SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 2, 1999
Commission file number 1-13970
CHROMCRAFT REVINGTON, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-1848094
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1100 North Washington Street, Delphi, IN 46923
--------------------------------------------------------------------------
(Address, including zip code, of registrant's principal executive offices)
(765) 564-3500
----------------------------------------------------
(Registrant's telephone number, including area code)
The undersigned Registrant hereby amends Item 7 of its Current Report on Form
8-K previously filed with the Securities and Exchange Commission on September
17, 1999 as set forth below.
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired
(1) Audited Balance Sheet for Korn Industries, Incorporated ("Korn
Industries") as of November 28, 1998, the related Statements of
Income, Stockholders' Equity and Cash Flows for the year ended
November 28, 1998, the Notes to Financial Statements and the
Independent Auditor's Report.
(b) Pro forma financial information
(1) Pro Forma Condensed Consolidated Balance Sheet of the Registrant as
of July 3, 1999 (unaudited).
(2) Pro Forma Condensed Consolidated Statement of Earnings of the
Registrant for the Six Months Ended July 3, 1999 (unaudited).
(3) Pro Forma Condensed Consolidated Statement of Earnings of the
Registrant for the Year Ended December 31, 1998 (unaudited).
(4) Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements.
(c) Exhibits
2 Stock Purchase Agreement dated September 3, 1999 by and among CRI
Corporation-Sumter, Korn Industries and the Selling Shareholders
(Incorporated by reference to Exhibit 2 of the Registrant's Form
8-K, File No. 1-13970, dated September 17, 1999).
2
Pro Forma Financial Information
Chromcraft Revington, Inc.
The following unaudited pro forma condensed consolidated balance sheet of
Chromcraft Revington, Inc. (the "Company") at July 3, 1999 combines the
balance sheet of Korn Industries, Incorporated ("Korn Industries") at May 28,
1999 and the Company's balance sheet as of July 3, 1999 and gives effect to a
Stock Purchase Agreement dated September 3, 1999 by and among CRI Corporation-
Sumter, Korn Industries and the shareholders of Korn Industries as if the
purchase contemplated by the Stock Purchase Agreement had occurred on such
date. The unaudited pro forma condensed consolidated statement of earnings of
the Company for the six months ended July 3, 1999 combines the operating
results of Korn Industries for the six months ended May 28, 1999 and the
Company's operating results for the six months ended July 3, 1999 and gives
effect to the purchase as if it had occurred at the beginning of the period.
The unaudited pro forma condensed consolidated statement of earnings of the
Company for the year ended December 31, 1998 combines the operating results of
Korn Industries for the fiscal year ended November 28, 1998 and the Company's
operating results for the year ended December 31, 1998 and gives effect to the
purchase as if it had occurred at the beginning of the period.
The pro forma statements do not purport to represent what the Company's
financial position or results of operations would actually have been if the
acquisition of Korn Industries had in fact occurred on such dates or to
project the Company's financial position or results of operations as of any
future date or for any future period. Information regarding the Company's
actual results of operations for the periods presented may be obtained from
the respective filings on Form 10-K and 10-Q previously filed with the
Commission.
3
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
Chromcraft Revington, Inc.
July 3, 1999
(In thousands)
(a)
Chromcraft Purchase
Revington, Korn Adjust-
Inc. Industries ments Pro Forma
--------- --------- --------- ---------
Assets
------
Accounts receivable $ 29,701 $ 5,043 $ - $ 34,744
Inventories 39,004 4,937 7,205 (b) 51,146
Deferred income taxes 1,297 301 (1,598)(c) -
Other current assets 4,120 257 - 4,377
--------- --------- --------- ---------
Current assets 74,122 10,538 5,607 90,267
Property, plant and equipment, net 37,103 7,941 129 (d) 45,173
Deferred income taxes - 1,649 1,174 (e) 369
(2,454)(c)
Goodwill and tradenames 20,880 - 6,661 (f) 27,541
Other assets 705 457 (331)(g) 831
--------- --------- --------- ---------
Total assets $ 132,810 $ 20,585 $ 10,786 $ 164,181
========= ========= ========= =========
Liabilities and Stockholders' Equity
------------------------------------
Accounts payable $ 8,526 $ 4,884 $ - $ 13,410
Accrued liabilities 11,478 2,016 514 (h) 14,008
Deferred income taxes - - 2,377 (e) 779
(1,598)(c)
--------- --------- --------- ---------
Current liabilities 20,004 6,900 1,293 28,197
Long term debt 6,600 14,698 8,525 (i) 29,823
Deferred income taxes 2,454 - (2,454)(c) -
Other liabilities 5,615 2,211 198 (h) 8,024
--------- --------- --------- ---------
Total liabilities 34,673 23,809 7,562 66,044
--------- --------- --------- ---------
Stockholders' equity 98,137 (3,224) 3,224 (a) 98,137
--------- --------- --------- ---------
Total liabilities and
stockholders' equity $ 132,810 $ 20,585 $ 10,786 $ 164,181
========= ========= ========= =========
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
4
Pro Forma Condensed Consolidated Statement of Earnings (unaudited)
Chromcraft Revington, Inc.
Six Months Ended July 3, 1999
(In thousands, except per share data)
Chromcraft Purchase
Revington, Korn Adjust-
Inc. Industries ments Pro Forma
--------- --------- --------- ---------
Sales $ 117,779 $ 27,992 $ - $ 145,771
Cost of sales 88,417 25,415 (134)(j) 113,587
(111)(k)
--------- --------- --------- ---------
Gross margin 29,362 2,577 245 32,184
Selling, general and
administrative expenses 15,847 5,268 122 (k) 21,237
--------- --------- --------- ---------
Operating income 13,515 (2,691) 123 10,947
Interest expense 164 819 (370)(l) 613
--------- --------- --------- ---------
Earnings before income tax expense 13,351 (3,510) 493 10,334
Income tax (benefit) expense 5,291 - (1,199)(m) 4,092
--------- --------- --------- ---------
Net earnings $ 8,060 $ (3,510) $ 1,692 $ 6,242
========= ========= ========= =========
Earnings per share of common stock
Basic $ .75 $ .58
========= =========
Diluted $ .73 $ .57
========= =========
Shares used in computing earnings per share
Basic 10,687 10,687
========= =========
Diluted 11,015 11,015
========= =========
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
5
Pro Forma Condensed Consolidated Statement of Earnings (unaudited)
Chromcraft Revington, Inc.
Year Ended December 31, 1998
(In thousands, except per share data)
Chromcraft Purchase
Revington, Korn Adjust-
Inc. Industries ments Pro Forma
--------- --------- --------- ---------
Sales $ 236,744 $ 54,651 $ - $ 291,395
Cost of sales 176,988 52,927 (2,822)(j) 226,801
(292)(k)
--------- --------- --------- ---------
Gross margin 59,756 1,724 3,114 64,594
Selling, general and
administrative expenses 31,964 6,769 97 (k) 38,830
--------- --------- --------- ---------
Operating income 27,792 (5,045) 3,017 25,764
Interest expense 739 1,138 (435)(l) 1,442
--------- --------- --------- ---------
Earnings before income tax expense 27,053 (6,183) 3,452 24,322
Income tax (benefit) expense 10,794 (2,021) 931 (m) 9,704
--------- --------- --------- ---------
Net earnings $ 16,259 $ (4,162) $ 2,521 $ 14,618
========= ========= ========= =========
Earnings per share of common stock
Basic $ 1.46 $ 1.31
========= =========
Diluted $ 1.41 $ 1.27
========= =========
Shares used in computing earnings per share
Basic 11,137 11,137
========= =========
Diluted 11,533 11,533
========= =========
See accompanying notes to unaudited pro forma condensed consolidated financial statements.
6
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
Chromcraft Revington, Inc.
(a) To record the purchase price allocation using the purchase method of
accounting based upon the fair value of the assets acquired and the
liabilities assumed. The purchase price of the acquisition consisted of
a cash payment of $7,400,000 to the stockholders of Korn Industries,
acquisition-related expenses of approximately $1,125,000 and the
assumption of the liabilities of Korn Industries. The Company's
revolving credit agreement imposes restrictions on the ability of the
Company's subsidiaries (including Korn Industries) to incur new
indebtedness outside of the revolving credit facility. Accordingly,
substantially all of the Korn Industries indebtedness has been refinanced
with borrowings under the Company's revolving credit facility. A recon-
ciliation of the allocation of the excess of the purchase price over the
book value of the net assets acquired is provided below.
Book value of net assets (liabilities) acquired $ (3,224,000)
To adjust the book value of balance sheet
items to their estimated fair values:
Inventories 7,205,000
Property, plant and equipment 129,000
Other long term assets (331,000)
Accrued liabilities (514,000)
Deferred income taxes (1,203,000)
Other long term liabilities (198,000)
Goodwill 6,661,000
------------
Net purchase price $ 8,525,000
============
Descriptions of these adjustments are contained in the following footnotes.
(b) To adjust Korn Industries' inventories, valued using the LIFO method, to
fair value.
(c) To reclassify deferred income taxes.
(d) To record the fair value of property, plant and equipment based on
independent appraisals and other information.
(e) To record the deferred tax effects of the pro forma adjustments.
(f) To record the excess of the purchase price over the total amount assigned
to the identifiable assets acquired less liabilities assumed.
(g) To write off deferred financing costs on Korn Industries' indebtedness
refinanced under the Company's revolving credit facility.
7
(h) To conform Korn Industries' accounting method to the Company for
recognizing certain vacation and warranty costs and to adjust the lia-
bility on deferred compensation agreements based on a 6% discount rate.
(i) To reflect borrowings to finance the cash payment to Korn Industries'
stockholders and acquisition-related expenses of the transaction.
(j) To record inventories using the first-in, first-out inventory method.
(k) To record goodwill amortization expense and a decrease in depreciation
expense due to the adjustment of property, plant and equipment to fair
value.
(l) To reflect the decrease in interest expense due to a lower assumed
average borrowing rate after refinancing the debt of Korn Industries
under the Company's revolving credit facility, partially offset by
interest expense incurred on borrowings to finance the cash payment to
Korn Industries' stockholders and acquisition-related expenses. The
Company's effective interest rate was approximately 5.3% for the six
months ended July 3, 1999 and 6.0% for the year ended December 31, 1998.
(m) To record the tax effect of the pro forma adjustments and a tax benefit
on Korn Industries' operating loss for the pro forma six month period
ended July 3, 1999.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to its Current Report on Form 8-K
to be signed on its behalf by the undersigned hereunto duly authorized.
CHROMCRAFT REVINGTON, INC.
--------------------------
(Registrant)
Date: November 12, 1999 By: /s/ Frank T. Kane
----------------- --------------------------
Frank T. Kane,
Vice President-Finance
9
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
FINANCIAL REPORT
NOVEMBER 28, 1998
CONTENTS
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance sheet 2 - 3
Statement of income 4
Statement of stockholders' equity 5
Statement of cash flows 6 - 7
Notes to financial statements 8 - 19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Korn Industries, Incorporated
Sumter, South Carolina
We have audited the accompanying balance sheet of Korn Industries,
Incorporated, d/b/a Sumter Cabinet Company as of November 28, 1998, and the
related statements of income, stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Korn Industries, Incorporated
as of November 28, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
McGladrey & Pullen, LLP
Wilmington, North Carolina
January 22, 1999, except for the third paragraph of Note 4, as to which the
date is March 9, 1999.
1
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
BALANCE SHEET
November 28, 1998
ASSETS (Notes 3 and 4)
Current Assets
Cash $ 1,000
Trade receiveables, less allowance
for doubtful accounts 1998 $50,000 6,598,986
Other receivables 87,705
Income tax refund claim 197,156
Inventories (Note 2) 5,753,429
Prepaid expenses 133,951
Deferred taxes (Note 7) 301,174
------------
Total current assets $ 13,073,401
Other Assets and Investments
Cash value of life insurance (Note 5) 102,116
Deferred debt expense, unamortized balance 74,835
Other 45,098
------------
222,049
------------
Deferred Taxes (Note 7) 1,649,195
------------
Property and Equipment
Land 305,990
Buildings 5,683,301
Machinery and equipment 12,044,179
Other 1,502,721
------------
19,536,191
Less accumulated depreciation 11,898,539
------------
7,637,652
------------
$ 22,582,297
============
See Notes to Financial Statements.
2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Revolving line-of-credit (Note 3) $ 10,035,373
Current maturities of long-term debt (Note 4) 611,176
Accounts payable and accrued expenses
(Notes 5 and 6) 6,136,036
------------
Total current liabilities 16,782,585
------------
Long-Term Debt, less current maturities (Note 4) 3,430,378
------------
Postemployment Benefits, less amounts due
currently (Note 5) 2,083,553
------------
Total liabilities 22,296,516
------------
Commitments and Contingencies (Notes 4, 7, 8, 9 and 10)
Stockholders' Equity (Note 9)
Capital stock:
Voting common, par value $1 per share;
authorized 2,000 shares; issued and
outstanding 626 shares 626
Nonvoting common, par value $1 per share;
authorized 198,000 shares; issued and
outstanding 44,911 shares 44,911
Retained earnings 240,244
------------
285,781
------------
$ 22,582,297
============
3
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
STATEMENT OF INCOME
Year Ended November 28, 1998
Net sales $ 54,651,241
Cost of goods sold 52,927,062
------------
Gross profit 1,724,179
------------
Operating expenses:
Selling expenses 4,786,045
General and administrative expenses (Note 5) 2,455,122
------------
7,241,167
------------
Operating loss (5,516,988)
------------
Nonoperating income (expense):
Interest income 25,507
Gain on sale of property and equipment 487,409
Other (15,363)
Interest expense (1,164,009)
------------
(666,456)
------------
Loss before income tax benefits (6,183,444)
Federal and state income benefit (Note 7) (2,021,166)
------------
Net loss $ (4,162,278)
============
See Notes to Financial Statements.
4
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
Year Ended November 28, 1998
Capital Stock Issued
---------------------------
Voting Nonvoting Retained
Common Common Earnings
------------ ------------ ------------
Balance, November 29, 1997 $ 626 $ 44,911 $ 4,402,522
Net loss - - (4,162,278)
------------ ------------ ------------
Balance, November 28, 1998 $ 626 $ 44,911 $ 240,244
============ ============ ============
See Notes to Financial Statements.
5
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
STATEMENT OF CASH FLOWS
Year Ended November 28, 1998
Cash Flows From Operating Activities
Net loss $ (4,162,278)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,103,836
Amortization of deferred debt costs 29,164
Gain on disposal of assets (487,409)
Deferred income taxes (1,908,329)
Postemployment benefits, net of payments (491,612)
Changes in working capital componets:
(Increase) decrease in:
Receivables 754,728
Income tax refund claim 2,774
Inventories 213,654
Prepaid expenses (18,721)
Other assets (40,763)
Increase in:
Accounts payable and accrued expenses 3,073,777
------------
Net cash used in operating activities (1,931,179)
------------
Cash Flows From Investing Activities
Purchase of property and equipment (184,853)
Proceeds from sale of assets 504,924
Proceeds from cash value of life insurance 76,016
------------
Net cash provided by investing activities 396,087
------------
Cash Flows From Financing Activities
Proceeds on revolving line-of-credit 60,449,400
Principal payments on revolving line-of-credit (57,786,779)
Proceeds from long-term borrowings -
Principal payments of long-term borrowings (1,077,529)
Deferred debt expense (50,000)
------------
Net cash provided by financing activities 1,535,092
------------
(Continued)
6
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
STATEMENT OF CASH FLOWS (Continued)
Year Ended November 28, 1998
Net change in cash $ -
Cash:
Beginning 1,000
------------
Ending $ 1,000
============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 1,132,464
============
Supplemental Disclosures of Non-Cash Financing Activities:
Coversion of short-term to long-term
financing (Note 4) $ 1,266,399
============
See Notes to Financial Statements.
7
KORN INDUSTRIES, INCORPORATED
D/B/A SUMTER CABINET COMPANY
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company is a manufacturer and wholesaler of high
quality, solid wood bedroom and dining room furniture under the name of
Sumter Cabinet Company. The Company markets and sells to independent
retailers and smaller furniture chains throughout North America on credit
terms the Company establishes for individual customers.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates have been made by management in several areas
including the possible outcome of certain claims and assessments (Note 8),
the realizability of the Company's deferred tax assets (Note 7), and
future operations associated with the Company's implementation of its
new operating strategy and related turnaround (Note 10), which could
impact the carrying value of property and equipment. Actual results
could differ materially from these estimates making it reasonably
possible that a change in the estimates could occur in the near term.
A summary of the Company's significant accounting policies follows:
Inventories: Inventories are stated at the lower of cost (last-in,
first-out method) or market.
Property and equipment: Property and equipment is stated at cost less
accumulated depreciation. Depreciation expense is calculated on the
straight-line method. The depreciation method is designed to amortize
the cost of the assets over their estimated useful lives, which are
generally as follows:
Buildings 10 - 30 years
Machinery and equipment 3 - 16 years
Other 3 - 10 years
The carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the related depreciation and amortization period
or to the carrying value is warranted. Such evaluation is based principally
on the expected utilization of the long-lived assets and the projected,
undiscounted cash flows of the Company's operations. As such, future
evaluations could be adversely impacted by the Company's future results of
operations.
Deferred taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
8
Advertising costs: The Company follows the policy of charging the costs of
advertising to expense as incurred. Advertising costs for 1998 were $850,739.
Fiscal year: The Company's fiscal year ends on the Saturday nearest to the
last day of November. The fiscal year included herein contained 52 weeks.
Note 2. Inventories
The components of inventories and the cumulative difference between the
last-in, first-out (LIFO) method and first-in, first-out (FIFO) method are
as follows:
Inventories (on a FIFO basis):
Production materials $ 7,448,496
Work in process 2,338,796
Finished goods 4,579,923
------------
Total (on FIFO basis) 14,367,215
Less allowance to adjust
the carrying value of
inventories to last-in,
first-out (LIFO) basis (8,613,786)
------------
Inventories at LIFO
(adopted in 1978) $ 5,753,429
============
Had inventories been valued on a FIFO basis, the net loss for 1998, net of
reduced tax benefit of $1,052,635, would have been $2,392,834.
Note 3. Revolving Line-of-Credit
The Company has a revolving line-of-credit. Advances on the line are
collateralized by substantially all assets of the Company and are cross-
collateralized to all other debt described in Note 4. The agreement limits
the funds available on the line-of-credit to a borrowing base which is based
on the lesser of 1) $15,000,000 less letters-of-credit or 2) relative
percentages of eligible (generally production materials and finished goods)
inventories (FIFO basis) and accounts receivable less letters-of-credit.
Interest is due monthly at the bank's reference rate plus .75%.
As more fully described in Note 4, the Company refinanced all of its bank
debt with a new lender subsequent to year end. The terms described above
and amounts reported on the balance sheet reflect the new terms of the
refinancing.
9
Note 4. Pledged Assets and Long-Term Debt
Long-term debt consists of the following:
Note payable to bank, principal due in monthly
installments of $27,778 plus interest at 2.75%
above the bank's prime lending rate $ 666,667
Note payable to bank, due in monthly installments
of $37,500 plus interest at 2.75% above the
bank's prime lending rate 637,500
Note payable to bank, due in monthly installments
of $24,516 plus interest at 2.75% above the
bank's prime lending rate 1,470,988
Short-term debt refinanced as a long-term liability
subsequent to year end as described below 1,266,399
-----------
4,041,554
Less current maturities 611,176
-----------
$ 3,430,378
===========
In December, 1998, the Company entered into an agreement with a lending
institution to refinance all of its existing debt. The agreement provided
for the following:
A revolving line-of-credit of up to $15,000,000 which bears interest
at the lending institution's reference rate plus .75% (Note 3).
A $3,000,000 note payable in monthly installments beginning in
March, 1999 of $50,000 plus interest at the lending institution's
reference rate plus 1.5%.
A $1,400,000 note payable in monthly installments beginning in
March, 1999 of $11,667 plus interest at the lending institution's
reference rate plus 1.5%.
These notes are collateralized by substantially all of the Company's assets
and cross-collateralized to all other debt with the lending institution. The
notes mature in December, 2003 and require compliance with certain covenants
including, but not limited to, specific levels of tangible net worth, working
capital and profitability, as well as a provision for subjective acceleration
by the lender. The Company was in violation of certain of these covenants,
which has been amended, in writing, by the bank on March 9, 1999. The
agreement also requires the maintenance of a lock box tied directly to the
revolving line-of-credit.
10
This refinancing allowed the Company to convert $1,266,399 of balances due
under its former revolving line-of-credit agreement to long-term debt.
Additionally, the financing agreement provided the Company a $1,500,000
capital expenditure line-of-credit commitment which may be used in the
upcoming year and termed out over a period of 60 months, with a balloon
payment due December, 2003.
The following schedule of aggregate maturities required on long-term debt have
been adjusted to reflect the terms of the refinancing.
Aggregate maturities required on long-term debt at November 28, 1998, are due
in future years as follows:
1999 $ 611,176
2000 740,004
2001 740,004
2002 740,004
2003 740,004
Later years 470,362
------------
$ 4,041,554
============
As of the date of closing on the new financing terms discussed above, the
lending institution's reference rate was 7.75%. At November 28, 1998, prime
rate was 7.75%.
Note 5. Postemployment Benefits
The Board of Directors has provided for deferred compensation to certain
existing and former key employees under individual agreements. In general,
the individual agreements provide for payment of compensation to key
employees at age 65 or after their retirement, or to their beneficiary in
event of death. Amounts are accrued under the Plan annually on a level term
basis so that by age 65 or anticipated retirement age, if different, the
accrual will be an amount equivalent to the present value of compensation
payments, discounted at rates of 7.5% to 9.25%.
At November 28, 1998, $2,064,379 has been accrued under these contracts. The
current portion of these payments under these contracts totaled approximately
$249,000 which is included in accounts payable and accrued expenses. The
deferred compensation charged to expense totaled $-0- for the year ended
November 28, 1998.
The Company has acquired life insurance on certain participants; the proceeds
from which could be used to partially cover these obligations in the event of
death.
The Company also provides postemployment health and life insurance coverage for
employees who had 15 years of continuing coverage on June 8, 1966.
11
The following table sets forth details of the plan's obligation as of January
1, 1998, the date of the plan's most recent actuarial valuations, recognized
in the accompanying balance sheet as of November 28, 1998:
Accumulated postretirement benefit obligation:
Retirees $ 700,718
----------
700,718
Less: Unrecognized transition obligation (327,633)
Less: Unrecognized net loss (104,439)
----------
Obligation recorded on balance sheet $ 268,646
==========
For measurement purposes, the current medical trend rate as of January 1, 1998
of 9% is anticipated to decline gradually over the next 4 years until it
reaches a level of 6% per year. The discount rate used to estimate the
accumulated postretirement benefit obligation was 7.25% annually. A 5%
increase in administrative fees associated with the plan has also been
assumed.
The Company's unfunded obligation that existed at December 3, 1995 (transition
date) is being accrued on a straight-line basis over a period of approximately
12 years (which approximates the remaining life expectancy of the plan
participants).
The periodic post retirement benefit cost for the year ended November 28,
1998, was as follows:
Interest cost $ 48,440
Amortization of unrecognized transition obligation 36,854
Amortization of unrecognized net loss 3,884
----------
$ 89,178
==========
If the assumed medical trend rates were increased by 1% in each year, the
accumulated postretirement benefit obligation as of the date of the last
actuarial valuation would be increased by $40,998 and the aggregate of net
periodic postretirement benefit cost would be increased by $6,431.
12
Note 6. Retirement and Bonus Plans
The Company has a qualified profit-sharing plan for those salaried employees
who meet the eligibility requirements. The annual contribution is at the
discretion of the Board of Directors and is not to exceed the maximum amount
allowed under the Internal Revenue Service regulations, which at the present
time is 15% of qualified salaries. No contributions were made for the year
ended November 28, 1998.
The Company also has a qualified profit-sharing plan for hourly employees.
The annual contribution is at the discretion of the Board of Directors and is
not to exceed the maximum amount deductible for federal income tax purposes
(see previous paragraph). No contributions were made to the plan for the year
ended November 28, 1998.
Note 7. Income Tax Matters
Total deferred tax assets and liabilities as of November 28, 1998, were as
follows:
Deferred tax assets $ 3,379,944
Deferred tax liabilities (1,429,575)
-----------
$ 1,950,369
===========
Taxable temporary differences giving rise to deferred tax liabilities relate
to property and equipment. Deductible temporary differences giving rise to
deferred tax assets relate to deferred compensation and postretirement
benefits, accrued workmen's compensation claims, inventories, allowance for
accounts receivable, and alternative minimum tax credit (AMT) and net operating
loss carryforwards.
Approximately $2.1 million of the total deferred tax assets identified above
is attributable to federal and state net operating loss carryforwards
generated during 1998. The federal operating loss carryforward available to
the Company totals approximately $5,300,000. The carryforward is available
for a period of 20 years and expires in 2018. The Company's state net
operating loss carryforward totals approximately $6,300,000 and is available
for a period of 15 years. Management believes it is more likely than not that
the Company's future profitability will be sufficient to ensure the utili-
zation of these carryforward benefits prior to their expiration. As such,
management does not believe avaluation allowance is necessary. Nonetheless,
continued recognition of the deferred tax assets will be dependent upon
sufficient future earnings of the Company which cannot be assured. As a
result, the amount of deferred tax assets considered realizable could be
reduced in the near and long-term if estimates of future taxable income are
reduced. Such an occurrence could materially adversely affect the Company's
future results of operations and financial condition. (See Note 10)
13
The net deferred tax assets and liabilities mentioned above have been
classified on the accompanying balance sheet as of November 28, 1998, as
follows:
Noncurrent assets $ 1,649,195
Current assets 301,174
-----------
$ 1,950,369
===========
The provision for income tax benefits credited to operations for the year
ended November 28, 1998, consists of the following:
Current $ (112,837)
Deferred (1,908,329)
-----------
Federal and state income tax benefits $(2,021,166)
===========
The income tax provision for 1998 differs from the amount determined by
applying the U.S. federal income tax rate to pre-tax income due to the
following:
Computed "expected" tax expense (benefit) $(2,102,371)
Increase (decrease) in taxes resulting from:
State income taxes (benefits),
net of federal tax (benefit) (204,054)
Reduced benefit of net operating loss
carryback due to previous year
application of AMT credits 275,390
Other, net 9,869
-----------
$(2,021,166)
===========
14
Note 8. Commitments and Contingencies
Lease commitment and total rental expense: The Company has leased exhibit
space and office equipment under noncancelable long-term agreements which
have initial or remaining noncancelable lease terms in excess of one year as
of November 28, 1998.
The future minimum rental commitments at November 28, 1998, under the leases
described above are approximately as follows:
For the 52-53 week period ending
1999 $ 113,866
2000 113,866
2001 17,828
2002 12,236
------------
Total minimum
payments required $ 257,796
============
The total rental and exposition expenses included in the income statement for
the year ended November 28, 1998 was $210,954.
Letters-of-credit: As security on its self-insured worker's compensation
program, the Company maintains a $250,000 irrevocable letter-of-credit
agreement with a bank. The letter-of-credit is unsecured and expires on
April 30, 1999. As of November 28, 1998, there were no open balances against
the letter-of-credit.
Claims and assessments: The Company has certain unsettled claims which
potentially involve significant amounts. Management cannot determine the
outcome of these claims but believes that their resolution will not have a
material adverse effect on the Company's financial position. Nonetheless, it
is reasonably possible that these claims could result in significant outcomes
unfavorable to the Company.
Note 9. Stock Redemption Agreement
On December 31, 1992, the Company entered a stock redemption agreement with
certain charitable beneficiaries of a former shareholder's estate which, at
November 28, 1998, includes 24,121 shares of the Company's nonvoting stock.
The agreement provides the Company with a cash call option, exercisable at any
time and from time-to-time, to purchase for cash all or any portion of the
shares owned by any of the charitable beneficiaries. The agreement further
provides the Company with a note call option, exercisable at any time, to
purchase in exchange for a promissory note all, but not less than all, of the
shares owned by any of the charitable beneficiaries.
The agreement also provides each of the charitable beneficiaries with a cash
put option, exercisable annually, to require the Company to purchase for cash
shares owned by the charitable beneficiary. The Company's annual repurchase
obligation under this put option is limited to $150,000 through November 30,
2002. Thereafter, the Company's annual repurchase obligation is limited to
the greater of 25% of Net Cash Flow, as defined, or 50% of the cash dividends
paid by the Company during the immediately preceding fiscal year.
15
If the Company's Board of Directors makes a good faith determination that the
Company cannot legally purchase the designated shares upon exercise of the put
option, the Company's requirement to perform its purchase obligation will be
suspended until such time the purchase can be legally consummated. This would
occur as a result of existing and future agreements with third parties that
would prohibit the Company's ability to perform its obligations. Addition-
ally, the beneficiaries have contracted to subordinate any claims they may
have against the Company to the Company's lending institution indebtedness, as
described in Notes 3 and 4.
The agreement also provides each of the charitable beneficiaries with a
deferred put option, exercisable any time after March 1, 2003 and prior to
March 1, 2012. The Company's obligation to purchase the shares under the
deferred put option is conditioned upon its having a minimum net worth of
$3.5 million and a debt equity ratio of less than three to one immediately
after the purchase, as well as the absence of any prohibition on the Company's
ability to do so under the terms of any borrowing arrangements.
The purchase price of the shares is fixed at $149.18 per share through
November 30, 2002. Thereafter, the purchase price per share is adjusted for
the increase or decrease in the book value per share of such nonvoting common
stock from November 30, 1991 through the November 30 immediately preceding the
exercise of the call or put option.
In the event the Company elects to exercise its note call option or any of the
charitable beneficiaries elects to exercise its deferred put option, the
purchase price would be payable in ten equal annual installments, including
interest at prime plus 1%, but not less than 5% nor more than 8%. The agree-
ment also provides for the suspension of the Company's purchase obligation
under the deferred put option in the event that the Company's Board of
Directors makes a good faith determination that the Company may not legally
honor that obligation.
Lastly, the agreement provides the Company with the right of first refusal to
purchase any shares owned by any of the charitable beneficiaries in the event
that any of them wishes to accept a bona fide offer from any third party to
purchase all or any portion of its shares, on the same terms and conditions as
set forth in such bona fide offer.
16
Note 10. Uncertainty
During 1998, the Company experienced a significant decline in profitability.
During 1997, the Company undertook a process of refocusing its strategy in
light of the changing conditions of the furniture industry. This strategy
included the following elements:
A focused marketing program aimed at developing a partnership with
selected independent retailers.
A new marketing initiative directed at regional retail chains to
achieve sufficient volume with minimum erosion of margin.
An expansion of the product line from the basic core items to
include more fashion groups.
An evolution from a "manufacture to stock" production philosophy to
a "manufacture to demand" philosophy in order to improve delivery
performance to customers and reduce the Company's investment in
work-in-process and finished goods inventories.
Through the end of 1997, the new strategy had begun to improve the Company's
results, particularly in the area of sales. However, in the first half of
1998, the manufacturing function faltered and the Company could neither meet
customer demands on a timely basis, control its material costs, nor produce
at an efficient level.
By the middle of the third quarter of 1998, the Company's stockholders and
management recognized the deteriorating trend and took specific actions to
turnaround operations and refocus on the Company's strategic objectives.
These efforts included designation of a new president and intensified efforts
to improve production material yield and reduce labor. Additionally, the
Company took immediate steps to maximize cash flow and manage its credit
facility.
Operations: While management's efforts began producing results, it became
apparent that the restructuring of the manufacturing process was more involved
than initially contemplated. Accordingly, management reassessed the amount of
time required for the turnaround. Unfortunately, the Company's bank lost
confidence in the turnaround process which resulted in a concerted effort by
management to seek new financing.
17
In December, 1998, the Company closed on a new financing agreement with
Foothill Capital Corporation. Among other things, the new financing package
provided the following to the Company (See Notes 3 and 4):
reduction in interest rates which management estimates will save
the Company approximately $200,000 annually.
conversion of approximately $1.27 million of currently due debt
under the Company's old revolving line-of-credit to long-term
financing.
reduction in annual long-term debt principal repayment
requirements by approximately $400,000.
extended availability of approximately $2 million on the Company's
revolving line-of-credit.
$1.5 million commitment to finance capital improvements during 1999.
Management believes that securing this new financing represents the essential
element for the Company to continue its turnaround efforts. In addition to the
sales and new product development initiatives previously discussed, management
has undertaken steps to achieve the following specific improvements to the
Company's production process:
reduction in labor head count by 100 over the course of the next
fiscal year.
improve production material yield by 3% which would be consistent
with historical levels.
maintain sales to achieve $60 million by the end of the year.
Through the first two and a half months of 1999, the Company has achieved a
reduction in labor head count by 24 and sales for the first quarter are
expected to exceed current year budgeted levels by $200,000 and prior year
levels by $1.6 million.
Management believes that the Company has regained its focus on its strategic
objectives and is beginning to recognize the benefits of the Company's efforts.
Management has projected income for the 1999 fiscal year to exceed $1.2
million and that substantial completion of the turnaround process will be
accomplished by the end of the first quarter of 1999.
In connection with obtaining the Company's new credit facility, management
provided projected results of operations, cash flows and financial position
to Foothill. Achieving these results through the turnaround effort will be
critical to the continued financial support by Foothill and the continued
operations of the Company. Management believes that the projected results
are attainable and that the lender's financial support will continue.
18
Year 2000 Issue: The Company is conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the Year
2000 Issue and is developing an implementation plan to resolve the Issue.
Based on the review of the computer systems, management believes the cost of
the remediation effort to make the systems Year 2000 ready is approximately
$675,000 consisting primarily of hardware and software acquisitions. Manage-
ment expects the cost will be incurred primarily in 1999 and financed by the
capital expenditure line-of-credit described in Note 4.
Note 11. Subsequent Event (Unaudited)
During 1999, the Company was not performing financially at the levels
anticipated and budgeted for as described in Note 10. As a result, effective
September 2, 1999, the Company's stockholders sold all of their stock to CRI
Corporation-Sumter (CRI), a wholly-owned subsidiary of Chromcraft Revington,
Inc. Among other things, the stock purchase agreement provides that a
specified portion of the sales proceeds will be held in escrow for potential
claims. The agreement also provides that certain of the selling stockholders
will indemnify the Company and CRI in these potential claims, regardless of
whether the amount held in escrow is sufficient to satisfy any obligation.
19