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EXHIBIT 99(iii)
THE KITCHEN COLLECTION, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1993 AND 1992
TOGETHER WITH AUDITORS' REPORT
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Report of Independent Public Accountants
To the Board of Directors and Stockholder of
The Kitchen Collection, Inc.:
We have audited the accompanying balance sheets of THE KITCHEN COLLECTION, INC.
(a Delaware corporation) as of December 31, 1993 and 1992, and the related
statements of income, changes in stockholder's equity and cash flows for the
years 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 audits.
We conducted our audits 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 audits provide 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 The Kitchen Collection, Inc.
as of December 31, 1993 and 1992, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen & Co.
Columbus, Ohio,
January 28, 1994.
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THE KITCHEN COLLECTION, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
ASSETS 1993 1992
------ ----------- -----------
Current assets:
Cash and cash equivalents $ 10,096 $ 4,166,684
Miscellaneous receivables 78,176 52,429
Accounts receivable - affiliate 4,000,000 -
Inventories 11,358,350 8,471,125
Prepaid expenses and other 1,207,442 881,241
----------- -----------
Total current assets 16,654,064 13,571,479
----------- -----------
Property, plant and equipment:
Land 61,300 61,300
Building and leasehold improvements 754,839 685,296
Furniture and fixtures 4,361,992 3,532,217
----------- -----------
5,178,131 4,278,813
Less: Accumulated depreciation and amortization (2,660,450) (2,073,530)
----------- -----------
Property, plant and equipment, net 2,517,681 2,205,283
Goodwill, net of accumulated amortization 3,961,760 4,076,872
----------- -----------
Total assets $23,133,505 $19,853,634
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 500,000 $ 500,000
Accounts payable and miscellaneous
accrued liabilities 5,176,386 2,965,559
Accounts payable - affiliates 429,621 219,313
Income taxes payable to affiliate 871,540 704,011
Accrued salaries and benefits 918,334 842,426
Other accrued taxes 712,064 595,692
----------- -----------
Total current liabilities 8,607,945 5,827,001
Long-term debt, less current maturities 1,900,000 2,400,000
----------- -----------
Total liabilities 10,507,945 8,227,001
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Stockholder's equity:
Common stock; $.01 par value; 100,000 shares
authorized; 10,500 shares issued and
outstanding 105 105
Additional paid-in capital 4,999,890 4,999,890
Retained earnings 7,625,565 6,626,638
----------- -----------
Total stockholder's equity 12,625,560 11,626,633
----------- -----------
Total liabilities and
stockholder's equity $23,133,505 $19,853,634
=========== ===========
The accompanying notes to financial statements are an integral part of these
balance sheets.
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THE KITCHEN COLLECTION, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992
----------- -----------
Net sales $53,748,681 $45,459,504
Cost of sales 30,618,244 25,747,606
----------- -----------
Gross margin 23,130,437 19,711,898
Selling, general, administrative
and other expenses 18,284,419 15,277,476
----------- -----------
Operating income 4,846,018 4,434,422
Interest expense 102,979 196,919
Goodwill amortization 115,112 115,112
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Income before provision
for income taxes 4,627,927 4,122,391
Provision for income taxes 1,879,000 1,715,000
----------- -----------
Net income $ 2,748,927 $ 2,407,391
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
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THE KITCHEN COLLECTION, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
Additional Total
Number Common Paid-in Retained Shareholder's
of Shares Stock Capital Earnings Equity
--------- -------- ------------ ---------- -------------
Balance, December 31, 1991,
as restated (Note 2) 10,500 $ 105 $4,999,890 $4,519,247 $ 9,519,242
------ ------- ---------- ---------- -----------
Dividend to stockholder -- -- -- (300,000) (300,000)
Net income, as restated -- -- -- 2,407,391 2,407,391
------ ------- ---------- ---------- -----------
Balance, December 31, 1992,
as restated 10,500 105 4,999,890 6,626,638 11,626,633
Net income -- -- -- 2,748,927 2,748,927
Dividend to stockholder -- -- -- (1,750,000) (1,750,000)
------ ------- ---------- ---------- -----------
Balance, December 31, 1993 10,500 $ 105 $4,999,890 $7,625,565 $12,625,560
====== ======= ========== ========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
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THE KITCHEN COLLECTION, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
1993 1992
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,748,927 $2,407,391
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 835,356 791,962
Loss on the sale of assets 8,063 5,597
Increase in miscellaneous receivables (25,747) (25,894)
Increase in inventories (2,887,225) (1,631,167)
Increase in prepaid expenses and other (326,201) (324,123)
Increase in accounts payable and
miscellaneous accrued liabilities 2,210,827 803,001
Increase in accounts payable - affiliates 210,308 66,511
Increase in income taxes payable to affiliate 167,529 47,481
Increase in accrued salaries and benefits 75,908 208,002
Increase in accrued taxes other than income 116,372 204,687
---------- ----------
Net cash provided by operating activities 3,134,117 2,553,448
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (1,049,832) (645,603)
Proceeds from sale of assets 9,127 35,205
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Net cash used in investing activities (1,040,705) (610,398)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (500,000) (400,000)
Dividend to stockholder (1,750,000) (300,000)
Loan to affiliate (4,000,000) -
---------- ----------
Cash used in financing activities (6,250,000) (700,000)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (4,156,588) 1,243,050
CASH AND CASH
EQUIVALENTS, beginning of the year 4,166,684 2,923,634
---------- ----------
CASH AND CASH EQUIVALENTS, end of the year $ 10,096 $4,166,684
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 138,441 $ 358,292
Income taxes $1,807,711 $1,634,697
The accompanying notes to financial statements are an integral part of these
statements.
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THE KITCHEN COLLECTION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1992
(1) ORGANIZATION
The Kitchen Collection, Inc. (the Company) is a specialty retailer of
kitchenware, tableware, small electrical appliances and related
accessories. The Company operates a chain of 104 retail and factory
outlet stores selling a complete line of products from Hamilton Beach
Proctor Silex, Inc. (HBPS), WearEver and Anchor Hocking Consumer
Glassware and Plastics (AH), as well as, a variety of products from other
vendors. These products include first quality items, factory seconds and
discontinued items. The Company has multi-year purchase and sales
agreements with WearEver, HBPS and AH, each of which have renewable
options. The Company is a wholly-owned subsidiary of NACCO Industries,
Inc. (NII).
(2) SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
retail inventory method.
BUILDING, LEASEHOLD IMPROVEMENTS, FURNITURE AND FIXTURES
Building, leasehold improvements, furniture and fixtures are stated at
cost. Expenditures for maintenance and repairs are charged to operations
as incurred. For financial reporting purposes, depreciation and
amortization is provided using the straight-line method based upon the
estimated useful lives of the related assets, as follows:
Building and leasehold improvements 5-20 years
Furniture and fixtures 5 years
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GOODWILL
Goodwill associated with the purchase of the Company by NII has been
capitalized and is being amortized over forty years on a straight-line
basis. Accumulated amortization was $642,710 and $527,599 at December
31, 1993 and 1992, respectively, with related amortization expense of
$115,112 for the years ended December 31, 1993 and 1992.
ACCOUNTING CHANGE FOR INCOME TAXES
The Company has adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109) effective January 1,
1993, and has elected to retroactively apply its provisions to January
1, 1989, as permitted by this standard. Accordingly, retained earnings
has been adjusted as of December 31, 1991 to reflect the cumulative
impact of applying this Standard. The $76,000 adjustment to retained
earnings consists of the cumulative effect of this change in the
accounting method as of December 31, 1991.
The financial statements for the year ended December 31, 1992 have been
restated for the effects of SFAS 109 resulting in the following impact
on net income:
Net income as previously reported $2,405,391
Adjustment for the effect of adoption of
SFAS 109 2,000
----------
Net income as restated $2,407,391
==========
Refer to Note 5 "Income Taxes" for additional information.
RECLASSIFICATIONS
Reclassifications have been made to the 1992 statements to conform with
the 1993 presentation.
(3) LINE-OF-CREDIT AGREEMENT
In March, 1990, the Company entered into a line-of-credit agreement
with a commercial bank for $2,500,000 at .5% over the bank's prime
rate or 2% over LIBOR. At May 1, 1992, the rates were reduced to the
bank's prime rate or 1.50% over LIBOR due to the Company achieving
certain performance tests.
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The line-of-credit is unsecured. The Company had no funds drawn against
the available balance at December 31, 1993 or 1992. The credit agreement
expires on May 31, 1994. The Company has annually renewed this agreement
in the past and expects to again renew it under similar arrangements
prior to its expiration.
(4) LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
1993 1992
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Note payable to bank at 1.5% over
LIBOR (5.0% and 5.5625% at
December 31, 1993 and 1992,
respectively) $2,400,000 $2,900,000
Less: current maturities (500,000) (500,000)
---------- ----------
$1,900,000 $2,400,000
========== ==========
The note payable to bank is unsecured. It is payable in annual installments
due each January, with interest due as specified until maturity on January
15, 1997.
The note contains restrictive covenants regarding maintenance of minimum
tangible net worth, cash flow coverage, as well as, limits on dividends and
capital expenditures. The Company was in compliance with all covenants as
of December 31, 1993 and 1992.
Aggregate maturities of the note are as follows:
1994 $ 500,000
1995 500,000
1996 700,000
1997 700,000
----------
$2,400,000
==========
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(5) INCOME TAXES
As discussed in Note 2, the Company has adopted SFAS 109 effective
January 1, 1993 and has retroactively applied its provisions to January
1, 1989. SFAS 109 requires, among other things, the measurement of
deferred tax assets or liabilities based on the difference between the
financial statement and income tax bases of assets and liabilities using
the enacted marginal tax rate. Deferred income tax expense or benefit
is based on the changes in the assets or liabilities from period to
period. The prior method of accounting for income taxes measured
deferred income tax expense or benefit based on timing differences
between the recording of income and expenses for financial reporting
purposes and for purposes of filing federal income tax returns at income
tax rates in effect when the differences arose.
The provision for income taxes consists of the following:
1993 1992
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Currently payable:
Federal $1,538,000 $1,447,000
State and local 347,000 316,000
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1,885,000 1,763,000
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Deferred:
Federal (1,000) (31,000)
State and local (5,000) (17,000)
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(6,000) (48,000)
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Total provision $1,879,000 $1,715,000
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The components of the net deferred income tax benefit are as follows:
1993 1992
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Store closing reserve $ 1,600 $ (3,600)
Uniform capitalization of inventory (26,000) (12,600)
Tax over (under) book depreciation 4,700 (14,000)
Vacation pay (14,700) (11,000)
State income taxes 19,300 (41,200)
Other 9,100 34,400
-------- --------
Total deferred income tax benefit, net $ (6,000) $(48,000)
======== ========
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Reconciliation of the Federal statutory and effective income tax rates follows:
1993 1992
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Federal statutory rate 35.0% 34.0%
Amortization of goodwill 0.8 0.9
State and local income tax, net of
Federal income tax effect 4.8 4.8
Other -- 1.9
----- -----
Effective tax rate 40.6% 41.6%
===== =====
A summary of the components of the net deferred tax asset balances included in
the accompanying balance sheet are as follows:
1993 1992
-------- --------
Inventories $158,000 $ 118,000
Accrued expenses and reserves 35,000 44,000
State income taxes 21,000 40,000
Depreciation (173,000) (166,000)
--------- ---------
Deferred tax asset, net $ 41,000 $ 36,000
========= =========
(6) RELATED PARTY TRANSACTIONS
Net purchases of inventories from HBPS during the years ended December
31, 1993 and 1992 were $5,005,846 and $4,062,620, respectively. HBPS
is 80% owned by NII. At December 31, 1993 and 1992, the Company owed
HBPS $408,621 and $212,313, respectively, for these purchases.
The Company incurred $26,000 and $32,000 for miscellaneous services
provided by NII for the years ended December 31, 1993 and 1992,
respectively. The Company had payables for such services at December
31, 1993 and 1992 of $21,000 and $7,000, respectively.
The Company paid dividends to NII during 1993 and 1992 of $1,750,000 and
$300,000, respectively.
As of December 31, 1993, the Company has a $4,000,000 receivable due
from NII. The Company recorded related interest income of $8,972
during 1993.
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(7) LEASES
The Company leases retail stores, a warehouse and equipment under
noncancellable operating leases which expire at various dates through
2003. Future minimum lease payments are as follows:
1994 $ 3,885,000
1995 3,526,000
1996 3,063,000
1997 2,502,000
1998 1,793,000
Thereafter 2,142,000
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Total minimum payments $16,911,000
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The Company has leases with percentage of sales clauses in all but two
of its store locations. Percentage of sales rent expense amounted to
$395,960 for the year ended December 31, 1993 and $358,373 for the year
ended December 31, 1992. The Company's total rent expense for the
years ended December 31, 1993 and 1992 was $5,191,258 and $4,113,208,
respectively.
(8) RETIREMENT INCOME PLAN
In 1987, the Company established a defined contribution savings plan for
employees who have completed one year of service and are at least 21
years of age. Employees can elect to defer and contribute a portion of
their salary, following the guidelines established in the plan. The
Company makes matching contributions of 50% of the employee's
contribution. In addition, the Company can make an annual profit
sharing contribution at its discretion. The matching contribution,
limited to 3% of the employee's compensation, and the Company's profit
sharing contribution amounted to $291,205 and $223,279 for the years
ended December 31, 1993 and 1992, respectively.
(9) SUBSEQUENT EVENTS
On January 5, 1994, the Company loaned an additional $1,000,000 to NII.
As of January 28, 1994, NII has made total repayments of $3,000,000 to
the Company.