hookerfurniture8ka041416.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

 
FORM 8-K/A
 
(AMENDMENT NO. 1)
 

 
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
Date of Report: April 15, 2016
(Date of earliest event reported: February 1, 2016)
 

 
HOOKER FURNITURE CORPORATION
(Exact name of registrant as specified in its charter)
 
 
Virginia 000-25349 54-0251350
(State or other jurisdiction of 
incorporation or organization)  
(Commission
File No.)
(I.R.S. Employer
Identification No.)
     
440 East Commonwealth Boulevard,
Martinsville, Virginia
24112 (276) 632-0459
(Address of principal executive offices)  (Zip Code)
(Registrant’s telephone number,
including area code)
 

 
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o      Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o      Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o      Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o      Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 
 

 
 
On February 1, 2016, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“Home Meridian”) pursuant to the Asset Purchase Agreement the Company and Home Meridian entered into on January 5, 2016.

The Company filed a Current Report on Form 8-K on February 1, 2016 (the “Original Form 8-K”) announcing the completion of the Acquisition and providing the disclosure items required in Items 1.01, 2.01, 2.03, 3.02, 8.01 and 9.01 of Form 8-K.

This Current Report on Form 8-K/A is being filed with the SEC to provide the disclosures required by Item 9.01 of Form 8-K, including the required historical financial information of Home Meridian and the required pro forma financial statements and amends and supplements the Original Form 8-K.

Except as otherwise provided herein, the other disclosures made in the Original Form 8-K remain unchanged.
 
Item 9.01                      Financial Statements and Exhibits
 
(a)           Financial Statements of Business Acquired
 
 
99.1
Audited consolidated balance sheets of Home Meridian as of November 1, 2015, October 26, 2014 and October 27, 2013, the related audited consolidated statements of comprehensive income and loss, changes in capital deficit for each of the years ended of November 1, 2015, October 26, 2014 and October 27, 2013 and the related notes to such audited consolidated financial statements.
 
(b)           Pro Forma Financial Information
 
 
99.2
Unaudited pro forma condensed combined balance sheet as of January 31, 2016, the related unaudited pro forma condensed combined statement of operations for the year ended January 31, 2016 and the related notes to such unaudited pro forma condensed combined financial statements.
 
The pro forma condensed combined financial statements are unaudited, are presented for informational purposes only, and are not necessarily indicative of the financial position or results of operations that would have occurred had the Home Meridian Acquisition been completed as of the dates or at the beginning of the periods presented. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future consolidated financial position or operating results of the combined companies.
 
(c)           Not applicable.
 
(d)           Exhibits
 
Exhibit No.
 
Description
23.1
   
99.1
   
99.2

 
 

 
 
Forward-Looking Statements
 
Certain statements made in this Form 8-K/A, other than those based on historical facts, may be forward-looking statements. Forward-looking statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could”  or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Those risks and uncertainties include but are not limited to: (1) general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; (2) the risks related to the recent acquisition of substantially all of the assets of Home Meridian International, Inc., (“HMI”) including maintaining HMI’s existing customer relationships, deal-related costs to be recognized in fiscal 2017, integration costs, costs related to acquisition debt, including debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, financial statement charges related to the application of current accounting guidance in accounting for the acquisition, the recognition of significant additional depreciation and amortization expenses by the combined entity,  the loss of key employees from HMI, the ongoing costs related to the assumption of HMI’s pension liabilities, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the companies which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the acquisition; (3) the risks specifically related to HMI’s operations including significant concentrations of its sales and accounts receivable in only a few customers or disruptions affecting its Madison, NC, Mayodan, NC or Redlands, CA warehouses or its High Point, NC administrative facilities; (4) our ability to successfully implement our business plan to increase sales and improve financial performance; (5) the cost and difficulty of marketing and selling our products in foreign markets; (6) disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships; (7) disruptions affecting our Henry County, Virginia warehouses and corporate headquarters facilities; (8) when or whether our new business initiatives, including, among others, H Contract and Homeware, become profitable;  (9) price competition in the furniture industry;  (10) changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials; (11) the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; (12) risks associated with the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;  (13) risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs and environmental compliance and remediation costs; (14) the interruption, inadequacy, security failure or integration failure of our information systems or information technology infrastructure, related service providers or the internet; (15) the direct and indirect costs associated with the implementation of our Enterprise Resource Planning system, including costs resulting from unanticipated disruptions to our business; (16) achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations; (17) adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products;  (18) risks associated with distribution through third-party retailers, such as non-binding dealership arrangements; (19) capital requirements and costs; (20) competition from non-traditional outlets, such as catalog and internet retailers and home improvement centers; (21) changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, declines  in consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit; (22) higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products; (23) higher than expected employee medical  costs; (24) other risks and uncertainties described under Part I, Item 1A. "Risk Factors" in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016. Additionally, actual results may differ materially from these forward looking statements for other reasons including that while the Home Meridian acquisition will be accounted for under the acquisition method of accounting (whereby the assets acquired and liabilities assumed will be measured at their respective fair values with any excess reflected as goodwill), the determination of the fair values of the net assets acquired, including intangible and net tangible assets, is based upon certain valuations that have not been finalized, and while the adjustments to record the assets acquired and liabilities assumed at fair value reflect our best estimates, such valuations are subject to change once the detailed analyses are completed, which adjustments may be material. Any forward-looking statement that we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise.

 
 

 
 
SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


HOOKER FURNITURE CORPORATION


By: /s/ Paul A. Huckfeldt                              
       Paul A. Huckfeldt
       Senior Vice President – Finance and Accounting
       Chief Financial Officer

Date:  April 15, 2016
 
 
 
 
 
 
 

 

EXHIBIT INDEX

23.1*
   
99.1*
   
99.2*
______________
*
Filed herewith.





 
 

 
ex23-1.htm
 
EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS
 

 
 
The Board of Directors
Hooker Furniture Corporation

We hereby consent to the inclusion in this Form8-K/A of Hooker Furniture Corporation of our reports dated January 8, 2016 and December 31, 2014 and January 2, 2014, relating to the consolidated financial statements of Home Meridian Holdings, Inc. and Subsidiaries as of November 1, 2015, October 26, 2014 and October 27, 2013.


/s/ Smith Leonard PLLC
April 15, 2016
ex99-1.htm
 
EXHIBIT 99.1

 

 

 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended November 1, 2015 and October 26, 2014
 
 
 
 
 

 


GRAPHIC
 

 
 
 

 

 

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended November 1, 2015 and October 26, 2014
 
 
 
 
 
 

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Contents


 
 
Independent Auditor’s Report
3-4
   
Consolidated Financial Statements
 
   
Balance sheets
5
   
Statements of comprehensive income (loss)
6
   
Statements of changes in capital deficit
7
   
Statements of cash flows
8
   
Summary of significant accounting policies
9-13
   
Notes to financial statements
14-26
 

 
 
2

 

GRAPHIC

Independent Auditor’s Report

 
To the Members of
Home Meridian Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of Home Meridian Holdings, Inc. and Subsidiaries (a wholly owned subsidiary of Home Meridian Acquisition, Inc.), which comprise the consolidated balance sheets as of November 1, 2015 and October 26, 2014, and the related consolidated statements of comprehensive income (loss), changes in capital deficit and cash flows for the years then ended, and the related summary of significant accounting policies and notes to the consolidated financial statements.
 
Management’s Responsibility for the Financial Statements
 
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
 
Auditor’s Responsibility
 
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
 
 
3

 
 
Opinion
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Home Meridian Holdings, Inc. and Subsidiaries as of November 1, 2015 and October 26, 2014, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
 
Emphasis of Matter
 
As discussed in Note 8 to the financial statements, during January 2016, the entity disposed of its assets and certain liabilities. Our opinion is not modified with respect to this matter.
GRAPHIC
High Point, North Carolina
January 8, 2016
 
 
 
 
 
 
 
 
Smith Leonard PLLC, Accountants & Consultants  4035 Premier Drive, Suite 300, High Point NC 27265-8311  Phone: 336.883.0181 Fax: 336.841.8764
 
 
4

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Balance Sheets
(in thousands except share data)

 
   
November 1,
2015
   
October 26,
2014
 
Assets
           
Current assets
           
Cash
  $ 103     $ 116  
Trade receivables, net of allowance for doubtful accounts
of $283 and $260
    43,779       42,918  
Inventories
    40,172       33,432  
Refundable income taxes
    110       202  
Other current assets
    1,546       1,673  
Total current assets
    85,710       78,341  
Property and equipment, net
    5,013       3,554  
Other assets
               
Intangible assets, net
    3,259       3,476  
Deferred financing costs, net
    308       385  
Total other assets
    3,567       3,861  
    $ 94,290     $ 85,756  
Liabilities and Capital Deficit
               
Current liabilities
               
Revolving credit line
  $ 35,088     $ 28,130  
Accounts payable
    22,148       12,673  
Accrued expenses
    11,760       7,124  
Deferred compensation and pension obligations, current portion
    266       263  
Total current liabilities
    69,262       48,190  
Long-term debt
    50,912       63,442  
Deferred compensation and pension obligations, less current portion
    7,628       7,812  
Total liabilities
    127,802       119,444  
Commitments and contingencies
               
Capital deficit
               
Common stock of $0.01 par value; authorized 20,000,000
voting shares, issued and outstanding 12,991,888 shares
    130       130  
Accumulated deficit
    (37,175 )     (37,539 )
Accumulated other comprehensive loss
    (4,467 )     (4,279 )
Total Home Meridian Holdings, Inc. capital deficit
    (41,512 )     (41,688 )
Non-controlling interest
    8,000       8,000  
Total capital deficit
    (33,512 )     (33,688 )
 
  $ 94,290     $ 85,756  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
5

 
 
 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) 

 
Year ended
 
November 1,
2015
   
October 26,
2014
 
   
(53 weeks)
   
(52 weeks)
 
 
           
Net sales
  $ 312,274     $ 277,941  
                 
Cost of sales
    253,506       226,485  
                 
Gross profit
    58,768       51,456  
                 
Selling, general and administrative expenses
    48,002       41,157  
                 
Operating income
    10,766       10,299  
                 
Other expense, net
               
Interest expense
    (10,303 )     (10,142 )
Other, net
    (16 )     (11 )
                 
Total other expense, net
    (10,319 )     (10,153 )
                 
Income before income taxes
    447       146  
                 
Income tax expense
    (83 )     (48 )
                 
Net income
    364       98  
                 
Other comprehensive income (loss), net of tax:
               
Increase in minimum pension liability, net of
income taxes of $0
    (188 )     (3,109 )
 
               
Comprehensive income (loss)
  $ 176     $ (3,011 )
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
6

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Changes in Capital Deficit
(in thousands except share data) 

 
   
Common
Shares
   
Common
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Non-
controlling
Interest
   
Total
Capital
Deficit
 
Balance, October 27, 2013
    12,991,888     $ 130     $ (37,637 )   $ (1,170 )   $ 8,000     $ (30,677 )
                                                 
Net income
    -       -       98       -       -       98  
Increase in minimum pension liability, net of income taxes of $0
    -       -       -       (3,109 )     -       (3,109 )
 
                                               
Balance, October 26, 2014
    12,991,888       130       (37,539 )     (4,279 )     8,000       (33,688 )
                                                 
Net income
    -       -       364       -       -       364  
Increase in minimum pension liability, net of income taxes of $0
    -       -       -       (188 )     -       (188 )
                                                 
Balance, November 1, 2015
    12,991,888     $ 130     $ (37,175 )   $ (4,467 )   $ 8,000     $ (33,512 )
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
7

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Cash Flows
(in thousands) 

 
Year ended
 
November 1,
2015
   
October 26,
2014
 
   
(53 weeks)
   
(52 weeks)
 
Cash flows from operating activities
           
Net income
  $ 364     $ 98  
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
               
Depreciation
    1,355       1,219  
PIK interest added to debt
    4,970       8,950  
Amortization of intangible assets
    217       218  
Amortization of deferred financing costs
    175       133  
Provision for bad debts
    339       140  
Provision for pension and deferred compensation
    384       10  
Payments for pension and deferred compensation
    (753 )     (903 )
Loss on disposal of property and equipment
    17       -  
Changes in operating assets and liabilities:
               
Trade receivables
    (1,200 )     (9,111 )
Inventories
    (6,740 )     (2,691 )
Refundable income taxes
    92       1,164  
Other current assets
    127       (413 )
Accounts payable and accrued expenses
    12,984       (2,052 )
Net cash provided by (used in) operating activities
    12,331       (3,238 )
Cash flows from investing activities
               
Purchases of property and equipment
    (1,704 )     (1,117 )
Net cash used in investing activities
    (1,704 )     (1,117 )
Cash flows from financing activities
               
Net borrowings on revolving credit line
    6,958       4,527  
Repayment of term loan
    (17,500 )     -  
Refinancing fees
    (98 )     (64 )
Net cash provided by (used in) financing activities
    (10,640 )     4,463  
Change in cash
    (13 )     108  
Cash, beginning of year
    116       8  
Cash, end of year
  $ 103     $ 116  
Supplemental disclosures of cash flows information
               
Landlord allowance for leasehold improvements
  $ 1,127     $ -  
Cash paid for interest
  $ 3,043     $ 1,048  
Cash paid for income taxes
  $ 15     $ 15  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
8

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Business
 
Home Meridian Holdings, Inc. (Home Meridian or the Company) is a global design, sourcing and marketing company headquartered in High Point, North Carolina. Home Meridian markets its products under the Pulaski Furniture Corporation (PFC), Samuel Lawrence Furniture (SLF), Samuel Lawrence Hospitality (SLH), and Prime Resource International (PRI) brand names. The Company imports various classes and styles of furniture through its global network of suppliers and sells these products to retailers throughout North America. SLH products are sold to hospitality companies throughout the United States. Through Sourcing Solutions Group (SSG), a division of Home Meridian, the Company assists retail companies in developing and sourcing specific products to meet their customer’s needs. The Company also operates an e- commerce division, Right2Home, which offers select merchandise to retail companies. These products are offered for sale on the retailer’s website or showroom floor and can be delivered directly to the consumer’s home by the Company.
     
   
The Company is a wholly owned subsidiary of Home Meridian Acquisition, Inc., which was formed solely for the acquisition of the Company.
     
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Home Meridian International, Inc. (HMI) (formally PFC), together with HMI’s subsidiary HM Numeria Co. Significant intercompany accounts and transactions have been eliminated.
     
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
     
Fiscal Year
 
The Company ended its fiscal year end on November 1, 2015 and October 26, 2014 which was comprised of 53 weeks and 52 weeks, respectively.
     
Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at November 1, 2015 and October 26, 2014. Balances at times may exceed insured limits.
 
   
 
 
 
9

 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Trade Accounts Receivable
and Credit Risk
 
Accounts receivable are customer obligations due under normal trade terms. Substantially all of the Company’s trade receivables are from furniture retailers and hospitality companies. The Company performs continuing credit evaluations of its customers’ financial condition and, although it generally does not require collateral, advance payments may be required from customers in certain circumstances. Management purchases credit insurance for certain customer balances.
 
   
   
Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve based on management’s assessment of their customers’ overall financial position. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness, or other matters affecting the collectability of amounts due from such customers, could have a material effect on the results of operations in the period in which such changes or events occur. Based on all available information, management believes the allowance for doubtful accounts as of November 1, 2015 is adequate. However, actual write-offs might exceed the recorded allowance.
     
Inventories
 
Inventories include finished goods acquired for resale and are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
     
Property and Equipment
 
Property and equipment are recorded at acquired values or cost less accumulated depreciation. Items costing under $5 are generally not capitalized. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. The cost of significant renewals and betterments are capitalized, while the cost of maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. The cost and accumulated depreciation of property and equipment are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the determination of net income or loss.
 
   
 
 
10

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Impairment or Disposal
of Long-lived Assets
 
The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
     
Intangible Assets
 
Definite-lived intangible assets are amortized over their estimated useful lives, determined based on the expected cash flows to be received from those relationships or assets.
     
   
Management uses qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite- lived intangible asset is impaired. If management concludes that an indefinite-lived intangible is not likely to be impaired, no further action is taken. However, if management concludes otherwise, the fair value of the indefinite-lived intangible asset based on qualitative factors is determined. If the carrying value is greater than the fair value an impairment charge is recorded. The Company did not record any impairment charge in 2015 or 2014.
     
Deferred Financing Costs
 
Financing costs are deferred and amortized to interest expense using the straight-line method over the life of the related indebtedness or credit facility. The straight-line method approximates the effective interest rate method. Accumulated amortization was $1,179 and $1,004 in 2015 and 2014.
 
   
Fair Value of Financial
Instruments
 
The carrying amount of the Company’s financial instruments, including trade receivables and accounts payable approximate their fair values due to the short-term nature of these instruments. Management believes that the estimated fair value of the Company’s debt approximates carrying value, as the interest rates on these obligations are variable or comparable to market rates available to the Company for similar borrowings.
 
   
Comprehensive Income
or Loss
 
The Company reports other comprehensive income or loss as a separate component from net income or loss within the consolidated statements of comprehensive income (loss) and consolidated statements of changes in capital deficit. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, other comprehensive income (loss) consists of changes in the net actuarial loss on pension liabilities, net of taxes.
     
 
 
11

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Revenue Recognition
 
Sales are recognized when product is shipped or delivered to the customer (based on shipping terms) and ownership has been transferred to the customer and are recorded net of allowances for trade promotions, estimated product returns, rebates, advertising programs and other discounts.
 
   
Shipping and Handling
Costs
 
The Company invoices its customers for the direct cost incurred to transport its product to the customer location. These invoiced amounts are included in net sales. The related costs are included in cost of sales.
     
Advertising Costs
 
The Company incurs catalog related expenses that are recorded as a component of other current assets and expensed as they are used. Other costs incurred for advertising are expensed when incurred. Advertising expense for 2015 and 2014 totaled $964 and $829.
     
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
     
   
Tax benefits are recorded only for tax positions that would be more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company’s policy is to classify any interest or penalties as income tax expense, if applicable. There were no such amounts in 2015 or 2014.
 
   
 
 
12

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
New Accounting
Pronouncements
 
During May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which provides guidance on the recognition of revenue. The ASU, as amended, is effective for periods beginning December 15, 2018, with no early application permitted. Management is currently assessing the impact that this guidance may have on the Company’s future consolidated financial statements.
 
   
   
During April 2015, the FASB issued ASU No. 2015-03, Interest— Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. The ASU is effective for periods beginning December 15, 2015 with early application permitted. Management is currently assessing the impact this guidance may have on the Company’s future consolidated financial statements.
     
   
During July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory which requires an entity to measure inventory at the lower of cost and net realizable value (thus reducing the measurement methods available to an entity). The amendments are effective for fiscal years beginning after December 15, 2016. Management does not expect this guidance to materially impact future financial statements or operating results.
     
   
During November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, which amends the balance sheet classification of deferred taxes. The new guidance requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. Previous guidance required deferred tax liabilities and assets to be separated into current and noncurrent amounts on the balance sheet. The guidance is effective for fiscal years beginning on or after December 15, 2017, with early adoption permitted at the beginning of an annual reporting period. Management is currently assessing the impact that this guidance may have on the Company’s future consolidated financial statements.
 
 
 
13

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
1. Property and Equipment

Property and equipment consists of the following:

   
Useful
Lives
   
2015
   
2014
 
Leasehold improvements
 
1 to 8
    $ 5,297     $ 4,632  
Machinery and equipment
 
5 to 10
      277       369  
Furniture, fixtures and office equipment
 
2 to 10
      2,978       2,534  
Vehicles
 
5 to 7
      9       9  
Construction in progress
    -       589       215  
Property and equipment, at cost
            9,150       7,759  
Less accumulated depreciation
            4,137       4,205  
Property and equipment, net
          $ 5,013     $ 3,554  
 
2. Intangible Assets
 
The carrying value and accumulated amortization of intangible assets are as follows:
       
   
2015
   
2014
 
 
 
Gross
   
Accumulated
Amortization
   
Gross
   
Accumulated
Amortization
 
Indefinite-lived
                       
Trade names
  $ 2,136     $ -     $ 2,136     $ -  
Definite-lived
                               
Customer relationships
    2,613       1,490       2,613       1,273  
                                 
Total
  $ 4,749     $ 1,490     $ 4,749     $ 1,273  
 
Amortization of customer relationships is computed over 12 years. Amortization expense for intangible assets for 2015 and 2014 was $217 and $218, respectively.

The estimated amortization expense for the next five years and thereafter is as follows:
 

2016
  $ 218  
2017
    218  
2018
    218  
2019
    218  
2020
    218  
Thereafter
    33  
    $ 1,123  
 
 
14

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
3. Debt
 
Debt consists of the following:
   
2015
   
2014
 
             
Revolving credit line
  $ 35,088     $ 28,130  
 Term loan
    50,912       63,442  
      86,000       91,572  
Less current portion
    35,088       28,130  
 
  $ 50,912     $ 63,442  
 
Revolving Credit Line
 
The revolving credit line with a bank provides for maximum borrowings of $60 million (subject to availability as defined in the agreement) with an expiration date of April 2017. An additional $10 million may be requested (for a maximum of $70 million), subject to approval by the bank. At the option of the Company, loans may be Base Rate Loans (interest payable at the higher of (a) the Prime Rate and (b) the Federal Funds Effective Rate plus an applicable margin) or LIBOR Rate Loans (interest payable at LIBOR plus an applicable margin). Applicable margins are determined quarterly based on the fixed charge coverage ratio of the Company for the previous four quarters, as defined in the agreement.
 
At November 1, 2015, the Company had $1,088 Base Rate Loans outstanding and $34,000 LIBOR Rate Loans outstanding bearing interest at 3.50% and 1.94%, respectively, for a blended rate of 1.99% (2014 blended rate of 2.13%). The credit line requires the Company to maintain minimum levels of fixed charges to EBITDA, as defined in the agreement. At November 1, 2015, the Company was in compliance with this requirement. The credit line is collateralized by substantially all the Company’s assets.

The Company’s cash receipts are deposited into a lender-controlled lockbox and are automatically applied to the line. In addition, the loan and security agreement contains a subjective acceleration clause relating to an event of default defined as a material adverse  change. Accordingly, the revolving credit line is classified as a current liability.

 
15

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
3. Debt (Concluded)
 
Term Loan
 
The term loan is collateralized by a second lien on substantially all the Company’s assets. The agreement contains restrictions on capital expenditures, distributions, additional debt, covenants for financial and other matters customarily included in loan agreements. At November 1, 2015, the Company was in compliance with these restrictions. Interest on the term loan accrues at 15.5%. Prior to 2015, interest was accrued on a non-cash or pay-in-kind (PIK) basis. Beginning in 2015, the Company began paying interest. The Company made interest payments of $2,127 in 2015 and $0 in 2014.  Principal payments were made in the amount of $17,500 during 2015 and $0 in 2014. The term loan  matures  on October 31, 2017, therefore all payments due under the term loan are shown as long-term liabilities in the accompanying consolidated balance sheets. The term loan lenders have an ownership interest in the Company’s parent.
 
4. Noncontrolling Interest
 
The Series A Preferred Shares in HMI are non-voting and have priority in the event of liquidation. The holders of the Series A Preferred Shares are entitled to, when and if declared by the Board of Directors, the annual amount of $75.00 per share payable in cash on December 31. No dividends have been declared through November 1, 2015. The dividend rights of the common stockholder are junior to those of the preferred stockholder; accordingly, no dividends may be paid on common stock while preferred dividends are outstanding.
 
 
 
 
16

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 


5. Income Taxes
 
Income tax expense consisted of the following:

   
2015
   
2014
 
Current                
Federal
  $ (39 )   $ -  
State
    (44 )     (48 )
Total current
    (83 )     (48 )
                 
Deferred                
Federal
    -       -  
State
    -       -  
Total deferred
    -       -  
Total income expense
  $ (83 )   $ (48 )
 
The following reconciles taxes at the federal statutory rate with reported income tax expense:

   
2015
   
2014
 
Expected income tax expense (at 34%)
  $ (152 )   $ (50 )
Increase (decrease) resulting from:
               
State income taxes, net of federal benefit
    (17 )     (31 )
Other
    (110 )     (23 )
Change in valuation allowance for
deferred tax assets
    196       56  
Provision for income taxes
  $ (83 )   $ (48 )

 
17

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
5. Income Taxes (Continued)

The components of deferred tax assets and liabilities are as follows:
    2015     2014  
Deferred tax assets:            
Accounts receivable
  $ 105     $ 96  
Inventories
    389       249  
Property and equipment
    710       833  
Accruals
    2,696       2,133  
Deferred compensation and pension
    1,248       1,387  
Federal net operating loss
    6,221       6,927  
State net operating loss
    734       803  
Minimum tax credits
    135       94  
Other
    32       24  
Total gross deferred tax assets
    12,270       12,546  
Less valuation allowance
    (11,820 )     (12,016 )
Net deferred tax assets
    450       530  
Deferred tax liabilities:                
Intangible assets
    (448 )     (518 )
Other
    (2 )     (12 )
Total gross deferred tax liabilities
    (450 )     (530 )
Net deferred tax liability
  $ -     $ -  
 
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate future taxable income. The Company is required to periodically assess the need to establish a valuation allowance against its deferred tax assets by considering whether it is more likely than not that the tax assets will be fully utilized. Based on the Company’s projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its federal net operating loss carryforwards. However, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that, absent recent historical evidence of the Company’s ability to generate taxable income, a valuation reserve against deferred tax assets should be established. Accordingly, in connection with the losses incurred in the most recent years, management established a valuation allowance against its deferred tax assets. The valuation allowance established by management is subject to periodic review and adjustment based on changes in facts and circumstances.
 
 
18

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
5. Income Taxes (Concluded)

At November 1, 2015, the Company had approximately $18.3 million of net operating loss carryforwards that will expire through 2034.
 
Tax years ended in 2012 through 2015 remain subject to examination by both Federal and North Carolina authorities.
 
6. Retirement Plans
 
Defined Benefit Pension Plan
 
The Company’s defined benefit pension plan (Pension Plan) covers substantially all employees employed prior to April 1, 2005. The Pension Plan was amended to freeze participation and all future benefit accruals. Benefits were based on years of service and the employee’s highest five-year average compensation. The Company’s funding policy is to make contributions to the plan based on the actuarially determined funding requirements of ERISA.
 
The following provides a reconciliation of benefit obligations, plan assets and funded status of the Pension Plan.
 
   
2015
   
2014
 
 
           
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 19,304     $ 17,452  
Interest cost
    794       795  
Actuarial (gain) loss
    (643 )     2,291  
Benefits paid
    (1,218 )     (1,234 )
Projected benefit obligation, end of year
    18,237       19,304  
 
               
Change in plan assets:
               
Fair value of plan assets, beginning of year
    13,921       14,023  
Actual return (loss) on plan assets
    (80 )     500  
Employer contributions
    460       632  
Expenses paid
    (245 )     -  
Benefits paid
    (1,218 )     (1,234 )
Fair value of plan assets, end of year
    12,838       13,921  
Funded status at end of year
  $ (5,399 )   $ (5,383 )
 
 
19

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
6. Retirement Plans (Continued)
 
Amounts recognized in the consolidated balance sheets consist of:
 
   
2015
   
2014
 
 
           
Current liabilities
  $ -     $ -  
 Non-current liabilities
    (5,399 )     (5,383 )
    $ (5,399 )   $ (5,383 )
 
Weighted-average assumptions:
 
   
2015
   
2014
 
 
           
Discount rate
    4.29 %     4.25 %
Expected long-term rate of return on plan assets
    7.00 %     7.00 %
Rate of compensation increase
    N/A       N/A  
 
Net pension cost included the following components:

   
2015
   
2014
 
Interest cost
  $ 795     $ 795  
Estimated return on plan assets
    (915 )     (900 )
Administrative expenses
    280       -  
Amortization of net loss
    86       -  
Total pension expense (income)
  $ 246     $ (105 )
 
To develop the long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
 
The Company’s investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.
 
 
20

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
6. Retirement Plans (Continued)
 
The investment policy is periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The same fiduciary assists in specific investment review and selection. The policy is established and administered in a manner that is compliant at all times with applicable government regulations.
 
The Company’s overall investment strategy is to achieve a mix of approximately 75% of investments for long-term growth and 25% for near-term benefit payments with a diversification of asset types and fund strategies. The current allocations for plan assets are 77% equity and 23% corporate bonds and U.S. Treasury Securities.
 
Mutual funds primarily include investments in a range of asset classes, including: domestic and international equities (both large and small cap), fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries.
 
The following are the major categories of plan assets measured at fair value on November 1, 2015, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).

   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Money Market Funds
  $ 122     $ -     $ -     $ 122  
Mutual Funds:
                               
International Funds
    3,370       -       -       3,370  
Growth Funds
    1,333       -       -       1,333  
Bond Funds
    2,228       -       -       2,228  
Value Funds
    1,334       -       -       1,334  
Emerging Market Funds
    1,264       -       -       1,264  
Corporate Bonds
    674       -       -       674  
Small Blend Funds
    2,513       -       -       2,513  
    $ 12,838     $ -     $ -     $ 12,838  
 
 
21

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
6. Retirement Plans (Continued)
 
The following are the major categories of plan assets measured at fair value as of October 26, 2014.
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Money Market Funds
  $ 222     $ -     $ -     $ 222  
Mutual Funds:
                               
International Funds
    3,650       -       -       3,650  
Growth Funds
    2,893       -       -       2,893  
Bond Funds
    2,869       -       -       2,869  
Value Funds
    1,469       -       -       1,469  
Emerging Market Funds
    1,460       -       -       1,460  
Small Blend Funds
    1,358       -       -       1,358  
    $ 13,921     $ -     $ -     $ 13,921  
 
The Company expects to contribute $581 to the Pension Plan in 2015.
 
The benefits expected to be paid in each year from 2016 through 2020 are $1,201, $1,177, $1,174, $1,157, and $1,147, respectively. The aggregate benefits expected to  be paid in the five years from 2021 through 2025 are $5,640. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at November 1, 2015. The accumulated benefit obligation under the plan was $18,237 at November 1, 2015. The amounts recognized in accumulated other comprehensive loss ($3,712) are comprised of net actuarial loss.
 
Supplemental Executive Retirement Program
 
The Company sponsors an unfunded Supplemental Executive Retirement Program (SERP), which is a nonqualified plan that provides additional retirement benefits to certain key employees. Effective September 30, 2006, the plan was amended to freeze participation and all future benefit accruals.
 
 
22

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 


6. Retirement Plans (Continued)
 
The following provides a reconciliation of benefit obligations, plan assets and funded status of the SERP.
 
   
2015
   
2014
 
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 2,574     $ 2,276  
Interest cost
    91       89  
Actuarial (gain) loss
    (6 )     432  
Benefits paid
    (241 )     (223 )
Projected benefit obligation, end of year
    2,418       2,574  
Change in plan assets:
               
Fair value of plan assets, beginning of year
    -       -  
Employer contributions
    241       223  
Benefits paid
    (241 )     (223 )
Fair value of plan assets, end of year
    -       -  
Funded status at end of year
  $ (2,418 )   $ (2,574 )
 
Amounts recognized in the consolidated balance sheets consist of:
 
   
2015
   
2014
 
Current liabilities
  $ (223 )   $ (223 )
Non-current liabilities
    (2,195 )     (2,351 )
    $ (2,418 )   $ (2,574 )
 
Weighted-average assumptions:
 
   
2015
   
2014
 
Discount rate
    3.89 %     3.85 %
Rate of compensation increase
    N/A       N/A  
 
Net cost of this plan included the following components:
 
   
2015
   
2014
 
Interest cost
  $ 94     $ 89  
Amortization of net loss
    36       13  
Total SERP expense
  $ 130     $ 102  
 
 
23

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
6. Retirement Plans (Concluded)
 
The benefits expected to be paid in each year from 2016 through 2020 are $221, $218, $211, $206 and $199, respectively. The aggregate benefits expected to be paid in the five years from 2021 through 2025 are
$880. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at November 1, 2015. The Company expects to amortize $38 of net loss in 2016. The accumulated benefit obligation under the plan was $2,418 at November 1, 2015. The amounts recognized in accumulated comprehensive loss ($755) are comprised of net actuarial loss.
 
Defined Contribution Plan
 
The Company has a qualified defined contribution plan covering substantially all employees of the Company who have met certain service and age requirements. Company contributions charged to expense were approximately $307 for 2015 and $283 for 2014.

Deferred Compensation Plan
 
The Company permitted certain former employees to defer compensation and earn interest on the deferred amounts. Interest is credited to participant accounts at a stated rate in the related agreements, which approximates 8%. Included in deferred compensation and pension obligations is $77 and $118 related to the deferred compensation plan at November 1, 2015 and October 26, 2014, of which $34 and $78 is included in long-term liabilities.
 
 
 
 
24

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
7. Commitments and Contingencies

Leases
 
The Company is obligated under various noncancelable operating leases for offices, warehouses and showrooms that expire at various dates through fiscal 2022. Certain of these leases contain escalation clauses or contingent rental payments based on the change in the Consumer Price Index. At November 1, 2015 minimum rental  payments due under operating leases with original commitments in excess of one year are as follows:

2016
  $ 3,661  
2017
    1,400  
2018
    1,213  
2019
    1,191  
2020
    1,013  
Thereafter
    1,321  
Total minimum rental payments
  $ 9,799  
 
Total rent expense under operating leases for 2015 and 2014 was $3,529 and $3,227. Taxes, insurance and maintenance expenses related to operating leases are also obligations of the Company.
 
Letters of Credit
 
The Company is party to letters of credit totaling approximately $860 at November 1, 2015. The letters of credit guarantee performance  of various trade activities to third parties. Management does not expect any material losses to result from these off-balance-sheet instruments because performance is not expected to be required and, therefore, is of the opinion that the fair value of these instruments is zero.
 
Trade Cases
 
Tariff expense is based on the most current rates published by the U.S. Department of Commerce. These rates are potentially subject to an administrative review process starting approximately one year after the publication date. The final amounts will depend on whether administrative reviews are performed and the outcome of those reviews, if any, on the Company’s vendors.
 
 
25

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands) 

 
7. Commitments and Contingencies (Concluded)

Concentrations of Sourcing Risk
 
The Company sources imported products through over one hundred different vendors located in three countries. Because of the large number and diverse nature of the foreign vendors from which the Company can source their imported products, the Company has some flexibility in the placement of products with any particular vendor or country.
 
Business and Credit Concentrations
 
Two customers accounted for 28% of 2015 sales and three customers accounted for 37% of accounts receivable at November 1, 2015. Two customers accounted for 29% of 2014 sales and 39% of accounts receivable at October 26, 2014.
 
Litigation
 
The Company is involved in various other legal proceedings and claims, arising in the ordinary course of its business, that have not been finally adjudicated. These actions, when finally concluded and determined, will not, in the opinion of management, have a material adverse effect upon the consolidated financial position of the Company.
 
Self-Insurance
 
The Company is self-insured for that portion of health care costs not covered by insurance. Self-insurance costs are accrued based on the aggregate of the liability for reported claims incurred but not reported. Stop-loss insurance limits for health insurance, annual  stop-loss insurance amounts to $50 per person.
 
8. Subsequent Events

In January 2016, the Company entered into an Asset Purchase Agreement with Hooker Furniture Corporation (“HOFT”) to sell substantially all of the Company’s assets and certain liabilities for approximately $100 million, comprised of $85 million in cash and $15 million of HOFT stock, subject to customary working capital adjustments.
 
Management has evaluated events occurring subsequent to the balance sheet date through January 8, 2016, the date that the consolidated financial statements were available to be issued, and has determined no other events require adjustment to or additional disclosure in the consolidated financial statements.
 
 
 
26

 
 
 
 

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended October 26, 2014 and October 27, 2013
 
 
 
 
 

 


GRAPHIC
 


 
 

 







 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended October 26, 2014 and October 27, 2013
 
 




 
 

 


Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Contents 

 

Independent Auditor’s Report
3-4
   
Consolidated Financial Statements
 
   
Balance sheets
5
   
Statements of comprehensive income (loss)
6
   
Statements of changes in capital deficit
7
   
Statements of cash flows
8
   
Summary of significant accounting policies
9-13
   
Notes to financial statements
14-27


 
2

 
 
GRAPHIC

Independent Auditor’s Report
 
 
To the Members of
Home Meridian Holdings, Inc. and Subsidiaries

We have audited the accompanying consolidated financial statements of Home Meridian Holdings, Inc. and Subsidiaries (a wholly owned subsidiary of Home Meridian Acquisition, Inc.), which comprise the consolidated balance sheets as of October 26, 2014 and October 27, 2013, and the related consolidated statements of comprehensive income (loss), changes in capital deficit and cash flows for the years then ended, and the related summary of significant accounting policies and notes to the consolidated financial statements.
 
Management’s Responsibility for the Financial Statements
 
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility
 
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
 
 
3

 
 
Opinion
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Home Meridian Holdings, Inc. and Subsidiaries as of October 26, 2014 and October 27, 2013, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
GRAPHIC
High Point, North Carolina
December 31, 2014
 
 
 
 
 
 
Smith Leonard PLLC, Accountants & Consultants  4035 Premier Drive, Suite 300, High Point NC 27265-8311  Phone: 336.883.0181 Fax: 336.841.8764
 
 
4

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Balance Sheets
(in thousands except share data) 

 
   
October 26,
2014
   
October 27,
2013
 
Assets
           
Current assets
           
Cash
  $ 116     $ 8  
Trade receivables, net of allowance for doubtful accounts
of $260 and $318
    42,918       33,947  
Inventories
    33,432       30,741  
Refundable income taxes
    202       1,366  
Other current assets
    1,673       1,260  
Total current assets
    78,341       67,322  
Property and equipment, net
    3,554       3,656  
Other assets
               
Intangible assets, net
    3,476       3,694  
Deferred financing costs, net
    385       454  
Total other assets
    3,861       4,148  
 
  $ 85,756     $ 75,126  
Liabilities and Capital Deficit
               
Current liabilities
               
Revolving credit line
  $ 28,130     $ 23,603  
Accounts payable
    12,673       15,199  
Accrued expenses
    7,124       6,650  
Deferred compensation and pension obligations, current portion
    263       258  
Total current liabilities
    48,190       45,710  
Long-term debt
    63,442       54,492  
Deferred compensation and pension obligations, less current portion
    7,812       5,601  
Total liabilities
    119,444       105,803  
Commitments and contingencies
               
Capital deficit
               
Common stock of $0.01 par value; authorized 20,000,000
voting shares, issued and outstanding 12,991,888 shares
    130       130  
Accumulated deficit
    (37,539 )     (37,637 )
Accumulated other comprehensive loss
    (4,279 )     (1,170 )
Total Home Meridian Holdings, Inc. capital deficit
    (41,688 )     (38,677 )
Noncontrolling interest
    8,000       8,000  
Total capital deficit
    (33,688 )     (30,677 )
 
  $ 85,756     $ 75,126  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
5

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) 

 
Year ended
 
October 26,
2014
   
October 27,
2013
 
 
           
Net sales
  $ 277,941     $ 224,749  
                 
Cost of sales
    226,485       180,279  
                 
Gross profit
    51,456       44,470  
                 
Selling, general and administrative expenses
    41,157       38,176  
                 
Operating income
    10,299       6,294  
                 
Other expense
               
Interest expense
    (10,142 )     (8,858 )
Other, net
    (11 )     (12 )
                 
Total other expense, net
    (10,153 )     (8,870 )
                 
Income (loss) before income taxes
    146       (2,576 )
                 
Income tax benefit (expense)
    (48 )     538  
                 
Net income (loss)
    98       (2,038 )
                 
Other comprehensive income (loss), net of tax:
               
Decrease (increase) in minimum pension liabilities, net of deferred taxes
    (3,109 )     4,434  
 
               
Comprehensive income (loss)
  $ (3,011 )   $ 2,396  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.

 
6

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Changes in Capital Deficit
(in thousands except share data) 


   
Common
Shares
   
Common
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Non-
controlling
Interest
   
Total
Capital
Deficit
 
Balance, October 28, 2012
    12,991,888     $ 130     $ (35,599 )   $ (5,604 )   $ 8,000     $ (33,073 )
                                                 
Net loss
    -       -       ( 2,038 )     -       -       (2,038 )
Decrease in minimum pension liability, net of deferred income taxes of $0
    -       -       -       4,434       -       4,434  
                                                 
Balance, October 27, 2013
    12,991,888       130       (37,637 )     (1,170 )     8,000       (30,677 )
                                                 
Net income
    -       -       98       -       -       98  
Increase in minimum pension liability, net of deferred income taxes of $0
    -       -       -       (3,109 )     -       (3,109 )
                                                 
Balance, October 26, 2014
    12,991,888     $ 130     $ (37,539 )   $ (4,279 )   $ 8,000     $ (33,688 )

See accompanying summary of significant accounting policies
and notes to consolidated financial statements.

 
7

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Cash Flows
(in thousands) 

 
Year ended
 
October 26,
2014
   
October 27,
2013
 
 
           
Cash flows from operating activities
           
Net income (loss)
  $ 98     $ (2,038 )
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
               
Depreciation
    1,219       1,366  
PIK interest added to debt
    8,950       7,685  
Amortization of intangible assets
    218       218  
Amortization of deferred financing costs
    133       290  
Provision for bad debts
    140       145  
Provision for pension and deferred compensation
    10       262  
Payments for pension and deferred compensation
    (903 )     (1,270 )
Loss on disposal of fixed assets
    -       28  
Changes in operating assets and liabilities:
               
Trade receivables
    (9,111 )     (4,124 )
Inventories
    (2,691 )     486  
Refundable income taxes
    1,164       (1,366 )
Other current assets
    (413 )     (273 )
Accounts payable and accrued expenses
    (2,052 )     6,498  
Net cash provided by (used in) operating activities
    (3,238 )     7,907  
Cash flows from investing activities
               
Purchases of property and equipment
    (1,117 )     (1,097 )
Net cash used in investing activities
    (1,117 )     (1,097 )
Cash flows from financing activities
               
Net borrowings (repayments) on revolving credit facility
    4,527       (6,415 )
Refinancing fees
    (64 )     (394 )
Net cash provided by (used in) financing activities
    4,463       (6,809 )
Change in cash
    108       1  
Cash, beginning of year
    8       7  
Cash, end of year
  $ 116     $ 8  
Supplemental disclosures of cash flows information
               
Cash paid for interest
  $ 1,048     $ 923  
Cash paid for income taxes
  $ 15     $ 730  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
8

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Business
 
Home Meridian Holdings, Inc. (Home Meridian or the Company) is a global design, sourcing and marketing company headquartered in High Point, North Carolina. Home Meridian markets its products under the Pulaski Furniture Corporation (PFC), Samuel Lawrence Furniture (SLF), Samuel Lawrence Hospitality (SLH), and Prime Resource International (PRI) brand names. The Company imports various classes and styles of furniture through its global network of suppliers and sells these products to retailers throughout North America. SLH products are sold to hospitality companies throughout the United States. Through Sourcing Solutions Group (SSG), a division of Home Meridian, the Company assists retail companies in developing and sourcing specific products to meet their customer’s needs. The Company also operates an e- commerce division, Right2Home, which offers select merchandise to retail companies that can be offered for sale on the retailer’s website or showroom floor that the Company will deliver directly to the consumer’s home.
     
   
The Company is a wholly owned subsidiary of Home Meridian Acquisition, Inc., which was formed solely for the acquisition of the Company.
     
Principles of Consolidation
 
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Home Meridian International, Inc. (HMI) (formally PFC), together with HMI’s subsidiary HM Numeria Co. Significant intercompany accounts and transactions have been eliminated.
     
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
     
Fiscal Year
 
The Company’s fiscal year ends on the last Sunday of October. Fiscal years ended October 26, 2014 and October 27, 2013 each comprised of 52 weeks.
     
Cash Equivalents
 
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at October 26, 2014 or October 27, 2013. Balances at times may exceed insured limits.
 
   
 
 
9

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Trade Accounts Receivable
and Credit Risk
 
Accounts receivable are customer obligations due under normal trade terms. Substantially all of the Company’s trade receivables are from furniture retailers and hospitality companies. The Company performs continuing credit evaluations of its customers’ financial condition and, although it generally does not require collateral, advance payments may be required from customers in certain circumstances. Management purchases credit insurance for certain customer balances.
 
   
   
Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve based on management’s assessment of their customers’ overall financial position. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness, or other matters affecting the collectability of amounts due from such customers, could have a material effect on the results of operations in the period in which such changes or events occur. Based on all available information, management believes the allowance for doubtful accounts as of October 26, 2014 is adequate. However, actual write-offs might exceed the recorded allowance.
     
Inventories
 
Inventories include finished goods acquired for resale and are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
     
Property and Equipment
 
Property and equipment are recorded at acquired values or cost less accumulated depreciation. Items costing under $5 are generally not capitalized. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. The cost of significant renewals and betterments are capitalized, while the cost of maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. The cost and accumulated depreciation of property and equipment are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the determination of net income or loss.
 
   
 
 
10

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Impairment or Disposal of
Long-Lived Assets
 
The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
 
   
Intangible Assets
 
Definite-lived intangible assets are amortized over their estimated useful lives, determined based on the expected cash flows to be received from these relationships or assets.
     
   
Management uses qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite- lived intangible asset is impaired. If management concludes that an indefinite-lived intangible is not likely to be impaired, no further action is taken. However, if management concludes otherwise, the fair value of the indefinite-lived intangible asset based on qualitative factors is determined. If the carrying value is greater than the fair value an impairment charge is recorded. The Company did not record any impairment charge in 2014 or 2013.
     
Deferred Financing Costs
 
Financing costs are deferred and amortized to interest expense using the straight-line method over the life of the related indebtedness or credit facility. The straight-line method approximates the effective interest rate method. Accumulated amortization was $1,004 and $871 in 2014 and 2013.
 
   
Fair Value of Financial
Instruments
 
The carrying amount of the Company’s financial instruments, including cash, trade receivables, and accounts payable approximate their fair values due to the short-term nature of these instruments. Management believes that the estimated fair value of the Company’s debt approximates carrying value, as the interest rates on these obligations are variable or comparable to market rates available to the Company for similar borrowings.
     
Comprehensive Income
 
The Company reports other comprehensive income or loss as a separate component from net income or loss within the consolidated statements of comprehensive income (loss) and consolidated statements of changes in capital deficit. Comprehensive income (loss) is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, other comprehensive income (loss) consists of changes in the net actuarial loss on pension liabilities, net of deferred taxes.
 
   
     
 
 
11

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Revenue Recognition
 
Sales are recognized when product is shipped or delivered to the customer (based on shipping terms) and ownership has been transferred to the customer and are recorded net of allowances for trade promotions, estimated product returns, rebates, advertising programs and other discounts.
 
   
Shipping and Handling
Costs
 
The Company invoices its customers for the direct cost incurred to transport its product to the customer location. These invoiced amounts are included in net sales. The related costs are included in cost of sales.
     
Advertising Costs
 
The Company incurs catalog related expenses that are recorded as a component of other current assets and expensed as they are used. Other costs incurred for advertising are expensed when incurred. Advertising expense for 2014 and 2013 totaled $829 and $699.
     
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
     
   
Tax benefits are recorded only for tax positions that would be more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company’s policy is to classify any interest or penalties as income tax expense, if applicable. There were no such amounts in 2014 or 2013.
 
   
 
 
12

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
New Accounting
Pronouncement
 
On May 28, 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which provides guidance on the recognition of revenue. The ASU is effective for periods beginning after December 15, 2017, with no early application permitted. Management is currently assessing the impact that this guidance may have on the Company’s future consolidated financial statements.
     
Subsequent Events
 
Management has evaluated events occurring subsequent to the balance sheet date through December 31, 2014, the date that the consolidated financial statements were available to be issued and has determined no events require adjustment to or additional disclosure in the consolidated financial statements.

 
 
 
 
 
 
13

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
1. Property and Equipment

Property and equipment consists of the following:
 
   
Useful
Lives
   
2014
   
2013
 
Leasehold improvements
 
2 to 5
    $ 4,632     $ 4,228  
Machinery and equipment
 
5 to 10
      369       341  
Furniture, fixtures and office equipment
 
3 to 10
      2,534       3,728  
Vehicles
 
5 to 7
      9       9  
Construction in progress
    -       215       626  
Property and equipment, at cost
            7,759       8,932  
Less – accumulated depreciation
            4,205       5,276  
Property and equipment, net
          $ 3,554     $ 3,656  
 
2. Intangible Assets
 
The carrying value and accumulated amortization of intangible assets are as follows:
          
   
2014
   
2013
 
   
Gross
   
Accumulated
Amortization
   
Gross
   
Accumulated
Amortization
 
Indefinite-lived
                       
Trade names
  $ 2,136     $ -     $ 2,136     $ -  
Definite-lived
                               
Customer relationships
    2,613       1,273       2,613       1,055  
Total
  $ 4,749     $ 1,273     $ 4,749     $ 1,055  
 
Amortization on customer relationships is computed over 12 years. Amortization expense for intangible assets for 2014 and 2013 was $218.

The estimated amortization expense for the next five years and thereafter is as follows:

2015
  $ 218  
2016
    218  
2017
    218  
2018
    218  
2019
    218  
Thereafter
    250  
    $ 1,340  

 
14

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
3. Debt   
 
Debt consists of the following:
 
   
2014
   
2013
 
Revolving credit line
  $ 28,130     $ 23,603  
Term loan
    63,442       54,492  
      91,572       78,095  
Less – current portion
    28,130       23,603  
 
  $ 63,442     $ 54,492  
 
Revolving Credit Line
 
The revolving credit line with a bank provides for maximum borrowings of $60 million (subject to availability as defined in the agreement) with an expiration date of April 2017. An additional $10 million may be requested (for a maximum of $70 million), subject to approval by the banks. At the option of the Company, loans may be Base Rate Loans (interest payable at the higher of (a) the Prime Rate and (b) the Federal Funds Effective Rate plus an applicable margin) or LIBOR Rate Loans (interest payable at LIBOR plus an applicable margin). Applicable margins are determined quarterly based on the Fixed Charge Coverage Ratio for the previous four quarters.

At October 26, 2014, the Company had $4,130 Base Rate Loans outstanding and $24,000 LIBOR Rate Loans outstanding bearing interest at 3.50% and 1.90%, respectively, for a blended rate of 2.13% (2013 blended rate of 2.28%). The credit line requires the Company to maintain minimum levels of Fixed Charges to EBITDA, as defined in the agreement. At October 26, 2014, the Company was in compliance with this requirement. The credit line is collateralized by substantially all the Company’s assets.

The Company’s cash receipts are deposited into a lender-controlled lockbox and are automatically applied to the line. In addition, the Loan and Security agreement contains a subjective acceleration clause relating to an event of default defined as a material adverse  change. Accordingly, the revolving credit line is classified as a current liability.

 
15

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
3. Debt (Concluded)
 
Term Loan
 
The term loan lenders have an ownership interest in the Company’s parent. The term loan is collateralized by a second lien on substantially all the Company’s assets. The agreement contains restrictions on capital expenditures, distributions, additional debt, covenants for financial and other matters customarily included in loan agreements. At October 26, 2014, the Company was in compliance with these restrictions. Interest on the term loan is non-cash or pay-in-kind (PIK) interest at 15.5%, with principal and interest payments required only when the Company has excess availability under the revolving credit line, as defined. No principal or interest payments were made during 2014 or 2013. All payments due under the term loan are shown as long-term liabilities in the accompanying consolidated balance sheet due to the contingent nature of the future payments. The term loan matures on October 31, 2017.
 
4. Noncontrolling Interest

The Series A Preferred Shares in HMI are non-voting and have priority in the event of liquidation. The holders of the Series A Preferred Shares are entitled to, when and if declared by the Board of Directors, the annual amount of $75.00 per share payable in cash on December 31. No dividends have been declared through January 2, 2014. The dividend rights of the common stockholder are junior to those of the preferred stockholder; accordingly, no dividends may be paid on common stock while preferred dividends are outstanding.


 
16

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes
 
Income tax benefit (expense) consisted of the following:
 
    2014     2013  
Current            
Federal
  $ -     $ 457  
State
    (48 )     81  
Total current
    (48 )     538  
Deferred                
Federal
    -       -  
State
    -       -  
Total deferred
    -       -  
Total income tax benefit (expense)
  $ (48 )   $ 538  
 
The following reconciles taxes at the federal statutory rate with reported income tax benefit (expense):

   
2014
   
2013
 
Expected income tax benefit (expense) (at 34%)
  $ (50 )   $ 876  
Increase (decrease) resulting from:
               
State income taxes, net of federal benefit     (31 )     53  
Other
    (23 )     186  
Change in valuation allowance for deferred tax assets     56       (577 )
Provision for income taxes    $ (48 )   $ 538  
 
 
17

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes (Continued)
 
The components of deferred tax assets and liabilities are as follows:
 
    2014     2013  
Deferred tax assets:            
Accounts receivable
  $ 96     $ 118  
Inventories
    249       140  
Property and equipment
    833       542  
Accruals
    2,133       1,221  
Deferred compensation and pension
    1,387       1,717  
Federal net operating loss
    6,927       7,918  
State net operating loss
    803       908  
Minimum tax credits
    94       94  
Other
    24       11  
Total gross deferred tax assets
    12,546       12,669  
Less – valuation allowance
    (12,016 )     (12,073 )
Net deferred tax assets
    530       596  
Deferred tax liabilities:                
Intangible assets
    (518 )     (586 )
Other
    (12 )     (10 )
Total gross deferred tax liabilities
    (530 )     (596 )
Net deferred tax liability
  $ -     $ -  
 
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate future taxable income. The Company is required to periodically assess the need to establish a valuation allowance against its deferred tax assets by considering whether it is more likely than not that the tax assets will be fully utilized. Based on the Company’s projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its federal net operating loss carryforwards. However, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that, absent recent historical evidence of the Company’s ability to generate taxable income, a valuation reserve against deferred tax assets should be established. Accordingly, in connection with the losses incurred in the most recent years, management established a valuation allowance against its deferred tax assets. The valuation allowance established by management is subject to periodic review and adjustment based on changes in facts and circumstances.

 
18

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes (Concluded)
 
At October 26, 2014, the Company had approximately $20.4 million of net operating loss carryforwards that will expire between 2030 and 2034.

Tax years ended in 2011 through 2014 remain subject to examination by both Federal and North Carolina authorities.
 
6. Retirement Plans
 
Defined Benefit Pension Plan
 
The Company’s defined benefit pension plan (“Pension Plan”) covers substantially all employees employed prior to April 1, 2005. The Pension Plan was amended to freeze participation and all future benefit accruals. Benefits were based on years of service and the employee’s highest five-year average compensation. The Company’s funding policy is to make contributions to the plan based on the actuarially determined funding requirements of ERISA.

The following provides a reconciliation of benefit obligations, plan assets and funded status of the Pension Plan:
 
   
2014
   
2013
 
 
           
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 17,452     $ 20,687  
Interest cost
    795       789  
Actuarial (gain) loss
    2,291       (2,793 )
Benefits paid
    (1,234 )     (1,231 )
Projected benefit obligation, end of year
    19,304       17,452  
 
               
Change in plan assets:
               
Fair value of plan assets, beginning of year
    14,023       12,398  
Actual return on plan assets
    500       1,887  
Employer contributions
    632       969  
Benefits paid
    (1,234 )     (1,231 )
Fair value of plan assets, end of year
    13,921       14,023  
Funded status at end of year
  $ (5,383 )   $ (3,429 )
 
 
19

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
Amounts recognized in the consolidated balance sheets consist of:
 
   
2014
   
2013
 
 
           
Current liabilities
  $ -     $ -  
Non-current liabilities
    (5,383 )     (3,429 )
    $ (5,383 )   $ (3,429 )
 
Weighted-average assumptions:
 
   
2014
   
2013
 
 
           
Discount rate
    4.25 %     4.72 %
Expected long-term rate of return on plan assets
    7.00 %     7.00 %
 Rate of compensation increase
    N/A       N/A  
 
Net pension cost included the following components:
 
   
2014
   
2013
 
 
           
Interest cost
  $ 795     $ 789  
Estimated return on plan assets
    (900 )     (821 )
Amortization of net loss
    -       142  
Total pension expense (income)
  $ (105 )   $ 110  
 
To develop the long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.
 
The Company’s investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.
 
 
20

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
The investment policy is periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The same fiduciary assists in specific investment review and selection. The policy is established and administered in a manner that is compliant at all times with applicable government regulations.
 
The Company’s overall investment strategy is to achieve a mix of approximately 75% of investments for long-term growth and 25% for near-term benefit payments with a diversification of asset types and fund strategies. The current allocations for plan assets are 80% equity and 20% corporate bonds and U.S. Treasury Securities.
 
Mutual funds primarily include investments in a range of asset classes, including: domestic and international equities (both large and small cap), fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments, and U.S. Treasuries.
 
The following are the major categories of plan assets measured at fair value on October 26, 2014, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Money Market Funds
  $ 222     $ -     $ -     $ 222  
Mutual Funds:
                               
International Funds
    3,650       -       -       3,650  
Growth Funds
    2,893       -       -       2,893  
Bond Funds
    2,869       -       -       2,869  
Value Funds
    1,469       -       -       1,469  
Emerging Market Funds
    1,460       -       -       1,460  
Small Blend Funds
    1,358       -       -       1,358  
 
  $ 13,921     $ -     $ -     $ 13,921  

 
21

 
                                          
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
The following are the major categories of plan assets measured at fair value as of October 27, 2013.
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
Money Market Funds
  $ 443     $ -     $ -     $ 443  
Mutual Funds:
                               
Growth Funds
    3,319       -       -       3,319  
International Funds
    3,057       -       -       3,057  
Bond Funds
    2,691       -       -       2,691  
Value Funds
    1,976       -       -       1,976  
Small Blend Funds
    1,271       -       -       1,271  
Emerging Market Funds
    1,266       -       -       1,266  
 
  $ 14,023     $ -     $ -     $ 14,023  
 
The Company expects to contribute $809 to the Pension Plan in 2015. Also, see Note 7.
 
The benefits expected to be paid in each year from 2015 through 2019 are $1,201, $1,180, $1,176, $1,165 and $1,164, respectively. The aggregate benefits expected to  be paid in the five years from 2020 through 2024 are $5,781. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at October 26, 2014. The accumulated benefit obligation under the plan was $19,304 at October 26, 2014. The amounts recognized in accumulated other comprehensive loss ($3,482) are comprised of net actuarial loss.

Supplemental Executive Retirement Program
 
The Company sponsors an unfunded Supplemental Executive Retirement Program (“SERP”), which is a nonqualified plan that provides additional retirement benefits to certain key employees. Effective September 30, 2006, the plan was amended to freeze participation and all future benefit accruals.
 
 
22

 
 
Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
The following provides a reconciliation of benefit obligations, plan assets and funded status of the SERP:

   
2014
   
2013
 
             
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 2,276     $ 2,825  
Interest cost
    89       89  
Actuarial (gain) loss
    432       (381 )
Benefits paid
    (223 )     (257 )
Projected benefit obligation, end of year
    2,574       2,276  
Change in plan assets:
               
Fair value of plan assets, beginning of year
    -       -  
Employer contributions
    223       257  
Benefits paid
    (223 )     (257 )
Fair value of plan assets, end of year
    -       -  
Funded status at end of year
  $ (2,574 )   $ (2,276 )
 
Amounts recognized in the consolidated balance sheets consist of:
 
   
2014
   
2013
 
Current liabilities
  $ (223 )   $ (221 )
Non-current liabilities
    (2,351 )     (2,055 )
    $ (2,574 )   $ (2,276 )
 
Weighted-average assumptions:
 
   
2014
   
2013
 
             
Discount rate
    3.85 %     4.09 %
Rate of compensation increase
    N/A       N/A  
 
Net cost of this plan included the following components:
 
 
 
2014
   
2013
 
Interest cost
  $ 89     $ 89  
Amortization of net loss
    13       51  
Total SERP expense
  $ 102     $ 140  
 
 
23

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Concluded)

The benefits expected to be paid in each year from 2015 through 2019 are $222, $219, $216, $208 and $203, respectively. The aggregate benefits expected to be paid in the five years from 2020 through 2024 are $916. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at October 26, 2014. The Company expects to amortize $36 of net loss in 2015. The accumulated benefit obligation under the plan was $2,574 at October 26, 2014. The amounts recognized in accumulated comprehensive loss ($797) are comprised of net actuarial loss.
 
Defined Contribution Plan
 
The Company has a qualified defined contribution plan covering substantially all employees of the Company who have met certain service and age requirements. Company contributions charged to expense were approximately $283 for 2014 and $270 for 2013.

Deferred Compensation Plan
 
The Company permitted certain former employees to defer compensation and earn interest on the deferred amounts. Interest is credited to participant accounts at a stated rate in the related agreements, which approximates 8%. Included in deferred compensation and pension obligations is $118 and $154 related to the deferred compensation plan at October 26, 2014 and October 27, 2013, of which $78 and $117 is included in long-term liabilities.
 
7. Commitments and Contingencies

Pension Funding
 
On March 22, 2013, the Pension Benefit Guaranty Corporation (PBGC) notified the Company of its determination that the 2009 relocation of certain Company operations from Pulaski, Virginia to High Point, North Carolina constituted a “cessation of operations” under ERISA section 4062(e) with respect to participants in the Pulaski Furniture Corporation Pension Plan for Employees (the “Pension Plan”) sponsored by the Company. As a result, the PBGC requested that the Company place $8.0 million in escrow with the PBGC or alternatively provide a bond to provide security in case the Pension Plan terminated by August 28, 2014 in a distressed or involuntary termination. On December 31, 2013, the PBGC Appeals Board denied the Company’s appeal.
 
 
24

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
7. Commitments and Contingencies (Continued)
 
On July 2, 2014, after further negotiations, the Company and the PBGC entered into a settlement agreement resolving this dispute under which the Company provided the PBGC a bond in the amount of $8.0 million, to be effective until September 2, 2014, in the event the Pension Plan experienced a distress or involuntary termination. In the settlement agreement, the PBGC acknowledged that it has made no determination concerning whether termination of the Pension Plan is needed and has no present intent to initiate proceedings to terminate the Pension Plan.

On July 8, 2014, the PBGC announced a moratorium, until the end of 2014, on the enforcement of 4062(e) cases. In its press release, the PBGC stated that “during the moratorium, from July 8 to December 31, 2014, the PBGC will cease enforcement efforts on open and new cases.”

Subsequent to September 2, 2014, the bond was cancelled and returned promptly to the Company.

Leases
 
The Company is obligated under various noncancelable operating leases for offices, warehouses and showrooms that expire at various dates through fiscal 2022. Certain of these leases contain escalation clauses or contingent rental payments based on the change in the Consumer Price Index. At October 26, 2014, minimum rental payments due under operating leases with original commitments in excess of one year are as follows:
 
2015
  $ 2,540  
2016
    1,603  
2017
    438  
2018
    435  
2019
    439  
Thereafter
    1,083  
Total minimum rental payments
  $ 6,538  
 
Total rent expense under operating leases for 2014 and 2013 was $3,227 and $3,185. Taxes, insurance and maintenance expenses related to operating leases are also obligations of the Company.
 
 
25

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)


7. Commitments and Contingencies (Continued)

Letters of Credit
 
The Company is party to letters of credit totaling approximately $790 at October 26, 2014. The letters of credit guarantee performance of various trade activities to third parties. Management does not expect any material losses to result from these off-balance-sheet instruments because performance is not expected to be required and, therefore, is of the opinion that the fair value of these instruments is zero.
 
Trade Cases
 
Tariff expense is based on the most current rates published by the U.S. Department of Commerce. These rates are potentially subject to an administrative review process starting approximately one year after the publication date. The final amounts will depend on whether administrative reviews are performed and the outcome of those reviews, if any, on the Company’s vendors.
 
In December 2014 the Court of Appeals for the Federal Circuit (CAFC) ruled that a determination in 2010 by the Department of Commerce related to anti-dumping duties imposed on the Company was supportable. The Company has begun the process of appealing the CAFC decision. Management has determined that the following range of probable outcomes to this appeal. If the Company is ultimately successful on all contested issues, management anticipates a return of its original deposits of approximately $139. However, if the Company is unsuccessful on  all  contested  issues management  anticipates the Company will be required to pay approximately $442. Management believes the ultimate result could be any amount within this range.
 
Concentrations of Sourcing Risk
 
The Company sources imported products through over one hundred different vendors located in three countries. Because of the large number and diverse nature of the foreign vendors from which the Company can source their imported products, the Company has some flexibility in the placement of products with any particular vendor or country.
 
 
26

 

Home Meridian Holdings, Inc.
and Subsidiaries
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
7. Commitments and Contingencies (Concluded)

Business and Credit Concentrations
 
Two customers accounted for 29% of 2014 sales and 39% of accounts receivable at October 26, 2014. Two customers accounted for 27% of 2013 sales and 32% of accounts receivable at October 27, 2013.
 
Litigation
 
The Company is involved in various other legal proceedings and claims, arising in the ordinary course of its business, that have not been finally adjudicated. These actions, when finally concluded and determined, will not, in the opinion of management, have a material adverse effect upon the consolidated financial position of the Company.

 
 
 
27

 
 
 
 
 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended October 27, 2013 and October 28, 2012
 
 
 
 
 

 


GRAPHIC
 


 
 

 




 

 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of
Home Meridian Acquisition, Inc.)
 





 
 


Consolidated Financial Statements
Years ended October 27, 2013 and October 28, 2012
 
 


 
 

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Contents 

 
Independent Auditor’s Report
3-4
   
Consolidated Financial Statements
 
   
Balance sheets
5
   
Statements of comprehensive income (loss)
6
   
Statements of changes in capital deficit
7
   
Statements of cash flows
8
   
Summary of significant accounting policies
9-13
   
Notes to financial statements
14-27
 
 
 
2

 
 
GRAPHIC
Independent Auditor’s Report

 
To the Members of
Home Meridian Holdings, Inc. and Subsidiary

We have audited the accompanying consolidated financial statements of Home Meridian Holdings, Inc. and Subsidiary (a wholly owned subsidiary of Home Meridian Acquisition, Inc.), which comprise the consolidated balance sheets as of October 27, 2013 and October 28, 2012, and the related consolidated statements of comprehensive income (loss), changes in capital deficit and cash flows for the years then ended, and the related summary of significant accounting policies and notes to the consolidated financial statements.
 
Management’s Responsibility for the Financial Statements
 
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
 
Auditor’s Responsibility
 
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
 
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error.  In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
 
 
3

 
 
Opinion
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Home Meridian Holdings, Inc. and Subsidiary as of October 27, 2013 and October 28, 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
GRAPHIC
High Point, North Carolina
January 2, 2014
 
 
 
 
 
 
Smith Leonard PLLC, Accountants & Consultants  4035 Premier Drive, Suite 300, High Point NC 27265-8311  Phone: 336.883.0181 Fax: 336.841.8764
 
 
4

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Balance Sheets
(in thousands except share data)

 
   
October 27,
2013
   
October 28,
2012
 
Assets
           
Current assets
           
Cash
  $ 8     $ 7  
Trade receivables, net of allowance for doubtful accounts
of $318 and $313
    33,947       29,968  
Inventories
    30,741       31,227  
Refundable income taxes
    1,366       -  
Other current assets
    1,260       987  
Total current assets
    67,322       62,189  
Property and equipment, net
    3,656       3,953  
Other assets
               
Intangible assets, net
    3,694       3,912  
Deferred financing costs, net
    454       350  
Total other assets
    4,148       4,262  
    $ 75,126     $ 70,404  
Liabilities and Capital Deficit
               
Current liabilities
               
Revolving credit line
  $ 23,603     $ 30,018  
Accounts payable
    15,199       9,339  
Accrued expenses
    6,650       6,012  
Deferred compensation and pension obligations, current portion
    258       320  
Total current liabilities
    45,710       45,689  
Long-term debt
    54,492       46,807  
Deferred compensation and pension obligations, less current portion
    5,601       10,981  
Total liabilities
    105,803       103,477  
Commitments and contingencies
               
Capital deficit
               
Common stock of $0.01 par value; authorized 20,000,000
voting shares, issued and outstanding 12,991,888 shares
    130       130  
Accumulated deficit
    (37,637 )     (35,599 )
Accumulated other comprehensive loss
    (1,170 )     (5,604 )
Total Home Meridian Holdings, Inc. capital deficit
    (38,677 )     (41,073 )
Noncontrolling interest
    8,000       8,000  
Total capital deficit
    (30,677 )     (33,073 )
    $ 75,126     $ 70,404  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.

 
5

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Comprehensive Income (Loss)
(in thousands) 


Year ended
 
October 27,
2013
   
October 28,
2012
 
 
           
Net sales
  $ 224,749     $ 225,235  
                 
Cost of sales
    180,279       180,374  
                 
Gross profit
    44,470       44,861  
                 
Selling, general and administrative expenses
    38,176       38,945  
                 
Operating income
    6,294       5,916  
                 
Other expense
               
Interest expense
    (8,858 )     (7,831 )
Other, net
    (12 )     (7 )
                 
Total other expense, net
    (8,870 )     (7,838 )
                 
Loss before income taxes
    (2,576 )     (1,922 )
                 
Income tax benefit (expense)
    538       (742 )
                 
Net loss
    (2,038 )     (2,664 )
                 
Other comprehensive income (loss), net of tax:
               
Decrease (increase) in minimum pension liabilities, net of deferred
    4,434       (1,906 )
                 
Comprehensive income (loss)
  $ 2,396     $ (4,570 )
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
6

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Changes in Capital Deficit
(in thousands except share data) 

 
   
Common
Shares
   
Common
Stock
   
Accumulated
Deficit
   
Accumulated
Other
Comprehensive
Loss
   
Non-
controlling
Interest
   
Total
Capital
Deficit
 
Balance, October 30, 2011
    12,991,888     $ 130     $ (32,935 )   $ (3,698 )   $ 8,000     $ (28,503 )
                                                 
Net loss
    -       -       (2,664 )     -       -       (2,664 )
Increase in minimum pension liability, net of deferred income taxes of $0
    -       -       -       (1,906 )     -       (1,906 )
                                                 
Balance, October 28, 2012
    12,991,888       130       (35,599 )     (5,604 )     8,000       (33,073 )
                                                 
Net loss
    -       -       (2,038 )     -       -       (2,038 )
Decrease in minimum pension liability, net of deferred income taxes of $0
    -       -       -       4,434       -       4,434  
                                                 
Balance, October 27, 2013
    12,991,888     $ 130     $ (37,637 )   $ (1,170 )   $ 8,000     $ (30,677 )

See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
7

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Consolidated Statements of Cash Flows
(in thousands) 

 
Year ended
 
October 27,
2013
   
October 28,
2012
 
 
           
Cash flows from operating activities
           
Net loss
  $ (2,038 )   $ (2,664 )
Adjustments to reconcile net loss to net cash provided by
operating activities:
               
Depreciation
    1,366       1,147  
PIK interest added to debt
    7,685       6,625  
Amortization of intangible assets
    218       218  
Amortization of deferred financing costs
    290       269  
Provision for bad debts
    145       470  
Pension and deferred compensation payments
    (1,270 )     (1,270 )
Provision for pension and deferred compensation
    262       285  
Loss on disposal of fixed assets
    28       36  
Changes in operating assets and liabilities:
               
Trade receivables
    (4,124 )     (986 )
Inventories
    486       291  
Refundable income taxes
    (1,366 )     -  
Other current assets
    (273 )     160  
Accounts payable and accrued expenses
    6,498       (145 )
Net cash provided by operating activities
    7,907       4,436  
Cash flows from investing activities
               
Purchases of property and equipment
    (1,097 )     (2,190 )
Net cash used in investing activities
    (1,097 )     (2,190 )
Cash flows from financing activities
               
Net borrowings (repayments) on revolving credit facility
    (6,415 )     (2,146 )
Refinancing fees
    (394 )     (99 )
Net cash use d in financing activities
    (6,809 )     (2,245 )
Change in cash
    1       1  
Cash, beginning of year
    7       6  
Cash, end of year
    8       7  
Supplemental disclosures of cash flows information
               
Cash paid for interest
    923       866  
Cash paid for income taxes
  $ 730     $ -  
 
See accompanying summary of significant accounting policies
and notes to consolidated financial statements.
 
 
8

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Business
Home Meridian Holdings, Inc. (Home Meridian or the Company) is a global design, sourcing and marketing company headquartered in High Point, North Carolina. Home Meridian markets its products under the Pulaski Furniture, Samuel Lawrence Furniture (SLF), Creations, Samuel Lawrence Hospitality (SLH), and Prime Resource International (PRI) brand names. The Company imports various classes and styles of furniture through its global network of suppliers, and sells these products to retailers throughout North America. SLH products are sold to hospitality companies throughout the United States.
   
 
The Company is a wholly owned subsidiary of Home Meridian Acquisition, Inc., which was formed solely for the acquisition of the Company.
   
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Home Meridian International, Inc. (HMI), (formally Pulaski Furniture Corporation). Significant intercompany accounts and transactions have been eliminated.
   
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
   
Fiscal Year
The Company’s fiscal year ends on the last Sunday of October. Fiscal years ended October 27, 2013 and October 28, 2012 each comprised of 52 weeks.
   
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. There were no cash equivalents at October 27, 2013 or October 28, 2012. Balances at times may exceed insured limits.
 
 
 
 
9

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Trade Accounts Receivable
and Credit Risk
Accounts receivable are customer obligations due under normal trade terms. Substantially all of the Company’s trade receivables are from furniture retailers and hospitality companies. The Company performs continuing credit evaluations of its customers’ financial condition and, although it generally does not require collateral, advance payments may be required from customers in certain circumstances. Management purchases credit insurance for certain customer balances.
 
 
 
Management reviews accounts receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The allowance for doubtful accounts includes any accounts receivable balances that are determined to be uncollectible, along with a general reserve based on management’s assessment of their customers’ overall financial position. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company has a limited number of customers with individually large amounts due at any given balance sheet date. Any unanticipated change in one of those customers’ credit worthiness, or other matters affecting the collectability of amounts due from such customers, could have a material effect on the results of operations in the period in which such changes or events occur. Based on all available information, management believes the allowance for doubtful accounts as of October 27, 2013 is adequate. However, actual write-offs might exceed the recorded allowance.
   
Inventories
Inventories include finished goods acquired for resale and are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
   
Property and Equipment
Property and equipment are recorded at acquired values or cost less accumulated depreciation. Items costing under $5 are generally not capitalized. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets. The cost of significant renewals and betterments are capitalized, while the cost of maintenance and repairs, which do not improve or extend the life of the respective assets, are charged to expense as incurred. The cost and accumulated depreciation of property and equipment are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the determination of net income or loss.
 
 
Impairment or Disposal of
Long-Lived Assets
The Company reviews the carrying values of its long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
   
 
 
10

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Intangible Assets
Definite-lived intangible assets are amortized over their estimated useful lives, determined based on the expected cash flows to be received from these relationships or assets.
   
 
Management used qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite- lived intangible asset is impaired, in which case management takes no further action. However, if management concludes that an indefinite- lived intangible is likely to be impaired, management determines the fair value of the indefinite-lived intangible asset based on a quantitative impairment test. The Company did not record any impairment in 2013 or 2012.
   
Deferred Financing Costs
Financing costs are deferred and amortized to interest expense using the straight-line method over the life of the related indebtedness or credit facility. The straight-line method approximates the effective interest rate method. Accumulated amortization was $871 and $581 in 2013 and 2012.
 
 
Fair Value of Financial
Instruments
The carrying amount of the Company’s financial instruments, including cash, trade receivables, and accounts payable approximate their fair values due to the short-term nature of these instruments. Management believes that the estimated fair value of the Company’s debt approximates carrying value, as the interest rates on these obligations are variable or comparable to market rates available to the Company through similar borrowings.
   
Comprehensive Income
The Company reports other comprehensive income or loss as a separate component from net income or loss within the consolidated statements of comprehensive income (loss) and consolidated statements of changes in capital deficit. Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, other comprehensive income (loss) consists of changes in the net actuarial loss on pension liabilities, net of deferred taxes.
   
 
 
11

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Revenue Recognition
Revenue is recognized when product is shipped or delivered to the customer (based on shipping terms) and ownership has been transferred to the customer. Various incentives may be provided to customers from time to time. These incentives are recorded as reductions to net sales at the time of recording the sale.
 
 
Shipping and Handling
Costs
The Company invoices its customers for the direct cost incurred to transport its product to the customer location. These invoiced amounts are included in net sales. The related costs are included in cost of sales.
 
 
Advertising Costs
The Company incurs catalog related expenses that are recorded as a component of other current assets and expensed as they are used. Other costs incurred for advertising are expensed when incurred. Advertising expense for 2013 and 2012 totaled $699 and $728.
   
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in deferred tax assets and liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
   
 
Tax benefits are recorded only for tax positions that would be more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards. The Company’s policy is to classify any interest or penalties as income tax expense, if applicable.
   
 
 
12

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Summary of Significant Accounting Policies
(in thousands) 

 
Subsequent Events
Management has evaluated events occurring subsequent to the balance sheet date through January 2, 2014, the date that the consolidated financial statements were available to be issued and has determined no events require adjustment to or additional disclosure in the consolidated financial statements.
 

 
 
 
 
13

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
1. Property and Equipment

Property and equipment consists of the following:
 
   
Useful
Lives
   
2013
   
2012
 
Leasehold improvements
 
2 to 5
    $ 4,228     $ 4,143  
Machinery and equipment
 
5 to 10
      341       383  
Furniture, fixtures and office equipment
 
3 to 10
      3,728       2,480  
Vehicles
 
5 to 7
      9       3  
Construction in progress
    -       626       184  
Property and equipment, at cost
            8,932       7,193  
Less – accumulated depreciation
            5,276       3,240  
Property and equipment, net
          $ 3,656     $ 3,953  
 
2. Intangible Assets
 
The carrying value and accumulated amortization of intangible assets are as follows:
 
   
October 27, 2013
   
October 28, 2012
 
 
 
Gross
   
Accumulated
Amortization
   
Gross
   
Accumulated
Amortization
 
Indefinite-lived
                       
Trade names
  $ 2,136     $ -     $ 2,136     $ -  
Definite-lived
                               
Customer relationships
    2,613       1,055       2,613       837  
Total
  $ 4,749     $ 1,055     $ 4,749     $ 837  
 
Amortization on customer relationships is computed over 12 years. Amortization expense for intangible assets for 2013 and 2012 was $218.

The estimated amortization expense for the next five years and thereafter is as follows:

2014
  $ 218  
2015
    218  
2016
    218  
2017
    218  
2018
    218  
Thereafter
    468  
    $ 1,558  

 
14

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
3. Debt

Debt consists of the following:
 
   
2013
   
2012
 
Revolving credit line
  $ 23,603     $ 30,018  
Term loan
    54,492       46,807  
      78,095       76,825  
Less – current portion
    23,603       30,018  
 
  $ 54,492     $ 46,807  
 
Revolving Credit Line
 
At October 28, 2012, the Company had a revolving credit line with a bank that provided for maximum borrowings of $42 million (subject to availability as defined in the agreement). In December 2012, this line was amended to increase the availability to $60 million and extend the expiration date to April 2017. An additional $10 million may be requested (for a maximum of $70 million), subject to approval by the banks. At the option of the Company, loans may be Base Rate Loans (interest payable at the higher of (a) the Prime Rate and (b) the Federal Funds Effective Rate plus an applicable margin) or LIBOR Rate Loans (interest payable at LIBOR plus an applicable margin). Applicable margins are determined quarterly based on the Fixed Charge Coverage Ratio for the previous four quarters.
 
At October 27, 2013, the Company had $1,603 Base Rate Loans outstanding and $22,000 LIBOR Rate Loans outstanding bearing interest at 3.75% and 2.27%, respectively, for a blended rate of 2.28% (2012 blended rate of 2.27%). The credit line requires the Company to maintain minimum levels of Fixed Charges to EBITDA, as defined in the agreement. At October 27, 2013, the Company was in compliance with this requirement. The credit line is collateralized by substantially all the Company’s assets.

The Company’s cash receipts are deposited into a lender-controlled lockbox and are automatically applied to the line. In addition, the Loan and Security agreement contains a subjective acceleration clause relating to an event of default defined as a material adverse  change. Accordingly, the revolving credit line is classified as a current liability.

 
15

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
3. Debt (Concluded)
 
Term Loan
 
The term loan lenders have an ownership interest in the Company’s parent. The term loan is collateralized by a second lien on substantially all the Company’s assets. The agreement contains restrictions on capital expenditures, distributions, additional debt, covenants for financial and other matters customarily included in loan agreements. At October 27, 2013, the Company was in compliance with these restrictions. Interest on the term loan is non-cash or pay-in-kind interest at 15.5%, with principal and interest payments required only when the Company has excess availability under the revolving credit line, as defined. No principal or interest payments were made during 2013 or 2012. All payments due under the term loan are shown as long-term liabilities in the accompanying consolidated balance sheet due to the contingent nature of the future payments. The term loan matures on October 31, 2017.
 
4. Noncontrolling Interest
 
The Series A Preferred Shares in HMI are non-voting and have priority in the event of liquidation. The holders of the Series A Preferred Shares are entitled to, when and if declared by the Board of Directors, the annual amount of $75.00 per share payable in cash on December 31. No dividends have been declared through January 2, 2014. The dividend rights of the common stockholder are junior to those of the preferred stockholder; accordingly, no dividends may be paid on common stock while preferred dividends are outstanding.
 
 
 
 
16

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes
 
Income tax benefit (expense) consisted of the following:

    2013     2012  
Current            
Federal
  $ 457     $ (551 )
State
    81       (191 )
Total current
    538       (742 )
Deferred                
Federal
    -       -  
State
    -       -  
Total deferred
    -       -  
Total income tax benefit (expense)
  $ 538     $ (742 )
 
The following reconciles taxes at the federal statutory rate with reported income tax benefit (expense):
 
   
2013
   
2012
 
Expected income tax benefit (at 34%)
  $ 876     $ 654  
Increase (decrease) in income tax expense resulting from:                
State income taxes, net of federal benefit
    53       (127 )
Other
    186       49  
Change in valuation allowance for deferred tax assets     (577 )     (1,318 )
Provision for income taxes       $ 538     $ (742 )
 
 
17

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes (Continued)

The components of deferred tax assets and liabilities are as follows:
 
    2013     2012  
Deferred tax assets:            
Accounts receivable
  $ 118     $ 116  
Inventories
    140       185  
Property and equipment
    542       470  
Interest, paid-in-kind
    -       7,623  
Accruals
    1,221       1,684  
Deferred compensation and pension
    1,717       2,089  
Federal net operating loss
    7,918       -  
State net operating loss
    908       -  
Minimum tax credits
    94       -  
Other
    11       -  
Total gross deferred tax assets
    12,669       12,167  
Less – valuation allowance
    (12,073 )     (11,497 )
Net deferred tax assets
    596       670  
Deferred tax liabilities:                
Intangible assets
    (586 )     (654 )
Other
    (10 )     (16 )
Total gross deferred tax liabilities
    (596 )     (670 )
Net deferred tax liability
  $ -     $ -  
 
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate future taxable income. The Company is required to periodically assess the need to establish a valuation allowance against its deferred tax assets by considering whether it is more likely than not that the tax assets will be fully utilized. Based on the Company’s projections of future operations, the Company believes that it will generate sufficient taxable income to utilize all of its federal net operating loss carryforwards. However, projected financial performance alone is not sufficient to warrant the recognition of a deferred tax asset to the extent the Company has had cumulative losses in recent years. Rather, the presumption exists that, absent recent historical evidence of the Company’s ability to generate taxable income, a valuation reserve against deferred tax assets should be established.
 
 
18

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
5. Income Taxes (Concluded)
 
Accordingly, in connection with the losses incurred in the most recent years, management established a valuation allowance against its deferred tax assets. The valuation allowance established by management is subject to periodic review and adjustment based on changes in facts and circumstances.
 
During 2013, the Company filed an application for an accounting method change with the IRS to change its method of accounting for interest expense to immediately deduct its paid-in-kind interest. It is anticipated that the IRS will approve the method change, which will result in a net operating loss carryforward (effectively, the paid-in-kind interest deferred tax asset is being converted to a net operating loss deferred tax asset). All deferred tax assets continue to be fully reserved.

At October 27, 2013, the Company had approximately $23.2 million of net operating loss carryforwards that will expire between 2030 and 2033.

Tax years ended in 2010 through 2013 remain subject to examination by both Federal and North Carolina authorities.
 
6. Retirement Plans
 
Defined Benefit Pension Plan
 
The Company’s defined benefit pension plan (“Pension Plan”) covers substantially all employees employed prior to April 1, 2005. The pension plan was amended to freeze participation and all future benefit accruals. Benefits were based on years of service and the employee’s highest five-year average compensation. The Company’s funding policy is to make contributions to the plan based on the actuarially determined funding requirements of ERISA.

 
19

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
The following provides a reconciliation of benefit obligations,  plan assets and funded status of the Pension Plan:

   
2013
   
2012
 
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 20,687     $ 19,369  
Interest cost
    789       869  
Actuarial (gain) loss
    (2,793 )     1,795  
Benefits paid
    (1,231 )     (1,346 )
Projected benefit obligation, end of year
    17,452       20,687  
 
               
Change in plan assets:
               
Fair value of plan assets, beginning of year
    12,398       11,961  
Actual return on plan assets
    1,888       822  
Employer contributions
    969       961  
Benefits paid
    (1,232 )     (1,346 )
Fair value of plan assets, end of year
    14,023       12,398  
Funded status at end of year
  $ (3,429 )   $ (8,289 )
 
Amounts recognized in the consolidated balance sheets consist of:

   
2013
   
2012
 
 
           
Current liabilities
  $ -     $ -  
Non-current liabilities
    (3,429 )     (8,289 )
    $ (3,429 )   $ (8,289 )
 
Weighted-average assumptions:
            
    2013     2012  
Discount rate
    4.72 %     3.94 %
Expected long-term rate of return on plan assets
    7.00 %     7.00 %
Rate of compensation increase
    N/A       N/A  
 
 
20

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)

Net pension cost included the following components:       
    2013     2012  
Interest cost
  $ 789     $ 869  
Estimated return on plan assets
    (821 )     (812 )
Amortization of net loss
    142       73  
Total pension expense
  $ 110     $ 130  
 
To develop the long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio.

The Company’s investment policy includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges by asset class. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plan’s actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies.

The investment policy is periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The same fiduciary assists in specific investment review and selection. The policy is established and administered in a manner that is compliant at all times with applicable government regulations.
 
The Company’s overall investment strategy is to achieve a mix of approximately 75% of investments for long-term growth and 25% for near-term benefit payments with a diversification of asset types and fund strategies. The current allocations for plan assets are 80% equity and 20% corporate bonds and U.S. Treasury Securities.

 
21

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Continued)
 
Equity securities primarily include investments in large-cap and mid-cap companies primarily located in the United States with small international exposure. Mutual funds primarily include investments in a range of asset classes, including: domestic and international equities (both large and small cap), fixed income securities such as corporate bonds, mortgage- backed securities, real estate investments, and U.S. Treasuries.
 
The following are the major categories of plan assets measured at fair value on October 27, 2013, using quoted prices in active markets for identical assets (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3).
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Funds
  $ 443     $ -     $ -     $ 443  
Mutual Funds:
                               
Growth Funds
    3,319       -       -       3,319  
International Funds
    3,057       -       -       3,057  
Bond Funds
    2,691       -       -       2,691  
Value Funds
    1,976       -       -       1,976  
Small Blend Funds
    1,271       -       -       1,271  
Emerging Market Funds
    1,266       -       -       1,266  
    $ 14,023     $ -     $ -     $ 14,023  
 
The following are the major categories of plan assets measured at fair value as of October 28, 2012.
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Money Market Funds
  $ 200     $ -     $ -     $ 200  
Mutual Funds:
                               
Bond Funds
    3,518       -       -       3,518  
Value Funds
    3,396       -       -       3,396  
Growth Funds
    3,208       -       -       3,208  
International Funds
    1,177       -       -       1,177  
Small Blend Funds
    899       -       -       899  
 
  $ 12,398     $ -     $ -     $ 12,398  
 
The Company expects to contribute $721 to the Pension Plan in 2014. Also, see Note 7.
 
 
22

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)


6. Retirement Plans (Continued)
 
The benefits expected to be paid in each year from 2014 through 2018 are $1,218, $1,165, $1,141, $1,134 and $1,121, respectively. The aggregate benefits expected to  be paid in the five years from 2019 through 2023 are $5,548. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at October 27, 2013. The accumulated benefit obligation under the plan was $17,452 at October 27, 2013. The amounts recognized in accumulated other comprehensive loss ($790) are comprised of net actuarial loss.
 
Supplemental Executive Retirement Program
 
The Company sponsors an unfunded Supplemental Executive Retirement Program (“SERP”), which is a nonqualified plan that provides additional retirement benefits to certain key employees. Effective September 30, 2006, the plan was amended to freeze participation and all future benefit accruals.

The following provides a reconciliation of benefit obligations, plan assets and funded status of the SERP:

   
2013
   
2012
 
Change in benefit obligation:
           
Projected benefit obligation, beginning of year
  $ 2,825     $ 2,755  
Interest cost
    89       107  
Actuarial (gain) loss
    (381 )     224  
Benefits paid
    (257 )     (261 )
Projected benefit obligation, end of year
    2,276       2,825  
 
               
Change in plan assets:
               
Fair value of plan assets, beginning of year
    -       -  
Employer contributions
    257       261  
Benefits paid
    (257 )     (261 )
Fair value of plan assets, end of year
    -       -  
Funded status at end of year
  $ (2,276 )   $ (2,825 )
 
 
23

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)


6. Retirement Plans (Continued)
 
Amounts recognized in the consolidated balance sheets consist of:
 
   
2013
   
2012
 
 
           
Current liabilities
  $ (221 )   $ (285 )
Non-current liabilities
    (2,055 )     (2,540 )
 
  $ (2,276 )   $ (2,825 )
 
Weighted-average assumptions:

   
2013
   
2012
 
 
           
Discount rate
    4.09 %     3.33 %
Rate of compensation increase
    N/A       N/A  
 
Net cost of this plan included the following components:

   
2013
   
2012
 
Interest cost
  $ 89     $ 107  
Amortization of net loss
    51       31  
Total SERP expense
  $ 140     $ 138  
 
The benefits expected to be paid in each year from 2014 through 2018 are $221, $218, $214, $209 and $197, respectively. The aggregate benefits expected to be paid in the five years from 2019 through 2023 are $855. The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at October 27, 2013. The Company expects to amortize $14 of net loss in 2014. The accumulated benefit obligation under the plan was $2,276 at October 27, 2013. The amounts recognized in accumulated comprehensive loss ($380) are comprised of net actuarial loss.

Defined Contribution Plan
 
The Company has a qualified defined contribution plan covering substantially all employees of the Company who have met certain service and age requirements. Company contributions charged to expense were approximately $270 for 2013 and $252 for 2012.

 
24

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
6. Retirement Plans (Concluded)
 
Deferred Compensation Plan

The Company permitted certain former employees to defer compensation and earn interest on the deferred amounts. Interest is credited to participant accounts at a stated rate in the related agreements, which approximates 8%. Included in deferred compensation and pension obligations is $154 and $187 related to the deferred compensation plan at October 27, 2013 and October 28, 2012, of which $117 and $152 is included in long-term liabilities.
 
7. Commitments and Contingencies
 
Pension Funding
 
The Company has cooperated with the Pension Benefit Guaranty Corporation (“PBGC”) for the past few years regarding PBGC’s investigation as to whether the 2009 relocation of certain  Company operations from Pulaski, Virginia to High Point, North Carolina constituted a “cessation of operations” under ERISA section 4062(e) with respect to participants in the Pulaski Furniture Corporation Pension Plan for Employees (“the Pension Plan”) sponsored by the Company. The Company declined the PBGC’s request for a subordinated lien in the amount of $8 million in the event the Pension Plan terminated before August 28, 2014 with an unfunded benefit liability. On March 22, 2013, PBGC notified the Company of its determination that the 2009 relocation constituted a “cessation of operations” under ERISA section 4062(e) and requested that the Company place the amount of $8 million in escrow with the PBGC or alternatively provide a bond to provide security in case the Pension Plan terminates by August 28, 2014 in a distress or involuntary termination with unfunded benefit liabilities.
 
PBGC has advised that it will consider alternative arrangements for providing security, including additional funding for the Pension Plan. If the Pension Plan does not terminate before August 28, 2014, any escrow would be refunded to the Company and any bond would be cancelled.

The Company disagrees with the PBGC’s determination and appealed the PBGC’s determination to the PBGC Appeals Board on September 5, 2013. On the night of December 31, 2013, the PBGC Appeals Board denied the Company’s appeal, advised that the decision constituted final agency action, and advised that the PBGC’s decision was subject to review in United States District Court.
 
 
25

 

Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
7. Commitments and Contingencies (Continued)
 
The Company intends to defend its position vigorously, including in court, if necessary. The Company strongly contends that no security is necessary or required by law because 1) the relocation of facilities was not a “cessation of operations” under ERISA 4062(e), 2) the Pension Plan is funded in accordance with federal standards and 3) the Pension Plan is not at risk for a distressed or involuntary termination before August 28, 2014. Further, the Company contends that if a 4062(e) event had occurred, the correct amount of contingent security for a distressed termination before August 28, 2014 would not be more than $2.8 million and would be paid over a period of time.

Leases
 
The Company is obligated under various noncancelable operating leases for offices, warehouses and showrooms that expire at various dates through fiscal 2016. Certain of these leases contain escalation clauses or contingent rental payments based on the change in the Consumer Price Index. At October 27, 2013, minimum rental payments due under operating leases with original commitments in excess of one year are as follows:
 
2014
  $ 2,378  
2015
    1,975  
2016
    1,139  
Total minimum rental payments
  $ 5,492  
 
Total rent expense under operating leases for 2013 and 2012 was $3,185 and $3,839. Taxes, insurance and maintenance expenses related to operating leases are also obligations of the Company.
 
Letters of Credit
 
The Company is party to letters of credit totaling approximately $720 at October 27, 2013. The letters of credit guarantee performance of various trade activities to third parties. Management does not expect any material losses to result from these off-balance-sheet instruments because performance is not expected to be required and, therefore, is of the opinion that the fair value of these instruments is zero.
 
 
26

 
 
Home Meridian Holdings, Inc.
and Subsidiary
(a wholly owned subsidiary of Home Meridian Acquisition, Inc.)
 
Notes to Consolidated Financial Statements
(in thousands)

 
7. Commitments and Contingencies (Concluded)
 
Trade Cases
 
Tariff expense is based on the most current rates published by the U.S. Department of Commerce. These rates are potentially subject to an administrative review process starting approximately one year after the publication date. The final amounts will depend on whether administrative reviews are performed and the outcome of those reviews, if any, on the Company’s vendors.
 
Business and Credit Concentrations
 
Two customers accounted for 27% of 2013 sales and two customers accounted for 32% of accounts receivable at October 27, 2013. One customer accounted for 10% of 2012 sales and another customer accounted for 13% of accounts receivable at October 28, 2012.
 
Litigation
 
The Company is involved in various legal proceedings and claims, arising in the ordinary course of its business, that have not been finally adjudicated. These actions, when finally concluded and determined, will not, in the opinion of management, have a material adverse effect upon the consolidated financial position of the Company.

 
27

 
ex99-2.htm
EXHIBIT 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On February 1, 2016, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“Home Meridian”) pursuant to the Asset Purchase Agreement the Company and Home Meridian entered into on January 5, 2016.

The following unaudited pro forma condensed combined financial statements and explanatory notes present how the consolidated financial statements of Hooker Furniture Corporation and Home Meridian may have appeared had the Acquisition been completed at earlier dates. The unaudited pro forma condensed combined financial statements show the impact of the Acquisition on the companies’ respective historical financial positions and results of operations under the acquisition method of accounting with Hooker Furniture Corporation treated as the acquirer of Home Meridian as if the Acquisition had been completed on February 2, 2015 for statements of operations purposes and on January 31, 2016 for balance sheet purposes.

The Acquisition will be accounted for under the acquisition method of accounting, whereby the assets acquired and liabilities assumed will be measured at their respective fair values with any excess reflected as goodwill. The determination of the fair values of the net assets acquired, including intangible and net tangible assets, is based upon certain valuations that have not been finalized, and, accordingly, the adjustments to record the assets acquired and liabilities assumed at fair value reflect the Company’s best estimate and are subject to change once the detailed analyses are completed. These adjustments may be material.

The Unaudited Pro Forma Condensed Combined Statements of Operations do not include: (1) any revenue or cost savings that may be achieved subsequent to the completion of the business combination; or (2) the impact of non-recurring items directly related to the business combination which are expected to be incurred during the Company’s fiscal year 2017.
 
The pro forma condensed combined financial statements are unaudited, are presented for informational purposes only, and are not necessarily indicative of the financial position or results of operations that would have occurred had the Acquisition been completed as of the dates or at the beginning of the periods presented. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future consolidated financial position or operating results of the combined companies. The unaudited pro forma condensed combined financial statements and the accompanying notes should be read together with:
 
§
the separate audited historical consolidated financial statements of Hooker Furniture Corporation for the year ended January 31, 2016 (as filed with the SEC on April 15, 2016 in Hooker Furniture Corporation’s Annual Report on Form 10-K for the fiscal year ended January 31, 2016); and
 
§
the audited historical consolidated financial statements of Home Meridian International, Inc. included in this filing.
 
 
 

 
 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FISCAL YEAR ENDED JANUARY 31, 2016
(In thousands)
 
         
Home
   
Pro forma
     
Pro Forma
 
   
Hooker
   
Meridian
   
Adjustments
     
Combined
 
Assets
                         
Current assets
                         
    Cash and cash equivalents
  $ 53,922     $ 2,317     $ (28,312 ) a,b     27,927  
    Trade accounts receivable, less allowance
    for doubtful accounts
    28,176       45,360       -         73,536  
    Inventories
    43,713       37,607       -         81,320  
    Prepaid expenses and other current assets
    2,256       2,090       (45 ) a     4,301  
    Income tax recoverable
    -       110       (110 ) a     -  
         Total current assets
    128,067       87,484       (28,467 )       187,084  
Property, plant and equipment, net
    22,768       4,914       900   c     28,582  
Cash surrender value of life insurance policies
    21,888       -       -         21,888  
Deferred taxes
    5,350       -       -         5,350  
Intangible assets
    1,382       3,204       25,596   a,c     30,182  
Goodwill
                    21,023   c     21,023  
Other assets
    2,198       258       (258 ) a     2,198  
         Total non-current assets
    53,586       8,376       47,261         109,223  
               Total assets
  $ 181,653     $ 95,860     $ 18,794       $ 296,307  
                                   
Liabilities and Shareholders’ Equity
                                 
Current liabilities
                                 
     Revolving credit line
  $ -     $ 44,274     $ (44,274 ) a   $ -  
    Current portion of term loan
                    5,856   b     5,856  
    Trade accounts payable
    9,105       20,795       (754 ) a,d     29,146  
    Accrued salaries, wages and benefits
    4,834       538       -         5,372  
    Income tax accrual
    357       -       -         357  
    Accrued commissions
    818       827       -         1,645  
    Deferred compensation and pension
                                 
   obligations, current
            266       -         266  
    Customer deposits
    694       200       -         894  
    Other accrued expenses
    797       6,277       (1,059 ) a     6,015  
         Total current liabilities
    16,605       73,177       (40,231 )       49,551  
Long term debt
            50,912       3,232   a,b     54,144  
Deferred compensation and pension obligations, non-current
    8,409       7,415       975   c     16,799  
Income tax accrual
    166       -       -         166  
Other long-term liabilities
    412       -       -         412  
Total long-term liabilities
    8,987       58,327       4,207         71,521  
              Total liabilities
    25,592       131,504       (36,024 )       121,072  
                                   
Shareholders’ equity
                                 
                                   
    Common stock, no par value
    18,667       130       20,137   a,b     38,934  
    Retained earnings
    137,255       (39,305 )     38,212   a,d     136,162  
    Accumulated other comprehensive income
    139       (4,469 )     4,469   a     139  
    Non-controlling interest
            8,000       (8,000 ) a     -  
               Total shareholders’ equity
  $ 156,061     $ (35,644 )   $ 54,818       $ 175,235  
                   Total liabilities and shareholders’ equity
  $ 181,653     $ 95,860     $ 18,794       $ 296,307  
 
See accompanying Notes to Condensed Combined Financial Statements.
 
 
 

 
 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 31, 2016
(In thousands)
 
         
Home
   
Pro forma
     
Pro forma
 
   
Hooker
   
Meridian
   
adjustment
     
Combined
 
                           
Net sales
  $ 246,999     $ 324,721             $ 571,720  
                                 
Cost of sales
    178,311       263,248               441,559  
                                 
      Gross profit
    68,688       61,473       -         130,161  
                                   
Selling and administrative expenses
    44,426       51,167       (4,410 ) e     91,183  
Amortization of acquired intangibles
            215       3,201   h     3,416  
                                   
        Operating income
    24,262       10,091       1,209         35,562  
                                   
Other Income (expense), net
                                 
      Interest expense
    (65 )     (9,952 )     8,986   f,g     (1,031 )
      Other, net
    262       (17 )     -         245  
                                   
      Income before income taxes
    24,459       122       10,195         34,776  
                                   
Income tax expense
    8,274       120       3,884         12,278  
                                   
       Net income
  $ 16,185     $ 2     $ 6,311       $ 22,498  
                                   
Earnings per share
                                 
       Basic
  $ 1.50                       $ 1.96  
       Diluted
  $ 1.49                       $ 1.95  
                                   
Weighted average shares outstanding:
                           
       Basic
    10,779               719         11,498  
       Diluted
    10,807               719         11,526  
 
See accompanying Notes to Condensed Combined Financial Statements.
 
 
 

 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1. Description of the Transactions

Acquisition of the Assets of Home Meridian International, Inc.

On February 1, 2016, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“Home Meridian”) pursuant to the Asset Purchase Agreement the Company and Home Meridian entered into on January 5, 2016 (the “Asset Purchase Agreement”).  The Company paid $85 million in cash and issued 716,910 shares of the Company’s common stock (the “Stock Consideration”) to designees of Home Meridian as consideration for the Acquisition. The Stock Consideration consisted of (i) 530,598 shares due to the $15 million of consideration payable in shares of Company common stock under the Asset Purchase Agreement, and (ii) 186,312 shares issued pursuant to working capital adjustments provided for in the Asset Purchase Agreement.  The working capital adjustment was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of 2015. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of the Company’s common stock for the fifteen trading days immediately preceding the closing date ($28.27).  Under the Asset Purchase Agreement, the Company also assumed certain liabilities of Home Meridian, including approximately $7.8 million of liabilities related to certain retirement plans.  The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of Home Meridian.
 
Amended Credit Facilities

On February 1, 2016, Hooker Furniture Corporation (the “Company”, “Hooker Furniture”) and its wholly owned subsidiaries, Bradington-Young, LLC and Sam Moore Furniture LLC (together with the Company, the “Borrowers”), entered into an amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the acquisition discussed in Item 2.01 below.  The Loan Agreement increases the amount available under the Company’s existing unsecured revolving credit facility to $30 million and increases the sublimit of such facility available for the issuance of letters of credit to $4 million.  Amounts outstanding under the revolving facility will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%.  The Borrowers must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter.

The Loan Agreement also provides the Borrowers with a $41 million unsecured term loan (the “Unsecured Term Loan”) and a $19 million term loan (the “Secured Term Loan”) secured by a security interest in certain Company-owned life insurance policies granted to BofA by the Company under a security agreement, dated as of February 1, 2016 (the “Security Agreement”).  BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Loan Agreement.

Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%.  Any amount borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 0.50%. The Borrowers must repay any principal amount borrowed under Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under Unsecured Term Loan will become due and payable.  The Borrowers must pay the interest accrued on any principal amount borrowed under Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable.  The Borrowers may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty.

On February 1, 2016, the Borrowers borrowed in full the amounts available under the Unsecured Term Loan and the Secured Term Loan in connection with the acquisition.
 
 
 

 

The Loan Agreement includes customary representations and warranties and requires the Company to comply with certain customary covenants, including, among other things, the following financial covenants: (i) maintaining at least a specified minimum level of tangible net worth, (ii) maintaining a ratio of funded debt to EBITDA not exceeding a specified amount and (iii) maintaining a basic fixed charge coverage ratio within a specified range.  The Loan Agreement also limits the right of the Borrowers to incur other indebtedness and to create liens upon its assets, subject to certain exceptions, among other restrictions.

The Loan Agreement does not restrict the Company’s ability to pay cash dividends on, or repurchase, shares of its common stock, subject to the Company complying with the financial covenants discussed above, if the Company is not otherwise in default under the Loan Agreement.
 
Note 2. Basis of Pro Forma Presentation
 
The unaudited pro forma condensed combined financial statements are presented to illustrate the effects of the Acquisition on the historical financial position and operating results of Hooker Furniture and Home Meridian. The Unaudited Pro Forma Condensed Combined Balance Sheets combine Hooker Furniture’s balance sheet as of January 31, 2016 and Home Meridian’s balance sheet as of January 31, 2016 and the Unaudited Pro Forma Condensed Combined Statement of Operations reflects the fiscal years then ended.  Both financial statements assume the transaction took place on February 2, 2015, the beginning of Hooker Furniture’s 2016 fiscal year.
 
The fair values of the assets acquired and liabilities assumed are provisional based on management’s preliminary estimate of the respective fair values. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the estimated fair value of identifiable assets and liabilities of Home Meridian as of the acquisition date will be reflected as goodwill. The fair values of net assets and resulting goodwill are subject to finalizing our analysis of the fair value of Home Meridian’s assets and liabilities as of the acquisition date and will be adjusted upon completion of the valuation. The use of different estimates could yield materially different results.
 
The pro forma financial statements are derived from the historical financial statements of the two companies and the adjustments applied to those historical statements are intended to illustrate the effect of the Acquisition, including the related financing transaction and the assignment of fair value to the acquired assets.  The pro forma financial statements should be read in conjunction with the historical financial statements of Hooker Furniture filed with the SEC on April 15, 2016 and the Home Meridian financial statements and accompanying notes included in this filing.
 
Note 3. Fair Value Estimates of Assets Acquired and Liabilities Assumed
 
The consideration and components of Hooker Furniture’s initial fair value allocation of the purchase price paid at closing and in the subsequent Net Working Capital Adjustment consisted of the following:
 
Fair value estimates of assets acquired and liabilities assumed
     
Purchase price consideration
     
     Cash paid for assets acquired
  $ 85,000  
     Value of shares issued for assets acquired
    15,000  
     Value of shares issued for excess net working capital
    5,267  
     Cash paid for net working capital adjustment
    995  
         
Total purchase price
  $ 106,262  
 
Fair value allocation of purchase price
       
   Accounts receivable
  $ 45,360  
   Inventory
    37,607  
   Prepaid expenses and other current assets
    2,045  
   Property and equipment
    5,814  
   Intangible assets
    28,800  
   Goodwill
    21,023  
   Accounts payable and accrued expenses
    (18,948 )
   Accrued expenses
    (6,783 )
   Pension plan and deferred compensation liabilities
    (8,656 )
         
Total purchase price
  $ 106,262  
 
 
 

 
 
Substantially all of these amounts are subject to subsequent adjustment as the Company continues to gather information during the measurement period. Certain intangible assets were acquired as part this transaction.  Trade names, customer relationships, and order backlog have been assigned preliminary fair values subject to additional analysis during the measurement period.  Some of these intangible assets have been assigned useful lives while others have been determined to be indefinite-lived.
 
Fair Value of identified intangible assets
 
Fair Value
 
  Trade names
  $ 11,500  
  Order backlog
    2,000  
  Customer relationships
    15,300  
         
    $ 28,800  
 
Expected amortization of identified intangible assets
 
Fiscal year
       
2017
  $ 3,415  
2018
    1,416  
2019
    1,416  
2020
    1,416  
2021
    1,416  
2022 and thereafter
    8,421  
         
    $ 17,500  
 
 
 

 
 
Note 4. Pro forma adjustments
 
The following adjustments give pro forma effect to the Home Meridian acquisition.
 
a)  
To eliminate the historical balances not acquired
 
Cash
  $
(2,317
)
Prepaids
   
(45
)
Income tax refundable
   
(110
)
Intangibles
   
(3,204
)
Loan origination
   
(258
)
Current debt
   
44,274
 
Non-current debt
   
50,912
 
Rent smoothing
   
1,046
 
State income tax
   
13
 
Deal related AP
   
1,691
 
Accrued payables
   
156
 
OCI
   
(4,469
)
Shareholders’ equity
   
130
 
Retained earnings
   
(39,305
)
Non-controlling interest
   
8,000
 
         
Total items not acquired
  $
56,514
 
 
b)  
To record the initial cash purchase price and subsequent net working capital adjustment and related debt and equity issued (see Note 3).
 
c)  
To record the initial fair value estimates of identified intangible assets, leasehold improvements and residual goodwill and adjust pension to fair value (see Note 3).
 
d)  
To record non-recurring acquisition-related costs. Costs expected to be incurred during the 2017 fiscal year ($1,093) are not reflected in the pro forma statement of operations.
 
e)  
Eliminate non-recurring transaction related costs.

f)  
Eliminate the impact of interest expense paid by Home Meridian under its former credit agreement ($9,952).
 
g)  
Record interest expense related to the Bank of America Acquisition Credit Facility. Interest is computed using variable rates as discussed in Note 1 ($966).  The initial interest rate on the $41 million Unsecured Term Loan was 1.93% and 0.93% on the Secured Term Loan.  A 1/8% variance in the variable interest rate would have an annual impact of $75,000 on interest expense.
 
h)  
Record amortization of identified intangible assets ($3,416), net of the elimination of amortization of Home Meridian intangible assets not acquired ($215).
 
The income tax effect of pro forma adjustments was calculated using the statutory federal rate of 35% and the Company’s effective state rate of 3.1%.

Since the closing date, the Company has made unscheduled payments of $5.0 million on the Unsecured Term Loan and $1.8 million on the Secured Term Loan, in addition to the regularly scheduled debt service payments required by the Loan agreement. The effects of these payments are not reflected in the pro forma financial statements.