1
Exhibit 99(ii)
HAMILTON BEACH/PROCTOR-SILEX, INC.,
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
2
HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995 2
Consolidated Statements of Operations for the Years Ended December 31, 1996 and 1995 3
Consolidated Statements of Changes in Stockholder's Equity for the Years Ended December
31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements as of December 31, 1996 and 1995 6 - 17
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Hamilton Beach/Proctor-Silex, Inc.:
We have audited the accompanying consolidated balance sheets of Hamilton
Beach/Proctor-Silex, Inc. (a Delaware corporation), and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations, 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 an 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 Hamilton
Beach/Proctor-Silex, Inc., and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Arthur Andersen, LLP
Richmond, Virginia,
January 31, 1997
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HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
ASSETS
1996 1995
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 359 $ 308
Accounts receivable, net 60,054 70,193
Inventories, net 48,326 58,727
Deferred income taxes 2,368 2,085
Prepaid expenses and other 6,721 6,776
--------- ---------
Total current assets 117,828 138,089
PROPERTY, PLANT, AND EQUIPMENT, NET 52,592 51,039
DEFERRED CHARGES AND INTANGIBLE ASSETS, NET 96,679 95,750
DEFERRED INCOME TAXES 4,729 3,122
OTHER ASSETS 14 27
--------- ---------
Total assets $ 271,842 $ 288,027
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 9,211 $ 17,226
Accounts payable 21,388 21,616
Other current liabilities 33,253 27,744
--------- ---------
Total current liabilities 63,852 66,586
--------- ---------
OTHER LIABILITIES 9,695 13,565
--------- ---------
LONG-TERM OBLIGATIONS:
Revolving credit agreements 80,000 65,000
Capital leases 449 542
--------- ---------
Total long-term obligations 80,449 65,542
--------- ---------
STOCKHOLDER'S EQUITY:
Common stock and paid-in capital, 100 shares authorized, issued, and outstanding at
$0.01 par value 155,609 149,268
Retained deficit (35,739) (2,816)
Minimum pension liability (393) (2,521)
Cumulative translation adjustment (1,631) (1,597)
--------- ---------
Total stockholder's equity 117,846 142,334
--------- ---------
Total liabilities and stockholder's equity $ 271,842 $ 288,027
========= =========
The accompanying notes are an integral part of these consolidated balance
sheets.
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HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
1996 1995
-------- --------
NET SALES $395,046 $381,356
COST OF SALES 326,146 318,968
-------- --------
Gross profit 68,900 62,388
SELLING, ADMINISTRATIVE, AND GENERAL EXPENSES 39,502 34,293
-------- --------
Operating profit 29,398 28,095
OTHER EXPENSE:
Interest 5,959 6,573
Amortization 5,715 3,683
Other, net 345 813
-------- --------
Total other expense 12,019 11,069
-------- --------
Income before income taxes 17,379 17,026
PROVISION FOR INCOME TAXES 6,696 5,274
-------- --------
Net income $10,683 $11,752
======== ========
The accompanying notes are an integral part of these consolidated statements.
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HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in Thousands, Other Than Par Value)
COMMON STOCK COMMON
-------------------- STOCK AND MINIMUM CUMULATIVE TOTAL
SHARES PAR PAID-IN RETAINED PENSION TRANSLATION STOCKHOLDER'S
OUTSTANDING VALUE CAPITAL DEFICIT LIABILITY ADJUSTMENT EQUITY
------------- ----- --------- -------- --------- ----------- -------------
BALANCES, December 31, 1994 100 $1 $149,268 $(14,568) $(2,357) $(1,974) $130,369
Minimum pension liability - - - - (164) - (164)
Net income - - - 11,752 - - 11,752
Translation adjustment - - - - - 377 377
--- -- -------- -------- ------- ------- --------
BALANCES, December 31, 1995 100 1 149,268 (2,816) (2,521) (1,597) 142,334
Minimum pension liability - - - - 2,128 - 2,128
Dividend paid for
acquisition of Glen
Dimplex shares - - 6,341 (33,606) - - (27,265)
Dividend - - - (10,000) - - (10,000)
Net income - - - 10,683 - - 10,683
Translation adjustment - - - - - (34) (34)
--- -- -------- -------- ------- ------- --------
BALANCES, December 31, 1996 100 $1 $155,609 $(35,739) $ (393) $(1,631) $117,846
=== == ======== ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated statements.
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HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,683 $11,752
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation 13,263 12,156
Loss on disposal of fixed assets 224 599
Amortization 5,715 3,683
Deferred income taxes (3,226) 38
Changes in assets and liabilities-
Decrease (increase) in:
Accounts receivable, net 10,139 6,086
Inventories, net 10,401 (9,670)
Prepaid expenses and other 55 (665)
Deferred charges and intangible assets (315) (2,067)
(Decrease) increase in:
Accounts payable (228) (10,219)
Other liabilities 5,118 (2,569)
------- -------
Net cash provided by operating activities 51,829 9,124
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Glen Dimplex shares (33,606) -
Capital expenditures (15,129) (9,549)
Proceeds from sale of fixed assets 41 115
Acquisition of supplier - (1,508)
Other 58 -
------- -------
Net cash used in investing activities (48,636) (10,942)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term obligations (59,937) (42,741)
Borrowings under long-term obligations 66,829 42,183
Dividend paid (10,000) -
------- -------
Net cash used in financing activities (3,108) (558)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (34) 377
------- -------
Net increase (decrease) in cash and cash equivalents 51 (1,999)
CASH AND CASH EQUIVALENTS, beginning of year 308 2,307
------- -------
CASH AND CASH EQUIVALENTS, end of year $ 359 $ 308
======= =======
The accompanying notes are an integral part of these consolidated statements.
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HAMILTON BEACH/PROCTOR-SILEX, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
(Dollars in Thousands)
1. ORGANIZATION AND BUSINESS:
Hamilton Beach/Proctor-Silex, Inc., and its wholly owned subsidiaries in Canada
and Mexico (the "Company"), design, manufacture, and sell small consumer
electric appliances. The principal markets for the Company's products are the
United States and Canada. The Company's products are sold primarily to retailers
and distributors. The Company is a wholly owned subsidiary of HB/PS Holdings,
Inc. ("Holdings"). Through October 17, 1996, Holdings was owned 80 percent by
NACCO Industries, Inc. ("NACCO"), and 20 percent by Glen Dimplex. Effective
October 18, 1996, Holdings became a wholly owned subsidiary of NACCO (see Note
3).
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All intercompany transactions and balances have
been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and highly liquid investments
with initial maturities of three months or less.
INVENTORIES, NET
Inventories are stated at the lower of cost or market. Cost has been determined
by the last-in, first-out ("LIFO") method for substantially all inventories
accounted for in the United States and under the first-in, first-out method for
all other inventories.
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PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment is stated at cost. All property, plant, and
equipment is depreciated on a straight-line basis over estimated useful lives of
up to 40 years for buildings and 4 to 6 years for machinery and equipment.
Assets recorded under capital leases and leasehold improvements are amortized
over the lesser of their estimated useful lives or remaining lease terms on a
straight-line basis.
GOODWILL
Goodwill is being amortized on a straight-line basis over periods up to 40
years. The Company continually evaluates whether events and circumstances have
occurred subsequent to its acquisitions that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the Company's
undiscounted cash flow over the remaining life of the goodwill in measuring
whether the goodwill is recoverable.
PRODUCT DEVELOPMENT COSTS
Costs associated with the development of new products and changes to existing
products are charged to operations as incurred. These costs amounted to $3,690
and $3,304 in 1996 and 1995, respectively.
ADVERTISING COSTS
Promotional or advertising costs associated with customer support programs are
accrued when the related revenues are recognized. All other costs incurred in
producing media advertising are expensed at the time the advertising takes
place. Promotional and advertising costs charged to expense were $26,270 and
$26,465 in 1996 and 1995, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated at
current exchange rates, while income and expense items are translated at average
rates for the period. Translation gains and losses associated with the Company's
Canadian subsidiary are reported as a component of stockholder's equity.
Translation gains and losses related to the Company's subsidiaries located in
Mexico are reported in the accompanying consolidated statements of operations.
PRODUCT LIABILITY
The Company is insured for product liability claims for amounts in excess of
established self-insured retention limits. Costs estimated to be incurred with
respect to product liability claims are accrued based on experience factors.
- -7-
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SELF-INSURANCE
The Company maintains a self-insurance program for health claims and a high
deductible insurance program for workers' compensation claims of all covered
employees. Losses are accrued based on the Company's estimate of future costs
that will be incurred for employee losses incurred prior to the balance sheet
date.
FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, accounts receivable, payables,
debt, interest rate agreements, and foreign currency contracts. The estimated
fair values of the Company's financial instruments at December 31, 1996 and
1995, approximate their carrying value as reflected in the consolidated balance
sheets (see Note 10). The estimated fair values of financial instruments have
been determined through information obtained from quoted market sources and
management estimates. The Company does not hold or issue financial instruments
or derivative financial instruments for trading purposes.
The Company enters into forward foreign exchange contracts in order to
hedge certain foreign currency commitments. Gains and losses from these
contracts are deferred and are recognized as part of the cost of the underlying
transaction being hedged.
The Company also enters into interest rate swap agreements with various terms
and maturity dates. The differential between the floating interest rate and the
fixed interest rate that is to be paid or received is recognized in interest
expense on a current basis.
3. ACQUISITION OF SHAREHOLDER INTEREST:
On October 18, 1996, Holdings, through its parent company, Housewares Holding
Company ("Housewares"), purchased Glen Dimplex's 20 percent ownership interest
in Holdings for $33,606. The purchase was established based upon provisions
included in the Shareholder Agreement dated October 11, 1990, among Housewares,
Holdings, and Hamilton Beach, Inc. The purchase of the Glen Dimplex shares was
effected via a dividend by the Company to Holdings in the amount of the purchase
price. The effect of this transaction on the financial statements of the Company
was an increase to retained deficit of $33,606, and an increase to goodwill and
additional paid-in capital of $6,341. The addition to goodwill is being
amortized on a straight-line basis over the remaining life of the goodwill
acquired upon the formation of the Company.
4. ACQUISITION:
On November 30, 1995, the Company acquired all the outstanding stock of
Plasticos Sotec, S.A de C.V. ("Sotec"), a Mexican supplier of molded plastic
parts, under the purchase method of accounting. The Company paid net cash of
$1,508 and assumed other liabilities of $350 for the stock and certain assets of
Sotec, plus acquisition costs. Prior to the acquisition, the Company paid $2,650
to terminate the supplier manufacturing arrangement. The goodwill associated
with the acquisition of $2,129 and the amount paid to terminate the supplier
manufacturing arrangement are being amortized over a 25 month period.
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5. ACCOUNTS RECEIVABLE, NET:
At December 31, accounts receivable consist of the following.
1996 1995
------- -------
Accounts receivable $68,479 $77,716
Less- Allowance for returns, discounts, and adjustments (7,498) (6,878)
Allowance for doubtful accounts (927) (645)
------- -------
Accounts receivable, net $60,054 $70,193
======= =======
6. INVENTORIES, NET:
At December 31, inventories consist of the following.
1996 1995
------- -------
Raw materials $10,915 $12,458
Work in process 3,061 3,196
Finished goods 34,078 43,323
LIFO allowance 272 (250)
------- -------
Inventories, net $48,326 $58,727
======= =======
As a result of changes in prices, and liquidation of certain LIFO inventories in
1996, operating profit increased $522 and decreased $141 for 1996 and 1995,
respectively. The cost of inventories stated under the LIFO method was 91
percent of the value of total inventories at December 31, 1996 and 1995.
7. PROPERTY, PLANT, AND EQUIPMENT, NET:
At December 31, property, plant, and equipment (including capital leases)
consists of the following.
1996 1995
--------- ---------
Land, buildings, and improvements $ 17,971 $ 17,862
Machinery and equipment 97,746 89,344
Construction work in process 9,542 5,231
--------- ---------
125,259 112,437
Less- Accumulated depreciation and amortization (72,667) (61,398)
--------- ---------
Property, plant, and equipment, net $ 52,592 $ 51,039
========= =========
8. DEFERRED CHARGES AND INTANGIBLE ASSETS, NET:
Goodwill amounted to $96,460 and $93,649 at December 31, 1996 and 1995,
respectively, net of accumulated amortization, and is being amortized over
periods up to 40 years on a straight-line basis. Goodwill amortization expense
amounted to $3,844 and $2,816 for 1996 and 1995, respectively. Patents,
trademarks, and other at December 31, 1996 and 1995, amounted to $25 and $1,323,
respectively, net of accumulated amortization, and are being amortized on a
straight-line basis over their remaining lives. Total amortization for 1996 and
1995 amounted to $1,287 and $284, respectively. Deferred financing costs at
December 31, 1996 and 1995, amounted to $194 and $778, respectively, net of
accumulated amortization, and are being amortized on a straight-line basis over
the life of the amended and restated credit agreement (see Note 9). Amortization
expense related to deferred financing costs for 1996 and 1995 was $584 and $583,
respectively.
9. REVOLVING CREDIT AGREEMENTS:
The Company has a bank credit facility (the "Agreement"), which includes a
revolving credit line and a letter-of-credit facility of up to $160,000 through
May 1999. In April 1995, the Agreement was amended to provide a lower interest
rate and facility fee if the Company achieves certain interest coverage ratios
and to allow for interest rates to be quoted under a competitive bid option. In
October 1996, the Agreement was amended to accommodate the dividend for the
purchase of the Glen Dimplex shares (see Note 3). This amendment increased the
amount available under the Agreement by $25,000 and modified certain required
ratios. The maturity date of the Agreement may, upon mutual consent, be extended
annually for an additional year. As amended, the Agreement allows borrowings to
be made at either (i) the lender's prime rate plus 0.25 percent or (ii) LIBOR
plus 0.75 percent. Additionally, a facility fee of 0.50 percent per annum times
the committed amount of the credit facility is paid to the lender. The borrowing
margins and facility fee rates are subject to reductions based upon the Company
achieving certain predetermined interest coverage ratios. During 1996, the
Company received an average reduction of 0.79 basis points on the combined
borrowing margin plus a facility fee resulting in an average margin over LIBOR
paid of 0.29 percent and an average facility fee paid of 0.17 percent.
- -9-
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The Agreement is secured by substantially all the Company's assets. The
Agreement includes certain covenants requiring, among other things, maintenance
of certain levels of (i) net worth, (ii) debt to total capital, and (iii)
interest coverage. At December 31, 1996, the Company was in compliance with all
the financial covenants of the Agreement. The Company also has in place
uncommitted credit lines, which are secured through and subject to the
Agreement, and which allow for borrowings of up to $20,000 on a daily basis. In
addition, the Company has an unsecured, uncommitted credit line of $5,000.
During 1996 and 1995, total average borrowings outstanding under all debt and
credit agreements were $94,762 and $99,724, at a weighted-average interest rate
of 6.12 percent and 6.58 percent, respectively. At December 31, 1996 and 1995,
the weighted average interest rate on all borrowings outstanding was 6.11
percent and 6.23 percent, respectively. In addition, at December 31, 1996 and
1995, outstanding obligations under letters of credit were $4,797 and $4,312,
respectively.
At the option of Housewares, a wholly owned subsidiary of NACCO, the Company
may, subject to certain terms and conditions of the Agreement, borrow up to
$35,000 from Housewares. No borrowings were outstanding during 1996 or 1995
under this agreement.
10. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS:
INTEREST RATE DERIVATIVES
The primary objective of interest rate risk management is to minimize the impact
of interest rate fluctuations on the Company's cash flow and financial results.
The Company has entered into certain interest rate swap agreements to swap
floating rate for fixed rate interest payments. At December 31, 1996, the
notional amount on interest rate swap agreements in effect and expiring on
various dates from March 1999 through November 1999 was $75 million, with the
average variable rate received and the average fixed rate paid during 1996 being
5.96 percent and 6.22 percent, respectively. At December 31, 1996, the aggregate
fair market value of the Company's interest rate swap agreements was $342, based
on quoted market prices received from the Company's swap agreement counter
parties.
FOREIGN CURRENCY DERIVATIVES
The Company enters into forward foreign exchange contracts for purposes of
hedging its exposure to foreign currency exchange rate fluctuations. These
contracts hedge primarily firm commitments and relate to the Canadian dollar. At
December 31, 1996, the Company had foreign currency contracts totaling $2,700,
with various expiration dates through March 10, 1997. The amount of deferred
gain associated with these contracts was not material. All interest rate and
foreign currency derivative agreements are with major commercial banks;
therefore, the risk of credit loss from nonperformance by the banks is minimal.
The Company evaluates its exposure to credit loss on an ongoing basis.
11. CONCENTRATION OF CREDIT RISK:
The Company sells its products to retailers and distributors located primarily
in North America and, as a result, maintains significant receivable balances
with its major customers. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. In addition, the Company maintains allowances for potential credit
losses. The Company's five largest customers accounted for approximately 48.6
percent and 46.4 percent of net sales in 1996 and 1995, respectively, and
approximately 48.4 percent and 47.0 percent of net accounts receivable at
December 31, 1996 and 1995, respectively.
12. LEASES:
The Company leases certain facilities under noncancelable leases expiring at
various dates through 2021. Plant and equipment under capital leases has been
recorded as property, plant, and equipment in the consolidated balance sheets,
and the related amortization is included with depreciation expense. At December
31, property, plant, and equipment includes the following amounts relating to
capital leases.
1996 1995
------ ------
Plant and equipment $9,303 $9,323
Less- Accumulated amortization (4,282) (3,829)
------ ------
$5,021 $5,494
====== ======
Future minimum lease payments for capital leases as of December 31, 1996, are as
follows: 1997 - $143; 1998- $91; 1999 - $79; 2000 - $74; 2001 - $72; and
thereafter - $688, and have a net present value of $587.
Future minimum lease payments for operating leases are as follows: 1997 -
$3,751; 1998 - $3,424; 1999 - $2,673; 2000 - $1,978, 2001 - $1,781; and
thereafter - $2,155.
Rental expense for operating leases amounted to $5,593 and $5,140 for
1996 and 1995, respectively.
13. INCOME TAXES:
The Company is included in the consolidated Federal income tax return filed by
NACCO. The Company's tax sharing agreement with NACCO provides that Federal
income taxes are computed by the Company on a separate return basis,
- -10-
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except that net operating loss and tax credit carryovers that benefit the
consolidated tax return are advanced to the Company and are repaid as utilized
on a separate return basis. To the extent that these carryovers are not used on
a separate return basis, the Company is required, under conditions pursuant to
the tax sharing agreement, to refund to NACCO the balance of carryovers advanced
and not used by the Company.
The provision for income taxes consists of the following amounts.
1996 1995
---- ----
Current:
Federal $8,208 $5,287
State 1,143 644
Foreign 538 470
------ ------
Total current provision 9,889 6,401
------ ------
Deferred:
Federal (2,663) (1,551)
State (250) 308
Foreign (280) 116
------ ------
Total deferred benefit (3,193) (1,127)
------ ------
Total provision for income taxes $6,696 $5,274
====== ======
A reconciliation of Federal statutory to effective income tax provision
follows.
1996 1995
---- ----
Statutory taxes at 35% $6,083 $5,959
Effect of:
State taxes 580 619
Foreign taxes 131 182
Acquisition accounting adjustments 1,028 964
Foreign tax credit (615) (2,784)
Other (511) 334
------ ------
Provision for income taxes $6,696 $5,274
====== ======
Effective rate 38.5% 31.0%
====== ======
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The foreign tax credit of $615 realized in 1996 resulted from repatriation of
virtually all prior earnings of a Mexican subsidiary, and additional foreign tax
credit realized from the 1995 repatriation of earnings of the Canadian
subsidiary. Such benefit is not expected to recur in 1997. The foreign tax
credit of $2,784 realized in 1995 resulted from repatriation of virtually all
prior earnings of the Canadian subsidiary.
A summary of the deferred tax assets and (liabilities) that comprise the net
deferred tax balances in the accompanying consolidated balance sheets resulting
from differences in the book and tax bases of assets and liabilities is as
follows.
1996 1995
---- ----
Deferred tax assets:
Employee benefits $ 2,848 $ 3,065
Plant restructuring reserve 517 530
Environmental reserve 2,195 2,288
Product liability reserve 1,906 1,786
Net operating loss and tax credit carryovers 5,289 6,041
Other 344 213
-------- --------
Total deferred tax assets 13,099 13,923
-------- --------
Deferred tax liabilities:
Advertising, sales, and inventory related reserves (2,428) (3,120)
Accelerated depreciation (2,462) (4,007)
Other (1,112) (1,589)
-------- --------
Total deferred tax liabilities (6,002) (8,716)
-------- --------
Net deferred tax assets $ 7,097 $ 5,207
======== ========
As of December 31, 1996, the Company had Federal net operating loss carryovers
of approximately $7,236, related to Hamilton Beach, Inc., and foreign tax credit
carryovers of $2,705. For Federal tax purposes, the utilization of acquired net
operating loss carryovers is limited to $1,953 on an annual basis, with any
unused limitation available for carryover to subsequent years. The Company
utilized $1,953 of the net operating loss carryovers related to Hamilton Beach,
Inc., in 1996. Loss carryovers are scheduled to expire in the years 2002 and
2003, and foreign tax credit carryovers are scheduled to expire in the years
1997 to 2000. As of December 31, 1996, the Company has recorded a deferred tax
asset of $5,238 associated with these carryforwards. Realization of the asset is
dependent on generating sufficient taxable and foreign source income prior to
expiration of the carryforwards. The amount of the deferred tax asset considered
realizable could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced. Although realization is not
assured, the Company fully expects to realize its deferred tax assets. As a
result, the Company has no valuation allowances as of December 31, 1996 and
1995.
No provision has been made for Federal income taxes on undistributed earnings of
foreign subsidiaries of approximately $945 as of December 31, 1996, as any
future remittances are expected to be substantially tax free.
- -12-
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14. RETIREMENT BENEFIT PLANS:
The Company sponsors a defined benefit plan, the Hamilton Beach/Proctor-Silex,
Inc., Profit Sharing Retirement Plan (the "Plan"). All full-time hourly and
salaried U.S. employees are eligible to participate in the Plan. The Plan
provides that participants accrue benefits annually based on age and annual
earnings. Upon retirement, participants receive their vested account balances
under the Plan plus all vested accrued benefits earned under prior frozen
benefit plans. Benefits will be paid upon normal retirement at age 65 or early
retirement after age 55. Participants become fully vested after five years of
service.
The Company's funding policy is to contribute each year an amount that satisfies
the minimum required contribution but does not exceed the maximum tax deductible
contribution. Also, the Company may make additional contributions to the Plan,
dependent upon the Company achieving certain profit and performance objectives.
In 1996 and 1995, the Company accrued $413 and $433, respectively, representing
the estimated amount of profit sharing to be contributed to the Plan in the
subsequent year. The Company contributed $2,693 and $1,658 to the Plan for the
plan years ended December 31, 1996 and 1995, respectively. Assets held by the
Plan consist mainly of common stocks, corporate and government bonds, and cash
and cash equivalents.
Effective December 31, 1996, the Company froze benefit accruals under the Plan
and established a new participant retirement account under the HBPS Employees
Retirement Savings Plan (401k) effective January 1, 1997. Accordingly, all
benefits accrued and obligations recorded under the Plan were frozen as of
December 31, 1996. The details of the components of net pension expense for the
years ended December 31, 1996 and 1995, are as follows.
1996 1995
------ ------
Service cost $1,373 $1,179
Interest cost on projected benefit obligation 2,595 2,597
Actual return on assets (2,299) (5,373)
Net amortization and deferral (287) 3,036
------ ------
Net pension expense $1,382 $1,439
====== ======
Actuarial factors used in accounting for the Plan as of December 31, 1996 and
1995, are as follows.
1996 1995
------ ------
Weighted-average discount rate 8.0% 7.5%
Long-term rate of return on assets 9.0% 9.0%
Rate of increase in compensation levels:
Salaried 5.0% 4.5%
Hourly 5.0% 4.5%
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The funded status of the Plan and amounts recognized in the Company's
consolidated balance sheets as of December 31, 1996 and 1995, are as follows.
1996 1995
-------- --------
Actuarial present value of benefit obligation:
Vested accumulated benefit obligation $32,015 $33,329
Nonvested accumulated benefit obligation 1,823 1,346
-------- --------
Total accumulated benefit obligation 33,838 34,675
Value of future salary projections 145 976
-------- --------
Total projected benefit obligation 33,983 35,651
Fair value of plan assets 33,059 29,570
-------- --------
Projected benefit obligation in excess of plan assets (924) (6,081)
Unrecognized net transition asset (6) (6)
Unrecognized net loss 539 4,882
Unrecognized prior service cost 23 10
Additional minimum liability (652) (4,116)
-------- --------
Pension liability recognized in consolidated balance sheets at December
31, 1996 and 1995 $ (1,020) $ (5,311)
======== ========
Statement of Financial Accounting Standards No. 87 ("SFAS 87"), "Employers'
Accounting for Pensions", requires the Company to recognize a minimum pension
liability equal to the unfunded accumulated benefit obligation ("ABO"). At
December 31, 1996 and 1995, the cumulative unfunded ABO was $1,020 and $5,311,
respectively. The Company recorded an adjustment that recognized an additional
minimum liability equal to the unfunded ABO. In accordance with SFAS 87, the
portion of the unfunded ABO in excess of unrecognized prior service cost was
charged directly to stockholder's equity and is separately presented in the
consolidated statements of changes in stockholder's equity. The Company also
sponsors the HBPS Employees Retirement Savings Plan (401k), a defined
contribution retirement savings plan covering substantially all of its full-time
United States employees. Under the plan, employees may defer up to 15 percent of
pay on a pre-tax basis. Effective July 1, 1995, the Company began matching
employee contributions to the plan at the rate of 50 percent, up to the first 2
percent of employee contributions. Effective January 1, 1997, the employer match
was increased to match 50 percent of the first 4 percent of employee
contributions. Employee pre-tax and employer matching contributions are
immediately 100 percent vested.
Effective January 1, 1997, the Company added a profit sharing feature to the
plan. Under the plan, participants receive an automatic contribution based on
age, ranging between 2 percent and 6.33 percent of annual pay. The Company may
also make additional profit sharing contributions to participant accounts
dependent upon the Company's achievement of certain profit and performance
goals. Profit sharing contributions vest on a 20 percent, five year graded
schedule.
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The Company maintains a postretirement health care plan for all retirees who
retired prior to October 1, 1992. In addition, the Company provides life
insurance benefits to all retirees who retired prior to October 1, 1992,
assuming they reached certain age and service requirements while working for the
Company. Under the Company's current policy, plan benefits are funded at the
time they are due to participants. The plan has no assets.
15. RELATED-PARTY TRANSACTIONS:
The Company sells merchandise to The Kitchen Collection, Inc. ("Kitchen
Collection"), a wholly owned subsidiary of Housewares. The Company's sales to
Kitchen Collection were $6,201 and $5,030 for 1996 and 1995, respectively.
Accounts receivable due from Kitchen Collection at December 31, 1996 and 1995,
amounted to $146 and $361, respectively, and are included in accounts
receivable.
NACCO incurs certain administrative and other expenses directly related
to the operation of the Company. These expenses are reimbursed to NACCO. The
Company expensed and paid $743 and $627 of these administrative expenses to
NACCO in 1996 and 1995, respectively. The related payable to NACCO was $48 and
$73 at December 31, 1996 and 1995, respectively.
16. CONTINGENCIES:
Various legal proceedings and claims have been or may be asserted against the
Company relating to the conduct of its business, including product liability and
environmental claims. These proceedings and claims are incidental to the
Company's ordinary course of business. Management believes that it has
meritorious defenses and will vigorously defend itself in these actions. Any
costs that management estimates may be paid as a result of these proceedings or
claims are accrued when the liability is considered probable and the amount can
be reasonably estimated. Although the ultimate disposition of these proceedings
and claims is not presently determinable, management believes, after
consultation with its general counsel, the likelihood that material costs will
be incurred in excess of accruals already recognized is remote.
17. INDUSTRY SEGMENT AND FOREIGN OPERATIONS:
The Company designs, manufactures, and sells small consumer electric appliances.
Net sales to one major customer totaled 27.5 percent in 1996 and 22.5 percent in
1995. The Company has operations in the United States, Mexico, and Canada.
Products are transferred between these geographic areas at the market value of
the products. Identifiable assets are those assets identified with the
operations in each geographic area at year-end. All deferred charges and
intangible assets are attributed to the United States. Eliminations include
amounts for intercompany sales, intercompany profits in inventory, and
intercompany investments.
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The following table presents sales, operating profit, and other financial
information by geographic area for 1996 and 1995.
UNITED
STATES CANADA MEXICO ELIMINATIONS CONSOLIDATED
------ ------ ------ ------------ ------------
1996:
Net sales $376,982 $38,349 $14,389 $(34,674) $395,046
Sales and transfers between
geographic areas 21,220 - 13,454 (34,674) -
Operating profit 28,998 424 120 (144) 29,398
Depreciation 9,351 69 3,843 - 13,263
Identifiable assets 252,438 11,927 16,347 (8,870) 271,842
Capital expenditures 6,341 180 8,608 - 15,129
1995:
Net sales $361,749 $41,795 $ 9,508 $(31,696) $381,356
Sales and transfers between
geographic areas 22,608 - 9,088 (31,696) -
Operating profit 27,195 1,230 167 (497) 28,095
Depreciation 8,932 32 3,192 - 12,156
Identifiable assets 270,333 13,625 7,266 (3,197) 288,027
Capital expenditures 7,732 109 1,708 - 9,549
18. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments during 1996 and 1995 included interest of $5,588 and $6,762 and
income taxes of $4,656 and $11,771, respectively.
19. RECENTLY ISSUED ACCOUNTING STANDARDS:
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 121 establishes accounting standards
for the impairment of long-lived assets, certain intangibles, and goodwill
related to those assets. SFAS 121 provides, among other things, that impairment
losses be recognized when expected future cash flows are less than the related
assets' carrying value. Impairment is recorded based on an estimate of expected
future discounted cash flows. There was no material effect on the Company's
consolidated financial statements as a result of its adoption of SFAS 121.
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