070
<INCOME-CONTINUING> 583,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 583,269
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
