<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: July 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
--------
Commission file number: 333-37135
---------
Omega Cabinets, Ltd.
--------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 42-1423186
(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification Number)
1205 Peters Drive, Waterloo, Iowa 50703
(Address of principal executive offices)
(Zip Code)
(319) 235-5700
------------------------------------------------
Registrants telephone number, including area code)
Not Applicable
------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. On May 15, 2000, all of the
voting stock of Omega Cabinets Ltd. was held by Omega Holdings, Inc.
("Holdings"), a Delaware corporation. As of March 15, 2000, Omega Cabinets, Ltd.
had 1,000 shares of Common Stock issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of July 1, 2000
and January 1, 2000
Condensed Consolidated Statements of Income for the three months
and six months ended July 1, 2000 and July 3, 1999
Condensed Consolidated Statements of Cash Flows for the six
months ended July 1, 2000 and July 3, 1999
Notes to Condensed Consolidated Financial Statements
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 1 January 1
2000 2000
(Unaudited) (Note)
-------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 1,104,311 $ 2,234,669
Accounts receivable 29,359,470 20,172,798
Inventories (Note 2) 17,952,945 18,191,451
Other current assets 3,861,837 3,537,936
-------------------------------
Total current assets 52,278,563 44,136,854
Property, plant and equipment 60,248,781 57,284,421
Less accumulated depreciation 12,803,231 10,876,410
-------------------------------
47,445,550 46,408,011
Deferred financing costs, net 6,531,347 7,114,428
Goodwill, net 91,672,580 92,929,361
Other assets 985,140 862,162
-------------------------------
Total assets $ 198,913,180 $ 191,450,816
===============================
Liabilities and stockholder's equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 23,034,947 $ 19,919,035
Current portion of long-term debt 13,353,059 11,387,384
-------------------------------
Total current liabilities 36,388,006 31,306,419
Deferred income taxes 4,973,660 4,207,780
Long-term debt, less current portion 156,911,102 161,796,436
Stockholder's equity (deficit):
Common stock, $.01 par value; 10,000 shares authorized; 1,000
shares issued and outstanding 10 10
Additional paid-in capital 82,883,308 82,598,542
Less stock notes receivable (2,174,662) (1,862,583)
Predecessor basis adjustment (11,031,662) (11,031,662)
Accumulated other comprehensive loss - foreign currency
translation adjustment (778,984) (1,319,083)
Retained earnings (deficit) (68,257,598) (74,245,043)
-------------------------------
Total stockholder's equity (deficit) 640,412 (5,859,819)
-------------------------------
Total liabilities and stockholder's equity (deficit) $ 198,913,180 $ 191,450,816
===============================
</TABLE>
Note: The balance sheet at January 1, 2000 has been derived from the audited
financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
July 1 July 3 July 1 July 3
2000 1999 2000 1999
----------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Net sales $79,690,910 $72,045,640 $153,133,804 $132,494,161
Cost of goods sold 57,591,899 50,326,034 111,854,389 93,478,840
----------------------------------- -----------------------------------
Gross profit 22,099,011 21,719,606 41,279,415 39,015,321
Selling, general and
administrative expenses (Note 11,767,986 8,438,284 20,741,333 15,844,328
4)
Amortization of goodwill 641,891 642,702 1,288,941 1,184,454
----------------------------------- -----------------------------------
Operating income 9,689,134 12,638,620 19,249,141 21,986,539
Interest expense 4,453,162 4,402,162 8,853,075 8,696,568
Foreign currency transaction
losses (gains) 396,464 (590,819) 513,665 (797,275)
----------------------------------- -----------------------------------
Income before income taxes 4,839,508 8,827,277 9,882,401 14,087,246
Income tax expense 1,918,326 3,373,905 3,894,967 5,411,139
----------------------------------- -----------------------------------
Net income $ 2,921,182 $ 5,453,372 $ 5,987,434 $ 8,676,107
=================================== ===================================
</TABLE>
See accompanying notes.
<PAGE>
Omega Cabinets, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six months ended
July 1 July 3
2000 1999
------------------------------
<S> <C> <C>
Operating activities
Net income $5,987,434 $ 8,676,107
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,907,867 3,316,859
Loss on disposal of fixed assets (Note 4) 2,468,546 -
Noncash interest income on stock notes receivable (68,963) -
Noncash stock option expense - 205,000
Deferred income taxes 791,250 820,000
Changes in operating assets and liabilities:
Accounts receivable (9,396,859) (6,493,886)
Inventories 110,854 (1,394,805)
Other assets (567,617) (291,054)
Accounts payable, accrued expenses and other liabilities 3,048,891 5,795,201
------------------------------
Net cash provided by operating activities 6,281,403 10,633,422
Investing activities
Purchases of property, plant and equipment (5,515,271) (6,399,353)
Payments for acquisition of business - (54,240,191)
------------------------------
Net cash used in investing activities (5,515,271) (60,639,544)
Financing activities
Payments for deferred financing costs - (2,810,775)
Payments of long-term debt (7,413,084) (8,477,241)
Proceeds from long-term debt 5,466,044 43,062,408
Capital contributions by parent 122,806 18,681,060
Payment to parent to redeem common stock and
options at parent level (81,135) (102,821)
------------------------------
Net cash (used in) provided by financing activities (1,905,369) 50,352,631
Effect of foreign exchange rate changes on cash 8,879 (67,924)
------------------------------
Net (decrease) increase in cash (1,130,358) 278,585
Cash at beginning of period 2,234,669 650,703
==============================
Cash at end of period $1,104,311 $ 929,288
==============================
</TABLE>
See accompanying notes.
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
July 1, 2000
1. Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended July 1, 2000 are not
necessarily indicative of the results that may be expected for the full 2000
fiscal year. For further information, refer to the Company's consolidated
financial statements and footnotes thereto for the year ended January 1, 2000.
2. Inventories
Inventories consist of the following:
July 1 January 1
2000 2000
------------------------------------
Raw materials $ 8,854,820 $ 8,893,729
Work-in-process 6,377,586 6,144,663
Finished goods 2,720,539 3,153,059
------------------------------------
$17,952,945 $18,191,451
====================================
3. 1999 Acquisition
On January 29, 1999, the Company acquired Kitchen Craft of Canada, Ltd.
("Kitchen Craft") for a purchase price of approximately $54.2 million. The
transaction was accounted for as a purchase. The accounts and transactions of
Kitchen Craft are included in the accompanying condensed consolidated financial
statements from the date of acquisition.
4. Disposal of Fixed Assets
In June 2000, the Company terminated implementation of its Enterprise Resource
and Planning (ERP) system. The Company charged approximately $2.5 million to
selling, general and administrative expense in the second quarter of fiscal 2000
related to the terminated implementation.
5. Comprehensive Income
Comprehensive income was $3,339,972 and $4,641,195 for the three months ended
July 1, 2000 and July 3, 1999, respectively, and $6,527,533 and $7,594,949 for
the six months ended July 1, 2000 and July 3, 1999, respectively.
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
6. Guarantor and Non-guarantor Subsidiaries
The Company's $100 million senior subordinated notes 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 July 1, 2000 and for the three and six months ended July 1,
2000 and July 3, 1999, which separately reflect Kitchen Craft (amounts in
thousands):
<TABLE>
<CAPTION>
The Kitchen
Company* Craft Eliminations Consolidated
--------------- --------------- -------------- -------------
Condensed Consolidating Balance Sheet
July 1, 2000
<S> <C> <C> <C> <C>
Current assets:
Cash $ 376 $ 728 $ - $ 1,104
Accounts receivable 19,386 9,973 - 29,359
Inventories 13,183 4,770 - 17,953
Other 2,802 1,060 - 3,862
--------------- --------------- -------------- -------------
Total current assets 35,747 16,531 - 52,278
Property, plant and equipment, net 34,776 12,670 - 47,446
Goodwill, net 49,817 41,856 - 91,673
Other noncurrent assets 39,907 428 (32,819) 7,516
--------------- --------------- -------------- -------------
Total assets $160,247 $71,485 $(32,819) $198,913
=============== =============== ============== =============
Current liabilities:
Accounts payable and accrued expenses $ 16,500 $ 1,202 $ 5,333 $ 23,035
Current portion of long-term debt 6,883 6,470 - 13,353
--------------- --------------- -------------- -------------
Total current liabilities 23,383 7,672 5,333 36,388
Long-term debt, less current portion 145,523 35,970 (24,582) 156,911
Other noncurrent liabilities 3,668 1,305 - 4,973
Total stockholder's equity (deficit) (12,327) 26,538 (13,570) 641
--------------- --------------- -------------- -------------
Total liabilities and stockholder's equity
(deficit) $160,247 $71,485 $(32,819) $198,913
=============== =============== ============== =============
</TABLE>
* Includes Panther which is inconsequential as described above.
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
6. Guarantor and Non-guarantor Subsidiaries (continued)
<TABLE>
<CAPTION>
The Kitchen
Company Craft Eliminations Consolidated
--------------- --------------- -------------- -------------
Condensed Consolidating Statement of Income
Three months ended July 1, 2000
<S> <C> <C> <C> <C>
Net sales $52,766 $26,925 $ - $79,691
Cost of goods sold 40,020 17,572 - 57,592
--------------- --------------- -------------- -------------
Gross profit 12,746 9,353 - 22,099
Selling, general and administrative expenses 8,713 3,697 - 12,410
Interest expense 3,644 809 - 4,453
Foreign currency transaction losses - 397 - 397
--------------- --------------- -------------- -------------
Income before income taxes 389 4,450 - 4,839
Income tax expense 141 1,777 - 1,918
=============== =============== ============== =============
Net income $ 248 $ 2,673 $ - $ 2,921
=============== =============== ============== =============
Condensed Consolidating Statement of Income
Three months ended July 3, 1999
<S> <C> <C> <C> <C>
Net sales $50,829 $21,217 $ - $72,046
Cost of goods sold 36,743 13,583 - 50,326
--------------- --------------- -------------- -------------
Gross profit 14,086 7,634 - 21,720
Selling, general and administrative expenses 6,016 3,066 - 9,082
Interest expense 3,538 864 - 4,402
Foreign currency transaction gains - (591) - (591)
--------------- --------------- -------------- -------------
Income before income taxes 4,532 4,295 - 8,827
Income tax expense 1,663 1,711 - 3,374
=============== =============== ============== =============
Net income $ 2,869 $ 2,584 $ - $ 5,453
=============== =============== ============== =============
Condensed Consolidating Statement of Income
Six months ended July 1, 2000
<S> <C> <C> <C> <C>
Net sales $102,880 $50,254 $ - $153,134
Cost of goods sold 78,596 33,258 - 111,854
--------------- --------------- -------------- -------------
Gross profit 24,284 16,996 - 41,280
Selling, general and administrative expenses 14,911 7,120 - 22,031
Interest expense 7,234 1,619 - 8,853
Foreign currency transaction gains - 514 - 514
--------------- --------------- -------------- -------------
Income before income taxes 2,139 7,743 - 9,882
Income tax expense 798 3,097 - 3,895
=============== =============== ============== =============
Net income $ 1,341 $ 4,646 $ - $ 5,987
=============== =============== ============== =============
</TABLE>
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
<TABLE>
<CAPTION>
6. Guarantor and Non-guarantor Subsidiaries (continued)
The Kitchen
Company Craft Eliminations Consolidated
--------------- --------------- -------------- -------------
Condensed Consolidating Statement of Income
Six months ended July 3, 1999
<S> <C> <C> <C> <C>
Net sales $97,682 $34,812 $ - $132,494
Cost of goods sold 70,929 22,550 - 93,479
--------------- --------------- -------------- -------------
Gross profit 26,753 12,262 - 39,015
Selling, general and administrative expenses 11,800 5,228 - 17,028
Interest expense 7,196 1,501 - 8,697
Foreign currency transaction gains - (797) - (797)
--------------- --------------- -------------- -------------
Income before income taxes 7,757 6,330 - 14,087
Income tax expense 2,887 2,524 - 5,411
--------------- --------------- -------------- -------------
Net income $ 4,870 $ 3,806 $ - $ 8,676
=============== =============== ============== =============
Condensed Consolidating Statement of Cash Flows
Six months ended July 1, 2000
<S> <C> <C> <C> <C>
Operating activities:
Net cash provided by operating activities $ 4,228 $ 2,053 $ - $ 6,281
Investing activities - purchase of
property, plant and equipment (3,642) (1,873) - (5,515)
Financing activities:
Proceeds from long-term debt - 5,466 - 5,466
Capital contributions, net of redemptions 41 - - 41
Intercompany funding 4,944 (4,944) - -
Payments of long-term debt (6,691) (721) - (7,412)
--------------- --------------- -------------- -------------
Net cash used in financing activities (1,706) (199) (1,905)
Effect of foreign exchange - 8 - 8
--------------- --------------- -------------- -------------
Net decrease in cash (1,120) (11) (1,131)
Cash at beginning of period 1,496 739 - 2,235
--------------- --------------- -------------- -------------
Cash at end of period $ 376 $ 728 $ - $ 1,104
=============== =============== ============== =============
</TABLE>
<PAGE>
Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
6. Guarantor and Non-guarantor Subsidiaries (continued)
<TABLE>
<CAPTION>
Condensed Consolidating Statement of Cash Flows
Six months ended July 3, 1999
<S> <C> <C> <C> <C>
Operating activities:
Net cash provided by operating activities $ 6,986 $ 3,648 $ - $10,634
Investing activities:
Purchases of property, plant and equipment (5,580) (820) - (6,400)
Payments for acquisition of business (505) (53,735) - (54,240)
--------------- --------------- -------------- -------------
Net cash used in investing activities (6,085) (54,555) (60,640)
Financing activities:
Proceeds from long-term debt 24,146 18,916 - 43,062
Capital contributions, net of redemptions 18,578 13,571 (13,571) 18,578
Intercompany funding (38,770) 25,199 13,571 -
Payments of long-term debt (2,756) (5,721) - (8,477)
Payments for deferred financing costs (2,228) (583) - (2,811)
--------------- --------------- -------------- -------------
Net cash provided by (used in) financing
activities (1,030) 51,382 - 50,352
Effect of foreign exchange - (68) - (68)
--------------- --------------- -------------- -------------
Net increase (decrease) in cash (129) 407 278
Cash at beginning of period 651 - - 651
--------------- --------------- -------------- -------------
Cash at end of period $ 522 $ 407 $ - $ 929
=============== =============== ============== =============
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The following discussion should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements for the period ended
July 1, 2000 and the Company's audited consolidated financial statements and
Annual Report on Form 10-K for the year ending January 1, 2000.
1999 Kitchen Craft Acquisition
On January 29, 1999, the Company consummated the acquisition of Kitchen
Craft of Canada, Ltd. ("Kitchen Craft") as further described in the Notes to
Condensed Consolidated Financial Statements. The acquisition was accounted for
as a purchase, with Kitchen Craft consolidated with the Company effective from
the acquisition date forward. Accordingly, the Company's results of operations
for the first six months of fiscal 1999 reflect five months of Kitchen Craft
results.
Results of Operations
Net Sales for the three months ended July 1, 2000 ("second quarter 2000") were
$79.7 million compared to $72.0 million for the comparable period in 1999
("second quarter 1999"), an increase of 10.6%. The increase in net sales in the
second quarter 2000 was primarily attributable to strong remodeling sales and
market share growth for Kitchen Craft and Omega partly offset by weakening sales
for the new home market. For the first six months of 2000 ("first half 2000"),
net sales were $153.1 million compared to $132.5 million for the first six
months of 1999 ("first half 1999"), an increase of 15.6%. First half 1999
results included five months of Kitchen Craft results. Second quarter 2000 net
sales for Kitchen Craft were $26.9 million, a 26.9% increase over second quarter
1999 driven primarily by U.S. market share expansion at existing dealers as well
as the impact of new selling locations. First half 2000 net sales for Kitchen
Craft were $50.3 million, an increase of 44.4% compared with first half 1999.
Net sales for the Omega lines (custom and semi-custom cabinetry and bath
vanities) were $25.3 million in the second quarter 2000 compared with $23.3
million for second quarter 1999, a 8.3% increase. Omega custom and semi-custom
net sales increased 30.0% and 7.4%, respectively, driven primarily by additional
selling locations at Home Depot EXPO, Sears' The Great Indoors, and the BKBG
Buying Group, an organization that represents over 150 independent kitchen and
bath dealers. Vanity sales declined 8.6% resulting from Company decisions to
exit various Home Depot stores and other low margin accounts. First half 2000
net sales for the Omega lines were $49.2 million, an increase of 9.4% compared
with first half 1999. HomeCrest stock net sales were $27.5 million for the
second quarter 2000, similar to second quarter 1999. First half 2000 stock sales
were $53.7 million compared to $52.7 million for the first half of 1999, a 1.9%
increase. HomeCrest net sales were unfavorably impacted by the Company's
decision to discontinue the Affinity frameless product offering as well as
softening new home starts. Excluding the Affinity impact, HomeCrest first half
net sales increased 7.0%.
Gross Profit for second quarter 2000 was $22.1 million compared to $21.7 million
for the second quarter 1999, an increase of 1.7%. As a percentage of net sales,
gross profit decreased to 27.7% in the second quarter 2000 from 30.1% in second
quarter 1999 with lower gross margins at every division driven primarily by
higher hardwood prices, employee medical costs, and fuel inflation. HomeCrest's
gross margin decreased to 22.1% in the second quarter 2000 compared to 24.7% in
the second quarter 1999 driven primarily by higher material, employee medical,
and fuel costs. Omega's gross profit decreased to 26.3% in the second quarter
2000 compared to 31.1% in the second quarter 1999 driven primarily by higher
material prices and usage related to Omega's new
<PAGE>
hardwood processing center. Kitchen Craft gross margins decreased to 34.7% in
the second quarter 2000 compared to 36.0% for second quarter 1999 driven
primarily by lower volume and margins at the 13 Company-owned retail stores. For
the first half of 2000, gross profit was $41.3 million compared to $39.0 million
for the first half of 1999, an increase of 5.8%. As a percentage of net sales,
gross profit decreased to 27.0% for the first half of 2000 compared to 29.4% for
the first half of 1999. Gross margins were lower at every division resulting
primarily from inflation related to hardwoods, medical, and fuel as well as
unfavorable labor productivity during first quarter 2000 at HomeCrest and Omega
related to new employee training.
Selling, General and Administrative Expenses for the second quarter 2000 were
$11.8 million compared to $8.4 million for the second quarter 1999, an increase
of 39.5%. As a percentage of net sales, selling, general and administrative
expenses were 14.8% for the second quarter 2000 compared to 11.7% for the second
quarter 1999. During fiscal June 2000, the Company terminated implementation of
the Baan Enterprise Resource and Planning system at the Omega division resulting
in a $2.5 million pre-tax charge to operations partly offset by a $1.0 million
income tax benefit. Project implementation started during the second quarter
1998 with planned completion by third quarter 1999. During the test phase, the
software proved unable to support Omega's complex product offering. Excluding
this charge, expenses were $9.3 million, an increase of 10.2% compared to second
quarter 1999 and as a percentage of net sales, expenses were 11.7%, similar to
second quarter 1999. For the first half 2000, expenses were $20.7 million
compared to $15.8 million for the first half 1999, an increase of 30.9%.
Excluding the non-recurring software charge, first half 2000 expenses were $18.3
million, an increase of 15.3% compared to the first half 1999 and as a
percentage of net sales, expenses were 11.9% compared to 12.0% for the first
half 1999. In addition to the software write-off, the Company also incurred $0.4
million to participate at the Kitchen and Bath Industry Show. The Company
participates once every two years and thus did not incur costs during fiscal
1999.
Interest Expense for second quarter 2000 was $4.5 million compared to $4.4
million for second quarter 1999, a 1.2% increase driven primarily by higher
average interest rates related to senior debt borrowings. For the first half
2000, interest expense was $8.9 million compared to $8.7 million for the first
half 1999, an increase of 1.8%. Higher interest rates were partly offset by
lower borrowings.
Income Taxes for second quarter 2000 were $1.9 million, compared to $3.4 million
for the second quarter 1999. Second quarter 2000 reflected a normalized tax rate
of 39.6% compared to 38.2% in second quarter 1999 resulting from a higher tax
rate at Kitchen Craft. First half 2000 income taxes were $3.9 million, compared
to $5.4 million for the first half of 1999. First half 2000 reflected a
normalized tax rate of 39.4%, compared with 38.4% for the first half of 1999.
Net Income for second quarter 2000 was $2.9 million compared to $5.5 million for
the second quarter 1999, a 46.4% decline related to factors discussed above as
well as an unfavorable $1.0 million pre-tax change in foreign currency
translations. For the first half of 2000, net income was $6.0 million, compared
to $8.7 million for the first half of 1999.
Results of Operations - Pro Forma
The results discussed above only include Kitchen Craft results since the
January 29, 1999 acquisition. To provide more insight into the underlying
performance of the consolidated group, a pro forma summary for first quarter
2000 and 1999 are shown below treating Kitchen Craft as if it was acquired prior
to 1999.
<PAGE>
Second Second
Quarter Quarter
($ in millions) 2000 1999 Increase
---- ---- --------
Net Sales:
Omega/HomeCrest $52.8 $50.8 3.8%
Kitchen Craft 26.9 21.2 26.9%
----- ------
Consolidated $79.7 $72.0 10.6%
EBITDA (1):
Omega/HomeCrest $ 7.7 $ 9.4 -18.1%
Kitchen Craft 6.2 5.1 22.5%
----- -----
Consolidated $13.9 $14.4 -3.9%
EBITDA Margin (1):
Omega/HomeCrest 14.6% 18.5%
Kitchen Craft 23.0% 23.9%
Consolidated 20.1% 17.4%
First First
Half Half
($ in millions) 2000 1999 Increase
---- ---- --------
Net Sales:
Omega/HomeCrest $102.9 $ 97.7 5.3%
Kitchen Craft 50.3 40.3 24.6%
Consolidated $153.1 $138.0 11.0%
EBITDA (1):
Omega/HomeCrest $ 14.3 $ 17.3 -17.3%
Kitchen Craft 11.0 8.6 27.4%
---- ------
Consolidated $ 25.3 $ 25.9 -2.4%
EBITDA Margin (1):
Omega/HomeCrest 13.9% 17.7%
Kitchen Craft 21.8% 21.3%
Consolidated 16.5% 18.8%
(1) 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, non-cash stock option and warrant expense and
certain unusual or nonrecurring expenses. 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 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
<PAGE>
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.
Liquidity and Capital Resources
The Company's primary cash needs are working capital, capital expenditures
and debt service. The Company has financed these cash requirements primarily
through internally generated cash flow and funds borrowed under the company's
credit facilities.
Net cash provided by operating activities for the first half 2000 was $6.3
million compared to $10.6 million for the first half 1999. The decrease of $4.3
million was driven by a $4.3 million net increase in operating assets and
liabilities related to sales growth and $2.7 million lower net income partly
offset by $2.7 million higher non-cash adjustments, such as the Baan software
write-off.
The Company used cash in investing activities of $5.5 million for the first
half 2000 compared to $60.6 million for the first half 1999, a decrease of $55.1
million. First half 1999 included $54.2 million related to financing of the
Kitchen Craft acquisition and $6.4 million for capital expenditures. Capital
expenditures for first half 2000 were $5.5 million and included a 30,000 square
foot capacity expansion and productivity program at HomeCrest's Goshen, IN
facility.
Cash used in financing activities was $1.9 million for first half 2000
compared to $50.4 million cash provided by financing activities for first half
1999. This change of $52.3 million was due primarily to financing of the January
1999 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.
At July 1, 2000, the Company's long-term debt consisted of (i) $100.0
million of senior subordinated notes; (ii) a U.S. senior credit facility,
consisting of a $51.1 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) $18.9 million term
facility (the "Canadian Term Facility") and a (Cdn) $15.0 million revolving
facility (the "Canadian Revolving Facility").
As of July 1, 2000, the Company had additional borrowing availability of
$18.7 million under the U.S. Revolving Facility and (Cdn) $7.5 million under the
Canadian Revolving Facility. In addition, the Company had cash of $1.1 million
that was available to further reduce the U.S. and Canadian Revolving Facilities.
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 $2.1 million per quarter during the four quarter periods beginning
September 1999, 2000, 2001, and 2002, respectively, with $2.6 million payments
due the last two quarters in 2003. Finally, four equal quarterly payments of
$6.1 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
<PAGE>
flow, if any. In this connection, a $1.1 million excess cash flow payment was
completed during March 2000. 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) $0.7 million, (Cdn)
$0.9 million and (Cdn) $2.2 million per quarter during 2000, 2001, 2002, 2003,
and 2004. Both the U.S. and Canadian Term Facilities mature on December 31,
2004. Revolving Facilities will mature on December 26, 2003 and have no
scheduled interim amortization.
Computer Systems and Year 2000
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 fiscal 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 quarterly report on Form 10-Q, the words "believes,"
"anticipates" and similar expressions are used to identify forward looking
statements. Such statements are subject to risks and uncertainties which could
cause actual results to differ materially from those projected. The Company
wishes to caution readers that the following important factors and others in
some cases have affected and in the future could affect the Company's actual
results and could cause the Company's results for 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, (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.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is subject to interest rate market risk in connection with its
long-term debt. These financial instruments are entered into for purposes other
than trading. As of July 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 $3,536 $ --
2001 8,027 --
2002 9,800 --
2003 18,277 --
2004 30,624 --
Thereafter -- 100,000
------- --------
Total $70,264 $100,000
======= ========
Fair value at July 1, 2000 $70,264 $ 92,000
(a) $27.8 million at LIBOR plus 1.75%, $24.6 million at LIBOR plus 2.00% and
$17.9 million at Canadian BA rate plus 2.00% (8.32% weighted average at
July 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to various legal actions arising in the ordinary
course of its business. The Company believes that the resolution of these legal
actions will not have a material adverse effect on the Company's financial
position or results of operations.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
<PAGE>
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
The Company and Holdings announce the election of Mark Buller as President,
Chief Executive Officer, and a director of each of Holdings and the Company.
Mark Buller succeeds Robert L. Moran who resigned as President, Chief Executive
Officer and a director of Holdings and the Company and from all offices and
positions held with each subsidiary of Holdings, including the Company.
Item 6. Exhibits and Reports on Form 8-K.
27.1 Financial Data Schedules.
(b) Reports on Form 8-K.
None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA CABINETS, LTD.
By: /s/ John Horton
Name: John Horton
Title: Chief Financial Officer
(Authorized Signatory and principal
financial officer)
Dated: August 14, 2000
