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Exhibit 99(iv)
THE KITCHEN COLLECTION, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
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, 1997 and 1996, 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, 1997 and 1996, 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 16, 1998.
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THE KITCHEN COLLECTION, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
------ -------------- ---------------
Current assets:
Cash $ 286,083 $ 140,235
Miscellaneous receivables 131,746 131,723
Accounts receivable - affiliate 700,111 3,600,000
Inventories 15,481,435 14,915,677
Import inventories in-transit 421,571 480,255
Prepaid expenses and other 2,044,916 1,886,586
------------ ------------
Total current assets 19,065,862 21,154,476
------------ ------------
Property, plant and equipment:
Building and leasehold improvements 388,017 276,446
Furniture and fixtures 7,396,035 7,158,482
------------ ------------
7,784,052 7,434,928
Less: Accumulated depreciation and amortization (5,476,149) (4,559,945)
------------ ------------
Property, plant and equipment, net 2,307,903 2,874,983
Goodwill, net of accumulated amortization 3,501,313 3,616,425
------------ ------------
Total assets $ 24,875,078 $ 27,645,884
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Current liabilities:
Accounts payable and miscellaneous accrued liabilities $ 5,851,656 $ 6,300,484
Accounts payable - affiliates 79,761 23,884
Income taxes payable to affiliate 800,000 864,576
Accrued salaries and benefits 1,527,614 1,378,280
Other accrued taxes 847,726 817,521
------------ ------------
Total current liabilities 9,106,757 9,384,745
Long-term debt 5,000,000 5,000,000
------------ ------------
Total liabilities 14,106,757 14,384,745
------------ ------------
Commitments
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 5,768,326 8,261,144
------------ ------------
Total stockholder's equity 10,768,321 13,261,139
------------ ------------
Total liabilities and stockholder's equity $ 24,875,078 $ 27,645,884
============ ============
The accompanying notes to financial statements
are an integral part of these statements.
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THE KITCHEN COLLECTION, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
-------------- --------------
Net sales $78,966,257 $74,921,070
Cost of sales 46,182,100 43,306,213
----------- -----------
Gross margin 32,784,157 31,614,857
Selling, general, administrative and other expenses 29,951,232 28,361,721
----------- -----------
Operating income 2,832,925 3,253,136
Interest expense 387,076 511,051
Amortization expense 136,807 136,710
----------- -----------
Income before provision for income taxes 2,309,042 2,605,375
Provision for income taxes 1,001,860 1,112,000
----------- -----------
Net income $ 1,307,182 $ 1,493,375
=========== ===========
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, 1997 AND 1996
Additional Total
Number of Common Paid-in Retained Stockholder's
Shares Stock Capital Earnings Equity
------ ----- ------- -------- ------
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
Dividends paid -- -- -- (3,800,000) (3,800,000)
Net income -- -- -- 1,307,182 1,307,182
------ ---- ---------- ----------- ------------
Balance, December 31, 1997 10,500 $105 $4,999,890 $ 5,768,326 $ 10,768,321
====== ==== ========== =========== ============
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, 1997 AND 1996
Increase (Decrease) in Cash
----------------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income $ 1,307,182 $ 1,493,375
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,144,504 1,100,430
Loss on the disposal of assets 91,892 10,398
(Increase) decrease in miscellaneous receivables (23) 43,456
Increase in inventories (507,074) (1,125,777)
Increase in prepaid expenses and other (158,330) (277,949)
Increase (decrease) in accounts payable and miscellaneous
accrued liabilities (448,828) 1,047,458
Increase (decrease) in accounts payable - affiliates 55,877 (127,446)
Decrease in income taxes payable to affiliate (64,576) (151,144)
Increase in accrued salaries and benefits 149,334 194,677
Increase in other accrued taxes 30,205 83,889
----------- -----------
Net cash provided by operating activities 1,600,163 2,291,367
----------- -----------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (554,204) (1,058,127)
Proceeds from disposal of assets -- 426,590
----------- -----------
Net cash used in investing activities (554,204) (631,537)
----------- -----------
FINANCING ACTIVITIES:
Dividends paid (3,800,000) --
Net (advances to) repayments on loan to affiliate 2,899,889 (1,650,000)
----------- -----------
Net cash used for financing activities (900,111) (1,650,000)
----------- -----------
(Continued on next page)
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THE KITCHEN COLLECTION, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Continued)
Increase (Decrease) in Cash
---------------------------
1997 1996
---- ----
NET INCREASE IN CASH $ 145,848 $ 9,830
CASH, beginning of the year 140,235 130,405
---------- ----------
CASH, end of the year $ 286,083 $ 140,235
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 421,657 $ 463,689
Income taxes $1,078,267 $1,253,554
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, 1997 AND 1996
(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 143 retail and factory
outlet stores throughout the United States and is a wholly-owned
subsidiary of NACCO Industries, Inc. (NII).
(2) SIGNIFICANT ACCOUNTING POLICIES
Use of 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.
Inventories
Inventories are stated at the lower of cost or market as determined by
the retail inventory method.
Property, Plant and Equipment
Property, plant and equipment is 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
Goodwill represents the excess purchase price paid over the fair value of
the net assets of the Company acquired by NII and is being amortized over
forty years on a straight-line basis. Accumulated amortization was
$1,103,157 and $988,045 at December 31, 1997 and 1996, respectively, with
related amortization expense of $115,112 for each of the years ended
December 31, 1997 and 1996. Management regularly evaluates its accounting
for goodwill considering such factors as historical and future
profitability and believes the asset is realizable and that the
amortization period remains appropriate.
Advertising
The Company incurs advertising costs in the form of radio, newspaper and
other print ads. Such costs are expensed as incurred. Advertising expense
was $250,785 and $250,455 in 1997 and 1996, 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, 1997 and 1996. The Company does not hold or issue
financial instruments or derivative financial instruments (interest rate
swap agreements) for trading purposes.
(3) LINE-OF-CREDIT AGREEMENT
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, 1997 or 1996.
As of December 31, 1997, the Company had letters of credit outstanding
totaling $96,663, which reduces the available balance to $4,903,337. The
credit agreement expires on May 31, 2000, and it provides an option to
extend the facility for one additional year on an annual basis.
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(4) LONG-TERM DEBT
On May 10, 1994, the Company entered a term note agreement with a
commercial bank for $5,000,000. Interest is payable quarterly at LIBOR,
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
---- ------
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, 1997 and 1996.
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 of 6.81% plus a base rate
margin, 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 amounts and related rates on this
interest rate swap agreement.
1997 1996
---- ----
Notional amount $5,000,000 $5,000,000
Average variable rate 6.6% 6.8% (6.81% and 6.82% at
received December 31, 1997 and 1996,
respectively)
Average fixed rate paid 7.8% 8.0% (7.81% and 8.06% at
December 31, 1997 and 1996,
respectively)
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(5) INCOME TAXES
The provision for income taxes consists of the following:
1997 1996
---- ----
Currently payable:
Federal $ 802,860 $ 882,000
State and local 192,000 244,000
---------- ----------
994,860 1,126,000
---------- ----------
Deferred:
Federal 10,000 (18,000)
State and local (3,000) 4,000
---------- ----------
7,000 (14,000)
========== ==========
Total provision $1,001,860 $1,112,000
========== ==========
Reconciliation of the Federal statutory and effective income tax rates is
as follows:
1997 1996
---- ----
Federal statutory rate 35.0% 35.0%
Amortization of goodwill 1.7 1.5
State and local income tax, net of Federal
income tax effect 5.4 6.2
Other 1.3 --
---- ----
Effective tax rate 43.4% 42.7%
==== ====
A summary of the components of the net deferred tax asset balances,
included in the accompanying balance sheet in prepaid expenses and other,
is as follows:
1997 1996
---- ----
Inventories $ 135,000 $ 140,000
Accrued expenses and reserves 404,000 366,000
State income taxes 9,000 (18,000)
Depreciation (222,000) (226,000)
--------- ---------
Deferred tax asset, net $ 326,000 $ 262,000
========= =========
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(6) RELATED PARTY TRANSACTIONS
Net purchases of inventories from Hamilton Beach<>Procter Silex (HBPS), a
related company, during the years ended December 31, 1997 and 1996, were
$6,264,169 and $6,080,255, 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, 1997 and
1996, were approximately $1,355,000 and $1,682,000, respectively. At
December 31, 1997 and 1996, the Company owed HBPS $56,812 and $415,
respectively, for these purchases.
The Company incurred $121,454 and $79,138 for miscellaneous services
provided by NII for the years ended December 31, 1997 and 1996,
respectively. The Company had payables for such services at December 31,
1997 and 1996, of $22,949 and $23,469, 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, 1997 and 1996 of $700,111 and
$3,600,000, respectively. The Company recorded related interest income of
$28,502 during 1997 and $14,184 during 1996.
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, 1997 and 1996,
of $800,000 and $864,576, 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:
1998 $ 5,750,828
1999 5,023,174
2000 4,047,974
2001 2,370,175
2002 1,308,756
Thereafter 730,985
------------
Total minimum payments $19,231,892
============
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The Company has leases with percentage of sales clauses in all but one of
its retail store locations. Percentage of sales rent expense amounted to
$626,718 for the year ended December 31, 1997 and $552,036 for the year
ended December 31, 1996. The Company's total rent expense for the years
ended December 31, 1997 and 1996, was $9,023,876 and $8,631,686,
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.
The Company's matching contribution, profit sharing contribution and
earnings accrued on the plans described above was $330,364 and $267,443
for the years ended December 31, 1997 and 1996, 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, 1997, there are no participants nor has the
Company incurred any expense with relation to this plan.
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(9) SELF INSURANCE COVERAGE
The Company is self insured for health insurance with stop loss coverage
for claims which exceed $50,000 per incident. Total expense for 1997 and
1996 was approximately $501,000 and $558,000, respectively.
(10) SUBSEQUENT EVENTS
Through January 16, 1998, the Company made additional advances to NII of
$1,200,000 and received payments of $1,100,000, for a net receivable
balance of $800,111 at January 16, 1998.