<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: September 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from: to
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Commission file number: 333-37135
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Omega Cabinets, Ltd.
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(Exact name of registrant as specified in its charter)
Delaware 42-1423186
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(State or other jurisdiction (I.R.S. Employer
incorporation or organization Identification Number)
1205 Peters Drive, Waterloo, Iowa 50703
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(Address of principal executive offices)
(Zip Code)
(319) 235-5700
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Registrants telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ x ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] Not Applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date. On November 1, 2000, all of the
voting stock of Omega Cabinets Ltd. was held by Omega Holdings, Inc.
("Holdings"), a Delaware corporation. As of November 1, 2000, Omega Cabinets,
Ltd. had 1,000 shares of Common Stock issued and outstanding.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are presented herein:
Condensed Consolidated Balance Sheets as of September 30, 2000
and January 1, 2000
Condensed Consolidated Statements of Income for the three months and nine
months ended September 30, 2000 and October 2, 1999
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and October 2, 1999
Notes to Condensed Consolidated Financial Statements
2
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Omega Cabinets, Ltd.
Condensed Consolidated Balance Sheets
September 30 January 1
2000 2000
(Unaudited) (Note)
-------------------------------
Assets
Current assets:
Cash $ 2,811,942 $ 2,234,669
Accounts receivable 29,470,372 20,172,798
Inventories (Note 2) 18,528,002 18,191,451
Other current assets 9,592,112 3,537,936
-------------------------------
Total current assets 60,402,428 44,136,854
Property, plant and equipment 62,447,926 57,284,421
Less accumulated depreciation 13,889,521 10,876,410
-------------------------------
48,558,405 46,408,011
Deferred financing costs, net 6,235,696 7,114,428
Goodwill, net 91,059,949 92,929,361
Other assets 1,043,353 862,162
-------------------------------
Total assets $207,299,831 $191,450,816
===============================
Liabilities and stockholder's equity (deficit)
Current liabilities:
Accounts payable and accrued expenses $ 27,356,439 $ 19,919,035
Current portion of long-term debt 5,989,404 11,387,384
-------------------------------
Total current liabilities 33,345,843 31,306,419
Deferred income taxes 5,353,086 4,207,780
Long-term debt, less current portion 155,915,271 161,796,436
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 90,161,153 82,598,542
Less stock notes receivable (3,208,526) (1,862,583)
Predecessor basis adjustment (11,031,662) (11,031,662)
Accumulated other comprehensive loss -
foreign currency translation adjustment (544,751) (1,319,083)
Retained earnings (deficit) (62,690,593) (74,245,043)
--------------------------------
Total stockholder's equity (deficit) 12,685,631 (5,859,819)
--------------------------------
Total liabilities and stockholder's
equity (deficit) $207,299,831 $191,450,816
================================
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.
3
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Omega Cabinets, Ltd.
Condensed Consolidated Statements of Income (Unaudited)
Three months ended Nine months ended
September 30 October 2 September 30 October 2
2000 1999 2000 1999
---------------------------- --------------------------
Net sales $79,015,534 $72,576,330 $232,149,338 $205,070,491
Cost of goods sold 55,226,896 50,905,579 167,081,285 144,384,419
---------------------------- --------------------------
Gross profit 23,788,638 21,670,751 65,068,053 60,686,072
Selling, general
and adminis-
trative expenses
(Note 4) 9,345,813 8,460,285 30,087,146 21,588,496
Amortization of
goodwill 641,751 640,174 1,930,692 1,824,628
---------------------------- ---------------------------
Operating income 13,801,074 12,570,292 33,050,215 34,272,948
Interest expense 4,351,046 4,489,402 13,204,121 13,185,970
Foreign currency
transaction
losses (gains) 296,852 59,220 810,517 (1,021,938)
---------------------------- ---------------------------
Income before
income taxes 9,153,176 8,021,670 19,035,577 22,108,916
Income tax expense 3,586,172 3,151,687 7,481,139 8,562,826
---------------------------- ---------------------------
Net income $ 5,567,004 $ 4,869,983 $ 11,554,438 $ 13,546,090
============================ ==========================
See accompanying notes.
4
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Omega Cabinets, Ltd.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended
September 30 October 2
2000 1999
---------------------------
Operating activities
Net income $11,554,438 $13,546,090
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,924,275 5,116,516
Loss on disposal of fixed assets (Note 4) 2,468,546 -
Noncash interest income on stock notes receivable (85,002) -
Noncash stock option expense - 205,000
Deferred income taxes 1,191,344 1,230,000
Changes in operating assets and liabilities:
Accounts receivable (9,633,915) (6,926,506)
Inventories (547,515) (2,671,788)
Other assets (116,019) (260)
Accounts payable, accrued expenses and other
liabilities 7,501,556 8,083,741
---------------------------
Net cash provided by operating activities 18,257,708 18,582,793
Investing activities
Purchases of property, plant and equipment (7,921,528) (8,639,260)
Payments for acquisition of business - (54,250,653)
----------------------------
Net cash used in investing activities (7,921,528) (62,889,913)
Financing activities
Payments for deferred financing costs - (2,787,463)
Payments of long-term debt (9,739,744) (13,239,146)
Proceeds from long-term debt - 43,062,408
Capital contributions by parent 132,805 18,681,060
Payment to parent to redeem common stock and
options at parent level (81,135) (102,821)
----------------------------
Net cash provided by (used in) financing activities (9,688,074) 45,614,038
Effect of foreign exchange rate changes on cash (70,833) (78,024)
----------------------------
Net increase in cash 577,273 1,228,894
Cash at beginning of period 2,234,669 650,703
---------------------------
Cash at end of period $ 2,811,942 $ 1,879,597
===========================
See accompanying notes.
5
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
September 30, 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 nine month periods ended September 30, 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:
September 30 January 1
2000 2000
--------------------------------
Raw materials $ 7,780,852 $ 8,893,729
Work-in-process 7,080,193 6,144,663
Finished goods 3,666,957 3,153,059
--------------------------------
$ 18,528,002 $ 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.
6
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
5. Comprehensive Income
Comprehensive income was $5,801,237 and $4,929,203 for the three months ended
September 30, 2000 and October 2, 1999, respectively, and $12,328,770 and
$12,524,152 for the nine months ended September 30, 2000 and October 2, 1999,
respectively.
6. Capital Contributions
In September 2000, the Company's parent issued additional common equity totaling
approximately $6.3 million which was contributed to the Company as additional
paid-in capital.
7. 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 September 30, 2000 and for the three and nine months ended
September 30, 2000 and October 2, 1999, which separately reflect Kitchen Craft
(amounts in thousands):
The Kitchen
Company* Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Balance Sheet
September 30, 2000
Current assets:
Cash $ 275 $ 2,537 $ - $ 2,812
Accounts receivable 19,600 9,870 - 29,470
Inventories 13,384 5,144 - 18,528
Other 8,877 715 - 9,592
------------------------------------------------
Total current assets 42,136 18,266 - 60,402
Property, plant and
equipment, net 34,916 13,642 - 48,558
Goodwill, net 49,453 41,607 - 91,060
Other noncurrent assets 43,315 393 36,428 7,280
------------------------------------------------
Total assets $169,820 $ 73,908 $ 36,428 $ 207,300
================================================
7
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
The Kitchen
Company* Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Balance Sheet (continued)
September 30, 2000
Current liabilities:
Accounts payable and
accrued expenses $ 19,454 $ 6,178 $ 1,724 $ 27,356
Current portion of
long-term debt 4,614 1,376 - 5,990
-----------------------------------------------
Total current liabilities 24,068 7,554 1,724 33,346
Long-term debt,
less current portion 145,049 35,447 (24,581) 155,915
Other noncurrent liabilities 4,067 1,286 - 5,353
Total stockholder's equity
(deficit) (3,364) 29,621 (13,571) 12,686
----------------------------------------------
Total liabilities and
stockholder's equity
(deficit) $169,820 $ 73,908 $(36,428) $ 207,300
==============================================
* Includes Panther which is inconsequential as described above.
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Income
Three months ended September 30, 2000
Net sales $ 51,378 $ 27,638 $ - $ 79,016
Cost of goods sold 37,105 18,122 - 55,227
-----------------------------------------------
Gross profit 14,273 9,516 - 23,789
Selling, general and
administrative expenses 6,381 3,607 - 9,988
Interest expense 3,475 876 - 4,351
Foreign currency transaction
losses - 297 - 297
-----------------------------------------------
Income before income taxes 4,417 4,736 - 9,153
Income tax expense 1,698 1,888 - 3,586
-----------------------------------------------
Net income $ 2,719 $ 2,848 $ - $ 5,567
===============================================
8
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Income
Three months ended October 2, 1999
Net sales $ 49,122 $ 23,454 $ - $ 72,576
Cost of goods sold 36,259 14,646 - 50,905
-----------------------------------------------
Gross profit 12,863 8,808 - 21,671
Selling, general and
administrative expenses 5,815 3,286 - 9,101
Interest expense 3,668 821 - 4,489
Foreign currency transaction
losses - 59 - 59
----------------------------------------------
Income before income taxes 3,380 4,642 - 8,022
Income tax expense 1,290 1,862 - 3,152
----------------------------------------------
Net income $ 2,090 $ 2,780 $ - $ 4,870
==============================================
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Income
Nine months ended September 30, 2000
Net sales $154,258 $ 77,891 $ - $ 232,149
Cost of goods sold 115,702 51,379 - 167,081
-----------------------------------------------
Gross profit 38,556 26,512 - 65,068
Selling, general and
administrative expenses 21,292 10,726 - 32,018
Interest expense 10,708 2,496 - 13,204
Foreign currency transaction
losses - 811 - 811
-----------------------------------------------
Income before income taxes 6,556 12,479 - 19,035
Income tax expense 2,497 4,984 - 7,481
-----------------------------------------------
Net income $ 4,059 $ 7,495 $ - $ 11,554
==============================================
9
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Income
Nine months ended October 2, 1999
Net sales $146,803 $ 58,267 $ - $ 205,070
Cost of goods sold 107,187 37,197 - 144,384
-----------------------------------------------
Gross profit 39,616 21,070 - 60,686
Selling, general and
administrative expenses 17,614 8,799 - 26,415
Interest expense 10,864 2,322 - 13,186
Foreign currency transaction
gains - (1,022) - (1,022)
-----------------------------------------------
Income before income taxes 11,138 10,971 - 22,109
Income tax expense 4,178 4,385 - 8,563
-----------------------------------------------
Net income $ 6,960 $ 6,586 $ - $ 13,546
===============================================
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Cash Flows
Nine months ended September 30, 2000
Operating activities - net cash
provided by operating
activities $ 11,438 $ 6,820 $ - $ 18,258
Investing activities - purchase
of property, plant and
equipment (4,610) (3,312) - (7,922)
Financing activities:
Capital contributions, net of
redemptions 52 - - 52
Intercompany funding 1,335 (1,335) - -
Payments of long-term debt (9,435) (305) - (9,740)
-----------------------------------------------
Net cash used in financing
activities (8,048) (1,640) - (9,688)
Effect of foreign exchange - (71) - (71)
-----------------------------------------------
Net increase (decrease) in cash (1,220) 1,797 - 577
Cash at beginning of period 1,496 739 - 2,235
-----------------------------------------------
Cash at end of period $ 276 $ 2,536 $ - $ 2,812
===============================================
10
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Omega Cabinets, Ltd.
Notes to Condensed Consolidated
Financial Statements (Unaudited) (continued)
7. Guarantor and Non-Guarantor Subsidiaries (continued)
The Kitchen
Company Craft Eliminations Consolidated
------------------------------------------------
Condensed Consolidating Statement of Cash Flows
Nine months ended October 2, 1999
Operating activities - net cash
provided by operating
activities $ 11,741 $ 6,842 $ - $ 18,583
Investing activities:
Purchases of property, plant
and equipment (7,160) (1,479) - (8,639)
Payments for acquisition of
business (516) (53,735) - (54,251)
-----------------------------------------------
Net cash used in investing
activities (7,676) (55,214) - (62,890)
Financing activities:
Proceeds from long-term debt 25,000 15,727 - 40,727
Capital contributions, net of
redemptions 17,269 12,746 (13,571) 16,444
Intercompany funding (37,583) 24,012 13,571 -
Payments of long-term debt (6,108) (2,661) - (8,769)
Payments for deferred financing
costs (2,231) (557) - (2,788)
-----------------------------------------------
Net cash provided by (used in)
financing activities (3,653) 49,267 - 45,614
Effect of foreign exchange - (78) - (78)
-----------------------------------------------
Net increase in cash 412 817 - 1,229
Cash at beginning of period 651 - - 651
----------------------------------------------
Cash at end of period $ 1,063 $ 817 $ - $ 1,880
==============================================
11
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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
September 30, 2000 and the Company's audited consolidated financial statements
and Annual Report on Form 10-K for the year ended 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 nine months of fiscal 1999 reflect eight months of Kitchen Craft
results.
Baan Software Write-off
During the second quarter of 2000, the Company terminated implementation
of Baan Enterprise Resource and Planning (ERP) system at the Omega division
resulting in a $2.5 million charge to operations partly offset by $1.0 million
tax credit. 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.
Results of Operations
Net Sales for the three months ended September 30, 2000 ("third quarter 2000")
were $79.0 million compared to $72.6 million for the comparable period in 1999
("third quarter 1999"), an increase of 8.9%. The increase in net sales in the
third 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 nine months of 2000, net sales were
$232.1 million compared to $205.1 million for the first nine months of 1999, an
increase of 13.2%. First nine months of 1999 results included eight months of
Kitchen Craft results. Third quarter 2000 net sales for Kitchen Craft were $27.6
million, a 17.8% increase over third quarter 1999 driven primarily by U.S.
market share expansion at existing dealers as well as the impact of new selling
locations. In this regard, third quarter 2000 unit orders from U.S.-based
customers increased 22.4% compared with third quarter 1999, while third quarter
unit orders from Canadian based customers declined 9.1%. First nine months of
2000 net sales for Kitchen Craft were $77.9 million, an increase of 33.7%
compared with the first nine months of 1999. First nine months of 1999 only
included results for eight months. Net sales for the Omega lines (custom and
semi-custom cabinetry and bath vanities) were $25.0 million in the third quarter
2000 compared with $22.4 million for third quarter 1999, a 11.6% increase. Omega
custom and semi-custom net sales increased 20.0% and 15.1%, 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 10.3% resulting from
Company decisions to exit various Home Depot stores and other low margin
accounts. First nine months 2000 net sales for the Omega lines were $74.2
million, an increase of 10.1% compared with the first nine months of 1999.
HomeCrest stock net sales were $26.4 million for the third quarter 2000, 1.3%
below the third
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quarter 1999. First nine months of 2000 stock sales were $80.1 million compared
to $79.4 million for the first nine months of 1999, a 0.8% 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 net sales would have increased 4.4% for
the first nine months 2000 compared to the comparable period during 1999.
Gross Profit for third quarter 2000 was $23.8 million compared to $21.7 million
for the third quarter 1999, an increase of 9.8%. As a percentage of net sales,
gross profit increased to 30.1% in the third quarter 2000 from 29.9% in third
quarter 1999 as a result of strong operating improvements at the HomeCrest and
Omega divisions. HomeCrest's gross margin increased to 23.2% in the third
quarter 2000 compared to 22.3% in the third quarter 1999 driven primarily by
significantly higher labor productivity resulting from capital investments and
workforce stability. Omega's gross profit increased to 32.3% in the third
quarter 2000 compared to 30.5% in the third quarter 1999 driven primarily by
higher sales prices, the elimination of certain low margin customers and product
lines, and the favorable impact related to Omega's new hardwood processing
center. Kitchen Craft gross margins decreased to 34.4% in the third quarter 2000
compared to 37.6% for third quarter 1999 driven primarily by lower labor
productivity related to significant new hires and lower margins at the
Company-owned retail stores. For the first nine months of 2000, gross profit was
$65.1 million compared to $60.7 million for the first nine months of 1999, an
increase of 7.2%. As a percentage of net sales, gross profit decreased to 28.0%
for the first nine months of 2000 compared to 29.6% for the first nine months 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 half 2000 at HomeCrest and Omega related to new
employee training. Gross margins have improved every quarter during fiscal 2000
increasing from 26.1% for first quarter 2000 to 30.1% for third quarter 2000 as
a result of sales price increases, improved factory execution, and the impact of
capital investments.
Selling, General and Administrative Expenses for the third quarter 2000 were
$9.3 million compared to $8.4 million for the third quarter 1999, an increase of
10.8%. As a percentage of net sales, selling, general and administrative
expenses were 11.8% for the third quarter 2000 compared to 11.6% for the third
quarter 1999. For the first nine months 2000, expenses were $30.1 million
compared to $24.3 million for the first nine months 1999, an increase of 23.9%.
Excluding the non-recurring software write-off of $2.5 million recorded during
second quarter 2000, first nine months 2000 expenses were $27.6 million, an
increase of 13.6% compared to the first nine months 1999 and as a percentage of
net sales, expenses were 11.9% for the first nine months 2000 compared to 11.8%
for the comparable period in 1999.
Interest Expense for the third quarter 2000 was $4.4 million compared to $4.5
million for third quarter 1999, a 3.1% decrease driven primarily by lower
borrowings partly offset by higher average interest rates related to senior debt
borrowings. For the first nine months 2000, interest expense was $13.2 million,
similar to the first nine months 1999.
Income Taxes for the third quarter 2000 were $3.6 million compared to $3.2
million for the third quarter 1999. Third quarter 2000 reflected a normalized
tax rate of 39.2% compared to 39.3% in third quarter 1999. First nine months
2000 income taxes were $7.5 million, compared to $8.6 million for the first nine
months 1999. First nine months 2000 reflected a normalized tax rate of
13
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39.3% compared with 38.7% for the first nine months of 1999 driven by higher
pre-tax income at Kitchen Craft, which has a slightly higher tax rate.
Net Income for the third quarter 2000 was $5.6 million compared to $4.9 million
for the third quarter 1999, a 14.3% increase related to factors discussed
previously. For the first nine months of 2000, net income was $11.6 million
compared to $13.5 million for the first nine months of 1999. The $1.9 million
lower net income for the first nine months 2000 compared with the first nine
months 1999 was driven primarily by $2.5 million pre-tax asset write-down and
$1.5 million higher pre-tax non-cash foreign currency losses partly offset by
$1.8 million higher pre-tax EBITDA.
Results of Operations - Pro Forma
The results discussed above only include Kitchen Craft results since the
January 29, 1999 acquisition. To provide more insight into the underlying
performance of the consolidated group, a pro forma summary for third quarter
2000 and 1999 are shown below treating Kitchen Craft as if it was acquired prior
to 1999.
Third Third
Quarter Quarter
($ in millions)... 2000 1999 Increase
---- ---- --------
Net Sales:
Omega/HomeCrest $51.4 $49.1 4.6%
Kitchen Craft.. 27.6 23.5 17.8%
----- -----
Consolidated... $79.0 $72.6 8.9%
EBITDA (1):
Omega/HomeCrest $ 9.4 $ 8.2 14.4%
Kitchen Craft.. 6.5 6.1 7.2%
----- -----
Consolidated... $15.9 $14.4 11.4%
EBITDA Margin (1):
Omega/HomeCrest 18.3% 16.7%
Kitchen Craft.. 23.5% 25.8%
Consolidated... 20.1% 19.7%
First First
Nine Months Nine Months
2000 1999 Increase
---- ---- --------
($ in millions)
Net Sales:
Omega/HomeCrest $154.3 $146.8 5.1%
Kitchen Craft 77.9 63.8 22.1%
------ ------
Consolidated $232.1 $210.6 10.2%
EBITDA (1):
Omega/HomeCrest $ 23.7 $ 25.6 -7.1%
Kitchen Craft 17.5 14.7 19.1%
------ ------
Consolidated $41.2 $ 40.2 2.5%
14
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EBITDA Margin (1):
Omega/HomeCrest 15.4% 17.4%
Kitchen Craft 22.4% 23.0%
Consolidated 17.7% 19.1%
(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 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 nine months
2000 was $18.3 million compared to $18.6 million for the first nine months 1999.
The Company used cash in investing activities of $7.9 million for the
first nine months 2000 compared to $62.9 million for the first nine months 1999,
a decrease of $55.0 million. First nine months 1999 included $54.3 million
related to financing of the Kitchen Craft acquisition and $8.6 million for
capital expenditures. Capital expenditures for first nine months 2000 were $7.9
million and included a 30,000 square foot capacity expansion and productivity
program at HomeCrest's Goshen, IN facility and expenditures at Kitchen Craft's
Winnipeg, Canada facility related to a 200,000 square foot capacity expansion to
be completed during the first half 2001.
Cash used in financing activities was $9.7 million for first nine months
2000 compared to $45.6 million cash provided by financing activities for first
nine months 1999. This change of $55.3 million was due primarily to financing of
the January 1999 Kitchen Craft acquisition and related financing costs.
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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 September 30, 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 $49.7 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)
$18.4 million term facility (the "Canadian Term Facility") and a (Cdn) $15.0
million revolving facility (the "Canadian Revolving Facility").
At September 30, 2000, the Company had no borrowings under the U.S. or
the Canadian Revolving Facilities. In addition, the Company had cash of $2.8
million and short-term equity receivable of $6.3 million that was used to
permanently reduce the term facilities by $6.3 million on October 13, 2000. 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 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.
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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.
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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 September 30, 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 $ 1,763 $ --
2001 7,995 --
2002 9,769 --
2003 11,850 --
2004 30,528 --
Thereafter -- 100,000
-------- -----------
Total (c) $ 61,905 $ 100,000
======== ===========
Fair value at September 30, 2000 $ 61,905 $ 91,000
(a) $25.1 million at LIBOR plus 1.75%, $24.6 million at LIBOR plus 2.00% and
$12.2 million at Canadian BA rate plus 2.00% (8.53% weighted average at
September 30, 2000).
(b) All at 10.5%.
(c) Variable rate debt reduced $6,263,749 on October 13, 2000 related primarily
to additional capital contributions received on October 6, 2000 and
recorded as other current assets as of September 30, 2000.
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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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.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.53 C. Spencer Employment Agreement dated July 10, 2000.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA CABINETS, LTD.
By: /s/ JOHN S. HORTON
------------------------------
Name: John S. Horton
Title: Chief Financial Officer
(Authorized signatory and
principal financial
officer)
Dated: November 8, 2000
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