VIKING RANGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2012 and December 31, 2011
(Dollars in Thousands)
| September 30, 2012 | ||||||||
| (unaudited) | December 30, 2011 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 2,924 | $ | 3,676 | ||||
| Accounts receivable - less allowance for doubtful | ||||||||
| accounts of $271 and $128 in 2012 and 2011, respectively | 24,378 | 21,611 | ||||||
| Other receivables | 423 | 510 | ||||||
| Inventories | ||||||||
| Finished goods and accessories | 4,276 | 6,556 | ||||||
| Raw materials, parts and work in progress | 11,188 | 13,091 | ||||||
| Service parts | 3,212 | 3,390 | ||||||
| Total inventories | 18,676 | 23,037 | ||||||
| Prepaid expenses and other assets | 4,579 | 5,430 | ||||||
| Total current assets | 50,980 | 54,264 | ||||||
| Property, plant and equipment | ||||||||
| Land | 1,558 | 1,542 | ||||||
| Buildings and improvements | 80,308 | 79,992 | ||||||
| Equipment | 150,838 | 151,041 | ||||||
| Total property, plant and equipment | 232,704 | 232,575 | ||||||
| Less accumulated depreciation and amortization | (154,954 | ) | (150,154 | ) | ||||
| Property, plant and equipment, net | 77,750 | 82,421 | ||||||
| Construction in progress | 3,201 | 4,507 | ||||||
| Goodwill | 7,859 | 7,859 | ||||||
| Other | 1,455 | 1,608 | ||||||
| Total assets | $ | 141,245 | $ | 150,659 | ||||
| LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 17,292 | $ | 12,520 | ||||
| Accrued expenses | 28,963 | 18,423 | ||||||
| Current maturities of long-term debt | 62,876 | 3,244 | ||||||
| Other current liabilities | 4,789 | 5,578 | ||||||
| Total current liabilities | 113,920 | 39,765 | ||||||
| Long-term debt, less current maturities | 102,917 | 168,919 | ||||||
| Other long-term liabilities | 14,254 | 14,510 | ||||||
| Shareholders' equity (deficit) | ||||||||
| Viking Range Corporation shareholders' equity (deficit) | ||||||||
| Common stock | 1,975 | 1,975 | ||||||
| Additional paid-in capital | 3,825 | 3,825 | ||||||
| Accumulated other comprehensive income | 280 | 39 | ||||||
| Retained earnings (deficit) | (92,389 | ) | (74,967 | ) | ||||
| Shareholder notes receivable | (4,156 | ) | (4,156 | ) | ||||
| Total Viking Range Corporation shareholders' equity (deficit) | (90,465 | ) | (73,284 | ) | ||||
| Non-controlling interest in consolidated entities | 619 | 749 | ||||||
| Total shareholders' equity (deficit) | (89,846 | ) | (72,535 | ) | ||||
| Total liabilities and shareholders' equity (deficit) | $ | 141,245 | $ | 150,659 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
VIKING RANGE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
Nine Months Ended September 30, 2012 and 2011
(Dollars in Thousands)
| September 30, 2012 | September 30, 2011 | |||||||
| Net sales | $ | 159,368 | $ | 154,198 | ||||
| Cost of goods sold | 112,723 | 95,880 | ||||||
| Gross margin | 46,645 | 58,318 | ||||||
| Selling, general and administrative | 47,303 | 51,604 | ||||||
| Restructuring | 5,530 | 343 | ||||||
| Operating income (loss) | (6,188 | ) | 6,371 | |||||
| Interest expense | 9,368 | 8,240 | ||||||
| Loss from continuing operations before income taxes | (15,556 | ) | (1,869 | ) | ||||
| Income tax expense | 80 | 500 | ||||||
| Net loss from continuing operations | (15,636 | ) | (2,369 | ) | ||||
| Loss from operations of discontinued businesses | (1,529 | ) | (1,043 | ) | ||||
| Net loss | (17,165 | ) | (3,412 | ) | ||||
| Net loss attributable to noncontrolling interest | (257 | ) | (453 | ) | ||||
| Net loss attributable to Viking Range Corporation | ||||||||
| and subsidiaries | $ | (17,422 | ) | $ | (3,865 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
VIKING RANGE CORPORATION AND AFFILIATES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2012 and 2011
(Dollars in Thousands)
| September 30, 2012 | September 30, 2011 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (17,165 | ) | $ | (3,412 | ) | ||
| Adjustments to reconcile net loss to net | ||||||||
| cash provided by (used in) operating activities | ||||||||
| Depreciation and amortization | 8,049 | 9,994 | ||||||
| Loss on disposal of assets | 179 | — | ||||||
| Other adjustments, net | 16,574 | (11,769 | ) | |||||
| Net cash provided by (used in) operating activities | 7,637 | (5,187 | ) | |||||
| Cash flows from investing activities | ||||||||
| Purchases of property, plant and equipment | (2,425 | ) | (3,192 | ) | ||||
| Proceeds from sale of property, plant and equipment | 265 | — | ||||||
| Proceeds from sale of business | 582 | — | ||||||
| Decrease in cash from deconsolidation | (245 | ) | ||||||
| Net cash used in investing activities | (1,823 | ) | (3,192 | ) | ||||
| Cash flows from financing activities | ||||||||
| Net proceeds from revolving line of credit | (6,353 | ) | 12,611 | |||||
| Proceeds from long-term borrowings | 3,000 | — | ||||||
| Principal payments on long-term debt | (3,017 | ) | (3,019 | ) | ||||
| Shareholder distributions | (280 | ) | (478 | ) | ||||
| Net cash provided by (used in) financing activities | (6,650 | ) | 9,114 | |||||
| Effect of foreign currency changes on cash and | ||||||||
| cash equivalents | 84 | (57 | ) | |||||
| (Decrease) increase in cash and cash equivalents | (752 | ) | 678 | |||||
| Cash and cash equivalents at beginning of year | 3,676 | 5,783 | ||||||
| Cash and cash equivalents at end of year | $ | 2,924 | $ | 6,461 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
VIKING RANGE CORPORATION AND SUBSIDIARIES
Nine Months Ended September 31, 2012 and 2011
(Dollars in Thousands, Except When Noted)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of Business and Basis of Presentation
The September 30, 2012 and 2011 financial statements are condensed consolidated financial statements of Viking Range Corporation ("VRC") and its subsidiaries (collectively, the "Company"). VRC manufactures ultra-premium ranges, ovens, other kitchen equipment, premium outdoor cooking equipment and other complementary products and sells these manufactured products and other purchased kitchen equipment to distributors primarily in the United States.
The subsidiaries of VRC consist of Viking Culinary Group, LLC ("VCG"); the Ramey Agency, LLC ("Ramey"); the Viking Hospitality Group, LLC ("VHG"); and other subsidiaries. VCG operates retail culinary centers in Florida, Mississippi and Tennessee, which sell cooking tools and bakeware and feature cooking schools. Ramey is an advertising agency whose primary customer is VRC. VHG owns and operates a hotel, restaurant, spa, retail store and cooking school in Greenwood, Mississippi. Lokion is a web development company based in Tennessee. In 2012, the Company sold its membership interest in Lokion to the noncontrolling interest holders.
VRC has contributed equity membership interests in certain of these subsidiaries to key members of management of the subsidiaries. The equity membership interests of these members of management have been recorded as non-controlling interests in the accompanying consolidated financial statements.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the Company's audited consolidated financial statements and footnotes for the year ended December 31, 2011.
Principles of Consolidation and Financial Statement Presentation
The consolidated financial statements include entities that are more than 50 percent owned or are otherwise controlled by the Company. All intercompany balances and transactions have been eliminated in consolidation.
The Company's share of earnings or losses of investees is included in the consolidated operating results using the equity method of accounting when the Company is able to exercise significant influence over the operating and financial decisions of the investee. If the Company is not able to exercise significant influence over the operating and financial decisions of the investee, the cost method of accounting is used.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Estimates are used when accounting for items such as the allowance for doubtful accounts, inventory obsolescence, warranties, self-insurance risk and recoverability of intangible and other long-lived assets.
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosure, establishes a three-level hierarchy for fair value measurements. The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The classification of fair value within the hierarchy is based upon the lowest level of input that is significant to the measurement. For Level 1, the valuation is based upon quoted prices for identical assets or liabilities in an active market. For Level 2, the valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable, either directly or indirectly, for substantially the full term of the financial instrument. For Level 3, the valuation is based upon other unobservable inputs that are significant to the fair value measurement.
The following table presents information about the liability recorded at fair value at September 30, 2012 and December 31, 2011, in the consolidated balance sheets:
| Fair Value Measurements at September 30, 2012 | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| In Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | Total at | |||||||||||||
| Identical Assets | Inputs | Inputs | September 30, | |||||||||||||
| (Level 1) | (Level 2) | (Level 3) | 2012 | |||||||||||||
| Interest rate swaps | $ | — | $ | 262 | $ | — | $ | 262 | ||||||||
| Total | $ | — | $ | 262 | $ | — | $ | 262 | ||||||||
| Fair Value Measurements at December 31, 2011 | ||||||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| In Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | Total at | |||||||||||||
| Identical Assets | Inputs | Inputs | December 31, | |||||||||||||
| (Level 1) | (Level 2) | (Level 3) | 2011 | |||||||||||||
| Interest rate swaps | $ | — | $ | 333 | $ | — | $ | 333 | ||||||||
| Total | $ | — | $ | 333 | $ | — | $ | 333 | ||||||||
At September 30, 2012 and December 31, 2011, the Company determined the fair value of its derivatives using model-derived valuations in which all significant inputs are observable.
The majority of the Company's non-financial instruments, which include goodwill, intangible assets and property and equipment, are not required to be carried at fair value on a recurring basis but are subject to fair value adjustments only in certain circumstances. If certain triggering events occur such that a non-financial instrument is required to be evaluated for impairment, a resulting asset impairment would require that the non-financial instrument be recorded at the lower of historical cost or its fair value.
Note 2. Litigation
The Company is subject to legal proceedings and claims, which arise in the ordinary course of business. Currently the Company is not subject to any pending, threatened or asserted legal proceedings or claims which the Company believes will have a material impact on the Company's fiscal condition or results of operations.
Note 3. Accrued Expenses
Accrued expenses as of September 30, 2012 and December 31, 2011 consisted of the following:
| September 30, 2012 | December 31, 2011 | ||||||
| Accrued Warranty | $ | 7,575 | $ | 5,197 | |||
| Accrued Interest | 4,125 | 825 | |||||
| Accrued co-op advertising | 1,324 | 1,017 | |||||
| Accrued property tax | 1,054 | 1,119 | |||||
| Accrued rebates | 1,985 | 2,425 | |||||
| Other Accrued Expenses | 12,900 | 7,840 | |||||
| $ | 28,963 | $ | 18,423 | ||||
Note 4. Warranty
The Company provides its end-user customers limited warranties on certain products that generally expire one year after the sale of the product to the customer. Warranty costs relating to products sold under warranty are estimated and recorded as warranty obligations at the time of sale based on historical warranty claims. The Company periodically assesses the adequacy of its recorded warranty liability and adjusts the amount as necessary. A rollforward of the Company's warranty liability for the nine months ended September 30, 2012 and December 31, 2011 is as follows:
| September 30, 2012 | December 31, 2011 | |||||||
| Balance - beginning of year | $ | 5,197 | $ | 6,068 | ||||
| Expense | 9,360 | 6,029 | ||||||
| Claims settled | (6,982 | ) | (6,900 | ) | ||||
| Balance - end of year | $ | 7,575 | $ | 5,197 | ||||
On June 16, 2009, the Company initiated a voluntary recall of certain refrigerators manufactured before April 10, 2006. The recall was initiated by management to expedite the repair of a condition that had resulted in certain warranty and damage claims. The following table provides additional information regarding this recall:
| September 30, 2012 | December 31, 2011 | |||||||
| Number of units involved in recall | 76,763 | 46,000 | ||||||
| Number of claims | 30,318 | 21,843 | ||||||
| Claims paid | $ | 11,058 | $ | 8,364 | ||||
| Estimate of total remaining liability | $ | 5,304 | $ | 2,875 | ||||
As additional information became available during the nine months ended September 30, 2012, the Company revised its estimate of the recall and recorded an additional charge or approximately $1,200.
In December 2012, the Company initiated a voluntary recall of certain refrigerators manufactured before August 2012. The recall was initiated by management to expedite the repair of a condition that had resulted in certain warranty and damage claims. There are 30,763 units involved in the recall. The estimated cost of this voluntary recall, $4,000, was included in cost of goods sold in the accompanying condensed consolidated statement of operations for the period ended September 30, 2012.
Note 5. Debt
Debt at September 30, 2012 and December 31, 2011 consisted of the following:
| September 30, 2012 | December 31, 2011 | |||||||
| Notes Payable | $ | 104,099 | $ | 101,593 | ||||
| Revolving loan under the credit facility | 52,300 | 58,653 | ||||||
| Bonds | 8,180 | 10,415 | ||||||
| Other | 1,214 | 1,502 | ||||||
| Total | 165,793 | 172,163 | ||||||
| Less current maturities | (62,876 | ) | (3,244 | ) | ||||
| Long-term debt, net of current maturities | $ | 102,917 | $ | 168,919 | ||||
In March 2012, the Company amended the terms of its credit agreement which provides for a revolving loan commitment (“Revolving Loans”) and received an extension on the maturity date of the Revolving Loans to March 29, 2013. Under the amended terms, current borrowings outstanding under the Revolving Loans are subject to interest at LIBOR plus 5.00 percent or the bank's prime rate plus 2.25 percent. The amended agreement provides for automatic and permanent reductions in the $75,000 loan commitment on the Revolving Loans by $2,500 on March 31, 2012, an additional $2,500 on June 30, 2012, an additional $2,500 on September 30, 2012, and an additional $2,500 on December 31, 2012. Borrowings on the Revolving Loans are classified in current maturities of long-term debt at September 30, 2012.
In March 2012, the Company obtained $3,000 of debt financing from a company whose officers and employees have a direct or indirect controlling interest in VRC (Sponsor). The financing is in the form of a promissory note with a fixed interest rate of 15 percent and is subordinated to the Credit Agreement. Additional borrowings of $16,000 are available under this promissory note which has a maturity date of December 1, 2015. In the event the Company's liquidity, as defined, is less than $3,000, the Sponsor will advance to the Company within five business days the shortfall as additional borrowings under the promissory note up to the available balance of the promissory note. A letter of credit was also established for the benefit of the lenders by the Sponsor in the amount of $10,000.
Included in notes payable at September 30, 2012 and December 31, 2011 is a $50,000 note payable to an outside investor. The note carries the same financial covenants as the Revolving Loans. In May 2012, the note was amended to restate financial covenants with the next measurement period being December 31, 2012. A letter of credit was also established for the benefit of the note holder by a company whose officers and employees have a direct or indirect controlling interest in VRC. The letter of credit totaled $3,000.
Note 6. Restructuring and Discontinued Operations
As part of an ongoing strategy to reduce costs, the Company has continued to restructure its operations and discontinue certain of its businesses.
During the nine month periods ended September 30, 2012 and 2011, the company incurred $5,530 and $343, respectively, of additional restructuring expense related to restructuring initiatives started in prior years. Restructuring and related charges are reported as restructuring charges in the consolidated statement of operations.
During the nine month periods ended September 30, 2012 and 2011, the Company incurred $1,529 and $1,386 of additional expense related to losses from operations and related closing costs for certain of its businesses.
The following is a summary of assets and liabilities of the discontinued operations, excluding cash, presented in other current assets and liabilities in the accompanying consolidated balance sheet at September 30, 2012:
| Assets of discontinued operations | ||||
| Accounts receivable | $ | 1,921 | ||
| Inventories | 197 | |||
| Property and equipment, net | 173 | |||
| Other assets | 1,428 | |||
| Total assets of discontinued operations | $ | 3,719 | ||
| Liabilities of discontinued operations | ||||
| Accounts payable | $ | 1,838 | ||
| Accrued expenses | 2,994 | |||
| Total liabilities of discontinued operations | $ | 4,832 | ||
The following is a summary of assets and liabilities of the discontinued operations, excluding cash, presented in other current assets and liabilities in the accompanying condensed consolidated balance sheet at December 31, 2011:
| Assets of discontinued operations | ||||
| Accounts receivable | $ | 2,662 | ||
| Inventories | 255 | |||
| Property and equipment, net | 308 | |||
| Other assets | 42 | |||
| Total assets of discontinued operations | $ | 3,267 | ||
| Liabilities of discontinued operations | ||||
| Accounts payable | $ | 1,681 | ||
| Accrued expenses | 3,897 | |||
| Total liabilities of discontinued operations | $ | 5,578 | ||
Note 7. Subsequent Events
The Company has evaluated subsequent events through February 27, 2012, the date these financial statements were available to be issued.
On December 31, 2012, The Middleby Corporation (“Middleby”), through its wholly-owned subsidiary Middleby Marshall Inc. ("Middleby Marshall"), acquired all of the issued and outstanding shares of the Company's capital stock (“Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, Middleby purchased the Company in an all cash transaction for $380 million, subject to certain post-closing adjustments. Of the purchase price, $30 million has been deposited in an escrow account as security for potential post-closing indemnification claims of Middleby against the Company's shareholders. The Stock Purchase Agreement contains customary representations and warranties, covenants, and indemnification provisions. The Company's debt was paid in full in connection with the acquisition and the related loan commitments were canceled.