Chromcraft Revington, Inc.
(in thousands, except share data)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Chromcraft Revington, Inc. and its wholly-owned subsidiaries (together, the “Company” or “CRI”) and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and the requirements of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 29, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all information and footnotes required by generally accepted accounting principles for complete financial statements.
The interim financial statements contained in this report should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in Chromcraft Revington’s annual report on Form 10-K for the year ended December 31, 2011.
The Company has made certain reclassifications to the 2011 Consolidated Financial Statements in order to conform to the 2012 presentation.
As further disclosed in Note 2 and effective March 20, 2012, the Company purchased all the outstanding stock of Executive Office Concepts, Inc. (EOC). As a result of the acquisition, the Company recorded initial goodwill of approximately $123. Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed, if any. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, goodwill of the reporting unit would be considered impaired. To measure the amount of the impairment loss, the implied fair value of a reporting unit’s goodwill is compared to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. If the carrying amount of a reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. For this test, the fair value of Company’s relevant reporting unit is determined using a combination of valuation techniques, including a discounted cash flow methodology. As the goodwill was recorded as of March 20, 2012, annual impairment tests will commence in the fourth quarter of 2012.
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-08,
Intangibles—Goodwill and Other (Topic 350)—Testing Goodwill for Impairment
(ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The guidance regarding the qualitative approach to goodwill impairment testing is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.
Intangible assets are recorded at their estimated fair value at the date of acquisition. Definite lived intangible assets are amortized using the straight-line method over their estimated useful lives. In assessing the recoverability of the Company’s intangible assets, the Company considers the qualitative indicators of impairment. If qualitative indicators of impairment are identified, the Company will perform quantitative tests which include estimating the cash flows expected to result from use of the asset. An impairment loss is recognized if the carrying amount of the intangible assets is not recoverable and exceeds fair value.
Note 2. Acquisition of Executive Office Concepts, Inc.
On March 20, 2012, the Company completed its acquisition of EOC, a California-based privately held company, through a stock purchase for total consideration of $509, of which $200 was paid in cash and the remaining balance of $309 payable through the issuance of an interest-bearing note to the seller. The note has been discounted by the Company in the amount of $19 to reflect fair value of the note
.
The balance will be paid in equal quarterly installments of $28 which began July 2012 and will end April 2015. EOC is a manufacturer and distributor of commercial furniture, primarily within the health care sector. The Company acquired EOC to complement its existing product line of seating, tables and waiting area furniture.
The EOC acquisition resulted in a new basis of accounting whereby the total purchase price was allocated to tangible and intangible assets and liabilities based on the fair values on the date of acquisition. The Company also incurred acquisition related costs of approximately $10 and $78, respectively, for the three and nine months ended September 29, 2012, which were recorded in selling, general and administrative expenses on the Consolidated Statement of Operations.
The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition:
Consideration:
|
|
|
|
Cash
|
|
$
|
200
|
|
Seller note payable
|
|
|
290
|
|
Total consideration
|
|
$
|
490
|
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired:
|
|
|
|
|
Cash
|
|
$
|
62
|
|
Accounts receivable
|
|
|
181
|
|
Inventories
|
|
|
338
|
|
Prepaid expenses and other current assets
|
|
|
75
|
|
Property, plant and equipment
|
|
|
357
|
|
Intangible assets
|
|
|
270
|
|
Goodwill
|
|
|
123
|
|
|
|
|
1,406
|
|
|
|
|
|
|
Recognized amounts of identifiable liabilities assumed:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
539
|
|
Deferred revenue
|
|
|
139
|
|
Deferred income tax liability
|
|
|
238
|
|
|
|
|
916
|
|
Total net assets acquired
|
|
$
|
490
|
|
Goodwill of $123 arising from the acquisition includes the expected synergies and other benefits that we believe will result from combining the operations of EOC with the operations of the Company, and any intangible assets that do not qualify for separate recognition such as the assembled workforce. The goodwill is not deductible for federal income tax purposes.
The fair value of the identifiable intangible assets was determined by utilizing various valuation models which include the relief from royalty method and the excess earnings method. Key assumptions include management’s projections of future cash flows based upon past experience and future expectations, and a discount rate of 18.0 %.
The fair value assigned to identifiable intangible assets and their useful lives at the acquisition date is as follows:
|
|
|
|
Useful
|
|
|
Amount
|
|
Life
|
|
|
|
|
|
Customer relationships
|
|
$
|
60
|
|
18 Years
|
Trademark
|
|
|
80
|
|
|
Air Quality Permits
|
|
|
130
|
|
|
|
|
$
|
270
|
|
|
For the nine months ended September 29, 2012, the Company recognized amortization expense related to the acquired customer relationships of $2.
Actual net sales of $1,639 and net earnings of $68 of EOC for the period since the acquisition on March 20, 2012 are included in our consolidated results of operations for the nine months ended September 29, 2012.
The following table summarizes the pro forma net sales and net loss of the combined entity for the three and nine months ended September 29, 2012 and October 1, 2011 as if the acquisition had occurred on January 1, 2011:
|
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Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 29,
|
|
|
October 1,
|
|
|
September 29,
|
|
|
October 1,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Pro forma net sales
|
|
$
|
13,673
|
|
|
$
|
14,535
|
|
|
$
|
41,963
|
|
|
$
|
42,449
|
|
Pro forma net loss
|
|
$
|
(717
|
)
|
|
$
|
(757
|
)
|
|
$
|
(3,683
|
)
|
|
$
|
(3,386
|
)
|
Note 3. Cash Equivalents
Cash and short-term, highly liquid investments with an original maturity of three months or less are considered cash and cash equivalents. There are no cash and cash equivalents on the balance sheet. Cash is swept daily from our bank accounts to be applied against outstanding borrowings under our loan and security agreement with Gibraltar Business Capital, LLC (“Gibraltar”).
Note 4. Inventories
Inventories at September 29, 2012 and December 31, 2011 consisted of the following:
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|
September 29,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Raw materials
|
|
$
|
5,267
|
|
|
$
|
5,139
|
|
Work-in-process
|
|
|
1,532
|
|
|
|
1,336
|
|
Finished goods
|
|
|
8,309
|
|
|
|
7,719
|
|
|
|
$
|
15,108
|
|
|
$
|
14,194
|
|
Inventory reserves decreased $112, on a net basis, in the nine months ended September 29, 2012.
Note 5. Property, Plant and Equipment
Property, plant and equipment at September 29, 2012 and December 31, 2011 consisted of the following:
|
|
September 29,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
324
|
|
|
$
|
324
|
|
Buildings and improvements
|
|
|
18,438
|
|
|
|
18,438
|
|
Machinery and equipment
|
|
|
23,501
|
|
|
|
23,159
|
|
Leasehold improvements
|
|
|
760
|
|
|
|
737
|
|
Construction in progress
|
|
|
91
|
|
|
|
-
|
|
|
|
|
43,114
|
|
|
|
42,658
|
|
Less accumulated depreciation and amortization
|
|
|
(36,670
|
)
|
|
|
(36,175
|
)
|
|
|
$
|
6,444
|
|
|
$
|
6,483
|
|
Note 6. Accrued Liabilities
Accrued liabilities at September 29, 2012 and December 31, 2011 consisted of the following:
|
|
September 29,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Employee-related benefits
|
|
$
|
669
|
|
|
$
|
794
|
|
Other accrued liabilities
|
|
|
2,834
|
|
|
|
2,905
|
|
|
|
$
|
3,503
|
|
|
$
|
3,699
|
|
Note 7. Debt
Note Payable
The Company acquired all of the outstanding stock of EOC on March 20, 2012 for a purchase price of $509, of which $200 was paid at closing and $309 is payable under a promissory note issued by the Company (“Note”). The Note has been discounted by the Company in the amount of $19 to reflect fair value of the Note. The Note has a term of three years, bears interest at 5.0% per annum and provides for equal quarterly payments of principal and interest of $28 with the first payment made in July 2012 and thereafter at the beginning of each quarter until April 2015. The outstanding balance of the Note at September 29, 2012 was $266, of which $99 is included in current liabilities and $167 in non-current liabilities.
Revolving Credit Facility
On April 20, 2012, the Company replaced its former credit facility with First Business Capital Corp. (“FBCC”) by entering into a new loan and security agreement with Gibraltar according to which Gibraltar currently provides the Company with a two-year secured revolving credit facility up to a maximum amount of $5,000 (including letters of credit) based upon eligible accounts receivable of the Company (the “Credit Facility”).
The Company had net borrowings on its revolving credit facilities of $1,524 in the first nine months of 2012 and an outstanding loan balance of $2,425 at September 29, 2012. The Company had approximately $2,535 of availability under the Credit Facility at September 29, 2012, which reflects a $40 reduction for reserves. The Company had approximately $1,908 of availability under the Credit Facility at November 9, 2012. Availability under the Credit Facility is calculated using a borrowing base equal to 85%, or such lesser percentage as determined by Gibraltar, of the net amount of the Company’s eligible accounts receivable. Availability fluctuates from time to time based on the amount of the Company’s eligible accounts receivable, lockbox receipts and outstanding advances under the Credit Facility.
The Credit Facility will expire on April 20, 2014 and will automatically be extended one time for one year, unless either the Company or Gibraltar provides the other with timely written notice of its intent not to extend the Credit Facility. All advances under the Credit Facility must be used for general working capital needs of the Company and capital expenditures up to $300 in a calendar year, except that the initial advance under the Credit Facility was used to pay outstanding borrowings and other obligations owed to FBCC under the former credit facility and certain fees and expenses owed to Gibraltar upon entering into the new Credit Facility.
Advances under the Credit Facility currently bear interest at the greater of (i) prime rate (the prime rate at September 29, 2012 was 3.25%) plus 6.25%, or (ii) 9.50% per annum. In addition, the Credit Facility requires the Company to pay a monthly collateral management fee and certain other fees and expenses to Gibraltar. The Company’s obligations under the Credit Facility are secured by all of the Company’s assets, including, but not limited to, accounts receivable, inventory, machinery, equipment, deposit accounts, real estate and general intangibles. The Credit Facility also includes a lockbox arrangement whereby all payments received by the Company to the lockbox are applied to any outstanding loan balance the Company has with Gibraltar.
Interest on advances under the Credit Facility formerly accrued at the greater of (i) prime rate plus 3.0%, or (ii) 6.25% per annum. However, effective August 14, 2012, the loan and security agreement for the Credit Facility was amended to provide that interest on advances was increased as provided above. This increase to the interest rate was a condition to Gibraltar agreeing to waive our noncompliance with the net income (loss) financial covenant under the Credit Facility. This financial covenant required that we have a net loss for the six month period ended June 30, 2012 of not more than $1,750. Our actual net loss for the six month period ended June 30, 2012 was $2,720. The net income (loss) financial covenant under the Credit Facility for the nine months ended September 29, 2012 was also amended on August 14, 2012 to provide for not more than a $3.5 million net loss.
The loan and security agreement for the Credit Facility contains representations and warranties as well as affirmative, negative and financial covenants of the Company. The covenants include, but are not limited to, minimum net income (loss) requirements as well as restrictions or limitations on other indebtedness, other liens on Company assets, capital expenditures, sales of assets (other than sales of inventory in the ordinary course of business), mergers with or acquisitions of other businesses and certain amendments to the Company’s Certificate of Incorporation and By-Laws.
The Credit Facility also contains events of default. The events of default include, but are not limited to, nonpayment of any of the Company’s obligations to Gibraltar, a failure by the Company to perform any of its covenants under the loan and security agreement for the Credit Facility or other related loan documents, a breach by the Company of any of its representations and warranties set forth in the loan and security agreement or other related loan documents, the occurrence of a condition or event that has a material adverse effect on the Company or if the Company’s current Chief Executive Officer or Chief Financial Officer is no longer employed in a senior management position at the Company. Certain events of default (for example, certain payment obligations and a change in the current Chief Executive Officer or Chief Financial Officer of the Company) have cure or grace periods.
Upon the occurrence of an event of default, Gibraltar may terminate the Credit Facility and not extend further credit to the Company, declare upon notice to the Company all amounts then outstanding under the Credit Facility to be immediately due and payable, charge a default rate of interest, take possession of and sell assets of the Company that constitute collateral for the Credit Facility and exercise any other rights and remedies that Gibraltar may have.
In order for the Company to be in compliance with its net income (loss) financial covenants under the Credit Facility, our net loss for the nine months ended September 29, 2012 and for the year ended December 31, 2012 must not exceed $3.5 million. The Company was in compliance with this financial covenant for the nine months ended September 29, 2012. However, management believes it is probable that the Company will not be in compliance with this financial covenant for the year ended December 31, 2012. As such, we will need to seek a waiver of this likely noncompliance from Gibraltar.
In addition, based upon management’s current financial projections, management believes it is probable that the Company will not be in compliance with the net income (loss) financial covenants under the Credit Facility in 2013. The financial covenants for 2013 were established in 2012 and at a time when management’s operating plan for 2013 had not yet been prepared. Although management is still in the process of finalizing our 2013 operating plan, management believes that the current net income (loss) financial covenant for the first three quarters in 2013 and for the year ending December 31, 2013, as set forth in the Waiver and Loan Modification Agreement attached as Exhibit 10.1 to this Form 10-Q, will need to be amended.
In this regard, we have initiated discussions with Gibraltar regarding obtaining a waiver of our probable noncompliance with our net income (loss) financial covenant for the year ended December 31, 2012 as well as an amendment to our financial covenants for 2013. If Gibraltar grants such a waiver and amends the covenants for 2013, it is possible that Gibraltar may impose additional conditions and require other concessions from the Company beyond what Gibraltar required as a condition to providing its previous waiver of the Company’s noncompliance with the net income (loss) financial covenant under the Credit Facility for the six months ended June 30, 2012. We also are discussing with Gibraltar the possibility of including eligible inventory to our borrowing base as a means to assure that we have adequate credit availability under our Credit Facility.
There is no assurance that Gibraltar will grant such a waiver or agree to such an amendment. In the event that Gibraltar is unwilling to agree to the waiver and amend the net income (loss) financial covenants for 2013 to levels that the Company believes it can achieve, then Gibraltar could declare an event of default, terminate the Credit Facility and not extend further credit to the Company, declare upon notice to the Company all amounts then outstanding under the Credit Facility to be immediately due and payable, charge a default rate of interest, take possession and sell assets of the Company that constitute collateral for the Credit Facility and exercise any other rights and remedies that Gibraltar may have. Any of these actions would adversely affect our liquidity, business and ability to continue to operate.
Further, if our trade creditors were to impose unfavorable terms on us, this could negatively impact our ability to obtain raw materials, products and services on acceptable terms. We have implemented expense controls and limitations on capital expenditures to conserve cash at the present time.
Because we presently are incurring losses, the continued availability of credit under our Credit Facility is critical to meeting our short term liquidity needs and to our ability to continue to operate. Assuming that Gibraltar grants the waiver and agrees to the amendment discussed above, the Company expects additional borrowings under the Credit Facility in the fourth quarter of 2012 and throughout 2013.
Note 8. Employee Stock Ownership Plan
Chromcraft Revington sponsors the Employee Stock Ownership and Savings Plan (the “Plan”) which consists of the following two components: (i) a leveraged employee stock ownership plan qualified under Section 401(a) of the Internal Revenue Code (the “Code”) which is designed to invest primarily in Company stock (the “ESOP”); and (ii) a qualified cash or deferred arrangement under Code Section 401(k) (the “401(k) Plan”). The Plan covers substantially all employees who have completed six months of service with the Company. The Company matching contribution with respect to participants’ pre-tax contributions to the 401(k) Plan for the 2011 plan year was made to the ESOP. The Company matching contribution with respect to participants’ pre-tax contributions to the 401(k) Plan for the 2012 plan year is expected to be made to the ESOP.
When the ESOP was established, Chromcraft Revington loaned $20,000 to the ESOP Trust to finance the ESOP’s purchase of common stock of the Company. The loan to the ESOP Trust provides for repayment to Chromcraft Revington over a 30-year term at a fixed rate of interest of 5.48% per annum. Chromcraft Revington makes annual contributions to the ESOP Trust equal to the ESOP Trust’s repayment obligation under the loan to the ESOP from the Company. The unallocated shares of Company common stock owned by the ESOP Trust are pledged to the Company as collateral for the Company’s loan to the ESOP Trust. As the ESOP loan is repaid, shares are released from collateral and allocated to ESOP accounts of active employees based on the proportion of total debt service paid in the year. Unearned ESOP shares are reported as a reduction of stockholders’ equity as reflected in the Consolidated Statement of Stockholders’ Equity of the Company. As shares are committed to be released, Chromcraft Revington reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. ESOP compensation expense for the three and nine months ended September 29, 2012 was $33 and $106, respectively, compared to $48 and $122, respectively, for the prior year periods.
ESOP shares at September 29, 2012 and December 31, 2011, respectively, consisted of the following:
|
|
September 29,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Allocated ESOP shares
|
|
|
401,624
|
|
|
|
301,357
|
|
Unearned ESOP shares
|
|
|
1,281,795
|
|
|
|
1,332,546
|
|
Total ESOP shares
|
|
|
1,683,419
|
|
|
|
1,633,903
|
|
Unearned ESOP shares, at cost
|
|
$
|
12,818
|
|
|
$
|
13,325
|
|
Fair value of unearned ESOP shares
|
|
$
|
974
|
|
|
$
|
1,452
|
|
Note 9. Income Taxes
At September 29, 2012 and December 31, 2011, the Company maintained a full valuation allowance against the entire net deferred income tax balance after considering relevant factors, including recent operating results, the likelihood of the utilization of net operating loss tax carryforwards, and the ability to generate future taxable income. The Company expects to maintain a full valuation allowance on its entire net deferred tax assets in 2012.
The Company assumed a deferred income tax liability in the amount of $238 as part of its acquisition of EOC. As a result of this business combination, the Company recorded a deferred income tax benefit of $238 for the three and nine months ended September 29, 2012. The Company estimates the deferred income tax liability will provide future taxable income to offset future taxable expense and, as such, has reduced its valuation allowance.
Note 10. Loss per Share of Common Stock
Due to the net loss in the three and nine months ended September 29, 2012 and October 1, 2011, loss per share, basic and diluted, are the same, as the effect of potential issuances of common stock would be antidilutive. There were 135,736 and 370,800 shares at September 29, 2012 and October 1, 2011, respectively, which were issuable upon the exercise of outstanding stock options, at a weighted average exercise price of $12.79 and $11.58, respectively. In addition, there were 139,043 and 275,000 shares of restricted stock outstanding at September 29, 2012 and October 1, 2011, respectively, for which vesting was contingent upon future performance and/or service conditions.
Note 11. Recently Issued Accounting Standards
There have been no recent accounting standards or changes in accounting standards during the nine months ended September 29, 2012, that are of significance, or potential significance to the Company, as compared to the recent accounting standards described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.