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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2000
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 Identification No.)
of incorporation or organization
1205 Peters Drive, Waterloo, Iowa 50703
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(Address of principal executive offices)
Registrant's telephone number, including area code: (319) 235-5700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part II of this Form 10-K or any amendment to this
Form 10-K. |X|
On March 30, 2000, all of the voting stock of Omega Cabinets, Ltd. was held by
Omega Holdings, Inc. ("Holdings"), a Delaware corporation.
As of March 30, 2000, Omega Cabinets, Ltd. had 1,000 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None
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FORM 10-K INDEX
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Page
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<S> <C>
Part I..........................................................................................3
Item 1. Business......................................................................3
Item 2. Properties. .................................................................12
Item 3. Legal Proceedings............................................................13
Item 4. Submission of Matters to a Vote of Security Holders..........................13
Part II........................................................................................13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........13
Item 6. Selected Financial Data......................................................14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation...................................................15
Item 8. Financial Statements and Supplementary Data..................................23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................24
Part III.......................................................................................25
Item 10. Directors and Executive Officers of the Registrant..........................25
Item 11. Executive Compensation......................................................28
Item 12. Security Ownership of Certain Beneficial Owners and Management..............32
Item 13. Certain Relationships and Related Transactions..............................35
Part IV........................................................................................37
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K...........37
</TABLE>
Reference in this Annual Report on Form 10-K is made to the Omega(TM),
HomeCrest(TM), Kitchen Craft(R), and Kitchen Craft (registered in Canada)
trademarks, which are owned by Holdings.
<PAGE>
Part I
Item 1. Business.
Omega Cabinets, Ltd. (the "Company" or "Omega") is a leading manufacturer
of wood and laminate kitchen cabinetry, bathroom vanities and related
accessories. Headquartered in Waterloo, Iowa, the Company produces a wide array
of custom, semi-custom and stock kitchen cabinetry and bathroom vanities
primarily for use in residential remodeling and, to a lesser extent, in new
construction. Omega manufactures its products in state-of-the-art,
highly-integrated facilities under the Omega (custom), Dynasty (semi-custom),
and Embassy (semi-custom) brand names. Omega's HomeCrest division ("HomeCrest")
manufactures its stock cabinets under the HomeCrest, Legend and Great Buy
Cabinetry brand names. The Company sells to a broad network of kitchen and bath
dealers, home centers, builders/contractors and independent distributors.
Kitchen Craft of Canada Ltd., based in Winnipeg, Manitoba, and an indirect
subsidiary of the Company, is the second largest manufacturer of kitchen
cabinetry and laminated countertops in Canada and the largest Canadian
manufacturer of semi-custom kitchen cabinetry. Kitchen Craft is also a leading
competitor in the United States semi-custom cabinet market. In contrast to the
Company, 100% of Kitchen Craft's cabinetry sales are generated by full access
products.
Company History
Omega was founded in 1977 by Robert J. Bertch. In its early years, Omega
principally manufactured bath vanities. In 1984, Omega began manufacturing
custom kitchen cabinetry under the Omega Custom brand name. In 1990, Omega
introduced a semi-custom kitchen cabinetry line under the Dynasty brand name as
a lower price alternative to the Omega Custom line.
In June 1994, Code, Hennessy & Simmons, Inc. led a group of private
investors, including the Company's current senior management team, in the
acquisition of Omega from its founder. In May 1995, Omega acquired HomeCrest
Corporation, a manufacturer of stock cabinetry under the HomeCrest brand name.
On or about April 28, 1997, Omega Holdings, Inc. ("Holdings"), the sole
stockholder of the Company, and Holdings' stockholders entered into a
recapitalization agreement (as amended to date, the "Merger Agreement") with
Omega Merger Corp. ("OMC"), a Company formed by affiliates of Butler Capital
Corporation ("BCC"), which provided for a merger (the "Merger") of OMC with and
into Holdings, and a recapitalization (the "Recapitalization") of Holdings, with
Holdings as the surviving corporation (the "OMC Merger"). Concurrently with the
OMC Merger, which occurred on June 13, 1997, aggregate consideration of
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approximately $201.9 million was paid to certain selling stockholders of
Holdings, including approximately $89.3 million of debt which was repaid in
connection therewith. The merger consideration was subject to a post-closing
working capital adjustment of $2.0 million, which was paid by the Company in
March 1998.
On January 29, 1999, the Company consummated the acquisition of Kitchen
Craft of Canada Ltd. ("Kitchen Craft") for approximately $54.3 million.
Concurrently with the acquisition, (i) Mezzanine Lending Associates III, L.P.
("MLA III") purchased stock of Holdings for approximately $13.3 million, (ii)
the Company amended and restated its existing senior credit agreement to provide
for an additional term loan of $25.0 million, (iii) the Company entered into a
Canadian dollar denominated senior credit agreement (the "Canadian Senior Credit
Agreement") pursuant to which it borrowed (Cdn) $22.0 million under a term loan
and approximately (Cdn) $2.0 million under a revolving loan, and (iv) the
existing Kitchen Craft management received shares of Class B Common Stock of
Kitchen Craft with a fair value of approximately $4.0 million, which are
exchangeable on a 1-for-1 basis into shares of common stock of Holdings.
In connection with the acquisition of Kitchen Craft, the Company solicited
the consent of the holders of its 10-1/2% Senior Subordinated Notes due 2007
(the "Notes") to certain amendments to the Indenture dated as of July 24, 1997
(the "Indenture") between the Company, Panther Transport, Inc., HomeCrest
Corporation and The Chase Manhattan Bank, as trustee. On January 28, 1999, the
Company, Panther Transport, Inc. and The Chase Manhattan Bank, as trustee,
entered into the First Supplemental Indenture to effect the amendments to the
Indenture described in the Company's Consent Solicitation Statement dated
January 12, 1999, as supplemented by Supplement No. 1 thereto dated January 26,
1999, Supplement No. 2 thereto dated January 27, 1999, and Supplement No. 3
thereto dated January 27, 1999.
Immediately following consummation of the acquisition of Kitchen Craft,
the Company, Panther Transport, Inc., Omega Kitchen Craft U.S. Corp., Bulrad
Illinois, Inc., and The Chase Manhattan Bank, as trustee, entered into the
Second Supplement Indenture dated January 29, 1999 pursuant to which each of
Omega Kitchen Craft U.S. Corp. and Bulrad Illinois, Inc. agreed to guarantee the
Company's obligations under the Notes and the Indenture in accordance with the
terms and provisions of the Indenture.
Products
The Company specializes in manufacturing kitchen cabinetry and bathroom
vanities and accessories. The Company offers its customers one of the most
extensive product lines in the cabinetry industry and believes that it is one of
only two national manufacturers that produces a full line of kitchen cabinetry
for all three market price points: custom, semi-custom and stock. The Company's
cabinetry is distinguished by its high quality materials, superior finishes and
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expert construction. The following chart illustrates the Company's fiscal 1997,
1998 and 1999 sales by product line:
Sales by Product Line
(dollars in millions)
<TABLE>
<CAPTION>
Product 1997 1998 1999(1)
- ------- ---- ---- ----
$ % of Sales $ % of Sales $ % of Sales
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Omega/HomeCrest
Custom Cabinetry $ 12.3 7.9% $ 13.2 7.8% $ 17.2 9.0%
Semi-Custom Cabinetry $ 44.3 28.4% $ 51.1 30.2% $ 53.8 28.3%
Stock Cabinetry $ 82.9 53.1% $ 87.8 51.9% $102.4 53.9%
Bath Vanities & Other $ 16.4 10.6% $ 17.1 10.1% $ 16.7 8.8%
------ ------ ------ ------ ------ ------
Total $155.9 100.0% $169.2 100.0% $190.1 100.0%
====== ====== ====== ====== ====== ======
Kitchen Craft
Semi-Custom Cabinetry -- -- -- -- $ 50.6 62.3%
Stock Cabinetry -- -- -- -- $ 18.1 22.2%
Countertops & Other -- -- -- -- $ 12.6 15.5%
------ ------
Total -- -- -- -- $ 81.3 100.0%
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</TABLE>
(1) These sales include eleven months of results for 1999 for Kitchen Craft,
which was acquired on January 29, 1999.
Custom Cabinetry. The Company manufactures and markets custom kitchen
cabinetry under the Omega Custom brand name. Omega Custom cabinets are
manufactured for each individual customer and are distinguished by their high
quality design, premium materials and superior construction. Omega Custom offers
the consumer the widest choice of cabinetry configurations, door styles and wood
species within the Company's product lines. The Company believes it is one of
the few custom cabinetry manufacturers capable of offering national distribution
as well as an unlimited choice of finishes through its "custom color match"
program. The Company's custom cabinetry is primarily sold to kitchen and bath
dealers as well as through Home Depot Expo and Sears' The Great Indoors
locations.
Semi-Custom Cabinetry. The Company manufactures and markets semi-custom
kitchen cabinetry under the Dynasty and Embassy brand names. Dimensional
modifications of size are
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available in both the Dynasty and Embassy lines, but not to the extent available
with the Omega Custom line. Approximately 33% of Dynasty/Embassy cabinetry sales
are produced from maple, with the balance primarily made up of oak (28%), cherry
(19%) and pecan (15%). The Dynasty line is sold primarily to kitchen and bath
dealers, while the Embassy line is sold primarily through home centers and
lumber yards such as Home Depot Expo and Sears The Great Indoors.
Stock Cabinetry. The Company manufactures and markets stock cabinetry
under the HomeCrest, Legend and Great Buy Cabinetry brand names. The HomeCrest
brand is sold through HomeCrest's distribution network of dealers,
builder/contractors and independent distributors. In September 1995, the Company
launched its Legend line of stock cabinetry that was developed subsequent to the
acquisition of HomeCrest in order to cross-sell stock cabinetry through the
Omega dealer network. In 1999, HomeCrest introduced Great Buy Cabinetry targeted
toward the builder channel.
The Company provides a number of options and option combinations for its
stock cabinetry. These options include dovetailed wood drawers, plywood
cabinetry side material options (instead of furniture board) and premium drawer
slides, which allow for a level of customization even at this lowest price
point. The Company manufactures 54 different stock door styles in six types of
wood including oak (46%), maple (13%), hickory (10%), ash (3%) and others (10%),
as well as white foil on medium-density fiberboard (18%).
Bathroom Vanities and Accessories. The Company manufactures and markets
bathroom vanities under a variety of brand names, including Classic, Coventry,
Hallmark, Lancaster, Monticello, Montrose, Omega Custom, and Sunrise. The
Company's vanity line has ten different price points covering the market from
value-priced, frameless cabinetry through high-end, furniture quality custom
vanities. The Company's vanity line includes the same materials, construction
and finishes found in the Company's kitchen cabinetry lines. Vanities are sold
to kitchen and bath dealers, home centers and, on a private-label basis, to one
distributor.
Full Access Cabinetry. Kitchen Craft manufactures and markets full access
semi-custom and stock kitchen cabinetry under the Integra and Aurora brand
names. Full access, or European style, cabinetry differs from framed cabinetry
in that front frames are not used during cabinet construction and appearance is
similar to a full-overlay framed cabinet. Integra retails at a higher price
point than Aurora resulting from a broader range of styles, all-wood door
construction, and quality of the drawer boxes. Both product lines are sold
primarily through kitchen and bath dealers and company-owned retail stores
located in Canada and the United States.
Other Products. Although the Company manufactures numerous standard wall
and base cabinetry sizes, the Company also manufactures various corner cabinets,
peninsula cabinets, special wall cabinets, medicine cabinets, special use
cabinets, sink bases, appliance cabinets and tall storage cabinets. The Company
also manufactures furniture products, such as bookcases,
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entertainment centers, hutches and desks and offers a line of kitchen and
bath-related accessory products.
In December 1996, the Company began marketing a line of all-wood,
value-priced home entertainment centers. The Company currently offers this line
in five styles. Initial distribution plans include some of the larger selling
locations in the Company's distribution network.
Kitchen Craft manufactures laminated countertops which are sold primarily
through company-owned retail stores in Canada as well as installation service
and related products sold solely through these stores.
The markets for the Company's cabinetry products are cyclical and are
affected by the same economic factors that affect the remodeling and housing
industries in general, including the availability of credit, changes in interest
rates, market demand and general economic conditions, all of which are beyond
the Company's control. Any deterioration in these markets could have a material
adverse effect on the Company's business, financial conditions and results of
operations.
Manufacturing
General. The Company operates four manufacturing facilities located in
Waterloo, Iowa; Goshen, Indiana; Clinton, Tennessee; and Winnipeg, Manitoba.
Custom and semi-custom kitchen cabinetry and bathroom vanities are manufactured
in Waterloo, and stock cabinetry and vanities are manufactured and assembled in
Goshen. Finished cabinetry frames and flat panel doors for stock cabinetry are
manufactured in Clinton. Full access cabinetry and laminated countertops are
manufactured in Winnipeg.
The plants are primarily machining, assembly and finishing operations. Raw
materials used by the plants consist of raw, kiln-dried lumber and plywood. At
the Waterloo facility, the lumber is cut and molded in a manner designed to
maximize material usage and minimize waste. At the Goshen facility, dimensioned
lumber and particle board is supplied by third-party vendors and the Waterloo
facility. Prior to assembly, plywood and furniture board is laminated and
machined. Panels, shelves, drawers, drawer fronts, floors and back parts are
then assembled. Semi-custom and stock cabinetry are finished (sanded, stained,
varnished and cured) and then assembled. Custom products are finished after
assembly. Hardware is then added, and the final product is inspected, packaged
and staged for shipment.
Suppliers and Raw Materials. In 1999, the Company purchased roughly $99
million of lumber and other raw materials from approximately 60 different
suppliers, the largest of which represented approximately 4% of such purchases.
The Company is not dependent upon any specific supplier for any of its raw
materials or component parts. The Company believes that its sources of supply
are adequate for its needs. Additionally, the Company recently formed a
dedicated materials management team to monitor its materials purchasing with the
goal of reducing costs.
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The Company's results of operations are affected significantly by
fluctuations in the market prices of hardwood lumber, which represent
approximately 20% of the total cost of goods sold by the Company. The Company
buys its hardwood supplies at market-based prices from numerous independent
sawmill operators. The cost of hardwood lumber is subject to fluctuation and is
affected by levels of supply as well as development in the timber cutting
industry. Significant increases in the price of lumber would increase the cost
of goods sold. Unless the Company was able to increase the prices of its
products, such price increases could have a materially adverse affect on the
Company's results of operation.
Transportation/Freight. Panther Transport, Inc. ("Panther"), a
wholly-owned subsidiary of the Company, provides trucking and freight services
to the Company for its Omega product lines. Panther leases 37 tractors and 50
trailers. HomeCrest and Kitchen Craft products are primarily shipped through
contract carriers to customers.
Sales and Marketing - Omega
The Company sells its products in the United States principally through
its network of 1,423 active kitchen and bath dealer locations, as well as
through home centers, builder/contractors and independent distributors. An
individual dealer may maintain more than one store location. Active kitchen and
bath dealer selling locations are defined by the Company as only those dealer
locations which have purchased over $10,000 of products in the past year. The
sales force and distribution network for the Company's Omega product lines is
separate and distinct from the distribution of stock product lines manufactured
by HomeCrest. The following chart illustrates the growth in the Company's active
selling locations from 1997 to 1999:
Active Selling Locations
Kitchen & Home
Year Bath Dealers Centers Other(1) Total Locations
- ---- ------------ ------- -------- ---------------
1997 1,248 235 20 1,503
1998 1,297 276 27 1,600
1999 1,423 247 30 1,700
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(1) Includes independent distributors and builders/contractors.
In 1999, approximately 82% of the Company's sales were through kitchen and
bath dealers. The Company has established strong relationships with its dealers
through superior customer service, timely delivery, quality products and
competitive pricing. Extensive interviews of kitchen and bath cabinetry dealers
indicate that service, timeliness of delivery, perceived value, and product
quality are all more important than price in choosing a cabinetry
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supplier. In 1999 the Company had an on-time, accurate completion record above
95%, which is aided by its bar coding systems for tracking work-in-progress and
finished goods inventory. These systems enable the Company to provide its
dealers with rapid order status and product information and options. The Company
seeks to establish long-term relationships with quality dealers and has
experienced very low dealer turnover rates, creating what management believes is
a significant competitive advantage within the industry.
Kitchen and bath dealers primarily service the remodeling market and
provide design consultation services to the consumer. These dealers primarily
sell custom and semi-custom products. The Company added 344 new kitchen and bath
dealer selling locations in 1999 and believes that the addition of new dealers
is important to future sales growth. It has been the Company's experience that
new selling locations generally mature within a 9- to 18-month time period. The
Company has focused particularly on adding dealers for its stock products in an
effort to increase sales of stock cabinetry into the remodeling market which is
less cyclical than the new construction market.
The Company further markets its products through home centers such as Home
Depot, Home Depot Expo, Sears' The Great Indoors, Menards and Eagle. The Company
has selectively targeted certain national and regional chains to distribute its
custom and semi-custom cabinetry and bath vanities. In 1999, the Company
increased sales through its home center channel by 12% driven primarily by new
store openings at Expo and the Great Indoors partly offset by lower sales at Me
nards due to temporary store closures for remodeling. In 1999, sales in the home
center distribution channel represented approximately 9% of the Company's total
net sales.
The Company also sells products through two independent distributors which
accounted for approximately 7% of total sales in 1999.
In early 1996, the Company also began targeting the manufactured housing
market and generated $3.1 million in sales in fiscal 1999 from one manufacturer.
The Company is uniquely positioned to serve the manufactured housing segment
through its Goshen, Indiana stock cabinetry manufacturing facility, which
geographically neighbors Elkhart, Indiana, the center of the U.S. manufactured
housing industry.
The Company produces its cabinetry primarily in response to firm orders.
By producing products only to order, the Company reduces its inventory risk by
lowering its work-in-progress inventory and improving inventory turns, all of
which contribute to the Company's low overall working capital requirements. The
Company generally ships its custom cabinetry within five weeks of order, its
semi-custom cabinetry within four weeks of order and its stock cabinetry within
10 days of order. The Company possesses an on-time, accurate order completion
record of over 95% which management believes is among the highest in the
industry. Order accuracy and lead times have been enhanced by the implementation
of the bar code system.
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The Company maintains separate sales forces for products produced by Omega
and HomeCrest consisting of 90 independent sales representatives, six
company-employed salespersons and approximately 30 customer service
professionals. The sales force assists the Company's dealers with training,
promotions, cabinetry displays and other services. All orders are placed
directly with the Company.
Sales and Marketing - Kitchen Craft
Kitchen Craft sells it products in Canada and the United States
principally through its network of 373 kitchen dealer locations and 12
company-owned retail stores. In 1999, dealer locations contributed 67% of sales,
retail stores 30%, and one regional homecenter, Beaver Lumber, contributed 3%.
Kitchen Craft generates approximately 46% of its sales from the Canadian
market, which is supported by a broad distribution network including 143
dealers, 10 company-owned retail stores, and 78 Beaver Lumber locations. The
retail stores were created due to the lack of a strong distribution channel of
independent kitchen and bath dealers in Canada. Management attributes this
industry dynamic primarily to the prevalence of nearly exclusive manufacturer
representation by dealers and the lack of population density in Canada. Kitchen
Craft's company-owned stores function in essentially the same manner and provide
substantially equivalent customer services as independent dealers.
The United States generates approximately 54% of Kitchen Craft sales and
is supported by 230 dealers and 2 company-owned stores located in Seattle and
Austin. In 1992, the Company aggressively expanded its United States
distribution network and the company-owned stores were created to overcome
initial difficulties in penetrating the independent dealer network.
Kitchen Craft maintains a U.S. sales force consisting of 10
company-employed salespersons and 13 independent sales representatives. The
sales force assists the Company's dealers with training, promotion, cabinetry
displays and other services.
Employees
As of January 1, 2000, the Company employed approximately 1,900 people of
which 257 were salaried and 1,643 were hourly, none of whom are covered by a
union or collective bargaining agreement. In addition, Kitchen Craft has
approximately 1,225 workers, none of whom are covered by a union or a collective
bargaining agreement. In addition, 164 of these employees work at the 12
company-owned retail stores.
Industry Overview
The kitchen and bath cabinetry industry consists of three primary price
points: custom, semi-custom and stock. Custom cabinetry is made-to-order and is
offered in an unlimited
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choice of design and construction styles, wood species, configurations, finishes
and colors. Semi-custom cabinetry is less expensive and is made-to-order from a
more limited set of options than custom cabinetry. Stock cabinetry is the least
expensive price point and offers the fewest number of styles, wood species and
finishes, with choices generally limited to the standard guidelines established
by the manufacturer. Kitchen cabinetry and bathroom vanities are generally
distributed through four separate channels: kitchen and bath dealers, home
centers, builders/contractors and independent distributors. Management estimates
that there are over 10,000 kitchen and bath dealers in the United States.
The United States kitchen and bath cabinetry industry is highly fragmented
with over 4,500 manufacturers. However, management believes that the industry
continues to consolidate, and that this trend toward industry consolidation will
continue as larger competitors with broader product offerings and more extensive
distribution networks will displace smaller, less-capable competitors.
Competition
The cabinetry industry is mature, competitive, regional and fragmented,
with approximately 4,500 manufacturers, many of which are small and compete
primarily on a local or regional basis. There are relatively low capital
requirements for cabinetry assembly, and therefore it is relatively easy for
small competitors to enter the industry.
Despite the relatively low barriers to entry facing small potential
industry entrants, ongoing consolidation is occurring due to customer demands
for shorter lead times and product innovation and the need for manufacturers to
invest in automation and technology. Such consolidation is making it more
difficult for smaller players to compete with larger, more integrated
manufacturers on a cost-effective basis. Management therefore believes that its
principal competitors include only those cabinetry manufacturers with strong
dealer networks and adequate capital supplies to invest in technology and
develop the economies of scale in manufacturing and purchasing required to
deliver the important combination of service, product quality and competitive
pricing demanded by customers.
Key competitive factors in the cabinetry industry include product quality,
breadth of offering, customer service, speed of delivery, value and price. The
cabinetry industry is subject to price competition, especially in the stock
cabinetry price point of the market. The Company believes that it competes
favorably with other manufacturers due to the breadth of its product offerings,
its production capacity and its delivery and service. Some of the Company's
competitors, however, are larger and have greater financial resources than the
Company.
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Intellectual Property
Holdings, the Company's sole stockholder, owns the Omega, HomeCrest and
Kitchen Craft trademarks. The Company believes that its trademarks are important
to its business operations and that the expiration or loss of such trademarks
could have a material adverse effect on the Company.
Environmental Matters
The Company's operations are subject to extensive federal, state and local
laws and regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. Permits are
required for certain of the Company's operations, and these permits are subject
to revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and
violations may result in the payment of fines or the entry of injunctions, or
both. The Company does not believe it will be required under existing
environmental laws and enforcement policies to expend amounts that will have a
material adverse effect on its results of operations or financial condition. The
requirements of such laws and enforcement policies, however, have generally
become stricter in recent years. Accordingly, the Company is unable to predict
the ultimate cost of compliance with environmental laws and enforcement
policies.
Item 2. Properties.
The following are the Company's principal manufacturing facilities and
properties:
<TABLE>
<CAPTION>
Location Owned/Leased Products Square Ft.
- -------- ------------ -------- ----------
<S> <C> <C> <C>
Waterloo, Iowa Owned Custom and semi-custom 420,000
cabinetry and vanities
Goshen, Indiana Owned Stock cabinetry 477,000
Clinton, Tennessee (1) Owned Finished frames and flat 201,000
panel doors
Winnipeg, Manitoba Owned Stock and semi-custom cabinetry 360,000
Winnipeg, Manitoba Leased Laminated countertops 30,000
</TABLE>
- ----------
(1) The Clinton property is a flexible facility currently utilized for the
sub-assembly of cabinetry and vanities.
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The Company believes that its plants and properties are generally very
well maintained and in excellent operating condition. While the Company
maintains adequate insurance coverage on all of its properties, the loss of
those facilities could have an adverse effect on the Company's operations.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters during the fourth quarter of the
fiscal year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
As of March 30, 2000, Omega had 10,000 authorized shares of common stock,
par value $.01 per share, of which 1,000 were issued and outstanding and held by
Holdings. There is no established public trading market for Omega common stock.
Omega's ability to pay dividends is limited under the Indenture, as amended.
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Item 6. Selected Financial Data
Set forth below is selected financial data of the Company. The Statement
of Income and Balance Sheet Data of the Company for the fiscal years 1995
through 1999 have been derived from the Company's audited consolidated financial
statements for those periods. The information presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Year Ended (1)
--------------------------------------------------------------------------
December December December January January
30, 1995 (2) 28, 1996 27, 1997 2, 1999 1, 2000 (3)
------------ -------- -------- ------- -----------
(in thousands, except ratios and statistical data)
<S> <C> <C> <C> <C> <C>
Statement of Income Data
Net sales $ 97,958 $ 136,225 $ 155,899 $ 169,220 $ 271,396
Cost of goods sold 72,690 97,287 112,557 121,767 192,430
--------- --------- --------- --------- ---------
Gross profit 25,268 38,938 43,342 47,453 78,966
Selling, general and administrative expenses 10,964 15,309 22,171(4) 20,101 33,401
Amortization of goodwill 1,163 1,332 1,398 1,440 2,468
--------- --------- --------- --------- ---------
Operating income 13,141 22,297 19,773(4) 25,912 43,097
Interest expense 9,701 10,441 16,313 15,074 17,446
Foreign currency transaction gain -- -- -- -- (969)
--------- --------- --------- --------- ---------
3,440 11,856 3,460 10,838 26,620
Income tax expense 1,360 4,700 1,695 4,180 10,516
--------- --------- --------- --------- ---------
Income before extraordinary item 2,080 7,156 1,765 6,658 16,104
Extraordinary loss on debt refinancing (5) -- -- 947 -- --
--------- --------- --------- --------- ---------
Net income $ 2,080 $ 7,156 $ 818 $ 6,658 $ 16,104
========= ========= ========= ========= =========
Ratio of earnings to fixed charges (6) 1.3x 2.1x 1.2x 1.7x 2.5x
Other Data
EBITDA (7) $ 15,500 $ 25,527 $ 28,710 $ 29,703 $ 50,374
EBITDA margin (7) 15.8% 18.7% 18.4% 17.6% 18.6%
Gross margin 25.8% 28.6% 27.8% 28.0% 29.1%
Capital expenditures 3,045 1,421 3,041 3,932 11,553
Depreciation and amortization 2,781 3,731 4,067 4,527 7,015
Net cash provided (used) by:
Operating activities 9,077 13,262 849 13,220 25,185
Investing activities (33,175) (2,181) (6,673) (3,932) (61,876)
Financing activities 24,103 (11,083) 5,978 (8,795) 38,334
Ratio of EBITDA to interest expense 1.6x 2.4x 1.8x 2.0x 2.9x
Number of active selling locations (at end of year)(8) 1,097 1,379 1,503 1,600 2,033
Balance Sheet Data (at end of period)
Working capital (deficit) $ (1,971) $ (850) $ 1,951 $ 5,225 $ 12,831
Total assets 102,206 103,577 117,346 114,208 191,451
Long-term debt, including current portion 92,539 81,636 146,120 141,855 173,184
Stockholder's equity (deficit) (4,354) 2,790 (43,152) (40,309) (5,860)
</TABLE>
(1) The Company follows a 52/53 week fiscal year. Fiscal 1998 consisted of 53
weeks and all other periods since fiscal 1995 consisted of 52 weeks. The
Company has not paid or declared any cash dividends during the periods
presented and is restricted in paying cash dividends under the terms of
its borrowing agreements.
(2) In May 1995, the Company acquired the operating assets of HomeCrest
Corporation in a transaction accounted for as a purchase.
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<PAGE>
(3) In January 1999, the Company acquired the stock of Kitchen Craft of Canada
Ltd. in a transaction accounted for as a purchase.
(4) Selling, general and administrative expenses for the year ended December
27, 1997 includes non-cash expenses relating to stock option and warrant
grants of $5,481 (before related income tax benefit of $1,972).
(5) As a result of the 1997 recapitalization and related refinancing, in June
1997 the Company wrote off existing unamortized deferred financing costs
of $1,554, resulting in an extraordinary loss of $947 (net of a related
income tax benefit of $607).
(6) For purposes of calculating the ratio, earnings consist of income or loss
before income taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing costs, and 25% of the rent
expense from operating leases which management believes is a reasonable
approximation of the interest factor included in the rent.
(7) 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,
amortization of goodwill and non-cash stock option and warrant expense.
Non-cash expense of $57, $5,481, $4, and $1,348 relating to stock option
and warrant grants was incurred in fiscal years 1996, 1997, 1998 and 1999,
respectively. 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.
(8) Active selling locations represent customer locations which have purchased
over ten thousand dollars of product in the prior year and includes
Kitchen Craft for 1999.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following is management's discussion and analysis of the financial
condition and results of operations of the Company for the fiscal years ended
January 1, 2000, January 2, 1999 and December 27, 1997. This discussion and
analysis should be read in conjunction with, and is qualified in its entirety
by, the sections entitled "Selected Financial Data" and the Consolidated
Financial Statements of the Company and the notes thereto including elsewhere in
this annual report on Form 10-K.
Previous Acquisitions
In June 1994, Omega acquired all of the outstanding common stock of the
predecessor to Omega for an aggregate purchase price of approximately $71.1
million. The transaction was accounted for by the purchase method and resulted
in goodwill of approximately $43.1 million, which is being amortized over 40
years. In May 1995, Omega acquired HomeCrest for a total
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<PAGE>
purchase price of $29.8 million, which was accounted for by the purchase method
and resulted in goodwill of approximately $13.5 million, which is being
amortized over 40 years.
1997 Merger
Concurrently with the OMC Merger, Mezzanine Lending Associates III, L.P.
("MLA III"), an affiliate of BCC, purchased stock of Holdings for approximately
$61.9 million and loaned Holdings an additional $10.0 million represented by a
junior subordinated note, and existing management shareholders and the Company's
founder retained approximately 11.1% of common stock with a fair value of
approximately $7.8 million in Holdings. In addition, the Company entered into an
agreement with various banks including U.S. Bank National Association as a bank
lender and as agent for the bank lenders' party thereto. The OMC Merger was
accounted for as a recapitalization. As a result, the OMC Merger did not affect
the historical basis of the Company's assets and liabilities.
1999 Kitchen Craft Acquisition
On January 29, 1999, the Company consummated the acquisition of Kitchen
Craft for $54.3 million. Concurrently with the acquisition, (i) MLA III
purchased stock of Holdings for approximately $13.3 million, (ii) the Company
amended and restated its existing senior credit agreement to provide for an
additional term loan of $25.0 million, (iii) the Company entered into the
Canadian Senior Credit Agreement pursuant to which it borrowed (Cdn) $22.0
million under a term loan and approximately (Cdn) $2.0 million under a revolving
loan and (iv) the existing Kitchen Craft management received shares of Class B
Common Stock of Kitchen Craft with a fair value of approximately $4.0 million,
which are exchangeable on a 1-for-1 basis into shares of common stock of
Holdings. The transaction was accounted for using the purchase method and
resulted in goodwill of approximately $43.9 million, which is being amortized
over 40 years. In addition, Kitchen Craft's results were consolidated with the
Company effective from the acquisition date forward. Accordingly, the Company's
results of operations for 1999 reflect eleven months of results for Kitchen
Craft.
Potential Acquisitions
The Company plans to capitalize on its position as one of the largest
domestic manufacturers of kitchen cabinetry and bathroom vanities by acquiring
other cabinetry companies as the industry consolidates. The Company continues to
explore potential acquisition opportunities and evaluate potential acquisition
candidates on a regular basis. The Company believes that acquiring additional
cabinetry manufacturers will facilitate growth in product line, broaden its
geographic distribution and promote additional operating efficiencies.
-16-
<PAGE>
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
Net Sales for fiscal 1999 were $271.4 million compared to $169.2 million
for fiscal 1998, an increase of 60.4%. The increase 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 eleven
months 1999 were $81.3 million and were not included in fiscal 1998 results. Net
sales of the Omega lines (custom and semi-custom cabinetry and bath vanities)
were $87.7 million in fiscal 1999 compared to $81.4 million in fiscal 1998, an
increase of 7.8% driven primarily by strong custom and semi-custom cabinetry
sales resulting from new dealers and new store openings at Home Depot EXPO
Design Centers and Sears The Great Indoors. Vanity sales declined 2.3% resulting
primarily from the product line's largest customer temporarily closing stores
during 1999 for large scale remodeling. Net sales of HomeCrest stock cabinetry,
sold under the HomeCrest and Legend brands, were $102.4 million in fiscal 1999
compared to $87.8 million in fiscal 1998, an increase of 16.5%. Strong sales to
existing dealers, impact of sales by new dealers, and strong new housing starts
drove this growth. In addition, HomeCrest increased sales by introducing a new
brand, Great Buy Cabinetry, and twenty new product lines.
Gross Profit for fiscal 1999 was $79.0 million compared to $47.5 million
for fiscal 1998, an increase of 66.4%. As a percentage of sales, gross profit
increased to 29.1% in fiscal 1999 compared to 28.0% in fiscal 1998, primarily as
a result of the Kitchen Craft acquisition partly offset by modestly lower gross
margins at both Omega and HomeCrest. HomeCrest's gross profit decreased to 23.0%
in fiscal 1999 compared to 23.9% in fiscal 1998 driven primarily by higher labor
costs due to the short-term impact of new and inexperienced production employees
hired to support the Company's growth. Omega's gross profit decreased to 29.3%
in fiscal 1999 compared to 32.1% in fiscal 1998 driven primarily by start-up
costs related to Omega's new rough mill facility and higher lumber costs.
Kitchen Craft's gross profit margin was 36.2%.
Selling, General and Administrative Expenses for fiscal 1999 was $33.4
million compared to $20.1 million for fiscal 1998, an increase of 66.2%. The
increase of $13.3 million is primarily attributable to Kitchen Craft expenses of
$10.9 million, which were not included in 1998 results, $1.3 million related to
non-cash stock option expense, and higher sales commissions related to revenue
growth. Fiscal 1998 included certain non-recurring acquisition and severance
expenses of $1.1 million. As a percentage of net sales, selling, general and
administrative expenses were 12.3% in fiscal 1999 compared to 11.9% in fiscal
1998. This increase was driven primarily by Kitchen Craft whose rate was 13.4%
and modestly higher than Omega's and HomeCrest's, due to Kitchen Craft's
company-owned retail stores.
Operating Income for fiscal 1999 was $43.1 million compared to $25.9
million for
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<PAGE>
fiscal 1998, an increase of 66.3%. As a percentage of sales, operating income
increased to 15.9% for fiscal 1999 compared to 15.3% for fiscal 1998. The
increase of $17.2 million in operating income for fiscal 1999 was primarily due
to the addition of Kitchen Craft and strong sales growth, partly offset by
higher labor costs at HomeCrest as discussed previously, start-up costs for
Omega's new rough mill facility, and higher non-cash stock option expense.
Interest Expense for fiscal 1999 was $17.4 million compared to $15.1
million for fiscal 1998, an increase of 15.7%. This $2.3 million increase was
primarily due to $3.1 million additional interest related to the Kitchen Craft
acquisition partly offset by $.8 million decrease related to lower debt levels
and interest rates on senior debt. During September 1999, the Company realized a
75 basis point reduction in senior debt interest as a result of attaining
certain debt coverage levels.
Income Tax Expense for fiscal 1999 was $10.5 million compared to $4.2
million for fiscal 1998. Fiscal 1999 reflected a normalized tax rate of 39.5%
compared with 38.6% for fiscal 1998 resulting from a higher tax rate at Kitchen
Craft.
Net Income for fiscal 1999 was $16.1 million compared to $6.7 million for
fiscal 1998 primarily attributable to the Kitchen Craft addition as well as
other factors described above. Net income as a percentage of net sales increased
to 5.9% for fiscal 1999 compared to 3.9% for fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Net Sales for fiscal 1998 were $169.2 million compared to $155.9 million
for fiscal 1997, an increase of 8.5%. Net sales of the Omega traditional lines
(custom and semi-custom cabinetry and bath vanities) were $81.4 million in 1998
compared to $73.0 in fiscal 1997, an increase of 11.4%, with sales increases in
all three lines. This increase in net sales reflects an increase in the number
of dealer locations, further penetration in specialty home centers such as Home
Depot Expo and Sears' The Great Indoors, and favorable customer reaction to
upgraded Omega Bath and Custom offerings. Net sales of stock cabinetry were
$87.8 million in fiscal 1998 compared to $82.9 million in fiscal 1997, a 6.0%
increase, as a result of an increase in dealer locations and the introduction of
17 new product lines, which was partially offset by an unplanned sales decline
at the largest customer (due to customer's system implementation issues).
Gross Profit for fiscal 1998 was $47.5 million compared to $43.3 million
in fiscal 1997, an increase of 9.5%. As a percentage of net sales, gross profit
increased to 28.0% in fiscal 1998 from 27.8% in fiscal 1997 primarily as a
result of a larger share of the sales coming from the Omega product lines which
carries higher margins.
Selling, General and Administrative Expenses for fiscal 1998 were $20.1
million, compared to $22.2 million in fiscal 1997, a decrease of 9.3%. Fiscal
1997 included non-cash
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<PAGE>
stock option and warrant expense of $5.5 million. Fiscal 1998 included certain
non-recurring acquisition and severance expenses of $1.1 million. Selling,
general and administrative expenses without giving effect to these charges would
have been $19.0 million in fiscal 1998 compared to $16.7 million in 1997, an
increase of 13.7%. As a percentage of net sales, selling, general and
administrative expenses, excluding the charges referred to above, increased to
11.2% in fiscal 1998 from 10.7% in fiscal 1997 primarily due to higher salary
expenses to support sales growth initiatives and improve customer support and
training; higher advertising costs for cooperative advertising participation;
higher literature expense associated with new product introductions; and higher
legal and accounting expenses incurred from increased external reporting
requirements.
Operating Income for fiscal 1998 was $25.9 million, or 15.3% of net sales,
compared to $19.8 million, or 12.7% of net sales, for fiscal 1997, an increase
of 31.1%. The increase in operating income in fiscal 1998 was primarily due to
higher sales and favorable product mix in 1998 and non-cash stock option and
warrant expenses in 1997 as discussed above. For fiscal 1998, operating income,
without giving effect to non-recurring acquisition and severance costs referred
to above, was $27.0 million, or 16.0% of net sales, compared to $25.2 million,
or 16.1% of net sales for fiscal 1997 (as adjusted for non-cash stock option and
warrant expense). The primary reason for this decrease in operating income as a
percentage of net sales was higher selling, general and administrative expenses
referred to above.
Interest Expense for fiscal 1998 was $15.1 million compared to $16.3
million for fiscal 1997, a decrease of 7.6%, primarily due to bridge loan
expenses incurred in fiscal 1997 associated with the recapitalization, partially
offset by higher full year interest on increased borrowings from
recapitalization.
Income Taxes for fiscal 1998 were $4.2 million compared to $1.7 million
for fiscal 1997. Fiscal 1998 reflected a normalized tax rate of 38.6% while
fiscal 1997 reflected variations in the effective tax rate due to the
recapitalization and related transactions.
Net Income for fiscal 1998 was $6.7 million compared to $0.8 million in
fiscal 1997 primarily due to non-cash stock option and warrant expense, the
extraordinary loss on debt refinancing and amortization of bridge loan fees in
fiscal 1997 as well as strong sales growth in fiscal 1998.
Results of Operations - Pro Forma
The results discussed above only include Kitchen Craft results since the
January 29, 1999 acquisition. To provide more insight into the underlying
performance of the consolidated group, a pro forma summary for fiscal years 1998
and 1999 are shown below treating Kitchen Craft as if it was acquired prior to
1998.
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<PAGE>
1999 1998 Increase
---- ---- --------
(in millions, except statistical data)
Net Sales:
Omega/HomeCrest $190.1 $169.2 12.3%
Kitchen Craft 86.9 69.7 24.5%
------ ------
Consolidated $276.9 $239.0 15.9%
Adjusted EBITDA (1):
Omega/HomeCrest $ 31.3 $ 31.1 0.7%
Kitchen Craft 20.2 11.5 74.6%
------ ------
Consolidated $ 51.5 $ 42.6 20.7%
Adjusted EBITDA Margin (1):
Omega/HomeCrest 16.5% 18.4%
Kitchen Craft 23.2% 16.5%
Consolidated 18.6% 17.8%
- ----------
(1) Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net
sales. Adjusted EBITDA represents EBITDA (see Item 6, Selected Financial
Data), as adjusted for certain unusual, one-time or nonrecurring expenses.
Pro Forma Net Sales for fiscal 1999 were $276.9 million compared to $239.0
million for fiscal 1998, an increase of 15.9%. All three divisions experienced
strong sales growth driven by strong new construction and sales of existing
homes as well as the introduction of new products and an increase in new selling
locations. Kitchen Craft sales to the U.S. market increased 42% compared to
fiscal 1998 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 7%, as lower margin project
business was pruned and cabinet prices increased.
Pro Forma Adjusted EBITDA for fiscal 1999 was $51.5 million compared to
$42.6 million for fiscal 1998, an increase of 20.7%. As a percentage of net
sales, Adjusted EBITDA was 18.6% for fiscal 1999 compared to 17.8% for fiscal
1998. Kitchen Craft Adjusted EBITDA and percent to net sales increased
dramatically during fiscal 1999 compared to fiscal 1998 primarily as a result of
higher sales of semi-custom cabinetry to U.S. dealers that have substantially
higher margins than stock cabinetry sales in Canada. Both the Omega and
HomeCrest divisions experienced Adjusted EBITDA margin declines as discussed
previously.
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.
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<PAGE>
Net cash provided by operating activities for fiscal 1999 was $25.2
million compared to $13.2 million for fiscal 1998. The increase of $11.9 million
was driven primarily by $9.4 million increase in net income and $4.1 million
increase in non-cash expenses partly offset by a $2.4 increase in income tax
receivable.
The Company used cash in investing activities of $61.9 million for fiscal
1999 compared to $3.9 million fiscal 1998, an increase of $58.0 million due to
$50.3 million related to financing of the Kitchen Craft acquisition and $7.6
million increase in capital expenditures. Total capital expenditures for fiscal
1999 were $11.6 million and major projects included Omega and Kitchen Craft's
rough mill facilities and Omega's ERP software.
Cash provided by financing activities was $38.3 million for fiscal 1999
compared to a cash usage of $8.8 million for fiscal 1998. This change of $47.1
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 borrowing 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 January 1, 2000, 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 $54.6
million term note 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) $20.3 million term facility (the
"Canadian Term Facility") and a (Cdn) $15.0 million revolving facility (the
"Canadian Revolving Facility").
As of January 1, 2000, the Company had additional borrowing availability
of $15.5 million under the U.S. Revolving Facility and (Cdn) $15.0 million under
the Canadian Revolving Facility. In addition, the Company had cash of $2.2
million that was available to further reduce the U.S. Revolving Facility. The
U.S. Term Facility requires quarterly principal payments that 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
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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
$6.3 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 that began 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.
Inflation
The costs of the Company's products are subject to inflationary pressures
and commodity price fluctuations. Inflationary pressure and commodity price
increases have been relatively modest over the past five years, except for
hardwood and plywood prices which rose significantly during fiscal 1999. The
Company has generally been able over time to recover the effects of inflation
and commodity price fluctuations through sales price increases.
Computer Systems and Year 2000
As described in the Form 10-Q for the quarter ended October 2, 1999, the
Company had developed plans to address potential exposures of its computer
systems related to the Year 2000. Since entering the year 2000, the Company has
not experienced any significant disruptions to its business nor is it aware of
any significant year 2000-related disruptions impacting its customers and
suppliers. Furthermore, the Company did not experience any material impact on
inventories at calendar year end. The Company will continue to monitor its
systems and operations until it is reasonably assured that no significant
business interruptions will occur as a result of any year 2000 issues.
Total costs of the Year 2000 project were $2.0 million with no significant
additional expense expected in 2000.
Forward Looking Statements
When used in this annual report on Form 10-K, 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 future periods to differ
materially from those expressed in any forward statements made by the Company:
(i) inability to hire and retain adequately trained employees, (ii) economic
conditions in the remodeling and housing markets,
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<PAGE>
(iii) availability of credit, (iv) increases in interest rates, (v) cost of
lumber and other raw materials, (vi) inability to maintain state-of-the-art
manufacturing facilities, (vii) heightened competition, including
intensification of price and service competition, the entry of new competitors
and the introduction of new products by existing competitors, (viii) inability
to capitalize on opportunities presented by industry consolidation, (ix) loss or
retirement of key executives and (x) inability to grow by acquisition of
additional cabinetry manufactures or to effectively consolidate operations of
businesses acquired.
Item 7A. 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 January 1, 2000, 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 scheduled
maturity dates (in thousands): Variable Rate (a) Fixed Rate (b)
Maturing in:
2000 $ 6,990 $ --
2001 8,215 --
2002 10,020 --
2003 16,654 --
2004 31,305 --
Thereafter -- 100,000
------- --------
Total $73,184 $100,000
======= ========
Fair value at January 1, 2000 $73,184 $100,000
(a) $34.1 million at LIBOR plus 1.75%, $25.0 million at LIBOR plus 2.00% and
$14.1 million at Canadian BA rate plus 2.00% (7.92% weighted average at
January 1, 2000).
(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.
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<PAGE>
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is set forth on pages F-1 to F-23
of this annual report on Form 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth certain information regarding the Company's
directors and executive officers, including their respective ages, as of March
1, 2000.
Name Age Position
---- --- --------
Robert L. Moran 45 Director and Chief Executive Officer
John S. Horton 39 Senior Vice President, Treasurer, Chief
Financial Officer
David Romeo 40 President, Omega
Craig S. Rae 40 Vice President, Sales & Marketing
John A. Goebel, Jr. 56 President, HomeCrest
Michael Hagan 47 Vice President, Administration, HomeCrest
Thomas Schmidt 46 Vice President, Marketing, HomeCrest
Douglas J. Conley 43 Vice President, Manufacturing, HomeCrest
Herbert D. Buller 58 Chief Executive Officer, Kitchen Craft
Mark Buller 35 President, Kitchen Craft
Gilbert Butler 62 Director
Donald E. Cihak 51 Director
Robert L. Moran has served as Director and Chief Executive Officer of
Omega since October 1998. Mr. Moran served as President of Omega from December
1997 to December 1999 and as Vice President, Operations of Omega from October
1995 to December 1997. In his current role, Mr. Moran has executive management
responsibilities for Omega's business units, with particular focus on strategic
planning, business development and acquisitions. From August 1992 to October
1995, Mr. Moran was employed at Newell Company, a mass
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<PAGE>
merchandise retailer of consumer products, where he was the Vice President of
Operations for the Home Hardware Division. From 1989 to 1992 he served as
President of various divisions at GWH Holdings, representing equipment and
robotic companies.
John S. Horton has served as Senior Vice President, Treasurer and Chief
Financial Officer of Omega since November 1998. Mr. Horton has responsibility
for all aspects of accounting, planning and analysis, SEC reporting, treasury
and investor relations. From 1997 to 1998, Mr. Horton was a Vice President at
Allied Signal Engines in various positions including Chief Financial Officer,
Business Development, and Productivity. Prior to 1997, Mr. Horton spent 15 years
at General Electric, most recently as Chief Financial Officer for several major
business units including the Military and Small Commercial Engines business and
the Gas Turbines business.
David Romeo has served as President of Omega since January 2000 and served
as Senior Vice President, Operations of Omega from June 1999 to January 2000.
From 1981 to 1999, Mr. Romeo was employed at Square D Company, a global
manufacturer electrical distribution and industrial products, and held various
senior leadership positions including Vice President, Operations, Square D
Company and Vice President and Controller, Schneider North America, Square D
Company's parent.
Craig S. Rae has served as Vice President, Sales and Marketing of Omega
since December 1997. Mr. Rae was employed at Leucadia National Corporation,
General Marble Division, a manufacturer of cultured marble vanity countertops
and bathroom cabinetry, from June 1995 to December 1997, where he was Vice
President of Sales and Marketing. Prior to General Marble, Mr. Rae was employed
as Vice President of Sales for Newell Company, Newell Home Hardware Division
from June 1994 to June 1995. From June 1992 to June 1995, Mr. Rae was Vice
President of Sales for BernzOmatic Division of the Newell Company.
John A. Goebel, Jr. has served as President of HomeCrest since 1995 and
has been with HomeCrest since 1986. He was plant manager at the Clinton facility
from 1986 to 1990, and served as Vice President, Operations at HomeCrest from
1990 to 1995.
Michael Hagan has served as Vice President, Administration, HomeCrest
since 1991. Mr. Hagan has been with HomeCrest since 1978.
Thomas Schmidt has served as Vice President, Marketing, HomeCrest since
1991. Mr. Schmidt is responsible for sales and marketing at HomeCrest.
Douglas J. Conley has served as Vice President, Manufacturing, HomeCrest
since 1995. From May 1991 to May 1995, Mr. Conley served as Vice President,
Human Resources for HomeCrest. Mr. Conley has been with HomeCrest since 1989.
Herbert D. Buller, the founder of Kitchen Craft of Canada Ltd., previously
served as the
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<PAGE>
President and a Director of Kitchen Craft of Canada Ltd. since 1971. Mr. Buller
is currently a Director and the Chief Executive Officer of Kitchen Craft.
Mark Buller has served as President of Kitchen Craft since 1996. Mr.
Buller has been with Kitchen Craft since 1987 and held various leadership
positions including Director, Sales and Marketing; General Manager, U.S. Sales;
and General Manager, Company Stores.
Gilbert Butler became a Director of the Company in June 1997. Since its
formation in 1981, he has been the President of BCC, a private investment firm
providing management advisory services to five investment limited partnerships,
including MLA III, that provide financing for leveraged buyouts, other
acquisitions and business expansions. Mr. Butler is also the managing general
partner of five limited partnerships that serve as the respective general
partners of the five investment limited partnerships. Mr. Butler is a trustee
and member of the investment committee of Corporate Property Investors, a real
estate investment trust.
Donald E. Cihak became a Director of the Company in June 1997. Mr. Cihak
has served as Managing Director of BCC Industrial Services, Inc. ("ISI"), a
management consulting company wholly owned by certain investment funds managed
by BCC, since September 1993. From April 1990 to September 1993, Mr. Cihak was
the Vice President, Finance and Administration for the Marine Group of Brunswick
Corporation.
At present, all Directors are elected and serve until a successor is duly
elected and qualified or until the earlier of his death, resignation or removal.
Other than with respect to Herbert D. Buller, who is the father of Mark Buller,
there are no family relationships between any of the Directors or executive
officers of Holdings or the Company. Executive officers of Holdings and the
Company are elected by and serve at the discretion of their respective boards of
directors.
Compensation of Directors
The Company pays no compensation to its independent directors, and pays no
additional remuneration to its employees or to executives of the Company for
serving as directors.
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<PAGE>
Item 11. Executive Compensation.
The following table sets forth information concerning the compensation for
the fiscal years ended January 1, 2000, January 2, 1999, and December 27, 1997
of Mr. Moran, the Chief Executive Officer of the Company, and the four other
most highly compensated executive officers of the Company (collectively, the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
Other Securities
Annual Underlying All Other
Name and Principal Position Salary Bonus Compensation Options Compensation
Year ($) ($) ($) (#) ($)
<S> <C> <C> <C> <C> <C> <C>
Robert L. Moran 1999 190,000 118,750 --- (1) 92.85(3) 5,000(4)
Chief Executive Officer 1998 163,923 80,000 --- (1) 32.75(3) 30,905(5)
1997 130,000 46,475 --- (1) 5.27(2) 3,750(4)
John S. Horton 1999 140,000 70,000 108,933(8) 18.49(3) 2,100(4)
Senior Vice President, 1998 24,231 10,000 7,283(8) --- ---
Treasurer and 1997 --- --- --- --- ---
Chief Financial Officer
John A. Goebel, Jr. 1999 146,000 91,250 --- (1) 83.19(3) 1,472(4)
President, HomeCrest 1998 140,000 70,000 --- (1) 41.66(3) 23,234(6)
1997 130,000 48,750 --- (1) 4.32(2) 1,284(4)
Herbert D. Buller 1999 108,120(7) 73,772(7) --- (1) --- ---
Chief Executive Officer, 1998 --- --- --- --- ---
Kitchen Craft 1997 --- --- --- --- ---
Mark Buller 1999 108,120(7) 73,772(7) --- (1) --- ---
President, Kitchen Craft 1998 --- --- --- --- ---
1997 --- --- --- --- ---
</TABLE>
(1) The perquisites and other benefits paid did not exceed the lesser of
$50,000 or 10% of the total annual salary and bonus of such Named
Executive Officer.
(2) The options represent options to purchase shares of common stock of Omega
Holdings, Inc. prior to the Merger, at an exercise price per share of
$12,963.51.
(3) The options represent options to purchase shares of the Common Stock of
Holdings following the Merger, at an exercise price per share of
$1,000.00.
(4) Additional compensation amounts refer to amounts matched by the Company
under the Company's 401(k) Profit Sharing Plan.
(5) Represents $25,987 received as a result of the working capital adjustment
in connection with the OMC Merger and Recapitalization, and $4,918 as
amounts matched by the Company under the Company's 401(k) Profit Sharing
Plan.
(6) Represents $19,997 received as a result of the working capital adjustment
in connection with the OMC Merger and Recapitalization, and $3,237 as
amounts matched by the Company under the Company's 401(k) Profit Sharing
Plan.
(7) Compensation paid in Canadian dollars has been converted to US dollars at
the 1999 average conversion rate of (Cdn) $1.4826 to (US) $1.0000.
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<PAGE>
(8) Includes moving and temporary living expenses reimbursed in accordance
with the terms of Mr. Horton's employment agreement.
Option Grants
The following table sets forth information concerning grants of options to
purchase Common Stock of Holdings made to the Named Executive Officers during
the fiscal year ended January 1, 2000.
OPTION GRANTS IN FISCAL 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (2)
Percent
of Total
Number of Options
Securities Granted to Exercise
Underlying Employees in Price Per
Options Fiscal 1999 Share Expiration
Name Granted (#) (%)(1) ($) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
Robert L. Moran 92.85 12.6 1,000 2/26/2009 114,636 237,537
John S. Horton 18.49 2.5 1,000 2/26/2009 22,828 47,303
John A. Goebel, Jr 83.19 11.3 1,000 2/26/2009 102,710 212,824
Herbert D. Buller -- -- -- -- -- --
Mark Buller -- -- -- -- -- --
</TABLE>
- ----------
(1) Percentages are based upon the total number of options to purchase shares
of Common Stock of Holdings granted to employees in fiscal 1999.
(2) There is currently no market for the Common Stock of Holdings. For
purposes of the calculations in this table, the fair market value of the
Common Stock as of February 26, 1999 ($1,371.87 per share) was determined
by the Board of Directors based upon arms length sales of shares of Common
Stock of Holdings. There have been no arms length sales of the Common
Stock of Holdings since February 26, 1999. In accordance with the rules of
the Securities and Exchange Commission, the amounts shown on this table
represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based
on assumed rates of stock appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration
date. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the
exercise. Actual gains, if any, on stock option exercises will depend on
the future performance of Holdings' Common Stock, the optionholder's
continued employment through the option period, and the date on which the
options are exercised.
-29-
<PAGE>
Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to options awarded
under the Holdings Stock Option Plan, including the number and aggregate value
of unexercised options outstanding on January 1, 2000.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTIONS VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options At
Shares Acquired Options At Fiscal Year-End Fiscal Year-End
On Exercise Value Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
Name (#) ($) (#)(1) ($)(1)(2)
<S> <C> <C> <C> <C>
Robert L. Moran --- --- 125.61/0 160,655/0
John S. Horton --- --- 18.49/0 23,649/0
John A. Goebel, Jr. --- --- 124.85/0 159,683/0
Herbert D. Buller --- --- --- ---
Mark Buller --- --- --- ---
</TABLE>
- ---------------------
(1) Represents options to purchase shares of Common Stock of Holdings at an
exercise price of $1,000 per share.
(2) Value is based on the difference between the option exercise price and the
fair market value at January 1, 2000. The fair market value of the Common
Stock of Holdings ($2,279.00 per share) was determined by the Board of
Directors. There have been no arms length sales of the Common Stock of
Holdings since February 26, 1999.
Employment Contracts, Termination of Employment and Change of Control
Arrangements
Mr. Moran is currently employed with the Company pursuant to an agreement
dated September 11, 1995, as amended on June 13, 1997. Under this agreement, Mr.
Moran receives an annual salary of $120,000, subject to annual increases, and is
eligible for a bonus of up to 30% of base salary. Mr. Moran is entitled to
receive twelve months' continued salary and benefits if he is terminated for
reasons other than cause. Following Mr. Moran's promotion to Chief Executive
Officer of Omega, the Company agreed to increase his salary to $190,000 and his
bonus to 50%.
Mr. Horton is currently employed as Senior Vice President, Treasurer, and
Chief Financial Officer, Omega pursuant to an agreement dated October 15, 1998.
Under this agreement, Mr. Horton is entitled to receive a base salary, subject
to annual increases, and a bonus in accordance with the Company's Executive
Bonus Plan for senior management
-30-
<PAGE>
("Bonus Plan"). Mr. Horton is also entitled to receive restricted stock
equivalent to a value of $50,000. In addition, Mr. Horton is eligible to
purchase shares of stock in Holdings which may be purchased with the proceeds of
a bank loan for up to 50% of the purchase price. Mr. Horton is also eligible to
receive stock options to be granted over a five-year period.
Mr. Goebel is currently employed as President, HomeCrest pursuant to an
agreement dated April 10, 1995, as amended on June 13, 1997. Under this
agreement, Mr. Goebel is entitled to receive a base salary, subject to annual
increases, and a bonus in accordance with the Company's Bonus Plan. Mr. Goebel
is also entitled to receive twelve months' continued salary and benefits if he
is terminated from the Company without cause. Mr. Goebel has the right under a
put agreement dated June 13, 1997 to cause Holdings to repurchase his Common
Stock in the event of his normal retirement from Holdings.
Mr. H. Buller is currently employed as Chief Executive Officer, Kitchen
Craft pursuant to an agreement dated January 29, 1999 and expiring on January
29, 2001. Under this agreement, Mr. Buller is entitled to receive a base salary
of (CDN) $175,000, subject to annual increases, and a bonus in accordance with
the Company's Bonus Plan). In addition, Mr. Buller is entitled to the use of a
company vehicle. Mr. Buller is also entitled to receive up to twenty-four
months' continued salary and benefits if he is terminated from Kitchen Craft
without cause. In addition, Mr. Buller is entitled to receive a retirement
allowance equal to (CDN) $70,000 upon the termination of his employment by
reason of death, incapacity or other than for cause. Mr. Buller has agreed not
to compete with the Kitchen Craft or solicit the customers, suppliers or
employees of Kitchen Craft for a period of two years following the date he
ceases to be employed by Kitchen Craft. Mr. Buller's employment agreement is
governed by Manitoba law.
Mr. M. Buller is currently employed as President, Kitchen Craft pursuant
to an agreement dated January 29, 1999 and expiring on January 29, 2002. Under
this agreement, Mr. Buller is entitled to receive a base salary of (CDN)
$175,000, subject to annual increases, and a bonus in accordance with the
Company's Bonus Plan). Mr. Buller is also entitled to receive up to thirty-six
months' continued salary and benefits if he is terminated from Kitchen Craft
without cause. Mr. Buller has agreed not to compete with the Kitchen Craft or
solicit the customers, suppliers or employees of Kitchen Craft for a period of
two years following the date he ceases to be employed by Kitchen Craft. Mr.
Buller's employment agreement is governed by Manitoba law.
The Named Executive Officers participate in the Bonus Plan whereby they
are eligible to receive a base bonus potential of 30-50% of base salary, with
the Chief Executive Officer having a base bonus potential of 50% of salary.
Payout is on a sliding scale based on operating profit performance against
budget starting at 85% of budget. There is an opportunity to earn up to 125% of
the base potential based on achieving 105% of planned operating income
performance.
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<PAGE>
Compensation Committee Interlocks and Insider Participation
The Company does not have a compensation committee. Instead, compensation
decisions for fiscal 1999 regarding the Company's executive officers were made
by the Board of Directors. Mr. Moran, an executive officer of the Company, has
served on the Board of Directors since November 4, 1998. The compensation for
Mr. Moran for the year ended January 1, 2000 was established pursuant to the
terms of his employment agreement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of Omega's issued and outstanding capital stock is owned by Holdings.
As of March 1, 2000, the outstanding capital stock of Holdings consisted of
80,018.6 shares of Common Stock, $.01 par value per share.
The following table sets forth certain information as of March 1, 2000
regarding the beneficial ownership of (i) each class of voting securities of
Holdings by each person known to Holdings to own more than 5% of any class of
outstanding voting securities of Holdings, and (ii) the equity securities of
Holdings by each Director of Holdings and the Company, each Named Executive
Officer and all of Holdings' and the Company's directors and executive officers
as a group. To the knowledge of Holdings, each such stockholder has sole voting
and investment power as to the shares shown unless otherwise noted. Beneficial
ownership of the securities listed in the table has been determined in
accordance with the applicable rules and regulations promulgated under the
Securities Exchange Act of 1934, as amended. Unless otherwise indicated below,
each entity or person listed below maintains a mailing address of c/o Omega
Cabinets, Ltd., 1205 Peters Drive, Waterloo, Iowa 50703.
The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission. The
information is not necessarily indicative of beneficial ownership for any other
purpose. Under these rules, beneficial ownership includes any shares as to which
the individual or entity has sole or shared voting or investment power and any
shares as to which the individual or entity has the right to acquire beneficial
ownership within 60 days after March 1, 2000 through the exercise of any stock
option, warrant or other right. The inclusion in the following table of those
shares, however, does not constitute an admission that the named stockholder is
a direct or indirect beneficial owner.
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<PAGE>
Shares Beneficially Owned
Common Stock
Number Percentage
Name and Address of Shares of Class
---------------- --------- --------
Principal Stockholder:
Mezzanine Lending
Associates III, L.P. (1) ................. 74,345.9 89.8%
c/o Butler Capital Corporation
767 Fifth Avenue, 6th Floor
New York, New York 10153
Directors and Executive Officers:
Gilbert Butler (2)(3) ...................... 74,345.9 89.8
Donald E. Cihak (3) ........................ -- --
Robert L. Moran (4) ........................ 1,061.6 1.3
John S. Horton (5) ......................... 729.4 *
John A. Goebel, Jr. (6) .................... 971.9 1.2
Herbert D. Buller (7) ...................... 969.1 1.2
Mark Buller (8) ............................ 609.0 *
All Directors and executive officers
as a group (12 persons)(9) ............... 6,193.1 7.6
- ---------------------
* Represents less than one percent.
(1) Includes warrants to purchase 2,806.3 shares of Common Stock held by ISI,
a corporation wholly-owned by certain investment funds managed by BCC,
including MLA III. Does not include shares owned by other stockholders
that are subject to the Stockholders Agreement. See "Certain Relationships
and Related Transactions -- Stockholders Agreement."
(2) The shares of Common Stock included in the table represent shares and
warrants held by MLA III and ISI, respectively. Mr. Butler is the Managing
General Partner of Mezzanine Lending Management III, L.P. ( "MLM III "),
the general partner of MLA III, and, accordingly, may be deemed to
beneficially own shares beneficially owned by MLA III. Mr. Butler
disclaims beneficial ownership of any such shares in which he does not
have a pecuniary interest.
(3) The address of Messrs. Butler and Cihak is c/o Butler Capital Corporation,
767 Fifth Avenue, 6th Floor, New York, New York 10153.
(4) The shares of Common Stock included in the table include 340.0 shares that
are held in the Rabbi Trust, see "Certain Relationships and Related
Transactions -- Deferred Compensation Plan and Rabbi Trust", 271.6 shares
that can be acquired upon the exercise of outstanding options, and 450.0
shares subject to a Stock Pledge Agreement between Mr. Moran and the
Company. See "Certain Relationships and Related Transactions -- Certain
Loans to Executive Officers."
-33-
<PAGE>
(5) The shares of Common Stock included in the table include 129.4 shares that
can be acquired upon the exercise of outstanding options, 39.5 shares that
are subject to vesting and 521.0 shares subject to a Stock Pledge
Agreement between Mr. Horton and the Company. See "Certain Relationships
and Related Transactions -- Certain Loans to Executive Officers."
(6) The shares of Common Stock included in the table include 323.4 shares that
are held in the Rabbi Trust, see "Certain Relationships and Related
Transactions -- Deferred Compensation Plan and Rabbi Trust", 245.0 shares
that can be acquired upon the exercise of outstanding options and 200.0
shares subject to Stock Pledge Agreement between Mr. Goebel and the
Company. See "Certain Relationships and Related Transactions -- Certain
Loans to Executive Officers."
(7) The shares of Common Stock included in the table include 960.3 shares of
Class B Common Stock of Kitchen Craft held by HEB2 Holdings Ltd., which
are exchangeable into an equal number of shares of Holdings Common Stock
in accordance with the terms thereof, and 8.8 shares that can be acquired
upon the exercise of outstanding options. The shares of Class B Common
Stock of Kitchen Craft are exchangeable at any time upon the request of
the holder into shares of Holdings Common Stock and are required to be
exchanged by the holder upon the request of the Company in connection with
any merger, sale, disposition or other significant transaction affecting
Holdings or Kitchen Craft, upon the termination of such holder's
employment with the Company and its subsidiaries, or, at any time after
January 29, 2006. Mr. Buller disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(8) The shares of Common Stock included in the table include 600.2 shares of
Class B Common Stock of Kitchen Craft held by MEB2 Holdings Ltd., which
are exchangeable into an equal number of shares of Holdings Common Stock
in accordance with the terms thereof, and 8.8 shares that can be acquired
upon the exercise of outstanding options. The shares of Class B Common
Stock of Kitchen Craft are exchangeable at any time upon the request of
the holder into shares of Holdings Common Stock and are required to be
exchanged by the holder upon the request of the Company in connection with
any merger, sale, disposition or other significant transaction affecting
Holdings or Kitchen Craft, upon the termination of such holder's
employment with the Company and its subsidiaries, or, at any time after
January 29, 2006. Mr. Buller disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest.
(9) Excludes shares deemed to be beneficially owned by Mr. Butler.
-34-
<PAGE>
Item 13. Certain Relationships and Related Transactions.
OMC Merger and Related Agreements
The OMC Merger occurred on June 13, 1997. Concurrently with the OMC
Merger, an aggregate consideration of $201.9 million was paid, subject to
adjustment based on the working capital of Holdings at the closing date. The
merger agreement contains customary representations, warranties, covenants and
indemnification provisions. In connection with the OMC Merger, pursuant to a
Merger Financing Agreement (the "Financing Agreement") with MLA III, MLA III
purchased 61,865 shares of Common Stock of Holdings for $61.9 million and
Holdings issued an 11% junior subordinated note to MLA III (the "Junior
Subordinated Note"). The Junior Subordinated Note was repaid in July 1997 with
proceeds from an offering by the Company under Rule 144A of the Securities Act
of 1933, as amended (the "Act") for $100 million in aggregate principal amount
of 10 1/2% senior subordinated notes. Under the Financing Agreement, the Company
has agreed to indemnify and pay certain expenses of BCC and its affiliates and
their advisors and consultants under certain circumstances.
Stockholders Agreement
In connection with the Merger, MLA III, ISI, management, the American
National Bank and Trust Company of Chicago, as trustee of the Rabbi Trust, each
participant in the Rabbi Trust, and all of the other stockholders and
optionholders of Holdings entered into a stockholders agreement (the
"Stockholders Agreement"), that, among other things, provides for tag-along
rights, drag-along rights, registration rights, restrictions on the transfer of
shares held by parties to the Stockholders Agreement and certain preemptive
rights for certain stockholders including management. The Stockholders Agreement
also provides that the parties thereto will vote their shares in the same manner
as MLA III and ISI in connection with certain transactions and that MLA III and
ISI will be entitled to fix the number of directors of Holdings. Pursuant to the
Stockholders Agreement, MLA III and ISI will be entitled to designate all of the
directors except for one, which will be the chief executive officer.
Management Agreement
In connection with the OMC Merger, the Company and Holdings entered into a
management agreement ("Management Agreement") with ISI, a management consulting
company wholly owned by investment funds managed by BCC. The Management
Agreement was supplemented by Supplement No. 1 thereto. Pursuant to the
Management Agreement, as supplemented, the Company and Holdings agree to pay ISI
$425,000 per year plus certain fees and expenses, including legal and accounting
fees and any out-of-pocket expenses incurred by ISI in connection with providing
services to the Company, and to indemnify ISI under certain circumstances. In
addition, ISI received warrants to purchase an aggregate of 2,391.4 shares of
Common Stock of Holdings at an exercise price of $1,000 per share and 414.9
shares of Common Stock of Holdings at an exercise price of $1,371.87 per share.
The warrants expire in
-35-
<PAGE>
2007 and 2009, respectively.
Deferred Compensation Plan and Rabbi Trust
In connection with the OMC Merger, Holdings and its subsidiaries adopted
the 1997 Omega Holdings, Inc. Deferred Compensation Plan (the "Plan") for the
purpose of providing the following benefits to those employees of Holdings and
its subsidiaries whose options to purchase shares of Holdings were canceled as a
result of the OMC Merger (the "Plan Participants"). Under the terms of the
Merger agreement, upon consummation of OMC Merger, each option to purchase
shares of Holdings stock held by the Plan Participants prior to the merger was
canceled, and Holdings established a deferred compensation obligation pursuant
to the Plan for the benefit of each Plan Participant. Benefits under the Plan
are payable in cash and in shares of Holdings stock, and are payable to Plan
Participants upon termination of employment or, under certain limited
circumstances, prior to termination. The benefits provided by the Plan represent
the unsecured obligations of Holdings.
As contemplated by the Plan and pursuant to the Rabbi Trust Agreement
dated as of June 13, 1997 between Holdings and American National Bank and Trust
Company of Chicago, as trustee, Holdings established the Rabbi Trust to hold
approximately 3,224.5 shares of Holdings Common Stock to satisfy Holdings'
obligations as provided in the Plan. In 1998 and 1999 certain shares of Holdings
were redeemed under terms of the Rabbi Trust Agreement and the Plan. Currently
1,600.9 shares of Holdings Common Stock are held in the Plan. The Rabbi Trust
maintains separate accounts for each Plan Participant, which accounts are
intended to reflect the obligation of the Company to distribute cash and shares
of Holdings stock to each Plan Participant. The Rabbi Trust may, at the
direction of the Company, make such distributions to satisfy the obligations of
the Company under the Plan. The Plan does not provide for elective deferrals by
Plan Participants.
Management Equity Arrangements
Holdings adopted a stock option plan for the benefit of employees of
Holdings and its subsidiaries in June 1997 (the "Stock Option Plan"). Pursuant
to the Stock Option Plan, 7,812.0 shares of Holdings Common Stock have been
reserved for issuance pursuant to the plan. The Stock Option Plan is
administered by the Board of Directors of Holdings, which has discretionary
authority to grant options and determine the terms and conditions of each award.
No awards may be granted under the Stock Option Plan after the completion of ten
years from its adoption, but awards previously granted may extend beyond that
date.
In addition, pursuant to the Stockholders Agreement, certain management
stockholders have the right to cause Holdings to repurchase Holdings Common
Stock held by such management stockholders upon their death or disability. In
addition, Mr. Goebel has entered into a put agreement with Holdings dated as of
June 13, 1997, whereby Mr. Goebel has the right, in addition to his rights under
the Stockholders Agreement, to cause Holdings to
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<PAGE>
repurchase Holdings Common Stock held by him in the event of normal retirement
from Holdings.
Certain Loans to Executive Officers
In connection with the purchase of shares of Common Stock of Holdings,
Holdings accepted as payment from certain executive officers purchasing such
shares a note bearing interest at the Applicable Federal Rate. In connection
with the purchase of 450.0, 200.0, 100.0, 521.0 and 300 shares of Common Stock
of Holdings, respectively, Messrs. Moran, Goebel, Rae, Horton and Romeo received
loans of approximately $617,343, $274,375, $137,187, $681,019 and $328,246,
respectively, of which $617,343, $274,375, $137,187, $390,509 and $328,246,
respectively, remained outstanding at January 1, 2000. The Company has agreed to
permit such executive officers to repay their respective loan obligations with
proceeds received from the sale or other disposition of the Common Stock
purchased therewith. Repayment of each of the loans is secured by a pledge of
the Common Stock purchased by such executive officer.
Part IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a)(1) Financial Statements
See Index to Financial Statements appearing at page F-1.
(a)(2) Financial Statement Schedules
The following Financial Statement Schedule is included at page F-23:
Schedule II - Valuation and Qualifying Accounts.
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the consolidated financial
statements or notes thereto.
(a)(3) Exhibits
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*
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<PAGE>
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.+
10.3 Omega Security Agreement dated as of January 29, 1999.+
10.4 Omega Pledge Agreement dated as of January 29, 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 [Intentionally Omitted]
10.11 [Intentionally Omitted]
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 [Intentionally Omitted]
10.15 [Intentionally Omitted]
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 [Intentionally Omitted]
10.27 Goebel Put Agreement dated June 13, 1997*
10.28 Bulrad Illinois Security Agreement dated as of January 29, 1999.+
10.29 Omega Kitchen Craft Holdings Pledge Agreement dated as of January 29,
1999.+
10.30 Omega Kitchen Craft U.S. Corp. Pledge Agreement dated as of January 29,
1999.+
10.31 Bulrad Illinois Guaranty dated as of January 29, 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).
10.33 3578275 Canada General Security Agreement dated as of January 29, 1999.+
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<PAGE>
10.34 Omega Guarantee dated as of January 29, 1999.+
10.35 Kitchen Craft Guarantee dated as of January 29, 1999.+
10.36 Kitchen Craft Security Agreement dated as of January 29, 1999.+
10.37 Supplement No. 1 to the Management Agreement dated January 29, 1999.+
10.38 H. Buller Employment Agreement dated January 29, 1999.+
10.39 M. Buller Employment Agreement dated January 29, 1999.+
10.40 J. Horton Employment Agreement dated October 15, 1998.+
10.41 C. Rae Employment Agreement dated October 22, 1997.+
10.42 Offer and Acceptance Contract dated September 15, 1998 for sale of land
to Company.+
10.51 E. Lytle Severance Agreement dated May 5, 1999 (Incorporated by
reference to Exhibit 10.51 to the Quarterly Report on Form 10-Q filed
with the Commission on November 9, 1999).
10.52 D. Romeo Employment Agreement dated May 27, 1999 (Incorporated by
reference to Exhibit 10.52 to the Quarterly Report on Form 10-Q file
with the Commission on November 9, 1999).
12.1 Statement regarding computation of ratio of earnings to fixed charges.
21.1 Subsidiaries of the Registrant.+
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.
+ Incorporated by reference to similarly numbered exhibit in the Company's
Annual Report on Form 10-K file with the Commission on April 1, 1999.
(b) Reports on Form 8-K.
None
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report has been sent to security holders covering the
registrant's last fiscal year and no proxy materials have been sent to more than
10 of the registrant's security holders during the registrant's last fiscal
year.
-39-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, 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
Dated: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/ Robert L. Moran Chief Executive Officer and March 29, 2000
- ------------------------- Director (principal executive
Robert L. Moran officer)
/s/ John S. Horton Senior Vice President, March 29, 2000
- ------------------------- Treasurer, Chief Financial
John S. Horton Officer (Principal Financial and
Accounting Officer)
/s/ Gilbert Butler Director March 27, 2000
- -------------------------
Gilbert Butler
/s/ Donald E. Cihak Director March 27, 2000
- -------------------------
Donald E. Cihak
-40-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors..........................................F-2
Consolidated Financial Statements of Omega Cabinets, Ltd.
Consolidated Balance Sheets as of January 1, 2000 and
January 2, 1999....................................................F-3
Consolidated Statements of Income for the years ended
January 1, 2000, January 2, 1999 and December 27, 1997.............F-5
Consolidated Statements of Stockholder's Equity (Deficit) for
the years ended January 1, 2000, January 2, 1999 and
December 27, 1997..................................................F-6
Consolidated Statements of Cash Flows for the years ended
January 1, 2000, January 2, 1999 and December 27, 1997.............F-8
Notes to Consolidated Financial Statements..........................F-10
Schedule II - Valuation and Qualifying Accounts........................F-23
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Omega Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Omega Cabinets,
Ltd. (a wholly-owned subsidiary of Omega Holdings, Inc.) as of January 1, 2000
and January 2, 1999, and the related consolidated statements of income,
stockholder's equity (deficit), and cash flows for each of the three years in
the period ended January 1, 2000. Our audits also included the financial
statement schedule listed in Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Omega Cabinets,
Ltd. at January 1, 2000 and January 2, 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
January 1, 2000, in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Des Moines, Iowa
February 25, 2000
F-2
<PAGE>
Omega Cabinets, Ltd.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 1 January 2
2000 1999
----------------------------------
<S> <C> <C>
Assets (Note 4)
Current assets:
Cash $ 2,234,669 $ 650,703
Income tax receivable 1,114,469 284,228
Accounts receivable, less allowance for doubtful
accounts of $1,796,000 in 1999 and $1,489,000
in 1998 20,172,798 13,788,890
Inventories (Note 3) 18,191,451 11,764,729
Prepaid expenses and other 1,546,028 588,566
Deferred income taxes (Note 6) 877,439 765,000
----------------------------------
Total current assets 44,136,854 27,842,116
Property, plant, and equipment, at cost:
Land and improvements 1,474,649 1,217,517
Buildings 23,703,727 15,309,166
Machinery and equipment 29,228,236 17,973,534
Construction in progress 2,877,809 1,939,368
----------------------------------
57,284,421 36,439,585
Less accumulated depreciation (10,876,410) (7,602,297)
----------------------------------
46,408,011 28,837,288
Deferred financing costs, less accumulated
amortization of $2,172,444 in 1999 and
$1,090,766 in 1998 7,114,428 5,360,388
Goodwill, less accumulated amortization of
$8,347,395 in 1999 and $5,852,007 in 1998
(Note 10) 92,929,361 51,418,582
Other assets 862,162 749,389
----------------------------------
Total assets $ 191,450,816 $ 114,207,763
==================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
January 1 January 2
2000 1999
----------------------------------
<S> <C> <C>
Liabilities and stockholder's equity (deficit)
Current liabilities:
Accounts payable $ 9,316,337 $ 3,790,367
Accrued expenses 10,602,698 7,721,071
Current portion of long-term debt (Note 4) 11,387,384 11,105,324
----------------------------------
Total current liabilities 31,306,419 22,616,762
Deferred income taxes (Note 6) 4,207,780 1,150,000
Long-term debt, less current portion (Note 4) 161,796,436 130,750,000
Commitments (Note 5)
Stockholder's equity (deficit) (Notes 2, 4, 5, 8, 9 and 10):
Common stock, $.01 par value; 10,000 shares
authorized; 1,000 shares issued and
outstanding 10 10
Additional paid-in capital 82,598,542 61,072,025
Less stock notes receivable (1,862,583) --
Predecessor basis adjustment (11,031,662) (11,031,662)
Accumulated other comprehensive loss - foreign
currency translation adjustment (1,319,083) --
Retained earnings (deficit) (74,245,043) (90,349,372)
----------------------------------
Total stockholder's equity (deficit) (5,859,819) (40,308,999)
----------------------------------
Total liabilities and stockholder's equity (deficit) $ 191,450,816 $ 114,207,763
==================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
Omega Cabinets, Ltd.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------------
January 1 January 2 December 27
2000 1999 1997
--------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 271,396,048 $ 169,220,139 $ 155,898,769
Cost of goods sold 192,429,908 121,766,772 112,556,300
--------------------------------------------------------
Gross profit 78,966,140 47,453,367 43,342,469
Selling, general and administrative
expenses (Note 8) 33,401,427 20,101,333 22,171,340
Amortization of goodwill 2,467,886 1,439,681 1,398,479
--------------------------------------------------------
Operating income 43,096,827 25,912,353 19,772,650
Interest expense 17,445,914 15,074,327 16,311,997
Foreign currency transaction gains (969,188) -- --
--------------------------------------------------------
Income before income taxes and
extraordinary item 26,620,101 10,838,026 3,460,653
Income tax expense (Note 6) 10,515,772 4,180,000 1,695,000
--------------------------------------------------------
Income before extraordinary item 16,104,329 6,658,026 1,765,653
Extraordinary loss on debt refinancing,
net of income tax benefit of $607,000
(Note 2) -- -- 947,443
--------------------------------------------------------
Net income $ 16,104,329 $ 6,658,026 $ 818,210
========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Omega Cabinets, Ltd.
Consolidated Statements of Stockholder's Equity (Deficit)
<TABLE>
<CAPTION>
Additional Paid-In
Common Stock Capital
-----------------------------------------
<S> <C> <C>
Balance at January 1, 1997 $ 10 $ 2,638,163
Capital contribution by parent (Note 2) 10 62,248,425
Dividend to parent to redeem common stock and
options at parent-level (Note 2) (10) (2,638,163)
Noncash capital contribution (Note 5) -- 587,000
Net income and comprehensive income for 1997 -- --
-----------------------------------------
Balance at December 27, 1997 10 62,835,425
Common stock issued at parent-level credited to the
Company -- 118,627
Dividend to parent to pay additional redemption
cost related to 1997 recapitalization (Note 2) -- --
Redemption of common stock and options at parent-
level charged to the Company (Note 9) -- (2,350,561)
Income tax benefit related to redemption of stock
(Note 9) -- 465,000
Stock option expense (Note 8) -- 3,534
Net income and comprehensive income for 1998 -- --
--------------------------------------
Balance at January 2, 1999 10 61,072,025
Common stock issued at parent-level credited to the
Company (Note 9) -- 20,463,755
Redemption of common stock and options at parent-
level charged to the Company -- (345,061)
Noncash capital contribution (Note 5) -- 60,000
Stock option expense (Note 8) -- 1,347,823
Comprehensive income:
Net income for 1999 -- --
Foreign currency translation adjustment -- --
Total comprehensive income
--------------------------------------
Balance at January 1, 2000 $ 10 $ 82,598,542
======================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Stock Predecessor Other Retained
Notes Basis Comprehensive Earnings
Receivable Adjustment Loss (Deficit) Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ -- $ (11,031,662) $ -- $ 11,183,557 $ 2,790,068
-- -- -- -- 62,248,435
-- -- -- (106,957,945) (109,596,118)
-- -- -- -- 587,000
-- -- -- 818,210 818,210
- -------------------------------------------------------------------------------------------------------
-- (11,031,662) -- (94,956,178) (43,152,405)
-- -- -- -- 118,627
-- -- -- (2,051,220) (2,051,220)
-- -- -- -- (2,350,561)
-- -- -- -- 465,000
-- -- -- -- 3,534
-- -- -- 6,658,026 6,658,026
- -------------------------------------------------------------------------------------------------------
-- (11,031,662) -- (90,349,372) (40,308,999)
(1,862,583) -- -- -- 18,601,172
-- -- -- -- (345,061)
-- -- -- -- 60,000
-- -- -- -- 1,347,823
-- -- -- 16,104,329 16,104,329
-- -- (1,319,083) -- (1,319,083)
--------------
14,785,246
- -------------------------------------------------------------------------------------------------------
$ (1,862,583) $ (11,031,662) $ (1,319,083) $ (74,245,043) $ (5,859,819)
=======================================================================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Omega Cabinets, Ltd.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------
January 1 January 2 December 27
2000 1999 1997
-------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 16,104,329 $ 6,658,026 $ 818,210
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 3,461,165 2,347,027 2,057,688
Amortization 3,553,499 2,180,165 2,009,640
Noncash stock option and warrant expense 1,347,823 3,534 5,481,000
Deferred income taxes 2,190,458 1,885,000 1,295,000
Deferred financing costs written off -- -- 1,554,443
Changes in operating assets and liabilities, net of effect
of business acquired:
Income tax receivable (830,241) 1,555,626 (1,839,854)
Accounts receivable 594,101 1,308,685 (4,331,489)
Inventories (1,934,568) (268,141) (2,200,709)
Prepaid expenses and other (405,364) (150,502) (106,037)
Other assets (112,773) 103,118 (5,069)
Accounts payable 546,686 (3,011,729) 1,885,006
Accrued expenses 670,325 684,567 (5,783,422)
Other liabilities -- (75,103) 14,900
-------------------------------------------------------
Net cash provided by operating activities 25,185,440 13,220,273 849,307
Investing activities
Purchases of property, plant, and equipment (11,552,570) (3,932,053) (3,041,213)
Additions to goodwill -- -- (3,632,046)
Payments for acquisition of business (Note 10) (50,323,500) -- --
-------------------------------------------------------
Net cash used in investing activities (61,876,070) (3,932,053) (6,673,259)
Financing activities
Proceeds from long-term debt 46,777,564 15,290,000 247,839,506
Payments for deferred financing costs (2,813,755) (247,207) (6,207,229)
Payments of long-term debt (19,901,123) (20,410,000) (186,355,651)
Capital contributions by parent 14,616,172 118,627 62,248,435
Payments to parent to redeem common stock and options
at parent-level (345,061) (3,546,457) (111,547,386)
-------------------------------------------------------
Net cash provided by (used in) financing activities 38,333,797 (8,795,037) 5,977,675
Effect of foreign exchange rate changes on cash (59,201) -- --
-------------------------------------------------------
Net increase in cash 1,583,966 493,183 153,723
Cash at beginning of year 650,703 157,520 3,797
-------------------------------------------------------
Cash at end of year $ 2,234,669 $ 650,703 $ 157,520
=======================================================
</TABLE>
F-8
<PAGE>
Omega Cabinets, Ltd.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
January 1 January 2 December 27
2000 1999 1997
----------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures
Interest paid in cash $15,177,581 $14,349,607 $22,096,013
Income taxes paid in cash, net of refunds received $ 6,273,041 $ 274,374 $ 2,400,275
Noncash financing activities:
Note issued for redemption of parent stock and options -- $ 855,324 $ 3,000,000
Noncash capital contribution - parent equity issued as
partial consideration for business acquired $ 3,985,000 -- --
Other noncash capital contributions from parent $ 60,000 -- $ 587,000
Notes receivable issued in exchange for parent stock $ 1,862,583 -- --
</TABLE>
See accompanying notes.
F-9
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements
For the years ended January 1, 2000,
January 2, 1999 and December 27, 1997
1. Accounting Policies
Description of Business and Basis of Presentation
Omega Cabinets, Ltd. (the "Company") manufactures cabinetry and related products
and accessories, including primarily kitchen and bath cabinets. The Company
sells to a broad network of independent dealers, home centers,
builders/contractors, independent distributors and retail stores throughout the
United States and Canada. The Company operates in one business segment for
financial reporting purposes.
The Company is a wholly-owned subsidiary of Omega Holdings, Inc. ("Holdings").
Holdings has no operations and its sole asset is its investment in the common
stock of the Company. Holdings' original acquisition cost of acquiring the
Company, including a predecessor basis adjustment, have been "pushed down" and
reflected in the accounts of the Company.
Fiscal Year
The Company follows a 52/53 week fiscal year. Fiscal 1998 consisted of 53 weeks
and 1997 and 1999 each consisted of 52 weeks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Accounts Receivable and Concentrations of Credit Risk
The Company's customer base is impacted by the remodeling and housing industries
and, accordingly, may be affected by cyclical trends and general conditions in
those industries. Concentrations of credit risk with respect to trade
receivables are limited due to the number of customers and their geographic
dispersion. The Company performs initial and periodic credit evaluations of its
customers, generally does not require collateral, and maintains allowances for
potential credit losses.
Inventories
The Company states inventories at the lower of cost or market using the
first-in, first-out (FIFO) method.
F-10
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Property, Plant and Equipment
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets, including 40 years for buildings and 5 - 10 years for
machinery and equipment.
Deferred Financing Costs and Goodwill
Deferred financing costs are amortized over the term of the related loans
ranging primarily from 6 to 10 years. Goodwill, representing the excess of
purchase price over the underlying net assets of businesses acquired, is
amortized on the straight-line method over 40 years. The carrying value of
goodwill is reviewed continually to determine whether any impairment has
occurred. This review takes into consideration the recoverability of the
unamortized amounts based on the estimated undiscounted cash flows of the
related business. To the extent that the estimated undiscounted future cash
flows were less than the carrying value of the related goodwill, an impairment
loss could be measured based upon various methods, including undiscounted cash
flows, discounted cash flows and fair value. Based upon undiscounted cash flows,
no impairment of goodwill was determined to exist and, accordingly, no
measurement was required.
Income Taxes
The Company files consolidated income tax returns in the U. S. with Holdings.
All income taxes allocated to the Company have been computed on a separate
return basis.
The Company follows the liability method of accounting for income taxes, under
which deferred income tax assets and liabilities are determined based on the
difference between financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rates. Deferred income tax expense is
based on the changes in the asset or liability from period to period.
Stockholder's Equity
In connection with a previous acquisition, the former owners of the acquired
business retained a continuing ownership interest in Holdings. Generally
accepted accounting principles require Holdings and the Company to record a
reduction to stockholder's equity representing the cost in excess of the
predecessor basis attributable to the continuing ownership interest.
Accordingly, a predecessor basis adjustment of $11,031,662 has been reflected in
stockholder's equity.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was
approximately $3,022,000 in 1999, $1,913,000 in 1998 and $1,739,000 in 1997.
F-11
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Fair Value of Financial Instruments
Financial instruments include accounts receivable, accounts payable, and
long-term debt. Management believes the fair value of accounts receivable and
accounts payable approximate their carrying value in the balance sheet as of
each balance sheet date. The fair value of the long-term debt is estimated based
on anticipated interest rates which management believes would currently be
available to the Company for similar issues of debt, taking into account the
current credit risk of the Company and other market factors, and arms-length
trades for debt securities which are traded. The fair value of long-term debt
including the senior subordinated notes is estimated to approximate the carrying
amount as of each balance sheet date.
Foreign Operations
The Company has operations in Canada through its wholly-owned subsidiary,
Kitchen Craft of Canada, Ltd. ("Kitchen Craft") and, as a result, has foreign
subsidiary financial statements denominated in Canadian dollars. Foreign
currency denominated assets and liabilities are translated using the exchange
rates in effect at the balance sheet date. Results of operations are translated
using the average exchange rates prevailing throughout the year. The effects of
exchange rate fluctuations on translating foreign currency denominated financial
statements into U. S. dollars are accumulated as part of the foreign currency
translation adjustment in stockholder's equity.
Gains and losses from foreign currency transactions are included in net income
for the year.
Prior to 1999, the Company had no material foreign operations. Long-lived assets
and net sales by country as of and for the year ended January 1, 2000 were
approximately as follows (in millions):
Long-Lived
Assets Net Sales
-------------------------------
United States $ 92.8 $190.1
Canada 54.5 81.3
-------------------------------
$147.3 $271.4
===============================
Emerging Accounting Issues
The Company is not aware of any accounting standards which have been issued and
which will require the Company to change current accounting policies or adopt
new policies, the effect of which would be material to the consolidated
financial statements.
F-12
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
2. 1997 Merger and Refinancing
Pursuant to an Agreement and Plan of Merger (the "OMC Merger") among Holdings,
the stockholders of Holdings, and Omega Merger Corp. ("OMC"), on June 13, 1997
OMC merged into Holdings, with Holdings as the surviving entity. Concurrent with
the Merger, certain investors affiliated with Butler Capital Corporation ("BCC")
invested approximately $61.9 million in the voting equity stock of Holdings.
This investment plus proceeds from new management investors resulted in total
new equity capital to Holdings of approximately $62.2 million, which in turn was
contributed by Holdings into the Company. These amounts plus the proceeds from
new long-term debt were used to repay all of the Company's then outstanding
long-term debt, to repurchase the majority of Holding's voting equity stock
outstanding prior to the OMC Merger, and to pay transaction fees and expenses.
The cost to repurchase stock was subject to certain defined post-closing
adjustments which had not been finalized as of December 27, 1997. As a result of
the OMC Merger and related transactions described above, BCC owned 88.4% of
Holdings immediately subsequent to the OMC Merger.
The OMC Merger was accounted for as a recapitalization and, accordingly, did not
impact the historical basis of the Company's assets or liabilities. All OMC
Merger and recapitalization transactions of Holdings have been pushed down and
reflected in the accounts of the Company, resulting in a dividend to parent of
$109.6 million in 1997 which was charged to stockholder's equity. As a result of
the OMC Merger and related debt refinancing, the Company also wrote off existing
unamortized deferred financing costs of $1,554,443, resulting in an
extraordinary loss in 1997 of $947,443 (net of related income tax benefit of
$607,000).
The post-closing adjustments to the repurchase price were finalized in 1998,
resulting in additional redemption cost of $2,051,220 which was charged to
stockholder's equity as a dividend to parent.
3. Inventories
Inventories consist of the following:
January 1 January 2
2000 1999
--------------------------------------
Raw materials $ 8,893,729 $ 4,541,976
Work-in-process 6,144,663 4,837,431
Finished goods 3,153,059 2,385,322
--------------------------------------
$ 18,191,451 $ 11,764,729
======================================
F-13
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
January 1 January 2
2000 1999
---------------------------------
<S> <C> <C>
Senior bank revolving loan, due December 2003, interest at defined
rate options (8.0% weighted average at January 1, 2000) $ 4,500,000 $ 5,500,000
Senior Term Loan A, payable in increasing quarterly installments
through December 2003, interest at LIBOR plus 1.75% (8.0% at
January 1, 2000) 29,598,036 35,500,000
Senior Term Loan B, payable in quarterly installments beginning March
2004 through December 2004, interest at LIBOR plus 2.0% (8.21% at
January 1, 2000) 25,000,000 --
Senior subordinated notes, due June 2007, interest at 10.5% 100,000,000 100,000,000
Note payable for stock redemption (Note 9), interest at prime plus
2.0%, repaid in full in January 1999 -- 855,324
Canadian senior term loan, payable in increasing quarterly
installments through December 2004, interest at defined rate options
(7.22% weighted average at January 1, 2000) 14,064,990 --
Other 20,794 --
---------------------------------
173,183,820 141,855,324
Less amounts due within one year 11,387,384 11,105,324
---------------------------------
Long-term debt, excluding current portion $161,796,436 $130,750,000
=================================
</TABLE>
Concurrent with the acquisition of Kitchen Craft (Note 10), the Company amended
its senior bank credit facility and also entered into a new Canadian senior bank
credit facility. The amended senior credit facility consists of a revolving
facility of up to $20 million and a term facility including the above Term Loan
A and Term Loan B. Interest on the term and revolving facilities is currently
payable and is determined at the Company's option of either a defined base rate
plus a margin ranging from .25% to 1.75% or a defined LIBOR plus a margin
ranging from 1.25% to 2.75%. The new Canadian senior credit facility consists of
a total credit facility of $37 million Canadian dollars ($22 million Canadian
dollars under a term facility and $15 million Canadian dollars under a revolving
facility). There were no outstanding amounts under the Canadian revolving
facility at January 1, 2000. Interest on the Canadian term and revolving
facilities is currently payable and is determined at the Company's option of
either a defined base rate plus a margin ranging 1.50% to 2.75% or a defined
prime rate plus a margin ranging from .50% to 1.75%. The applicable margin
percentage under both the senior bank credit facility and the Canadian facility
is determined based upon the Company's cash flow leverage ratio. Borrowings
under the bank facilities are guaranteed by Holdings and secured by all of the
stock and assets of the Company.
F-14
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
4. Long-Term Debt (continued)
The revolving loan matures in December 2002 and has no scheduled interim
payments. The Company projects that the January 1, 2000 revolving loan balance
will be repaid during fiscal 2000 based on available cash flow and, accordingly,
such amount is classified as current portion of long-term debt. The Company is
required to pay a commitment fee of 0.5% per annum on the unused amounts of both
the senior bank revolving loan and the Canadian revolving loan. Additional loan
payments are also due each year based on 75% of the Company's defined excess
cash flow, if any. These mandatory prepayments will be applied first to repay
the term loans and then to the permanent reduction of the revolving loans. In
addition, the Company is required to make prepayments on the term and revolving
loans under certain other circumstances, including certain sales of assets or
issuance of debt or equity securities. The agreements contain various
restrictive covenants including a restriction on payment of dividends and
requirements to meet certain financial covenants.
Interest on the senior subordinated notes is payable semiannually. The notes
mature June 2007 and have no scheduled interim payments. The senior subordinated
notes are subordinated in right and payment to the senior bank loans, and are
generally not redeemable at the Company's option prior to June 2002, except in
certain circumstances. Beginning in June 2002, the notes may be redeemed at the
Company's option at 105.25% of principal, declining 1.75% annually to 100% in
June 2005. The related indenture agreement contains various restrictive
covenants, including a restriction on payment of dividends. See Note 11
regarding subsidiary guarantees of the senior subordinated notes.
As of January 1, 2000, aggregate future maturities of long-term debt are as
follows:
2000 $ 11,387,384
2001 8,317,630
2002 10,019,506
2003 12,154,305
2004 31,304,995
Thereafter 100,000,000
---------------
$ 173,183,820
===============
F-15
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
5. Commitments
The Company leases transportation equipment, facilities and equipment under
noncancelable operating leases with lease terms of 3 to 8 years. The Company
expects that generally leases will be renewed under renewal options or the
leased assets will be replaced in the normal course of business. Total rental
expense under operating leases was approximately $2,377,000 in 1999, $1,539,000
in 1998 and $1,611,000 in 1997.
Minimum future rental commitments applicable to operating leases at January 1,
2000 are as follows:
2000 $1,588,000
2001 1,204,000
2002 811,000
2003 419,000
2004 152,000
-----------
$4,174,000
===========
In June 1997, the Company entered into a management agreement with an affiliate
of the majority stockholder of Holdings. The agreement was amended in 1999 in
connection with the acquisition of Kitchen Craft. The agreement requires the
Company to pay $425,000 per year for management services provided, plus certain
fees and expenses. Expense under the management agreement was $425,000 in 1999,
$325,000 in 1998 and $176,000 in 1997. In addition, in 1999 and 1997 Holdings
issued fully-exercisable warrants (for the purchase of Holdings' common stock)
to the management company in connection with the management agreement. Holdings
recorded the fair value of the warrant as of the issuance date, and the related
charge and additional paid-in capital of $60,000 and $587,000 in 1999 and 1997,
respectively, was "pushed-down" and reflected in the financial statements of the
Company. Prior to June 1997, the Company incurred management fees to an
affiliate of the former majority stockholder of Holdings, resulting in expense
of approximately $147,000 in 1997.
The Company is jointly and severally liable, under a stockholders agreement of
Holdings, for Holdings' obligation to repurchase its common shares and fully
vested stock options held by management stockholders solely in the event of the
death or disability of such stockholders. The management stockholders include 49
individuals representing a total of approximately 9% of Holdings' fully-diluted
common shares. The aggregate repurchase amount of all stock subject to the
repurchase was approximately $12.9 million at January 1, 2000.
F-16
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Components of income tax expense, including amounts relating to the
extraordinary loss in 1997, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Current expense (benefit):
Federal $ 2,387,000 $ 1,586,000 $ (123,000)
State 225,000 244,000 (84,000)
Foreign 5,713,314 -- --
--------------------------------------------------------
Total current expense 8,325,314 1,830,000 (207,000)
Deferred expense:
Federal 1,258,000 1,634,000 771,000
State 347,000 251,000 524,000
Foreign 585,458 -- --
--------------------------------------------------------
Total deferred expense 2,190,458 1,885,000 1,295,000
Charge equivalent to reduction of currently
payable amount resulting from income tax
benefit credited to equity -- 465,000 --
--------------------------------------------------------
$10,515,772 $ 4,180,000 $ 1,088,000
========================================================
</TABLE>
A reconciliation of income tax expense with the amount computed by applying the
statutory federal income tax rate to pretax income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Amount based on federal statutory rate $ 9,051,000 $ 3,685,000 $ 648,000
State income taxes, net of federal benefit 378,000 506,000 437,000
Effect of foreign taxes 1,062,772 -- --
Other 24,000 (11,000) 3,000
--------------------------------------------------------
Income tax expense $10,515,772 $ 4,180,000 $ 1,088,000
========================================================
</TABLE>
F-17
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
Components of the net deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
January 1, 2000 January 2, 1999
------------------------------------ --------------------------------------
Current Noncurrent Current Noncurrent
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C>
Deferred tax assets:
Goodwill $ -- $ -- $ -- $ 430,000
Accruals and reserves 815,697 -- 710,000 --
Stock options and warrants -- 750,000 -- 230,000
Other 61,742 -- 55,000 --
------------------------------------ --------------------------------------
877,439 750,000 765,000 660,000
Deferred tax liabilities:
Depreciation -- (3,182,780) -- (1,810,000)
Goodwill -- (1,075,000) -- --
Deferred financing costs -- (350,000) -- --
Foreign currency exchange -- (350,000) -- --
------------------------------------ --------------------------------------
Net deferred tax asset (liability) $ 877,439 $(4,207,780) $ 765,000 $(1,150,000)
==================================== ======================================
</TABLE>
In connection with the acquisition of Kitchen Craft (Note 10), the Company
recorded a net deferred tax liability of approximately $755,000 at the date of
acquisition.
7. Employee Benefit Plans
The Company has profit-sharing, 401(k) and other benefit plans covering
substantially all full-time U. S. employees and certain foreign employees. Under
certain plans, the Company makes a matching contribution equal to 50% of the
participant's contribution, up to specified maximum amounts. In addition, the
Company may elect to contribute an additional amount to the plan at the
discretion of the Company's Board of Directors. Expense related to the plans was
$719,000 in 1999, $561,000 in 1998 and $372,000 in 1997.
8. Stock Option Plan
Holdings has an incentive stock option plan pursuant to which key employees may
be granted options to purchase shares of its Class A common stock. Options are
granted at the discretion of the Board of Directors. Holdings accounts for stock
options in accordance with Accounting Principles Board Opinion No. 25.
Compensation expense relating to Holdings' stock option plan which has been
pushed down and reflected in the financial statements of the Company was
approximately $1,348,000 in 1999, $3,500 in 1998 and $4,894,000 in 1997.
F-18
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
8. Stock Option Plan (continued)
Under FASB Statement No. 123 (FAS 123), certain pro forma information is
required as if Holdings had accounted for options under the alternative fair
value method of FAS 123. Holdings used a Black-Scholes model to determine the
per share fair value of the options at the grant date. The following assumptions
were used in the valuation:
Weighted average risk-free interest rate:
1999 6.01%
1998 5.62
1997 5.71
Expected dividend yield None
Expected volatility .001
Expected life of options 5 years
For purposes of pro forma disclosures, the estimated fair value of the options
at the grant date is amortized to expense over the vesting period of the
options. Pro forma option compensation expense is not indicative of what annual
pro forma expense may be in the future. Pro forma net income of the Company,
assuming the alternative FAS 123 method were used, would be approximately
$15,840,000 in 1999, $6,581,000 in 1998 and $629,000 in 1997.
9. Stockholder's Equity Transactions
During 1999, Holdings issued additional common equity totaling approximately
$20.5 million, primarily in connection with the acquisition of Kitchen Craft
(see Note 10). The Holdings' equity in turn was contributed to the Company as
additional paid-in capital. The Holdings' equity also included common stock
issued to certain management stockholders in exchange for notes receivable. The
outstanding stock notes receivable balance at January 1, 2000 was approximately
$1.9 million and is reported as a reduction to stockholder's equity.
In 1998, Holdings redeemed certain common stock shares and options of departing
management stockholders for aggregate cash consideration of $1,495,237 and a
subordinated note for $855,324. The Company paid the redemption cost to Holdings
and charged the amount to additional paid-in capital. A related income tax
benefit of $465,000 resulting from the stock redemption was credited to
stockholder's equity.
Other ongoing issuances (redemptions) of Holdings' stock are contributed to
(paid by) the Company and accordingly credited (charged) to additional paid-in
capital.
F-19
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
10. Acquisition
On January 29, 1999, the Company acquired Kitchen Craft for cash consideration
of approximately $48 million plus equity of Holdings with a fair value of
approximately $4 million. The transaction was accounted for as a purchase. The
aggregate purchase price, including fees and expenses of approximately $2.2
million, was allocated based on fair value as follows:
Current assets $11,568,000
Property, plant and equipment 8,988,000
Goodwill 43,946,000
Current liabilities (10,193,000)
-------------
$54,309,000
=============
The results of operations of Kitchen Craft from the date of purchase are
included in the accompanying consolidated statements of income. Pro forma
amounts for 1999 and 1998, assuming that the purchase occurred at the beginning
of each respective period are approximately as follows:
1999 1998
---------------------------------
Net sales $276,910,000 $238,960,000
Net income 16,480,000 9,630,000
11. Guarantor and Non-Guarantor Subsidiaries
The Company's $100 million senior subordinated notes (Note 4) 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.
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 year ended January 1, 2000, which separately
reflect Kitchen Craft (amounts in thousands):
F-20
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
11. Guarantor and Non-Guarantor Subsidiaries (continued)
<TABLE>
<CAPTION>
The Company* Kitchen Craft Eliminations Consolidated
--------------------------------------------------------------------
Condensed Consolidating Balance Sheet
<S> <C> <C> <C> <C>
Current assets
Cash $ 1,496 $ 739 $ -- $ 2,235
Accounts receivable 12,929 7,244 -- 20,173
Inventories 13,115 5,076 -- 18,191
Other 2,659 879 -- 3,538
--------------------------------------------------------------------
Total current assets 30,199 13,938 -- 44,137
Property, plant and equipment, net 34,828 11,580 -- 46,408
Goodwill, net 50,544 42,385 -- 92,929
Other noncurrent assets 45,238 502 (37,763) 7,977
--------------------------------------------------------------------
Total assets $ 160,809 $ 68,405 $ (37,763) $ 191,451
====================================================================
Current liabilities:
Accounts payable and accrued expenses $ 12,484 $ 6,628 $ 808 $ 19,920
Current portion of long-term debt 9,914 1,473 -- 11,387
--------------------------------------------------------------------
Total current liabilities 22,398 8,101 808 31,307
Long-term debt, less current portion 149,184 37,612 (25,000) 161,796
Other noncurrent liabilities 2,868 1,340 -- 4,208
Total stockholder's equity (deficit) (13,641) 21,352 (13,571) (5,860)
--------------------------------------------------------------------
Total liabilities and stockholder's
equity (deficit) $ 160,809 $ 68,405 $ (37,763) $ 191,451
====================================================================
<CAPTION>
The Company* Kitchen Craft Eliminations Consolidated
--------------------------------------------------------------------
Condensed Consolidating Statement of Income
<S> <C> <C> <C> <C>
Net sales $ 190,056 $ 81,340 $ -- $ 271,396
Cost of goods sold 140,574 51,856 -- 192,430
--------------------------------------------------------------------
Gross profit 49,482 29,484 -- 78,966
Selling, general and administrative
expenses 23,927 11,942 -- 35,869
Interest expense 14,333 3,113 -- 17,446
Foreign currency transaction gains -- (969) -- (969)
--------------------------------------------------------------------
Income before income taxes 11,222 15,398 -- 26,620
Income tax expense 4,217 6,299 -- 10,516
--------------------------------------------------------------------
Net income $ 7,005 $ 9,099 $ -- $ 16,104
====================================================================
</TABLE>
F-21
<PAGE>
Omega Cabinets, Ltd.
Notes to Consolidated Financial Statements (continued)
11. Guarantor and Non-Guarantor Subsidiaries (continued)
<TABLE>
<CAPTION>
The Company* Kitchen Craft Eliminations Consolidated
--------------------------------------------------------------------
Condensed Consolidating Statement of Cash Flows
<S> <C> <C> <C> <C>
Operating activities:
Net cash provided by operating
activities $ 14,561 $ 10,624 $ -- $ 25,185
Investing activities:
Purchases of property, plant and
equipment (8,705) (2,847) -- (11,552)
Payments for acquisition of business (516) (49,808) -- (50,324)
--------------------------------------------------------------------
Net cash used in investing activities (9,221) (52,655) (61,876)
Financing activities:
Proceeds from long-term debt 32,200 14,578 -- 46,778
Capital contributions, net of
redemptions 14,271 13,571 (13,571) 14,271
Intercompany funding (33,778) 20,207 13,571 --
Payments of long-term debt (14,957) (4,944) -- (19,901)
Payments for deferred financing costs (2,231) (583) -- (2,814)
--------------------------------------------------------------------
Net cash provided by (used in) financing
activities (4,495) 42,829 -- 38,334
Effect of foreign exchange -- (59) -- (59)
--------------------------------------------------------------------
Net increase in cash 845 739 -- 1,584
Cash at beginning of period 651 -- -- 651
--------------------------------------------------------------------
Cash at end of period $ 1,496 $ 739 $ -- $ 2,235
====================================================================
</TABLE>
* Includes Panther which is inconsequential as described above.
F-22
<PAGE>
Omega Cabinets, Ltd.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Balance at Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Additions Deductions End of Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 1, 2000
Allowance for doubtful accounts $1,489,000 $155,000 $307,000 (1) $155,000 (2) $1,796,000
YEAR ENDED JANUARY 2, 1999
Allowance for doubtful accounts 1,804,000 23,000 -- 338,000 (2) 1,489,000
YEAR ENDED DECEMBER 27, 1997
Allowance for doubtful accounts 1,628,000 362,000 -- 186,000 (2) 1,804,000
</TABLE>
(1) Addition from acquisition of Kitchen Craft.
(2) Uncollectible accounts written off, net of recoveries.
F-23
<PAGE>
Exhibit 12.1
OMEGA CABINETS, LTD.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
The Company
---------------------------------------------------------------------------
Year ended
---------------------------------------------------------------------------
December 30, December 28, December 27, January 2, January 1,
1995 1996 1997 1999 2000
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary item $ 3,439,656 $11,856,024 $ 3,460,653 $10,838,026 $26,620,101
Fixed charges:
Interest expense 9,700,914 10,441,182 16,311,997 15,074,327 17,445,914
Estimated portion of rental expense attributable to
interest costs (25%) 333,750 421,500 402,750 384,750 594,250
---------------------------------------------------------------------------
Total fixed charges 10,034,664 10,862,682 16,714,747 15,459,077 18,040,164
---------------------------------------------------------------------------
Earnings before income taxes and fixed charges $13,474,320 $22,718,706 $20,175,400 $26,297,103 $44,660,265
===========================================================================
Ratio of earnings to fixed charges 1.3 2.1 1.2 1.7 2.5
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Audited financial statements provided by Ernst & Young LLP
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-02-1999 JAN-01-2000
<PERIOD-START> DEC-28-1997 JAN-03-1999
<PERIOD-END> JAN-02-1999 JAN-01-2000
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 0
<DEPRECIATION> 7,602,297 10,876,410
<TOTAL-ASSETS> 114,207,763 191,450,816
<CURRENT-LIABILITIES> 22,616,762 31,306,419
<BONDS> 130,750,000 161,796,436
0 0
0 0
<COMMON> 10 10
<OTHER-SE> 40,309,009 5,859,829
<TOTAL-LIABILITY-AND-EQUITY> 114,207,763 191,450,816
<SALES> 169,220,139 271,396,048
<TOTAL-REVENUES> 169,220,139 271,396,048
<CGS> 121,766,772 192,429,908
<TOTAL-COSTS> 121,766,772 192,429,908
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,074,327 17,445,914
<INCOME-PRETAX> 10,838,026 26,620,101
<INCOME-TAX> 4,180,000 10,515,772
<INCOME-CONTINUING> 6,658,026 16,104,329
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,658,026 16,104,329
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
