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: September 29, 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 September 29, 2001, all of the voting stock of Omega Cabinets Ltd. was held by Omega Holdings, Inc. ("Holdings"), a Delaware corporation. As of September 29, 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 September 29, 2001 and December 30, 2000 Condensed Consolidated Statements of Income for the three months and nine months ended September 29, 2001 and September 30, 2000 Condensed Consolidated Statements of Cash Flows for the nine months ended September 29, 2001 and September 30, 2000 Notes to Condensed Consolidated Financial Statements Omega Cabinets, Ltd. Condensed Consolidated Balance Sheets
SEPTEMBER 29 DECEMBER 30 2001 2000 (UNAUDITED) (NOTE) ---------------------------------------- ASSETS Current assets: Cash $ 4,248,279 $ 2,982,601 Accounts receivable 31,562,766 22,921,739 Inventories (Note 2) 18,349,350 17,605,364 Other current assets 4,700,813 4,531,065 ---------------------------------------- Total current assets $ 58,861,208 48,040,769 Property, plant and equipment 75,503,130 65,773,454 Less accumulated depreciation 18,133,974 14,926,752 ---------------------------------------- 57,369,156 50,846,702 Deferred financing costs, net 5,067,512 5,947,957 Goodwill, net 88,643,881 90,415,806 Other assets 1,661,805 1,084,794 ---------------------------------------- Total assets $211,603,562 $196,336,028 ======================================== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses $ 34,381,426 $ 21,229,049 Current portion of long-term debt 6,409,654 11,442,812 ---------------------------------------- Total current liabilities $ 40,791,080 32,671,861 Deferred income taxes 7,195,509 6,071,206 Long-term debt, less current portion 131,020,501 141,104,851 Stockholder's equity: Common stock, $.01 par value; 10,000 shares authorized; 1,000 shares issued and outstanding 10 10 Additional paid-in capital 86,852,686 88,446,216 Less stock notes receivable (2,591,986) (2,341,000) Predecessor basis adjustment (11,031,662) (11,031,662) Accumulated other comprehensive loss - foreign currency translation adjustment (159,081) (549,888) Retained earnings (deficit) (40,473,495) (58,035,566) ---------------------------------------- Total stockholder's equity 32,596,472 16,488,110 ---------------------------------------- Total liabilities and stockholder's equity $211,603,562 $196,336,028 ========================================
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. Omega Cabinets, Ltd. Condensed Consolidated Statements of Income (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 29 SEPTEMBER 30 SEPTEMBER 29 SEPTEMBER 30 2001 2000 2001 2000 ------------------------------------ ------------------------------------ Net sales $ 85,159,815 $ 79,015,534 $246,027,532 $232,149,338 Cost of goods sold 60,306,034 55,226,896 174,263,749 167,081,285 ------------------------------------ ------------------------------------ Gross profit $ 24,853,781 $ 23,788,638 $ 71,763,783 $ 65,068,053 Selling, general and administrative expenses 9,479,131 9,345,813 28,321,705 30,087,146 Amortization of goodwill 630,825 641,751 1,895,196 1,930,692 ------------------------------------ ------------------------------------ Operating income 14,743,825 13,801,074 41,546,882 33,050,215 Interest expense 3,656,419 4,351,046 11,461,288 13,204,121 Foreign currency transaction losses 580,859 296,852 889,124 810,517 ------------------------------------ ------------------------------------ Income before income taxes 10,506,547 9,153,176 29,196,470 19,035,577 Income tax expense 4,160,324 3,586,172 11,636,297 7,481,139 ------------------------------------ ------------------------------------ Net income $ 6,346,223 $ 5,567,004 $ 17,560,173 $ 11,554,438 ==================================== ====================================
See accompanying notes. Omega Cabinets, Ltd. Condensed Consolidated Statements of Cash Flows (Unaudited)
NINE MONTHS ENDED SEPTEMBER 29 SEPTEMBER 30 2001 2000 --------------------------------------- OPERATING ACTIVITIES Net income $ 17,560,173 $ 11,554,438 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,383,287 5,924,275 Loss on disposal of fixed assets (Note 3) - 2,468,546 Noncash interest income on stock notes receivable (103,215) (85,002) Deferred income taxes 1,200,000 1,191,344 Changes in operating assets and liabilities: Accounts receivable (9,163,164) (9,633,915) Inventories (1,003,879) (547,515) Other assets (795,131) (116,019) Accounts payable, accrued expenses and other liabilities 13,586,560 7,501,556 --------------------------------------- Net cash provided by operating activities 27,664,631 18,257,708 INVESTING ACTIVITIES Purchases of property, plant and equipment (11,033,599) (7,921,528) --------------------------------------- Net cash used in investing activities (11,033,599) (7,921,528) FINANCING ACTIVITIES Payments of long-term debt (19,074,073) (9,739,744) Proceeds from long-term debt 5,498,018 - Capital contributions by parent 126,130 132,805 Payment to parent to redeem common stock and options at parent level (1,898,945) (81,135) Proceeds from stock notes receivable 31,529 - --------------------------------------- Net cash used in financing activities (15,317,341) (9,688,074) Effect of foreign exchange rate changes on cash (48,013) (70,833) --------------------------------------- Net increase in cash 1,265,678 577,273 Cash at beginning of period 2,982,601 2,234,669 --------------------------------------- Cash at end of period $ 4,248,279 $ 2,811,942 =======================================
See accompanying notes. Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 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 nine month periods ended September 29, 2001 and September 30, 2000 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. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. The Company will apply the new rules beginning in the first quarter of 2002. Applying the nonamortization provisions of the Statements will result in an increase in pretax income to the extent of goodwill amortization which is no longer recorded. The Company's historical amortization expense was approximately $2.6 million in fiscal year 2000 and $1.9 million in the nine months ended September 29, 2001. During 2002, the Company will perform the first of the required impairment tests of goodwill and has not yet determined what the effect, if any, will be on the earnings or financial position of the Company. Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 2001 2. INVENTORIES Inventories consist of the following:
SEPTEMBER 29 DECEMBER 30 2001 2000 ---------------------------------------- Raw materials $ 7,869,104 $ 7,510,552 Work-in-process 6,398,835 6,720,423 Finished goods 4,081,411 3,374,389 ---------------------------------------- $18,349,350 $17,605,364 ========================================
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 $6,496,469 and $5,801,237 for the three months ended September 29, 2001 and September 30, 2000, respectively, and $17,950,980 and $12,328,770 for the nine months ended September 29, 2001 and September 30, 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. Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 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 September 29, 2001 and for the three and nine months ended September 29, 2001 and September 30, 2000, which separately reflect Kitchen Craft (amounts in thousands):
THE KITCHEN COMPANY* CRAFT ELIMINATIONS CONSOLIDATED --------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 29, 2001 Current assets: Cash $ 945 $ 3,303 $ - $ 4,248 Accounts receivable 20,464 11,099 - 31,563 Inventories 13,044 5,305 - 18,349 Other 3,924 777 - 4,701 --------------------------------------------------------------- Total current assets 38,377 20,484 - 58,861 Property, plant and equipment, net 38,053 19,316 - 57,369 Goodwill, net 47,999 40,645 - 88,644 Other noncurrent assets 41,397 262 (34,930) 6,729 --------------------------------------------------------------- Total assets $ 165,826 $ 80,707 $ (34,930) $ 211,603 =============================================================== Current liabilities: Accounts payable and accrued expenses $ 24,939 $ 13,673 $ (4,231) $ 34,381 Current portion of long-term debt 5,169 1,241 - 6,410 --------------------------------------------------------------- Total current liabilities 30,108 14,914 (4,231) 40,791 Long-term debt, less current portion 125,168 22,980 (17,128) 131,020 Other noncurrent liabilities 5,721 1,475 - 7,196 Total stockholder's equity (deficit) 4,829 41,338 (13,571) 32,596 --------------------------------------------------------------- Total liabilities and stockholder's equity (deficit) $ 165,826 $ 80,707 $ (34,930) $ 211,603 ===============================================================
*Includes Panther which is inconsequential as described above. Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 2001 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
THE KITCHEN COMPANY CRAFT ELIMINATIONS CONSOLIDATED --------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENT OF INCOME THREE MONTHS ENDED SEPTEMBER 29, 2001 Net sales $55,377 $29,783 $ - $85,160 Cost of goods sold 40,148 20,158 - 60,306 --------------------------------------------------------------- Gross profit 15,229 9,625 - 24,854 Selling, general and administrative expenses 6,439 3,671 - 10,110 Interest expense 3,259 397 - 3,656 Foreign currency transaction gains - 582 - 582 --------------------------------------------------------------- Income before income taxes 5,531 4,975 - 10,506 Income tax expense 2,178 1,982 - 4,160 --------------------------------------------------------------- Net income $ 3,353 $ 2,993 $ - $ 6,346 =============================================================== 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 =============================================================== CONDENSED CONSOLIDATING STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 29, 2001 Net sales $162,067 $83,961 $ - $246,028 Cost of goods sold 118,003 56,261 - 174,264 --------------------------------------------------------------- Gross profit 44,064 27,700 - 71,764 Selling, general and administrative expenses 19,587 10,630 - 30,217 Interest expense 9,865 1,596 - 11,461 Foreign currency transaction losses - 890 - 890 --------------------------------------------------------------- Income before income taxes 14,612 14,584 - 29,196 Income tax expense 5,811 5,825 - 11,636 --------------------------------------------------------------- Net income $ 8,801 $ 8,759 $ - $ 17,560 ===============================================================
Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 2001 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
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 21,292 10,726 - 32,018 expenses 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 ============================================================== CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 29, 2001 Operating activities - net cash provided by operating activities $ 17,067 $10,598 $ - $ 27,665 Investing activities - purchase of property, plant and equipment (5,461) (5,573) - (11,034) Financing activities: Payments of long-term debt (17,465) (1,609) - (19,074) Proceeds from long-term debt 5,498 - - 5,498 Redemptions of stock, net of capital contributions (1,774) - - (1,774) Proceeds from stock notes receivable 32 - - 32 Intercompany funding 2,033 (2,033) - - -------------------------------------------------------------- Net cash used in financing activities (11,676) (3,642) - (15,318) Effect of foreign exchange - (48) - (48) -------------------------------------------------------------- Net increase (decrease) in cash (70) 1,335 - 1,265 Cash at beginning of period 1,015 1,968 - 2,983 -------------------------------------------------------------- Cash at end of period $ 945 $ 3,303 $ - $ 4,248 ==============================================================
Omega Cabinets, Ltd. Notes to Condensed Consolidated Financial Statements (Unaudited) September 29, 2001 5. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES (CONTINUED)
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 ==============================================================
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 29, 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 September 29, 2001 ("third quarter 2001") were $85.2 million compared to $79.0 million for the three months ended September 30, 2000 ("third quarter 2000"), an increase of 7.8%. For the first nine months of 2001, net sales were $246.0 million compared to $232.1 million for the first nine months of 2000, an increase of 6.0%. The increase in net sales in the third quarter and first nine months of 2001 was primarily attributable to strong new home construction and the impact of new products and selling locations partly offset by discontinued low-margin product lines and accounts. Net sales for the Kitchen Craft division were $29.8 million in the third quarter 2001 compared with $27.6 million for the third quarter 2000, a 7.8% increase. Net sales for the first nine months of 2001 for Kitchen Craft were $84.0 million, an increase of 7.8% compared with the first nine months of 2000 driven primarily by strong demand in the new home and multi-unit market. Net sales for the Omega lines (custom and semi-custom cabinetry and bath vanities) were $26.1 million in the third quarter 2001 compared with $25.0 million for third quarter 2000, a 4.4% increase. Net sales for the first nine months of 2001 for the Omega lines were $77.9 million, an increase of 5.1% compared with the first nine months of 2000. Sales for the first nine months of 2001 increased 10% for Omega's semi-custom products and 6% for Omega's bath line driven by new products and selling locations. Omega's custom cabinetry sales declined 9% driven by soft demand in the luxury remodel market. Net sales for HomeCrest's stock product lines were $29.3 million in the third quarter 2001 compared with $26.4 million for the third quarter 2000, a 11.0% increase. Net sales for the first nine months of 2001 for the HomeCrest lines were $84.2 million, an increase of 5.1% compared with the first nine months of 2000. The increase in HomeCrest sales growth is primarily due to new products and selling locations as well as continued strength in the new home construction market. GROSS PROFIT for third quarter 2001 was $24.9 million compared to $23.8 million for third quarter 2000, an increase of 4.5%. As a percentage of net sales, gross profit declined to 29.2% in third quarter 2001 from 30.1% in third quarter 2000. For the first nine months of 2001, gross profit was $71.8 million compared to $65.1 million for the first nine months of 2000, an increase of 10.3%. As a percentage of net sales, gross profit improved to 29.2% for the first nine months of 2001 from 28.0% for the first nine months of 2000. This improvement 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 third quarter 2001 were $9.5 million compared to $9.3 million for the third quarter 2000, an increase of 1.4%. As a percentage of net sales, selling, general and administrative expenses were 11.1% for the third quarter 2001 compared to 11.8% for the third quarter 2000. For the first nine months of 2001, expenses were $28.3 million compared to $30.1 million for the first nine months of 2000, a decrease of 5.9%. The first nine months of 2000 included a non-recurring charge of $2.4 million related to a failed software implementation. Excluding this charge, expenses increased 2.3% compared to the first nine months of 2000 and as a percentage of net sales, expenses were 11.1% compared to 11.9% for the first nine months of 2000. INTEREST EXPENSE for third quarter 2001 was $3.7 million compared to $4.4 million for third quarter 2000, a 16.0% decrease driven by lower average borrowings and interest rates. For the first nine months of 2001, interest expense was $11.5 million compared to $13.2 million for the first nine months of 2000, a decrease of 13.2%. INCOME TAXES for third quarter 2001 were $4.2 million, compared to $3.6 million for third quarter 2000. Third quarter 2001 reflected a normalized tax rate of 39.6% compared to 39.2% in third quarter 2000 resulting from a higher effective state tax rate for the U.S. divisions. First nine months of 2001 income taxes were $11.6 million, compared to $7.5 million for the first nine months of 2000. First nine months of 2001 reflected a normalized tax rate of 39.9%, compared with 39.3% for the first nine months of 2000. NET INCOME for third quarter 2001 was $6.3 million compared to $5.6 million for third quarter 2000, a 14.0% increase related to factors discussed above. For the first nine months of 2001, net income was $17.6 million, compared to $11.6 million for the first nine months of 2000, a 52.0% increase. To provide more insight into the underlying performance of the consolidated group, a summary for third quarter 2001, third quarter 2000, the twelve months ended September 29, 2001 and the twelve months ended September 30, 2000 are shown below:
Third Quarter Twelve Months Ended ------------- ------------------- 2001 2000 Increase 9/29/01 9/30/00 ---- ---- -------- ------- ------- ($ in millions) Net Sales: Omega/HomeCrest $55.4 $51.4 7.8% $208.1 $197.5 Kitchen Craft 29.8 27.6 7.8% 109.9 101.0 ----- ------ ----- -------- Consolidated $85.2 $79.0 7.8% $318.1 $298.5 Adjusted EBITDA (1): Omega/HomeCrest $10.1 $ 9.4 6.8% $ 36.5 $ 29.5 Kitchen Craft 6.6 6.5 2.3% 25.3 22.9 ----- ------ ----- -------- Consolidated $16.7 $15.9 5.0% $ 61.8 $ 52.5 Adjusted EBITDA Margin (2): Omega/HomeCrest 18.2% 18.3% 17.6% 14.9% Kitchen Craft 22.3% 23.5% 23.0% 22.7% Consolidated 19.6% 20.1% 19.4% 17.6%
-------- (1) Adjusted EBITDA represents EBITDA, as defined below, adjusted for certain unusual, one-time or nonrecurring expenses. During third quarter 2001, the net adjustment to EBITDA was $25,115. During third quarter 2000, the net adjustment to EBITDA was $353,855 related primarily to executive severance 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 nine months of 2001 was $27.7 million compared to $18.3 million for first nine months of 2000. The increase of $9.4 million was driven primarily by $6.0 million higher net income and a $2.6 million decline in operating assets and liabilities compared with a $2.8 million increase during the first nine months of 2000. The Company used cash in investing activities of $11.0 million for the first nine months of 2001 compared to $7.9 million for the first nine months of 2000, an increase of $3.1 million. Major capital expenditures for the first nine months of 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 $15.3 million for the first nine months of 2001 compared to cash used of $9.7 million for the first nine months of 2000. This change of $5.6 million was due to $3.8 million for lower borrowings and $1.8 million for various stockholder equity redemptions. 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 29, 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 $30.3 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) $11.2 million term facility (the "Canadian Term Facility") and a (Cdn) $15.0 million revolving facility (the "Canadian Revolving Facility"). As of September 29, 2001, the Company had no borrowings under the U.S. or Canadian Revolving Facilities. In addition, the Company had cash of $4.2 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 $1.2 million and $1.5 million per quarter during the four quarter periods beginning September 2001 and 2002, respectively, with $1.8 million payments due the last two quarters of 2003. Finally, four equal quarterly payments of $4.3 million will occur during 2004 with the term loan fully amortized on December 31, 2004. Additional payments are also due each year based on 75% of the Company's defined excess cash flow, if any. As a result of this requirement, a mandatory $4.1 million excess cash flow payment was made during March 2001 and a voluntary $5.0 million payment was made during September 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) $0.4 million, (Cdn) $0.5 million, (Cdn) $0.6 million and (Cdn) $1.6 million per quarter during 2001, 2002, 2003, and 2004. Both the U.S. and Canadian Term Facilities mature on December 31, 2004. Revolving Facilities mature on December 26, 2003 and have no scheduled interim amortization. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. The Company will apply the new rules beginning in the first quarter of 2002. Applying the nonamortization provisions of the Statements will result in an increase in pretax income to the extent of goodwill amortization which is no longer recorded. The Company's historical amortization expense was approximately $2.6 million in fiscal year 2000 and $1.9 million in the nine months ended September 29, 2001. During 2002, the Company will perform the first of the required impairment tests of goodwill and has not yet determined what the effect, if any, will be on the earnings or financial position of the Company. FORWARD LOOKING STATEMENTS When used in this quarterly report on Form 10-Q, the words "believes," "anticipates" and similar expressions are used to identify forward looking statements. Such statements are subject to risks and uncertainties which could cause actual results to differ materially from those projected. The Company wishes to caution readers that the following important factors and others in some cases have 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. 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 29, 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): Variable Rate (a) Fixed Rate (b) Maturing in: 2001 $ 1,496 -- 2002 6,715 -- 2003 8,146 -- 2004 21,073 -- Thereafter -- 100,000 ------- Total $37,430 $100,000 ======= ======== Fair value at September 29, 2001 $37,430 $102,500 (a) $13.2 million at LIBOR plus 1.25%, $17.1 million at LIBOR plus 1.50% and $7.1 million at Canadian BA rate plus 1.50%, (7.01% weighted average at September 29, 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. 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 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: November 9, 2001