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Exhibit 99(iii)
THE KITCHEN COLLECTION, INC.
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FINANCIAL STATEMENTS
--------------------
AS OF DECEMBER 31, 1996 AND 1995
--------------------------------
TOGETHER WITH AUDITORS' REPORT
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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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, 1996 and 1995, 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, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Arthur Andersen, LLP
Columbus, Ohio,
January 29, 1997.
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THE KITCHEN COLLECTION, INC.
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BALANCE SHEETS
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AS OF DECEMBER 31, 1996 AND 1995
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ASSETS 1996 1995
------ ---- ----
Current assets:
Cash $ 140,235 $ 130,405
Miscellaneous receivables 131,723 175,179
Accounts receivable - affiliate 3,600,000 1,950,000
Inventories 14,915,677 14,124,708
Import inventories in-transit 480,255 145,447
Prepaid expenses and other 1,886,586 1,608,637
------------ ------------
Total current assets 21,154,476 18,134,376
------------ ------------
Property, plant and equipment:
Land -- 61,300
Building and leasehold improvements 276,446 866,459
Furniture and fixtures 7,158,482 6,376,292
Construction in progress -- 77,500
------------ ------------
7,434,928 7,381,551
Less: Accumulated depreciation and amortization (4,559,945) (4,142,388)
------------ ------------
Property, plant and equipment, net 2,874,983 3,239,163
Goodwill, net of accumulated amortization 3,616,425 3,731,536
------------ ------------
Total assets $ 27,645,884 $ 25,105,075
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable and miscellaneous accrued liabilities $ 6,300,484 $ 5,253,026
Accounts payable - affiliates 23,884 151,330
Income taxes payable to affiliate 864,576 1,015,720
Accrued salaries and benefits 1,378,280 1,183,603
Other accrued taxes 817,521 733,632
------------ ------------
Total current liabilities 9,384,745 8,337,311
Long-term debt 5,000,000 5,000,000
------------ ------------
Total liabilities 14,384,745 13,337,311
------------ ------------
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 8,261,144 6,767,769
------------ ------------
Total stockholder's equity 13,261,139 11,767,764
------------ ------------
Total liabilities and stockholder's equity $ 27,645,884 $ 25,105,075
============ ============
The accompanying notes to financial statements are an integral part
of these balance sheets.
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THE KITCHEN COLLECTION, INC.
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STATEMENTS OF INCOME
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FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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1996 1995
----------- -----------
Net sales $74,921,070 $69,588,640
Cost of sales 43,306,213 40,048,483
----------- -----------
Gross margin 31,614,857 29,540,157
Selling, general, administrative and other expenses 28,361,721 26,102,350
----------- -----------
Operating income 3,253,136 3,437,807
Interest expense 511,051 505,848
Amortization expense 136,710 131,183
----------- -----------
Income before provision for income taxes 2,605,375 2,800,776
Provision for income taxes 1,112,000 1,174,000
----------- -----------
Net income $ 1,493,375 $ 1,626,776
=========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
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THE KITCHEN COLLECTION, INC.
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STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
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FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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Additional Total
Number Common Paid-in Retained Stockholder's
of Shares Stock Capital Earnings Equity
--------- ----- ------- -------- ------
Balance, December 31, 1994 10,500 $105 $4,999,890 $5,140,993 $10,140,988
Net income -- -- -- 1,626,776 1,626,776
------ ---- ---------- ---------- -----------
Balance, December 31, 1995 10,500 105 4,999,890 6,767,769 11,767,764
Net income -- -- -- 1,493,375 1,493,375
------ ---- ---------- ---------- -----------
Balance, December 31, 1996 10,500 $105 $4,999,890 $8,261,144 $13,261,139
====== ==== ========== ========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
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THE KITCHEN COLLECTION, INC.
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STATEMENTS OF CASH FLOWS
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FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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Increase (Decrease) in Cash
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1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,493,375 $ 1,626,776
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,100,430 1,025,093
Loss on the disposal of assets 10,398 26,090
Decrease in miscellaneous receivables 43,456 52,527
(Increase) decrease in inventories (1,125,777) 119,050
Increase in prepaid expenses and other (277,949) (174,545)
Increase (decrease) in accounts payable and miscellaneous
accrued liabilities 1,047,458 (2,312,501)
Decrease in accounts payable - affiliates (127,446) (55,891)
Decrease in income taxes payable to affiliate (151,144) (61,640)
Increase in accrued salaries and benefits 194,677 35,305
Increase (decrease) in other accrued taxes other than income 83,889 (37,938)
----------- -----------
Net cash provided by operating activities 2,291,367 242,326
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (1,058,127) (1,459,676)
Proceeds from disposal of assets 426,590 2,450
----------- -----------
Net cash used in investing activities (631,537) (1,457,226)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (advances to) repayments on loan to affiliate (1,650,000) 1,175,000
----------- -----------
Net cash provided by (used in) financing activities (1,650,000) 1,175,000
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(Continued on next page)
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THE KITCHEN COLLECTION, INC.
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STATEMENTS OF CASH FLOWS
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FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
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(Continued)
Increase (Decrease) in Cash
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1996 1995
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NET INCREASE (DECREASE) IN CASH $ 9,830 $ (39,900)
CASH, beginning of the year 130,405 170,305
---------- -----------
CASH, end of the year $ 140,235 $ 130,405
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
Cash paid during the year for:
Interest $ 463,689 $ 560,133
Income taxes $1,253,554 $ 1,446,353
The accompanying notes to financial statements are an integral part of these
statements.
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THE KITCHEN COLLECTION, INC.
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NOTES TO FINANCIAL STATEMENTS
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DECEMBER 31, 1996 AND 1995
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(1) ORGANIZATION
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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 144 retail and factory
outlet stores throughout the United States and is a wholly-owned
subsidiary of NACCO Industries, Inc. (NII).
(2) SIGNIFICANT ACCOUNTING POLICIES
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USE OF ESTIMATES
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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.
INVENTORIES
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Inventories are stated at the lower of cost or market as determined by
the retail inventory method.
LEASEHOLD IMPROVEMENTS, FURNITURE AND FIXTURES
----------------------------------------------
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:
Leasehold improvements 5 years
Furniture and fixtures 5 years
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GOODWILL
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Goodwill is associated with the purchase of the Company by NII and is
being amortized over forty years on a straight-line basis. Accumulated
amortization was $988,045 and $872,934 at December 31, 1996 and 1995,
respectively, with related amortization expense of $115,111 for each of
the years ended December 31, 1996 and 1995. Management regularly
evaluates its accounting for goodwill considering such factors as
historical and future profitability and believes that the asset is
realizable and the amortization period remains appropriate.
INCOME TAXES
------------
Deferred tax assets or liabilities are based on the difference between
the financial statement and income tax basis 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, refer to Note 5 "Income Taxes" for additional information.
ADVERTISING
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The Company incurs advertising costs in the form of radio, newspaper and
other print ads. Such costs are expensed as incurred. Advertising expense
was $250,455 and $204,879 in 1996 and 1995, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company enters into interest rate swap agreements with terms that run
concurrent with the related debt. The differential between the floating
interest rate and the fixed interest rate, which is to be paid or
received, is recognized in interest expense as interest rates change over
the life of the related debt agreement.
The fair values of financial instruments have been determined through
information obtained from quoted market sources and management estimates.
The fair value of the financial instruments approximated their carrying
values at December 31, 1996 and 1995. The Company does not hold or issue
financial instruments or derivative financial instruments (interest rate
swap agreements) for trading purposes.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to 1995 amounts to conform to
1996 presentation.
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(3) LINE-OF-CREDIT AGREEMENT
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The Company has an unsecured revolving line-of-credit agreement with a
commercial bank for $5,000,000. Interest accrues at the bank's prime
rate, money market rate or LIBOR rate plus a base rate margin of .425% to
1.25%, as determined by certain performance measures. The Company had no
funds drawn against the available balance at December 31, 1996 or 1995.
As of December 31, 1996, the Company had letters of credit outstanding
totaling $71,736, which reduces the available balance to $4,928,264. The
credit agreement expires on May 31, 1999.
(4) LONG-TERM DEBT
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Long-term debt consists of the following, as of December 31:
1996 1995
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Note payable to bank at 8.06% at
December 31, 1996 and 7.81% at
December 31, 1995 $5,000,000 $5,000,000
========== ==========
On May 10, 1994, the Company entered a term note agreement with a
commercial bank for $5,000,000. Interest is payable quarterly at 6.81%,
plus a base rate margin between .75% and 1.75%, determined by certain
performance measures. The note is unsecured and annual principal payments
are due on January 15 of the following years:
Year Amount
-------- ------------
1997 $ -
1998 -
1999 2,500,000
2000 2,500,000
------------
$ 5,000,000
============
The note contains restrictive covenants regarding maintenance of minimum
net worth, interest coverage and leverage. The Company was in compliance
with all covenants as of December 31, 1996 and 1995.
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The Company entered into an interest rate swap agreement with a six year
term during 1994. The use of this agreement allowed the Company to enter
into a long-term credit agreement with a performance based, floating rate
of interest and then swap it for a fixed rate as opposed to entering into
a higher cost fixed-rate credit agreement. This agreement is with a major
commercial bank; therefore, the risk of credit loss from nonperformance
by the bank is minimal. The following summarizes the notional amount and
related rates on this interest rate swap agreement at December 31, 1996:
Notional amount $5,000,000
Average variable rate received 6.81%
Average fixed rate paid 8.00% (8.06% at December 31, 1996)
(5) INCOME TAXES
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The provision for income taxes consists of the following:
1996 1995
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Currently payable:
Federal $ 882,000 $ 988,000
State and local 244,000 234,000
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1,126,000 1,222,000
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Deferred:
Federal (18,000) (32,000)
State and local 4,000 (16,000)
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(14,000) (48,000)
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$1,112,000 $1,174,000
============ =============
The components of the net deferred income tax benefit are as follows:
1996 1995
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Inventory uniform capitalization and volume
discounts $ 84,000 $ (36,000)
Tax over book depreciation 5,000 7,000
Vacation pay (18,000) (19,000)
Medical cost (6,000) (47,000)
State income taxes (44,000) 63,000
Other (35,000) (16,000)
============ =============
Total deferred income tax benefit, net $ (14,000) $ (48,000)
============ =============
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Reconciliation of the Federal statutory and effective income tax rates is
as follows:
1996 1995
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Federal statutory rate 35.0% 35.0%
Amortization of goodwill 1.5 1.4
State and local income tax, net of Federal
income tax effect 6.2 5.8
Other - (0.3)
--------- ---------
Effective tax rate 42.7% 41.9%
========= =========
A summary of the components of the net deferred tax asset balances,
included in the accompanying balance sheet in prepaid expenses and other,
are as follows:
1996 1995
-------- --------
Inventories $140,000 $224,000
Accrued expenses and reserves 366,000 230,000
State income taxes (18,000) (62,000)
Depreciation (226,000) (220,000)
======== ========
Deferred tax asset, net $262,000 $172,000
======== ========
(6) RELATED PARTY TRANSACTIONS
--------------------------
Net purchases of inventories from Hamilton Beach<>Procter Silex (HBPS), a
related company, during the years ended December 31, 1996 and 1995, were
$6,080,255 and $5,467,375, respectively. The purchase price of this
inventory is determined by negotiations between the two companies and is
comparable to market. Related inventory levels at December 31, 1996 and
1995, were approximately $1,682,000 and $2,359,000, respectively. At
December 31, 1996 and 1995, the Company owed HBPS $415 and $126,179,
respectively, for these purchases.
The Company incurred $79,138 and $87,913 for miscellaneous services
provided by NII for the years ended December 31, 1996 and 1995,
respectively. The Company had payables for such services at December 31,
1996 and 1995, of $23,469 and $25,151, respectively.
The Company has an agreement with NII to loan NII up to $15,000,000.
Outstanding amounts are collectible on demand. Interest is payable
quarterly at the applicable short-term Federal rate. The Company has a
receivable due from NII at December 31, 1996 and 1995 of $3,600,000 and
$1,950,000, respectively. The Company recorded related interest income of
$14,184 during 1996 and $20,209 during 1995.
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The Company has a tax sharing agreement with NII, as NII and the Company
are included in the same consolidated group for Federal tax purposes. The
Company files separate tax returns for state and local tax purposes. The
Company has recorded taxes payable to NII at December 31, 1996 and 1995,
of $864,576 and $1,015,720, respectively.
(7) LEASES
------
The Company leases its home office, retail stores, warehouse space and
equipment under noncancellable operating leases which expire at various
dates through 2006. Future minimum lease payments are as follows:
1997 $ 5,844,388
1998 5,263,029
1999 4,324,017
2000 3,206,764
2001 1,452,642
Thereafter 1,269,623
-----------
Total minimum payments $21,360,463
===========
The Company has leases with percentage of sales clauses in all but two of
its retail store locations. Percentage of sales rent expense amounted to
$552,036 for the year ended December 31, 1996 and $375,144 for the year
ended December 31, 1995. The Company's total rent expense for the years
ended December 31, 1996 and 1995, was $8,631,686 and $7,759,326,
respectively.
(8) RETIREMENT INCOME PLANS
-----------------------
The Company maintains 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, limited to
3% of the employee's compensation. In addition, the Company can make an
annual profit sharing contribution at its discretion.
Effective January 1, 1995, the Company established a deferred
compensation plan for management employees. The purpose of the plan is to
provide for certain employees of the Company benefits they would have
received under the retirement savings plan but for certain limitations
imposed by the INTERNAL REVENUE CODE. The plan is administrated and the
related assets are held by the Company. Earnings are accrued by the
Company based upon return on equity, as defined by the plan. The assets
of the plan are unsecured.
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The Company's matching contribution, profit sharing contribution and
earnings accrued on the plans described above was $267,443 and $317,613
for the years ended December 31, 1996 and 1995, respectively.
Effective December 20, 1995, the Company established a deferred
compensation plan for participants in the retirement savings plan not
included in the deferred compensation plan for management employees. The
purpose of the plan is to provide for certain employees of the Company
benefits they would have received under the retirement savings plan but
for certain limitations imposed by the INTERNAL REVENUE Code. The plan is
administrated and the related assets are held by the Company. Earnings
shall be accrued by the Company based upon the earnings of the retirement
savings plan, as defined by the plan. The assets of the plan shall be
unsecured. As of December 31, 1996, there are no participants nor has the
Company incurred any expense with relation to this plan.
(9) SELF INSURANCE COVERAGE
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The Company is self insured for health insurance with stop loss coverage
for claims which exceed $45,000 per incident. Total expense for 1996 and
1995 was approximately $558,000 and $649,000, respectively.
(10) SUBSEQUENT EVENTS
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Through January 29, 1997, the Company made additional advances to NII of
$400,000 and received payments of $2,530,000, for a net receivable
balance of $1,470,000 at January 29, 1997.