10-Q 1 d10q.txt FORM 10-Q 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: June 30, 2001 ------------- 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 June 30, 2001, all of the voting stock of Omega Cabinets Ltd. was held by Omega Holdings, Inc. ("Holdings"), a Delaware corporation. As of June 30, 2001, Omega Cabinets, Ltd. had 1,000 shares of Common Stock issued and outstanding. PART I - FINANCIAL INFORMATION Item 1. Financial Statements The following financial statements are presented herein: Condensed Consolidated Balance Sheets as of June 30, 2001 and December 30, 2000 Condensed Consolidated Statements of Income for the three months and six months ended June 30, 2001 and July 1, 2000 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and July 1, 2000 Notes to Condensed Consolidated Financial Statements 2 Omega Cabinets, Ltd. Condensed Consolidated Balance Sheets

Note: The balance sheet at December 30, 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 Omega Cabinets, Ltd. Condensed Consolidated Statements of Income (Unaudited)

See accompanying notes. 4 Omega Cabinets, Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes. 5 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 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 June 30, 2001 are not necessarily indicative of the results that may be expected for the full 2001 fiscal year. For further information, refer to the Company's consolidated financial statements and footnotes thereto for the year ended December 30, 2000. 2. Inventories Inventories consist of the following: June 30 December 30 2001 2000 -------------------------------------- Raw materials $ 7,916,248 $ 7,510,552 Work-in-process 7,066,058 6,720,423 Finished goods 3,814,382 3,374,389 -------------------------------------- $18,796,688 $17,605,364 ====================================== 6 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 3. Write-off of Fixed Assets In June 2000, the Company terminated implementation of a new enterprise resource and planning (ERP) system. The Company charged approximately $2.4 million to selling, general, and administrative expense in the second quarter of fiscal 2000 related to the terminated implementation. 4. Comprehensive Income Comprehensive income was $6,729,846 and $3,339,972 for the three months ended June 30, 2001 and July 1, 2000, respectively, and $11,454,511 and $6,527,533 for the six months ended June 30, 2001 and July 1, 2000, respectively. 5. Guarantor and Non-guarantor Subsidiaries The Company's $100 million senior subordinated notes are fully and unconditionally guaranteed by Panther Transport, Inc. (Panther), a wholly owned subsidiary of the Company. Separate financial statements or summarized financial information for Panther have not been presented since its operations are inconsequential and its accounts and transactions represent less than 1% of each of the consolidated total assets, liabilities, equity, net sales, operating income, and net income of the Company. Management believes that the separate financial statements and summarized financial information of Panther are not material to investors. 7 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 5. Guarantor and Non-guarantor Subsidiaries (continued) 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 of Canada, Ltd. (Kitchen Craft) business. Set forth below are consolidating condensed financial statements as of June 30, 2001 and for the three and six months ended June 30, 2001 and July 1, 2000, which separately reflect Kitchen Craft (amounts in thousands):

*Includes Panther which is inconsequential as described above. 8 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 5. Guarantor and Non-guarantor Subsidiaries (continued)

9 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 5. Guarantor and Non-guarantor Subsidiaries (continued)

10 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 5. Guarantor and Non-guarantor Subsidiaries (continued)

11 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 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 June 30, 2001 and the Company's audited consolidated financial statements and Annual Report on Form 10-K for the year ending December 30, 2000. Results of Operations Net Sales for the three months ended June 30, 2001 ("second quarter 2001") were $83.7 million compared to $79.7 million for the three months ended July 1, 2000 ("second quarter 2000"), an increase of 5.0%. For the first six months of 2001 ("first half 2001"), net sales were $160.9 million compared to $153.1 million for the first six months of 2000 ("first half 2000"), an increase of 5.1%. The increase in net sales in the second quarter and first half of 2001 was primarily attributable to strong new home construction and the impact of new products partly offset by discontinued low-margin product lines and accounts. Net sales for the Kitchen Craft division were $28.3 million in the second quarter 2001 compared with $26.9 million for second quarter 2000, a 5.2% increase. First half 2001 net sales for Kitchen Craft were $54.2 million, an increase of 7.8% compared with first half 2000 driven primarily by strong orders in the U.S. market. Net sales for the Omega lines (custom and semi-custom cabinetry and bath vanities) were $26.4 million in the second quarter 2001 compared with $25.3 million for second quarter 2000, a 4.6% increase. First half 2001 net sales for the Omega lines were $51.8 million, an increase of 5.4% compared with first half 2000. Sales for the first half 2001 increased 8% for Omega's semi-custom and bath products driven by new products and selling locations while custom sales declined 5% driven by a weak remodeling market. Net sales for HomeCrest's stock product lines were $29.0 million in the second quarter 2001 compared with $27.5 million for second quarter 2000, a 5.2% increase. First half 2001 net sales for the HomeCrest lines were $54.9 million, an increase of 2.2% compared with first half 2000, primarily due to new products and selling locations. Gross Profit for second quarter 2001 was $25.3 million compared to $22.1 million for the second quarter 2000, an increase of 14.7%. As a percentage of net sales, gross profit increased to 30.3% in the second quarter 2001 from 27.7% in second quarter 2000. For the first half 2001, gross profit was $46.9 million compared to $41.3 million for the first half 2000, an increase of 13.6%. This increase was driven primarily by improved factory execution at every division and the impact of various capital and Company-wide cost reduction projects. Selling, General and Administrative Expenses for the second quarter 2001 were $9.7 million compared to $11.8 million for the second quarter 2000, a decrease of 17.8%. As a percentage of net sales, selling, general and administrative expenses were 11.6% for the second quarter 2001 compared to 14.8% for the second quarter 2000. Second quarter 2000 included a non-recurring charge of $2.4 million related to the failed implementation of a Baan enterprise resource and planning system. Excluding this charge, selling, general and administrative expenses for second quarter 2001 increased 3.0% as compared to second quarter 2000. For the first half 2001, expenses were $18.8 million compared to $20.7 million for the first half 2000, a decrease of 9.2%. Excluding the non-recurring software charge, expenses for the first half 2001 increased 12 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 2.6% compared to the first half 2000. Excluding the non-recurring charge, as a percentage of net sales, expenses were 11.7% for the first half 2001 compared to 12.0% for the first half 2000. Interest Expense for second quarter 2001 was $3.9 million compared to $4.5 million for second quarter 2000, a 13.0% decrease driven by lower average borrowings and interest rates. For the first half 2001, interest expense was $7.8 million compared to $8.9 million for the first half 2000, a decrease of 11.8%. Income Taxes for second quarter 2001 were $4.7 million, compared to $1.9 million for the second quarter 2000. Second quarter 2001 reflected a normalized tax rate of 40.1% compared to 39.6% in second quarter 2000 resulting from a higher effective state tax rate for the U.S. divisions. First half 2001 income taxes were $7.5 million, compared to $3.9 million for the first half 2000. First half 2001 reflected a normalized tax rate of 40.0%, compared with 39.4% for the first half 2000. Net Income for second quarter 2001 was $7.0 million compared to $2.9 million for the second quarter 2000, a 139.7% increase resulting from the factors discussed above. For the first half of 2001, net income was $11.2 million, compared to $6.0 million for the first half of 2000. To provide more insight into the underlying performance of the consolidated group, a summary for second quarter 2001, second quarter 2000, the twelve months ended June 30, 2001 and the twelve months ended July 1, 2000 are shown below:

________ 13 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 (1) Adjusted EBITDA represents EBITDA, as defined below, adjusted for certain unusual, one-time or nonrecurring expenses. During second quarter 2001, the net adjustment to EBITDA was $0.2 million. During second quarter 2000, the net adjustment to EBITDA was $2.7 million related primarily to a write-off of capitalized software costs. 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. (2) Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of net sales. 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 2001 was $17.0 million compared to $6.3 million for first half 2000. The increase of $10.7 million was driven primarily by $5.2 million higher net income and stable operating assets and liabilities compared with a $6.7 million increase in operating assets and liabilities during first half 2000. The Company used cash in investing activities of $8.7 million for first half 2001 compared to $5.5 million for first half 2000, an increase of $3.2 million. Major capital expenditures for first half 2001 included a 200,000 square foot capacity expansion project at Kitchen Craft's Winnipeg facility and productivity projects at HomeCrest's Goshen, IN facility. Cash used in financing activities was $9.4 million for first half 2001 compared to cash used in financing activities of $1.9 million for first half 2000. This change of $7.5 million was due to $5.7 million related to lower borrowings and $1.8 million for various stockholder equity redemptions 14 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 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 June 30, 2001, 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 $35.8 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) $13.1 million term facility (the "Canadian Term Facility") and a (Cdn) $15.0 million revolving facility (the "Canadian Revolving Facility"). As of June 30, 2001, the Company had no borrowings under the U.S. or Canadian Revolving Facilities. In addition, the Company had cash of $2.0 million that was available to further reduce long-term debt. The U.S. Term Facility requires quarterly principal payments that began in April 1999 at $1.0 million per quarter and increase at each September anniversary. Subsequent payments will be approximately $1.4 million and $1.7 million per quarter during the four quarter periods beginning September 2001 and 2002, respectively, with $2.0 million payments due the last two quarters in 2003. Finally, four equal quarterly payments of $4.9 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. As a result of this requirement, a $4.1 million excess cash flow payment was completed during March 2001. The Canadian Term Facility requires quarterly payments that began in April 1999 at approximately (Cdn) $0.4 million per quarter and increase at each anniversary. Subsequent payments will be approximately (Cdn) $0.5 million, (Cdn) $0.6 million, (Cdn) $0.7 million and (Cdn) $1.8 million per quarter during 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. 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 15 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 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 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 June 30, 2001, 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):

(a) $16.4 million at LIBOR plus 1.25%, $19.4 million at LIBOR plus 1.50% and $8.6 million at Canadian BA rate plus 1.50%, (7.19% weighted average at June 30, 2001). (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. During December 2000 the Company entered into a one year interest rate swap agreement at 6.11% LIBOR rate on approximately $42.0 million for the first three months, $35.0 million for the second three months, $33.0 million for the third three months, and $30.0 million for the final three months. 16 Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) June 30, 2001 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. None 17 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 S. Horton Title: Chief Financial Officer (Authorized signatory and principal financial officer) Dated: August 10, 2001 18

OMEGA CABINETS LTD 10-Q