<PAGE>
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: July 3, 1999
--------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
---------------------- ----------------------
Commission file number: 333-37135
----------------------------------------
Omega Cabinets, Ltd.
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(Exact name of registrant as specified in its charter)
Delaware 42-1423186
----------------------------- -----------------------
(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
---------------------------------------------------------
Registrants telephone number, including area code)
Not Applicable.
------------------------------------------------------------------------------
(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.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of July 3, 1999
and January 2, 1999
Condensed Consolidated Statements of Income for the three
months and six months ended July 3, 1999 and June 27, 1998
Condensed Consolidated Statements of Cash Flows for the six
months ended July 3, 1999 and June 27, 1998
Notes to Condensed Consolidated Financial Statements
-2-
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
JULY 3 JANUARY 2
1999 1999
(Unaudited) (Note)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 929,288 $ 650,703
Accounts receivable 27,177,951 13,788,890
Inventories (Note 2) 17,572,718 11,764,729
Other current assets 2,275,725 1,637,794
------------ ------------
Total current assets 47,955,682 27,842,116
Property, plant and equipment 52,124,125 36,439,585
Less accumulated depreciation 9,206,847 7,602,297
------------ ------------
42,917,278 28,837,288
Deferred financing costs, net 7,672,780 5,360,388
Goodwill, net 94,162,529 51,418,582
Other assets 942,748 749,389
------------ ------------
Total assets $193,651,017 $114,207,763
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 24,400,090 $ 11,511,438
Current portion of long-term debt 15,212,589 11,105,324
------------ ------------
Total current liabilities 39,612,679 22,616,762
Deferred income taxes 2,710,000 1,150,000
Long-term debt, less current portion 165,259,119 130,750,000
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 79,855,264 61,072,025
Predecessor basis adjustment (11,031,662) (11,031,662)
Foreign currency translation adjustment (1,081,158) --
Retained earnings (deficit) (81,673,235) (90,349,372)
------------ ------------
Total stockholder's equity (deficit) (13,930,781) (40,308,999)
------------ ------------
Total liabilities and stockholder's equity (deficit) $193,651,017 $114,207,763
============ ============
</TABLE>
Note: The balance sheet at January 2, 1999 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.
-3-
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JULY 3 JUNE 27 JULY 3 JUNE 27
1999 1998 1999 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $72,045,640 $42,603,759 $132,494,161 $81,594,201
Cost of goods sold 50,326,034 29,797,760 93,478,840 58,844,780
--------------------------- -------------------------
Gross profit 21,719,606 12,805,999 39,015,321 22,749,421
Selling, general and adminis-
trative expenses 7,847,465 5,030,741 15,047,053 9,877,727
Amortization of goodwill 642,702 359,920 1,184,454 719,840
--------------------------- -------------------------
Operating income 13,229,439 7,415,338 22,783,814 12,151,854
Interest expense 4,402,162 4,043,937 8,696,568 7,837,184
--------------------------- -------------------------
Income before income taxes 8,827,277 3,371,401 14,087,246 4,314,670
Income tax expense 3,373,905 1,287,000 5,411,139 1,647,000
--------------------------- -------------------------
Net income $ 5,453,372 $ 2,084,401 $ 8,676,107 $ 2,667,670
=========================== =========================
</TABLE>
See accompanying notes.
-4-
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 3 JUNE 27
1999 1998
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,676,107 $ 2,667,670
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,316,859 2,259,371
Noncash stock option expense 205,000 -
Deferred income taxes 820,000 620,000
Changes in operating assets and liabilities:
Accounts receivable (6,493,886) (1,314,590)
Inventories (1,394,805) (479,287)
Other assets (291,054) 1,918,137
Accounts payable, accrued expenses and other liabilities
5,795,201 325,309
----------------------------
Net cash provided by operating activities 10,633,422 5,996,610
INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,399,353) (1,307,193)
Payments for acquisition of business (54,240,191) -
----------------------------
Net cash used in investing activities (60,639,544) (1,307,193)
FINANCING ACTIVITIES
Payments for deferred financing costs (2,810,775) (230,036)
Payments of long-term debt (8,477,241) (3,000,000)
Proceeds from long-term debt 43,062,408 1,380,000
Capital contributions by parent 18,681,060 100,000
Payment to parent to redeem common stock and
options at parent level (102,821) (2,605,236)
----------------------------
Net cash provided (used) by financing activities 50,352,631 (4,355,272)
Effect of foreign exchange rate changes on cash (67,924) -
----------------------------
Net increase in cash 278,585 334,145
Cash at beginning of period 650,703 157,520
----------------------------
Cash at end of period $ 929,288 $ 491,665
============================
</TABLE>
See accompanying notes.
-5-
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
July 3, 1999
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 and six month periods ended July 3, 1999 are not
necessarily indicative of the results that may be expected for the full 1999
fiscal year. For further information, refer to the Company's consolidated
financial statements and footnotes thereto for the year ended January 2, 1999.
2. INVENTORIES
Inventories consist of the following:
JULY 3 JANUARY 2
1999 1999
------------ ------------
Raw materials $ 7,619,917 $ 4,541,976
Work-in-process 6,277,254 4,837,431
Finished goods 3,675,547 2,385,322
----------- -----------
$17,572,718 $11,764,729
=========== ===========
-6-
<PAGE>
3. ACQUISITION
On January 29, 1999, the Company acquired Kitchen Craft of Canada, Ltd.
("Kitchen Craft") for a purchase price of approximately $54 million. The
transaction was accounted for as a purchase. The accounts and transactions of
Kitchen Craft are included in the accompanying condensed consolidated financial
statements from the date of acquisition. As more fully described in the Form
10-K, the acquisition was financed by additional equity and long-term debt,
primarily senior bank term loans payable over approximately six years. Pro
forma results, assuming the acquisition had occurred at the beginning of fiscal
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JULY 3 JUNE 27 JULY 3 JUNE 27
1999 1998 1999 1998
---------------------- ---------------------
<S> <C> <C> <C> <C>
Net sales $72,046 $60,106 $138,008 $114,274
Net income 5,453 2,710 9,055 3,335
</TABLE>
4. COMPREHENSIVE INCOME
Comprehensive income was $4,641,195 and $2,084,401 for the three months ended
July 3, 1999 and June 27, 1998, respectively, and $7,594,949 and $2,667,670 for
the six months ended July 3, 1999 and June 28, 1998, respectively.
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company's senior subordinated notes in aggregate principal amount of $100
million are fully and unconditionally guaranteed by Panther Transport, Inc.
("Panther"), the Company's only wholly-owned subsidiary prior to 1999. 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.
-7-
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
Beginning in fiscal 1999 as a result of the Kitchen Craft acquisition, the
Company also has two wholly-owned subsidiaries which do not guarantee the senior
subordinated notes. These non-guarantor subsidiaries generally comprise the
Kitchen Craft business. Set forth below are consolidating condensed financial
statements as of and for the three and six months ended July 3, 1999, which
separately reflect the combined non-guarantor subsidiaries (amounts in
thousands):
<TABLE>
<CAPTION>
The Non-guarantor
Company* Subsidiaries Eliminations Consolidated
--------- ------------ ------------- -------------
CONDENSED CONSOLIDATING BALANCE SHEET
<S> <C> <C> <C> <C>
Current assets:
Cash $ 522 $ 408 $ - $ 930
Accounts receivable 19,310 7,868 - 27,178
Inventories 13,275 4,298 - 17,573
Other 1,465 811 - 2,276
-------- ------- -------- --------
Total current assets 34,572 13,385 - 47,957
Property, plant and equipment, net 33,131 9,786 - 42,917
Goodwill, net 51,199 42,963 - 94,162
Other noncurrent assets 46,830 555 (38,770) 8,615
-------- ------- -------- --------
Total assets $165,732 $66,689 $(38,770) $193,651
======== ======= ======== ========
Current liabilities:
Accounts payable and accrued expenses $ 17,176 $ 7,423 $ (199) $ 24,400
Current portion of long-term debt 11,294 3,919 - 15,213
-------- ------- -------- --------
Total current liabilities 28,470 11,342 (199) 39,613
Long-term debt, less current portion 151,951 38,308 (25,000) 165,259
Other noncurrent liabilities 1,967 743 - 2,710
Total stockholder's equity (deficit) (16,656) 16,296 (13,571) (13,931)
-------- ------- -------- --------
Total liabilities and stockholder's
equity (deficit) $165,732 $66,689 $(38,770) $193,651
======== ======= ======== ========
</TABLE>
* Includes Panther which is inconsequential as described above.
-8-
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
Three months ended July 3, 1999
----------------------------------------------------
The Non-guarantor
Company Subsidiaries Eliminations Consolidated
----------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME
<S> <C> <C> <C> <C>
Net sales $50,829 $21,217 $ - $72,046
Cost of goods sold 36,743 13,583 - 50,326
----------------------------------------------------
Gross profit 14,086 7,634 - 21,720
Selling, general and administrative 6,016 2,475 - 8,491
expenses
Interest expense 3,538 864 - 4,402
----------------------------------------------------
Income before income taxes 4,532 4,295 - 8,827
Income tax expense 1,663 1,711 - 3,374
----------------------------------------------------
Net income $ 2,869 $ 2,584 $ - $ 5,453
====================================================
</TABLE>
<TABLE>
<CAPTION>
Six months ended July 3, 1999
----------------------------------------------------
The Non-guarantor
Company Subsidiaries Eliminations Consolidated
----------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME
<S> <C> <C> <C> <C>
Net sales $97,682 $34,812 $ - $132,494
Cost of goods sold 70,929 22,550 - 93,479
----------------------------------------------------
Gross profit 26,753 12,262 - 39,015
Selling, general and administrative 11,800 4,431 - 16,231
expenses
Interest expense 7,196 1,501 - 8,697
----------------------------------------------------
Income before income taxes 7,757 6,330 - 14,087
Income tax expense 2,887 2,524 - 5,411
----------------------------------------------------
Net income $ 4,870 $ 3,806 $ - $ 8,676
====================================================
</TABLE>
-9-
<PAGE>
5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<S> <C> <C> <C> <C>
Operating activities:
Net cash provided by operating $ 6,986 $ 3,648 $ - $ 10,633
activities
Investing activities:
Purchases of property, plant and (5,580) (820) - (6,399)
equipment
Payments for acquisition of business (505) (53,735) - (54,240)
-------------------------------------------
Net cash used in investing activities (6,085) (54,555) (60,639)
Financing activities:
Proceeds from long-term debt 24,146 18,916 - 43,062
Capital contributions, net of 18,578 13,571 (13,571) 18,578
redemptions
Intercompany funding (38,770) 25,199 13,571 -
Payments of long-term debt (2,756) (5,721) - (8,477)
Payments for deferred financing costs (2,228) (583) - (2,811)
-------------------------------------------
Net cash provided by (used in) financing
activities (1,030) 51,382 - 50,352
Effect of foreign exchange - (68) - (68)
-------------------------------------------
Net increase (decrease) in cash (129) 407 278
Cash at beginning of period 651 - - 651
-------------------------------------------
Cash at end of period $ 522 $ 407 $ - $ 929
===========================================
</TABLE>
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements for the period ended
July 3, 1999 and the Company's audited consolidated financial statements and
Annual Report on Form 10-K for the year ending January 2, 1999.
1999 KITCHEN CRAFT ACQUISITION
On January 29, 1999, the Company consummated the acquisition of Kitchen
Craft of Canada, Ltd. ("Kitchen Craft") as further described in the Notes to
Condensed Consolidated Financial Statements. The acquisition was accounted for
as a purchase, with Kitchen Craft consolidated with the Company effective from
the acquisition date forward. Accordingly, the Company's results of operations
for the fiscal 1999 first half reflect five months of results of Kitchen Craft.
RESULTS OF OPERATIONS
Net Sales for the three months ended July 3, 1999 ("second quarter 1999") were
$72.0 million compared to $42.6 million for the comparable period in 1998
("second quarter 1998"), an increase of 69.1%. The increase in net sales in the
second quarter 1999 was primarily attributable to the addition of Kitchen Craft,
strong consumer spending on remodeling projects, and robust new housing starts.
Net sales for Kitchen Craft for second quarter 1999 were $21.2 million and were
not included in second quarter 1998 results. For the first six months of 1999
("first half 1999"), net sales were $132.5 million compared to $81.6 million for
the comparable period in 1998 ("first half 1998"), an increase of 62.4%. Net
sales for Kitchen Craft in first half 1999 were $34.8 million and were not
included in 1998 results. Net sales of the Omega lines (custom and semi-custom
cabinetry and bath vanities) were $23.3 million in the second quarter 1999
compared to $20.8 million for the second quarter 1998, a 12.1% increase. Strong
Omega custom sales resulting from 1998 new product introductions drove this
increase partly offset by soft vanity sales. First half 1999 net sales of the
Omega lines were $45.0 million compared to $40.5 million for the first half
1998, an increase of 11.1%. Net sales of HomeCrest stock cabinetry were $27.5
million in the second quarter 1999 compared to $21.8 million in second quarter
1998, an increase of 26 .1%. Strong sales from existing dealers, impact of new
dealers, and strong new housing starts drove this growth. First half 1999 net
sales of HomeCrest stock cabinetry were $52.7 million compared to $41.1 million
for the first half 1998, an increase of 28.2%.
Gross Profit for the second quarter 1999 was $21.7 million compared to $12.8
million for the second quarter in 1998, an increase of 69.6%. As a percentage
of net sales, gross profit increased to 30.1% in the second quarter 1999 from
30.0% in second quarter 1998, primarily as a result of the Kitchen Craft
acquisition and higher selling prices at every division, partly offset by
additional hiring and training
-11-
<PAGE>
expenses at the Omega and HomeCrest divisions. Kitchen Craft realized the
highest gross profit percentage at 36.0%. The gross profit percentage of Omega
and HomeCrest for second quarter 1999 declined from second quarter 1998 as a
result of new employment costs as well as higher growth in the lower margin
HomeCrest business. For the first half of 1999, gross profit was $39.0 million
compared to $22.7 million for the first half 1998, an increase of 71.5%. As a
percentage of net sales, gross profit increased to 29.4% in the first half 1999
compared to 27.9% in the first half 1998, with margin increases realized at
every division.
Selling, General and Administrative Expenses for the second quarter 1999 were
$7.8 million compared to $5.0 million for the second quarter 1998, an increase
of 56.0%. The increase in selling, general and administrative expenses can be
attributed primarily to Kitchen Craft expenses of $2.2 million, which were not
included in the second quarter 1998 results, higher sales commissions related to
revenue growth and $0.2 million related to non-cash stock option expenses. As a
percentage of net sales, selling, general and administrative expenses declined
to 10.9% in the second quarter 1999 from 11.8% in the second quarter 1998,
primarily due to non-recurring costs in 1998 supporting various sales growth
initiatives. For the first half 1999, selling, general and administrative
expenses were $15.0 million compared to $9.9 million for the first half 1998, an
increase of 52.3%. The increase of $5.1 million was primarily attributable to
Kitchen Craft expenses of $4.0 million, higher sales commissions related to
revenue growth, and $0.2 million non-cash stock option expense. As a percentage
of net sales, selling, general and administrative expenses declined to 11.4% for
the first half 1999 from 12.1% for the first half 1998.
Operating Income for the second quarter 1999 was $13.2 million compared to $7.4
million for the second quarter 1998, an increase of 78.4%. As a percentage of
sales, operating income increased to 18.4% for the second quarter 1999 from
17.4% for the second quarter 1998, primarily attributable to the addition of
Kitchen Craft, sales price increases, and aggressive overhead cost control. For
the first half 1999, operating income was $22.8 million compared to $12.2
million for first half 1998, an increase of 87.5%. As a percentage of sales,
operating income increased to 17.2% for the first half 1999 compared to 14.9%
for the first half 1998.
Interest Expense for the second quarter 1999 was $4.4 million compared to $4.0
million for the second quarter 1998, an increase of 8.9%, primarily due to
increased borrowings associated with the 1999 Kitchen Craft acquisition, partly
offset by lower interest rates on senior debt. For the first half 1999
interest expense was $8.7 million compared to $7.8 million for the first half
1998, an increase of 11.0%.
Income Taxes for the second quarter 1999 reflected an effective tax rate of
38.2%, similar to the second quarter 1998. For the first half 1999, the
effective tax rate was 38.4% compared to 38.2% for the first half 1998.
Net Income for the second quarter 1999 was $5.5 million compared to $2.1
million for the second quarter 1998. The increase in net income for the first
quarter 1999 was primarily attributable to the Kitchen Craft acquisition as well
as other factors described. For the first half 1999, net income was $8.7
million compared to $2.7 million for the first half 1998.
-12-
<PAGE>
RESULTS OF OPERATIONS-- PRO FORMA
The historical consolidated results discussed above include Kitchen Craft
results only since the January 29, 1999 acquisition date. To provide more
insight into the underlying performance of the consolidated group, a pro forma
summary is shown below treating Kitchen Craft as if it has been acquired prior
to the first quarter 1998.
<TABLE>
<CAPTION>
Second Second
Quarter Quarter
1999 1998 Increase TTM(1)
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
Net Sales:
Omega/HomeCrest $ 50.8 $ 42.6 19.2% $185.1
Kitchen Craft 21.2 17.5 21.2% 77.4
------ ------ --------
Consolidated $ 72.0 $ 60.1 19.8% $262.5
====== ====== ========
EBITDA(2):
Omega/HomeCrest $ 9.4 $ 8.6 9.0% $ 34.1
Kitchen Craft 5.1 2.8 79.5% 15.9
------ ------ --------
Consolidated $ 14.4 $ 11.4 26.4% $ 50.0
====== ====== ========
EBITDA Margin (2):
Omega/HomeCrest 18.5% 20.1% 18.4%
Kitchen Craft 23.9% 16.1% 20.6%
Consolidated 20.1% 19.0% 19.1%
<CAPTION>
First First
Half Half
1999 1998 Increase
------ ----- --------
<S> <C> <C> <C>
Net Sales:
Omega/HomeCrest $ 97.7 $ 81.6 19.7%
Kitchen Craft 40.3 32.7 23.4%
------ ------
Consolidated $138.0 $114.2 20.8%
====== ======
EBITDA(2):
Omega/HomeCrest $ 17.3 $ 14.4 20.7%
Kitchen Craft 8.6 4.2 104.6%
------ ------
Consolidated $ 25.9 $ 18.6 39.7%
====== ======
EBITDA Margin (2):
Omega/HomeCrest 17.7% 17.6%
Kitchen Craft 21.3% 12.9%
Consolidated 18.8% 16.2%
</TABLE>
-13-
<PAGE>
____________
(1) Trailing twelve months through second quarter 1999.
(2) EBITDA Margin represents EBITDA as a percentage of net sales. EBITDA
represents income from operations before interest expense (including
amortization of deferred financing costs), income taxes, depreciation, and
amortization of goodwill. EBITDA is presented because it is a widely
accepted financial indicator of a leveraged company's ability to service
and/or incur indebtedness and because management believes that EBITDA is a
relevant measure of the Company's ability to generate cash without regard to
the Company's capital structure or working capital needs. EBITDA as
presented may not be comparable to similarly titled measures used by other
companies, depending upon the non-cash charges included. When evaluating
EBITDA, investors should consider that EBITDA (i) should not be considered
in isolation but together with other factors which may influence operating
and investing activities, such as changes in operating assets and
liabilities and purchase of property and equipment, (ii) is not a measure of
performance calculated in accordance with generally accepted accounting
principles, (iii) should not be construed as an alternative or substitute
for income from operations, net income or cash flows from operating
activities in analyzing the Company's operating performance, financial
position or cash flows and (iv) should not be used as an indicator of the
Company's operating performance or as a measure of its liquidity.
Pro Forma Net Sales for second quarter 1999 were $72.0 million compared with
$60.1 million for second quarter 1998, an increase of 19.8%. All three
divisions experienced double-digit sales growth driven by strong new
construction and sales of existing homes as well as the introduction of new
products and an increase in selling locations. For the first half 1999, pro
forma net sales were $138.0 million compared to $114.2 million for the first
half 1998, an increase of 20.8%. Kitchen Craft sales to the U.S. market
increased 42% during first half 1999 compared to first half 1998. This sales
increase was driven by strong growth at existing dealers, the addition of new
selling locations, and an increase in cabinet average selling price. Kitchen
Craft Sales to the Canadian market increased 5% as lower margin project business
was pruned and cabinet prices increased.
Pro Forma EBITDA for the second quarter 1999 was $14.4 million compared with
$11.4 million for the second quarter 1998, an increase of 26.4%. As a
percentage of net sales, EBITDA increased to 20.1% during the second quarter
1999 compared with 19.0% during the second quarter 1998. The increase in EBITDA
and EBITDA margin was primarily attributable to 19.8% pro forma sales growth,
several price increases introduced at each division, and aggressive and overhead
cost control. In addition, Kitchen Craft EBITDA and EBITDA margin increased
during the second quarter 1999 compared to the second quarter 1998 as a result
of higher sales of semi-custom cabinetry to U.S. dealers that have substantially
higher margins than stock cabinetry or sales in Canada. For the first half
1999, EBITDA was $25.9 million compared to $18.6 million for the first half
1998, an increase of 39.7%. EBITDA margin increased to 18.8% compared to 16.2%
during first half 1998. In addition, a new rough mill operation at Omega's
Waterloo facility was completed during second quarter 1999. Management
anticipates cost savings to favorably impact operations beginning in the third
quarter.
-14-
<PAGE>
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 the first half 1999 was $10.6
million as compared to $6.0 million for the first half 1998, an increase of $4.6
million. The increase was primarily due to a $6.0 million increase in net income
resulting from the Kitchen Craft acquisition and strong operating performance
partly offset by higher working capital to support revenue growth.
The Company used cash in investing activities of $60.6 million in the first
half 1999 compared to $1.3 million in the first half 1998. The increase of
$59.3 million was due to $54.2 million related to financing of the Kitchen Craft
acquisition and $5.1 million increase in capital expenditures. Total capital
expenditures for the first half 1999 were $6.4 million compared to $1.3 million
for the first half of 1998, due primarily to 1999 spending for the Omega rough
mill, Omega ERP implementation and Kitchen Craft.
Cash provided by financing activities was $50.4 million for the first half
1999 compared to a cash usage of $4.4 million for the first half 1998. This
change of $54.8 million was due primarily to financing of the Kitchen Craft
acquisition and related financing costs.
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 bank
loans, 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 bank loans
in an amount sufficient to enable the Company to service its indebtedness or
make anticipated capital expenditures.
As a result of the fiscal 1999 acquisition of Kitchen Craft, the Company's
long-term debt structure has changed substantially. At July 3, 1999, the
Company's long-term debt consisted of (i) the $100.0 million of senior
subordinated notes; (ii) a U.S. senior credit facility, consisting of a $57.2
million term facility (the "U.S. Term Facility") and a $20.0 million revolving
facility (the "U.S. Revolving Facility"); and (iii) a Canadian senior credit
facility, consisting of a (Cdn) $21.2 million term facility (the "Canadian Term
Facility") and a (Cdn) $15.0 million revolving facility (the "Canadian Revolving
Facility").
-15-
<PAGE>
As of July 3, 1999, the Company had additional borrowing availability of
$14.0 million under the U.S. Revolving Facility and (Cdn) $10.0 million under
the Canadian Revolving Facility. The U.S. Term Facility requires quarterly
principal payments which began in April 1999 at $1.0 million per quarter and
increasing at each September anniversary. Subsequent payments will be
approximately $1.3 million, $1.4 million, $1.8 million and $2.2 million per
quarter during the four quarter periods beginning September 1999, 2000, 2001,
and 2002, respectively, with $2.6 million payments due the last two quarters in
2003. Finally, four equal quarterly payments of $6.2 million will occur during
2004 with the term loan fully amortized on December 31, 2004. Additional
payments are also due each year based on 75% of the Company's defined excess
cash flow, if any. The Canadian Term Facility requires quarterly payments
beginning in April 1999 at approximately (Cdn) $0.4 million per quarter and
increasing at each anniversary. Subsequent payments will be approximately (Cdn)
$0.5 million, (Cdn) $0.6 million, (Cdn) $0.8 million, (Cdn) $0.9 million and
(Cdn) $2.3 million per quarter during 2000, 2001, 2002, 2003, and 2004. Both
the U.S. and Canadian Term Facilities mature on December 31, 2004. Revolving
Facilities will mature on December 26, 2003 and have no scheduled interim
amortization.
COMPUTER SYSTEMS AND YEAR 2000
The Year 2000 issue, common to most companies, concerns the inability of
information technology, ("IT") and non-information technology ("non-IT") systems
to recognize and process date-sensitive information after 1999 due to the use of
only the last two digits to refer to a year. This problem could affect both
information systems (hardware and software) and other equipment that relies on
microprocessors. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, schedule production, send invoices, or engage
in similar normal business activities.
The Company has completed an assessment of its IT systems, both hardware and
software, and has developed a plan to timely address the Year 2000 issue.
Systems that interact with customers and that focus on the core business
functions of buying, manufacturing, selling and accounting have been given the
highest priority. Systems and equipment, particularly production equipment that
utilize embedded chips, that are not Year 2000 compliant have been identified
and remediation efforts are in process. Management estimates that nearly 90% of
the remediation efforts were completed as of July 3, 1999. Some of the
Company's current systems are being upgraded and others are being replaced with
Year 2000-compliant systems. System upgrades and replacements are being unit-
tested as they are completed. All remediation efforts and testing of
replacement systems are expected to be completed by October 1, 1999. The
Company is monitoring the need to develop contingency plans to remediate
information systems scheduled to be replaced in case delays in the installation
schedule for the new systems make remediation of the older systems necessary.
The Company currently believes that it will complete all phases of its plan
without any material adverse consequences to its business, operation, or
financial condition.
The Company's assessment of its non-IT systems (including phone, voicemail,
heating/air-conditioning, electricity and security systems) was completed as of
January 2, 1999. The Company used internal resources to address the Year 2000
Issue of its non-IT systems and has not incurred
-16-
<PAGE>
significant separately identifiable costs and does not expect to incur
significant additional costs in order to upgrade its non-IT systems. All
validation and implementation of these non-IT systems has been completed.
The Company has spent approximately $1.6 million, to date, in the execution
of its Year 2000 plan. Total costs to address Year 2000 issues are currently
estimated not to exceed $2.0 million and consist primarily of costs for the
remediation of internal systems, including internal programming time. Funds for
these costs are expected to be provided by the operating cash flows of the
Company.
The Company is also in the process of monitoring the progress of significant
third parties in their efforts to become Year 2000 compliant. Those third
parties include, but are not limited to product suppliers, large customers,
financial institutions, third party benefit administrators, and utilities. The
Company has requested confirmation from all material third parties as to when
they will be Year 2000 compliant and has obtained responses from approximately
95% of material third parties. Although the Company is not aware of any
material third parties who are not Year 2000 compliant, if the Company's
customers and suppliers do not achieve Year 2000 compliance before the end of
1999, the Company may experience a variety of problems, which may have a
material adverse effect on the Company. To the extent such suppliers are not
Year 2000 compliant by the end of 1999, such suppliers may fail to deliver
ordered materials and products to the Company and may fail to bill the Company
properly and promptly. Consequently, the Company may experience delays in
manufacturing product to send to its customers. The Company plans to address
potential problems with its suppliers by identifying and arranging for
alternative sources of supplies. Due to the nature of its product, the Company
does not believe it has any exposure to contingencies related to the Year 2000
Issue for the products it has sold.
The Company could be faced with severe consequences if Year 2000 issues are
not identified and resolved in a timely manner by the Company and significant
third parties. A worst-case scenario would result in the short-term inability
to manufacture adequate amounts of product to support incoming customer orders
resulting in lost revenues and customer loyalty. The amount would be dependent
on the length and nature of the disruption, which cannot be predicted or
estimated. In light of the possible consequences, the Company is devoting the
resources needed to address Year 2000 issues in a timely manner. Management
receives monthly (if not more often) updates as to project status. While
management expects a successful resolution of these issues, there can be no
guarantee that material third parties, on which the Company relies, will address
all Year 2000 issues on a timely basis or that their failure to timely and
successfully address all issues would not have an adverse effect on the Company.
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
-17-
<PAGE>
affected and in the future could affect the Company's actual results and could
cause the Company's results for 1999 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 manufactures or to effectively consolidate
operations of businesses acquired.
-18-
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to interest rate market risk in connection with its
long-term debt. These financial instruments are entered into for purposes other
than trading. As of July 3, 1999, the Company's debt instruments consisted of
certain obligations which bear a fixed interest rate and others which bear
interest at variable rates. The following table provides information about the
Company's debt instruments that are sensitive to changes in interest rates, and
presents the principal cash flows and related interest rates by expected
maturity dates (in thousands):
Variable Rate (a) Fixed Rate (b)
<TABLE>
<CAPTION>
Maturing in:
<S> <C> <C>
1999 $11,967 $ --
2000 6,971 --
2001 8,172 --
2002 9,992 --
2003 12,120 --
2004 31,250 --
Thereafter -- 100,000
------- --------
Total $80,472 $100,000
======= ========
Fair value at July 3, 1999 $80,472 $100,125
</TABLE>
(a) $38.3 million at LIBOR plus 2.50%, $25.0 million at LIBOR plus 2.75% and
$17.2 million at Canadian BA rate plus 2.75% (7.57% weighted average at
July 3, 1999). Spread reduced by 25 basis points during July 1999.
(b) All at 10.5%.
The Company's interest expense is most sensitive to changes in the general
level of U.S. and certain foreign (LIBOR and Canadian BA) interest rates. In
this regard, changes in such interest rates affect the interest paid on certain
of its debt. To manage the impact of fluctuations in interest rates, the Company
continually monitors and may select a variety of rate options on its
variable-rate debt. In addition, the Company has maintained a majority of its
debt borrowings as fixed-rate debt. Although it has not historically done so,
the Company in the future may consider entering into interest rate swaps or
similar transactions in order to fix certain interest costs on variable-rate
debt.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to various legal actions arising in the ordinary
course of its business. The Company believes that the resolution of these legal
actions will not have a material adverse effect on the Company's financial
position or results of operations.
-19-
<PAGE>
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.
2.1 Master Transaction Agreement dated as of January 29, 1999 (Incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the
Commission on February 12, 1999).
3.1 Certificate of Incorporation, as amended, of the Registrant* 3.2 By-laws of
the Registrant* 4.1 Indenture dated as of July 24, 1997*
4.2 First Supplemental Indenture dated January 28, 1999 (Incorporated by
reference to Exhibit 99.1 to the Current Report on Form 8-K filed with the
Commission on February 12, 1999).
4.3 Second Supplemental Indenture dated January 29, 1999 (Incorporated by
reference to Exhibit 99.2 to the Current Report on Form 8-K filed with the
Commission on February 12, 1999).
10.1 First Amended and Restated Credit Agreement dated as of January 29
(Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K
filed with the Commission on February 12, 1999).
10.2 Panther Security Agreement dated as of January 29, 1999. (Incorporated by
reference to Exhibit 10.2 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.3 Omega Security Agreement dated as of January 29, 1999. (Incorporated by
reference to Exhibit 10.3 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
-20-
<PAGE>
10.4 Omega Pledge Agreement dated as of January 29, 1999. (Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
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*
10.11 Key Severance Agreement dated October 30, 1998. (Incorporated by reference
to Exhibit 10.11 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
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 [Reserved]
10.15 [Reserved]
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*
10.28 Bulrad Illinois Security Agreement dated as of January 29, 1999.
(Incorporated by reference to Exhibit 10.28 to the Annual Report on Form
10-K file with the Commission on April 1, 1999).
10.29 Omega Kitchen Craft Holdings Pledge Agreement dated as of January 29,
1999. (Incorporated by reference to Exhibit 10.29 to the Annual Report on
Form 10-K file with the Commission on April 1, 1999).
10.30 Omega Kitchen Craft U.S. Corp. Pledge Agreement dated as of January 29,
1999. (Incorporated by reference to Exhibit 10.30 to the Annual Report on
Form 10-K file with the Commission on April 1, 1999).
10.31 Bulrad Illinois Guaranty dated as of January 29, 1999. (Incorporated by
reference to Exhibit 10.31 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.32 Credit Agreement dated as of January 29, 1999 (Incorporated by reference
to Exhibit 4.2 to the Current Report on Form 8-K filed with the Commission
on February 12, 1999).
-21-
<PAGE>
10.33 3578275 Canada General Security Agreement dated as of January 29, 1999.
(Incorporated by reference to Exhibit 10.33 to the Annual Report on Form
10-K file with the Commission on April 1, 1999).
10.34 Omega Guarantee dated as of January 29, 1999. (Incorporated by reference
to Exhibit 10.34 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.35 Kitchen Craft Guarantee dated as of January 29, 1999. (Incorporated by
reference to Exhibit 10.35 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.36 Kitchen Craft Security Agreement dated as of January 29, 1999.
(Incorporated by reference to Exhibit 10.36 to the Annual Report on Form
10-K file with the Commission on April 1, 1999).
10.37 Supplement No. 1 to the Management Agreement dated January 29, 1999.
(Incorporated by reference to Exhibit 10.37 to the Annual Report on Form
10-K file with the Commission on April 1, 1999).
10.38 H. Buller Employment Agreement dated January 29, 1999. (Incorporated by
reference to Exhibit 10.38 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.39 M. Buller Employment Agreement dated January 29, 1999. (Incorporated by
reference to Exhibit 10.39 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.40 J. Horton Employment Agreement dated October 15, 1998. (Incorporated by
reference to Exhibit 10.40 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.41 C. Rae Employment Agreement dated October 22, 1997. (Incorporated by
reference to Exhibit 10.41 to the Annual Report on Form 10-K file with the
Commission on April 1, 1999).
10.42 Offer and Acceptance Contract dated September 15, 1998 for sale of land to
Company. (Incorporated by reference to Exhibit 10.42 to the Annual Report
on Form 10-K file with the Commission on April 1, 1999).
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.
None.
-22-
<PAGE>
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/ Robert L. Moran
----------------------------------
Name: Robert L. Moran
Title: Chief Executive Officer
(Principal executive
officer and principal
financial officer)
Dated: August 5, 1999
-23-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ERNST &
YOUNG UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JULY 3, 1999 AND
IS QUALIFIED IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-1999
<CASH> 929,288
<SECURITIES> 0
<RECEIVABLES> 29,210,951
<ALLOWANCES> 2,033,000
<INVENTORY> 17,572,718
<CURRENT-ASSETS> 47,410,266
<PP&E> 52,124,125
<DEPRECIATION> 9,206,847
<TOTAL-ASSETS> 193,651,017
<CURRENT-LIABILITIES> 39,612,679
<BONDS> 0
0
0
<COMMON> 10
<OTHER-SE> (13,930,791)
<TOTAL-LIABILITY-AND-EQUITY> 193,651,017
<SALES> 132,494,161
<TOTAL-REVENUES> 132,494,161
<CGS> 93,478,840
<TOTAL-COSTS> 93,478,840
<OTHER-EXPENSES> 16,231,507
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,696,568
<INCOME-PRETAX> 14,087,246
<INCOME-TAX> 5,411,139
<INCOME-CONTINUING> 8,676,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,676,107
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
