Form 8-K/A

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

Date of report (Date of earliest event reported): March 2, 2018

 

 

Lifetime Brands, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

(State or Other Jurisdiction of Incorporation)

 

0-19254   11-2682486
(Commission File Number)   (IRS Employer Identification No.)

1000 Stewart Avenue, Garden City, New York 11530

(Address of Principal Executive Offices) (Zip Code)

(Registrant’s Telephone Number, Including Area Code) 516-683-6000

(Former Name or Former Address, if Changed Since Last Report) N/A

 

 

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):

 

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

 

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

 

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

 

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


Item 2.01 Completion of Acquisition or Disposition of Assets

On March 6, 2018, Lifetime Brands, Inc. filed with the Securities and Exchange Commission (the “SEC”) a Current Report on Form 8-K (the “Original Form 8-K”) disclosing, among other things, that on March 2, 2018, the company completed the acquisition of Taylor Holdco, LLC (“Taylor”), pursuant to the merger agreement by and among the Company, TPP Acquisition I Corp., a Delaware corporation (“Merger Sub”), TPP Acquisition II LLC, a Delaware limited liability company (“Buyer Survivor LLC”), Taylor Parent, LLC, a Delaware limited liability company (“Taylor Parent”), Taylor Holdco, LLC, a Delaware limited liability company (“Taylor”), and solely for purposes of certain sections of the Merger Agreement, CP Taylor GP, LLC, a Delaware limited liability company, providing for the acquisition of Taylor by the Company (the “Acquisition”).

This Current Report on Form 8-K/A is being filed with the SEC to amend the Original Form 8-K in order to provide the disclosures required by Item 9.01 of Form 8-K, including the required historical financial information of Taylor Holdco, LLC and the required pro forma financial statements.

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 Businesses Acquired.

The audited consolidated financial statements as of March 31, 2017 and March 31, 2016 and for the fiscal years ended March 31, 2017, 2016, and 2015 of Taylor Holdco, LLC and Subsidiaries and the related notes to such audited consolidated financial statements are filed with this Current Report on Form 8-K/A as Exhibit 99.1 and incorporated herein by reference.

The unaudited condensed consolidated financial statements as of December 31, 2017 and for the nine months ended December 31, 2017 and 2016 of Taylor Holdco, LLC and Subsidiaries and the related notes to such unaudited condensed consolidated financial statements are filed with this Current Report on Form 8-K/A as Exhibit 99.2 and incorporated herein by reference.

 

  (b) Pro Forma Financial Information.

The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2017, the related Unaudited Pro Forma Condensed Consolidated Statement of Operations for the twelve months ended December 31, 2017 and the related notes to such unaudited pro forma condensed consolidated financial statements (collectively, the “Unaudited Pro Forma Condensed Consolidated Financial Statements”) are furnished with this Current Report on Form 8-K/A as Exhibit 99.3 and incorporated herein by reference.

The Unaudited Pro Forma Condensed Consolidated 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 period presented. In addition, the Unaudited Pro Forma Condensed Consolidated Financial Statements do not purport to project the future consolidated financial position or operating results of the combined companies.

 

  (d) Exhibits

 

23.1   

Consent of BDO LLP, Independent accountant.


99.1

   Audited consolidated financial statements as of March 31, 2017 and March 31, 2016 and for the fiscal years ended March  31, 2017, 2016, and 2015 of Taylor Holdco, LLC and Subsidiaries and the related notes to such audited consolidated financial statements.

99.2

   Unaudited condensed consolidated financial statements as of December 31, 2017 and for the nine months ended December  31, 2017 and 2016 of Taylor Holdco, LLC and Subsidiaries and the related notes to such unaudited condensed consolidated financial statements.

99.3

   Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December  31, 2017, the related Unaudited Pro Forma Condensed Consolidated Statement of Operations for the twelve months ended December 31, 2017 and the related notes to such unaudited pro forma condensed consolidated financial information.


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 thereunto duly authorized.

 

Lifetime Brands, Inc.
By:   /s/ Laurence Winoker
  Laurence Winoker
  Senior Vice President – Finance, Treasurer and Chief Financial Officer

 

Date: May 17, 2018

EX-23.1

Exhibit 23.1

Consent of Independent Auditor

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. Nos. 333-105382, 333-146017, 333-162734, 333-186208, 333-208961, 333-221613) of Lifetime Brands, Inc. of our report dated December 23, 2017, relating to the consolidated financial statements of Taylor Holdco, LLC and subsidiaries, which appears in this Form 8-K/A.

/s/ BDO USA, LLP

Seattle, Washington

May 17, 2018

EX-99.1
Table of Contents

Exhibit 99.1

 

   LOGO   
  

Taylor Holdco, LLC and Subsidiaries

 

Consolidated Financial Statements

As of and for the Fiscal Years Ended March 31, 2017, 2016, and 2015

 

 

 

   LOGO   
The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee.       LOGO


Table of Contents

 

 

 

  

        Taylor Holdco, LLC and Subsidiaries        

 

Consolidated Financial Statements

As of and for the Fiscal Years Ended March 31, 2017, 2016, and 2015

 


Table of Contents

Taylor Holdco, LLC and Subsidiaries

Contents

 

 

Independent Auditor’s Report

     3  

Consolidated Financial Statements

  

Consolidated Balance Sheets as of March 31, 2017, 2016, and 2015

     4  

Consolidated Statements of Operations for the Fiscal Years Ended March  31, 2017, 2016, and 2015

     5  

Consolidated Statements of Changes in Member’s Capital for the Fiscal Years Ended March 31, 2017, 2016, and 2015

     6  

Consolidated Statements of Cash Flows for the Fiscal Years Ended March  31, 2017, 2016, and 2015

     7  

Notes to Consolidated Financial Statements

     8  

 

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Table of Contents
LOGO   

Tel: 206-624-2020

Fax: 206-624-7579

www.bdo.com

  

800 Fifth Avenue, Suite 3750

Seattle, WA 98104

Independent Auditor’s Report

Board of Directors

Taylor Holdco, LLC and Subsidiaries

Seattle, WA

We have audited the accompanying consolidated financial statements of Taylor Holdco, LLC and Subsidiaries, which comprise the consolidated balance sheets as of March 31, 2017, 2016, and 2015, and the related consolidated statements of operations, changes in member’s capital, and cash flows for the fiscal years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Consolidated 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 audits 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.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Taylor Holdco, LLC and Subsidiaries as of March 31, 2017, 2016, and 2015, and the results of their operations and their cash flows for the fiscal years then ended in accordance with accounting principles generally accepted in the United States of America.

 

LOGO

December 23, 2017

 

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO is the brand name for the BDO network and for each of the BDO Member Firms.

 

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Taylor Holdco, LLC and Subsidiaries

Consolidated Balance Sheets

(In Thousands)

 

 

March 31,

   2017      2016      2015  

Assets

        

Current Assets

        

Cash and cash equivalents

   $ 16,937      $ 7,270      $ 1,720  

Receivables, net

     24,774        21,910        27,266  

Inventories, net

     25,932        25,939        25,248  

Current deferred income taxes

     2,734        2,419        3,474  

Income tax receivable

     —          1,176        —    

Prepaid expenses and other current assets

     762        592        1,591  
  

 

 

    

 

 

    

 

 

 

Total Current Assets

     71,139        59,306        59,299  
  

 

 

    

 

 

    

 

 

 

Noncurrent Assets

        

Property and equipment, net

     2,982        2,775        5,472  

Goodwill

     70,619        70,619        70,619  

Intangible assets, net

     144,756        158,459        174,108  

Other assets

     225        225        552  
  

 

 

    

 

 

    

 

 

 

Total Noncurrent Assets

     218,582        232,078        250,751  
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 289,721      $ 291,384      $ 310,050  
  

 

 

    

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

March 31,

   2017      2016      2015  

Liabilities and Member’s Capital

        

Current Liabilities

        

Accounts payable

   $ 14,836      $ 13,775      $ 16,038  

Accrued liabilities

     5,005        5,766        3,241  

Current portion of contingent consideration

     8,309        —          750  

Current portion of long-term debt

     3,586        614        2,066  
  

 

 

    

 

 

    

 

 

 

Total Current Liabilities

     31,736        20,155        22,095  
  

 

 

    

 

 

    

 

 

 

Long-Term Liabilities

        

Contingent consideration

     —          7,663        6,540  

Deferred income taxes

     7,795        8,698        13,057  

Long-term debt, net of current portion

     180,106        186,006        198,060  

Mandatorily redeemable preferred units

     24,374        21,036        18,156  
  

 

 

    

 

 

    

 

 

 

Total Long-Term Liabilities

     212,275        223,403        235,813  
  

 

 

    

 

 

    

 

 

 

Total Liabilities

     244,011        243,558        257,908  
  

 

 

    

 

 

    

 

 

 

Commitments and Contingencies (Note 10)

        

Member’s Capital

     45,710        47,826        52,142  
  

 

 

    

 

 

    

 

 

 

Total Liabilities and Member’s Capital

   $ 289,721      $ 291,384      $ 310,050  
  

 

 

    

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Taylor Holdco, LLC and Subsidiaries

Consolidated Statements of Operations

(In Thousands)

 

 

Year ended March 31,

   2017     2016     2015  

Net Sales

   $ 173,706     $ 179,689     $ 135,010  

Cost of Goods Sold

     98,987       106,324       76,819  
  

 

 

   

 

 

   

 

 

 

Gross Profit

     74,719       73,365       58,191  
  

 

 

   

 

 

   

 

 

 

Operating Expenses

      

Selling, general, and administrative expenses

     55,897       53,047       39,975  

Acquisition-related expenses

     —         —         2,444  

Impairment charges

     2,100       4,300       10,854  

Change in fair value of contingent consideration

     646       1,123       (4,390

Gain on sale of China factory

     —         —         (715

Total operating expenses

     58,643       58,470       48,168  
  

 

 

   

 

 

   

 

 

 

Income from operations

     16,076       14,895       10,023  
  

 

 

   

 

 

   

 

 

 

Other Expense

      

Interest expense

     (15,487     (16,475     (14,134

Redeemable preferred interest

     (3,338     (2,880     (2,486

Other, net

     11       (588     (514
  

 

 

   

 

 

   

 

 

 

Total other expense

     (18,814     (19,943     (17,134
  

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (2,738     (5,048     (7,111

Income Tax Benefit

     622       1,652       3,039  
  

 

 

   

 

 

   

 

 

 

Net Loss

   $ (2,116   $ (3,396   $ (4,072
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Taylor Holdco, LLC and Subsidiaries

Consolidated Statements of Changes in Member’s Capital

(In Thousands, except number of units)

 

 

     Common
Member
Units
     Total
Member’s
Capital
 

Balance, March 31, 2014

     52,657      $ 46,151  

Contribution from parent company

     —          10,082  

Foreign currency translation adjustments

     —          (19

Net loss

     —          (4,072
  

 

 

    

 

 

 

Balance, March 31, 2015

     52,657        52,142  

Distribution to parent company

     —          (920

Net loss

     —          (3,396
  

 

 

    

 

 

 

Balance, March 31, 2016

     52,657        47,826  

Net loss

     —          (2,116
  

 

 

    

 

 

 

Balance, March 31, 2017

     52,657      $ 45,710  
  

 

 

    

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Taylor Holdco, LLC and Subsidiaries

Consolidated Statements of Cash Flows

(In Thousands)

 

 

Year ended March 31,

   2017     2016     2015  

Cash Flows From Operating Activities

      

Net loss

   $ (2,116   $ (3,396   $ (4,072

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation and amortization

     13,159       15,546       10,222  

Impairment charges

     2,100       4,300       10,854  

Redeemable preferred interest

     3,338       2,880       2,486  

Change in fair value of contingent consideration

     646       1,123       (4,390

Amortization of debt origination fees

     1,038       1,043       705  

Gain on sale of China factory

     —         —         (715

Deferred income taxes

     (1,218     (3,304     (3,370

Realized foreign currency translation adjustment

     —         —         (19

Changes in operating assets and liabilities:

      

Receivables

     (2,864     5,356       (2,041

Income tax receivable

     1,176       (1,176     —    

Inventories

     7       (691     (1,749

Prepaid expenses and other assets

     (170     1,326       187  

Accounts payable

     1,061       (2,263     5,461  

Accrued liabilities

     (761     1,775       (1,432
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     15,396       22,519       12,127  
  

 

 

   

 

 

   

 

 

 

Cash Flows From Investing Activities

      

Cash paid for acquisition of business

     —         —         (50,034

Cash received on sale of China factory

     —         —         5,534  

Capital expenditures

     (1,704     (1,208     (1,229

Acquisition of intangible assets

     (59     (292     —    
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,763     (1,500     (45,729
  

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities

      

Borrowings under long-term debt

     —         —         48,210  

Principal payments of long-term debt

     (3,966     (14,549     (12,211

Borrowings on revolver

     —         —         4,000  

Payments on revolver

     —         —         (5,000

Distribution to parent company

     —         (920     —    

Cash paid for debt origination fees

     —         —         (776
  

 

 

   

 

 

   

 

 

 

Net provided by (used in) financing activities

     (3,966     (15,469     34,223  
  

 

 

   

 

 

   

 

 

 

Net Change in Cash

     9,667       5,550       621  

Cash, beginning of year

     7,270       1,720       1,099  
  

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 16,937     $ 7,270     $ 1,720  
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

      

Cash paid during the year for:

      

Interest

   $ 16,148     $ 14,656     $ 14,980  

Income tax paid (refunded)

     23       2,890       (375

Supplemental Disclosure of Noncash Investing and Financing Activities:

      

Capital contribution from parent company in connection with business acquisition

   $ —       $ —       $ 10,082  

See accompanying notes to the consolidated financial statements.

 

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Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

1. Description of Business

Taylor Holdco, LLC and subsidiaries dba Filament Brands (the “Company”) primarily design, market, and distribute consumer and food service precision measurement products, including kitchen scales, thermometers and timers, bath scales, wine accessories, kitchen tools, and select outdoor products to major retailers in the United States, Canada and select distributors throughout Europe and Asia. The Company distributes products under the Taylor, Salter, Springfield, HoMedics, Rabbit, Houdini, Metrokane, EatSmart, TravelWise, Chef’n, Vibe, d.stil, RBT, and private label brand names. The Company is majority owned by Taylor Parent, LLC (“Parent Company”).

Taylor Finance, LLC is a wholly-owned subsidiary of Taylor Holdco, LLC (“Holdco”). Taylor Precision Products, Inc. is a wholly owned subsidiary of Taylor Finance, LLC.

On June 8, 2012, Taylor Acquisition, Inc. was formed and subsequently acquired the net assets of Taylor North American Scales from FKA Distributing Co. d/b/a HoMedics, Inc. Taylor North American Scales was a combination of Taylor Precision Products, the HoMedics USA bath scale business segment, the HoMedics Group Canada measurement products business segment, and Springfield Acquisition Co. LLC intellectual property. Upon formation, Taylor Acquisition, Inc. changed its name to Taylor Precision Products, Inc.

The Company acquired the assets of Health Tools LLC on November 8, 2013 and Metrokane Inc. on November 12, 2013. Health Tools LLC sources and sells precision kitchen and bathroom scales to customers based in the United States and Canada under the “EatSmart” brand name. Metrokane Inc. designs, sources, markets, and distributes high quality wine corkscrews, barware, and wine accessories under the “Rabbit,” “RBT,” “Houdini,” and, “Metrokane” brand names.

On February 28, 2014, Taylor Precision Products, Inc. terminated operations at a factory near Shanghai, China and began the process of selling the related assets. The operations were not significant to the Company and the sale was completed in August 2014.

The Company acquired the stock of Chef’n Corporation (“Chef’n”) on December 23, 2014 in a cash and stock transaction. Chef’n designs, sources, markets, and distributes worldwide innovative kitchen tools and hydration products under the Chef’n, Vibe, d.stil and private label brand names.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Taylor Holdco, LLC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

We have prepared the accompanying consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”).

Use of Estimates

The preparation of consolidated 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 amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates.

 

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Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

Cash and Cash Equivalents

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. For the purpose of the consolidated statement of cash flows, the Company considers all deposits with a maturity of three months or less to be cash equivalents.

Trade Receivables

Collateral or other security is generally not required on trade receivables. The Company monitors the credit quality of its customers, and an allowance for doubtful accounts is maintained at a level management believes is sufficient to cover potential credit losses based on historical bad debt write-off experience and specific risks identified for uncollected accounts. Trade receivables are charged off against the allowance when it is determined that the receivable will not be collected. The allowance for doubtful accounts as of March 31, 2017, 2016, and 2015 was $151, $282, and $94 respectively. Trade receivables are presented net of reserves for estimated customer returns and allowances, at net realizable value.

Customer Concentration

One customer accounted for 24% of sales during the fiscal year ended March 31, 2017. As of March 31, 2017, one customer accounted for 38% of accounts receivable.

Two customers accounted for 35% of sales during the fiscal year ended March 31, 2016. As of March 31, 2016, two customers accounted for 46% of accounts receivable.

Two customers accounted for 24% of sales during the fiscal year ended March 31, 2015. As of March 31, 2015, one customer accounted for 38% of accounts receivable.

Inventories

Inventories consist primarily of finished goods and are valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Certain slow-moving items have been reduced to net realizable value based on recent sales activity and management’s best estimate of future transactions. The reserve to reduce inventories to net realizable value as of March 31, 2017, 2016, and 2015 was $329, $719, and $754, respectively.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over estimated useful lives, which range from two to five years. Upon sale or retirement of property and equipment, the cost and accumulated depreciation are eliminated from the respective accounts, and a gain or loss is recorded. Repair and maintenance costs are expensed as incurred. Expenditures for renewals and betterments are capitalized and depreciated over their estimated useful lives. Assets classified as held for sale are stated at the lower of carrying amount or estimated fair value less cost to sell. Leasehold improvements are depreciated over the lesser of the expected lease term or estimated useful life.

Long-Lived Assets

Long-lived assets and identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable.

 

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Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated, future net cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value.

Intangible assets with finite lives are generally amortized using the straight-line method over their estimated economic useful lives ranging from 5 to 15 years.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the acquisition method of accounting. Goodwill is not amortized. We test goodwill annually as of March 31 at the reporting unit level. We have determined the Company has one reporting unit. At each impairment testing date, we perform a quantitative assessment of goodwill and compare the fair value of the reporting unit to its carrying amount. To the extent the carrying amount exceeds its fair value, a second step would be performed to compute the amount of impairment as the difference between the implied fair value of goodwill and the carrying value.

The second impairment assessment, if required, involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date. For the years ended March 31, 2017, 2016 and 2015, based on the results of our quantitative analyses, we determined there was no impairment of goodwill.

Indefinite-lived intangible assets are reviewed for impairment annually as of March 31 and whenever events or circumstances indicate that the carrying value may not be recoverable. The Company recognized impairment of certain indefinite-lived intangible assets during the fiscal years ended March 31, 2017, 2016, and 2015. See Note 6.

Income Taxes

The Company’s subsidiary, Taylor Precision Products, Inc., is a corporation formed under Subchapter C of the Internal Revenue Code and is subject to corporate taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax expense is measured by the change in the deferred tax assets or liabilities during the year.

The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Management believes the Company has no unrecognized tax benefits. The Company’s policy for recording interest and penalties associated with examinations by tax authorities is to record such items as a component of income tax expense.

The Company and its subsidiaries’ tax years ending in 2012 through 2016 remain open to examination by federal and state tax authorities. The Company files state income tax returns in multiple jurisdictions, each with unique laws regarding statutes of limitations.

 

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Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

Fair Value Measurements

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.

 

  Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date;

 

  Level 2 — Inputs to the valuation methodology other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and

 

  Level 3 — Inputs to valuation methodology are unobservable inputs in situations where there is little or no market activity of the asset and liability and the reporting entity makes estimates or assumptions relating to the pricing of the asset or liability including assumptions regarding risk.

The Company followed purchase accounting conventions as prescribed by ASC 805, Business Combinations, to establish the opening balance sheet of the acquired entities for all its acquisitions. The fair value measurement methods used to estimate the fair value of the assets acquired and liabilities assumed at the acquisition date utilized a number of significant unobservable inputs of Level 3 assumptions. These assumptions included, among other things, projections of future operating results, the implied fair value of assets using an income approach by preparing a discounted cash flow analysis, and other subjective assumptions.

The carrying values of financial instruments such as cash, accounts receivable, accounts payable, and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes that the current carrying amount of its long-term debt approximates fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates.

Revenue Recognition

The Company recognizes revenues when the following criteria are met: persuasive evidence of an agreement exists, upon the later of shipment of product to the customer or when title to the product transfers to the customer per the terms of the sales contract, the Company’s price to the buyer is fixed and determinable, and collectability is reasonably assured. Revenues are recorded net of estimated sales returns and allowances.

Customer Rebates and Consumer Advertising

The Company participates in cooperative advertising and other rebate programs with its customers, including volume rebates. During the fiscal years ended March 31, 2017, 2016, and 2015, $10,881, $9,737, and $8,843 was incurred under these programs, respectively. These amounts are reflected as a reduction to net sales. The Company expenses all consumer advertising costs as incurred.

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

As of March 31, 2017, 2016, and 2015, the reserves for cooperative advertising and other rebates were $810, $1,092, and $1,354 respectively, which are included in net receivables. Reserves are estimated using historical experience and terms of existing arrangements with customers.

Merchandise Returns

For the fiscal years ended March 31, 2017, 2016, and 2015, sales returns under merchandise return programs were $4,815, $4,561, and $4,379, respectively. Sales returns are reflected in net sales. Reserves for estimated merchandise returns as of March 31, 2017, 2016, and 2015 included in net receivables were $1,485, $1,098, and $1,542, respectively, and are estimated using historical experience.

Shipping and Handling Costs

Shipping and handling costs of $6,250, $6,692, and $6,033 are classified as selling, general, and administrative expenses in the consolidated statements of operations for the fiscal years ended March 31, 2017, 2016, and 2015, respectively. Amounts charged to customers for recovery of shipping and handling costs are included in net sales.

Research and Development

Research and development expenses consist primarily of outside contract costs incurred in the development or testing of prototype products. These costs are expensed as incurred in selling, general and administrative expenses in the consolidated statements of operations.

Employee Benefits

The Company sponsors a 401(k) defined contribution savings plan for its U.S. employees. The Company provides a matching contribution up to a maximum of 3% of a participant’s eligible compensation, and employees become immediately vested. The Company made employer contributions of $198, $145, and $102 to the plan for the fiscal years ended March 31, 2017, 2016, and 2015, respectively.

Recently Issued Accounting Standards

In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs be presented as a direct deduction from the carrying amount of the related debt liability, consistent with the presentation of debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as deferred charge assets, separate from the related debt liability. ASU 2015-03 does not change the recognition and measurement requirements for debt issuance costs. The Company has adopted the provisions of this ASU and retrospectively applied to all fiscal year ends included in the consolidated financial statements.

On August 27, 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern, which added Subtopic 205-40 to the Accounting Standards Codification (“ASC”) (the “Subtopic”). This Subtopic requires management to determine whether substantial doubt exists concerning the reporting entity’s ability to continue as a going concern, in which case certain disclosures will be required. The Subtopic affects financial statement presentation, but not methods of accounting, and is effective on a prospective basis for annual periods ending after December 2016 and each reporting period thereafter, although early adoption is permitted. The Company has adopted the Subtopic for the year ended March 31, 2017 and identified no matters raising substantial doubt regarding the Company’s ability to continue as a going concern

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

In May 2014, the FASB issued new authoritative accounting guidance on revenue from contracts with customers. The new standard provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. It also requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. In August 2015, the FASB changed the effective date of the new revenue recognition accounting guidance for private companies to be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for annual periods beginning after the original effective date of December 15, 2016. The Company is in the process of reviewing customer contracts and evaluating the impact of the new standard on the consolidated financial statements and the timing of the adoption.

In November 2015, the FASB issued new authoritative accounting guidance on simplifying the presentation of deferred income taxes, which requires that deferred income tax liabilities and assets be presented as a net non-current deferred tax asset or liability by jurisdiction on the balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is unchanged. This guidance is effective for periods beginning after December 15, 2017; however, earlier adoption is permitted for all entities for any interim or annual statements that have not been issued. The Company is in the process of evaluating the impact of the new standard on the consolidated financial statements and the timing of adoption.

In February 2016, the FASB issued new authoritative accounting guidance on leases which increases transparency and comparability for lease transactions. The new standard brings substantially all leases on the balance sheets for operating lease arrangements with lease terms greater than 12 months for lessees. This update will require a modified retrospective application, which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is in the process of assessing the impact of the new standard on the consolidated financial statements and the timing of adoption.

In July 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value. This ASU does not apply to inventory measured using the last-in, first-out method. ASU 2015-11 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is in the process of assessing the impact of the new standard on the consolidated financial statements upon adoption.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies how entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for the Company’s fiscal year ended March 31, 2023. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of assessing the impact of the new standard on the consolidated financial statements upon adoption.

 

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Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

3. Acquisitions

Acquisition of Chef’n Corporation

During December 2014, the Company acquired the stock of Chef’n Corporation (“Chef’n”) for $66,656. The Company acquired the business to continue to expand the product offerings and brands to the retail trade and expansion of the Company’s internet channel. The following table summarizes the allocation of the consideration transferred to assets acquired and liabilities assumed:

 

Accounts receivable

   $ 11,597  

Inventories

     4,976  

Property, plant and equipment

     3,974  

Goodwill

     26,225  

Intangible assets

     40,900  

Other assets

     833  
  

 

 

 

Total Assets

     88,505  

Accounts payable

     6,145  

Accrued expenses and other liabilities

     1,131  

Deferred tax liabilities

     14,573  
  

 

 

 

Total Liabilities

     21,849  
  

 

 

 

Total purchase price

     66,656  
  

 

 

 

Less: Contingent consideration

     (6,540

Less: Stock Issued to former owners

     (10,082
  

 

 

 

Total Cash Paid for Acquisition

   $ 50,034  
  

 

 

 

Consideration paid for the Chef’n acquisition includes an estimate of contingent consideration payable in cash to the former owners should certain gross profit targets be met in the future. The fair value of the contingent consideration was determined using Level 3 inputs. At the acquisition date, the Company estimated the fair value was $6,540, determined using the probability of potential payout. In addition, the former owners of Chef’n were granted 5,041 shares of Class C units of the Parent Company which approximated a share price of $2 per share for a total consideration of $10,082. The units issued of the Parent Company are reflected as contributed capital within the statements of changes in member’s capital and cash flows.

As of March 31, 2016 and 2017, the Company revalued the contingent consideration payable to $7,663 and $8,309, respectively. The fair value of the contingent consideration is determined based on a discounted cash flow analysis using market and operating performance projections available at the balance sheet dates, a risk free interest rate of approximately 1%, and discounted over the remaining months until expiration of the agreement on December 23, 2017. For the years ended March 31, 2016 and 2017, the change in estimated fair value of $1,123 and $646, respectively, is presented as change in fair value of contingent consideration on the statement of operations. The contingent consideration payable is due within 60 days of the expiration of the agreement.

The Company attributes the goodwill arising from the acquisition to its ability to scale operations, expand product offerings, and increase market share. Goodwill recorded in connection with the acquisition is not deductible for tax purposes.

Other than goodwill, the acquired intangible assets primarily consist of trade names, technology, non-compete agreements, and customer relationships. The weighted-average amortization period for the acquired finite-lived

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

intangible assets is 13 years. The fair values of the acquired intangible assets and goodwill were determined using a combination of the income, market, and cost approaches, using Level 3 inputs.

In connection with the acquisition of Chef’n, certain expenses were incurred in completing the transaction. Expenses of $2,444 incurred were primarily related to legal and accounting fees, agent fees, and closing fees paid to the parties involved in the transaction. These costs are reflected in the consolidated statements of operations as acquisition-related expenses.

Prior Period Acquisition of Heath Tools, LLC and Metrokane, Inc.

During November 2013, the Company acquired the net assets of Heath Tools, LLC (“Heath Tools”) and Metrokane, Inc. (“Metrokane”) for $21,771 and $74,866, respectively. The Company acquired the businesses to continue to expand the product offerings and brands to the retail trade and expansion of the Company’s internet channel. Consideration paid for the Metrokane acquisition included a $1,000 deferred fee, payable in installments over the 15 month period post-acquisition, which was paid in full with no amount remaining payable as of March 31, 2015. Consideration paid for the Heath Tools acquisition included an estimate of contingent consideration payable to the former owners, should certain EBITDA targets bet met. The fair value of the contingent consideration was determined using Level 3 inputs. At the acquisition date, the Company estimated the fair value was $5,890, determined using the probability of potential payout. During the year ended March 31, 2015, contingent consideration of $715 was paid and $4,390 was reversed into income and recorded as a change in fair value of contingent consideration in the consolidated statements of operations.

4. Related-Party Transactions

The management fee incurred under the arrangement with the majority unitholder of the Parent Company was $710, $500, and $500 for the fiscal years ended March 31, 2017, 2016, and 2015, respectively, and is included within selling, general, and administrative expenses in the consolidated statements of operations.

5. Property and Equipment

Property and equipment at March 31, 2017, 2016, and 2015 consist of the following:

 

March 31,

   2017      2016      2015     

Useful Life
in Years

Machinery, molds, and equipment

   $ 3,827      $ 7,454      $ 8,968      2-3

Computers, furniture and fixtures

     2,917        1,715        2,627      2-5

Leasehold improvements

     758        758        1,325      Lease life

Construction in process

     352        457        385     
  

 

 

    

 

 

    

 

 

    

Total property and equipment

     7,854        10,384        13,305     
  

 

 

    

 

 

    

 

 

    

Less accumulated depreciation

     (4,872      (7,609      (7,833   
  

 

 

    

 

 

    

 

 

    

Total Property and Equipment, net

   $ 2,982      $ 2,775      $ 5,472     
  

 

 

    

 

 

    

 

 

    

Change in accounting estimate

During the fiscal year ended March 31, 2016, the Company implemented a change in estimate in connection with the economic useful lives of certain mold and tooling equipment assets. In prior years, the assets were

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

depreciated over their estimated economic useful lives of ten years. However, due to the forecasted remaining lifecycle of the product produced by the molds and tooling equipment, the estimated economic useful lives of the assets were reduced to three years. The change in estimate resulted in additional depreciation of $2,374 for the fiscal year ended March 31, 2016.

Depreciation expense totaled approximately $1,496, $3,905, and $780 for the fiscal years ended March 31, 2017, 2016, and 2015, respectively.

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

6. Goodwill and Other Intangible Assets

The changes in carrying amounts of goodwill during the years ended March 31, 2017, 2016, and 2015 are as follows:

 

March 31,

   Goodwill      Accumulated
Impairment
Losses
     Balance  

Balance, March 31, 2014

   $ 44,394      $ —        $ 44,394  

Acquisition

     26,225        —          26,225  
  

 

 

    

 

 

    

 

 

 

Balance, March 31, 2015

     70,619        —          70,619  
  

 

 

    

 

 

    

 

 

 

Balance, March 31, 2016

     70,619        —          70,619  
  

 

 

    

 

 

    

 

 

 

Balance, March 31, 2017

   $ 70,619      $ —        $ 70,619  
  

 

 

    

 

 

    

 

 

 

At March 31, 2017, 2016, and 2015, the net book value of intangible assets is as follows:

 

March 31, 2017

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Book Value
     Average
Life in
Years
 

Manufacturer representative relationships

   $ 41,700      $ (12,549    $ 29,151        15  

Technology

     26,786        (11,268      15,518        10  

Customer relationships

     42,000        (7,997      34,003        15  

Noncompete agreement

     14,400        (12,909      1,491        5  

Patents

     353        (50      303        15  

Order backlog

     230        (230      —       
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets

     125,469        (45,003      80,466     
  

 

 

    

 

 

    

 

 

    

Indefinite-lived trade names

     64,290        —          64,290     
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 189,759      $ (45,003    $ 144,756     
  

 

 

    

 

 

    

 

 

    

 

March 31, 2016

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Book Value
     Average
Life in
Years
 

Manufacturer representative relationships

   $ 41,700      $ (9,769    $ 31,931        15  

Technology

     26,786        (8,589      18,197        10  

Customer relationships

     42,000        (5,197      36,803        15  

Noncompete agreement

     14,400        (9,536      4,864        5  

Patents

     294        (20      274        15  

Order backlog

     230        (230      —       
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets

     125,410        (33,341      92,069     
  

 

 

    

 

 

    

 

 

    

Indefinite-lived trade names

     66,390        —          66,390     
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 191,800      $ (33,341    $ 158,459     
  

 

 

    

 

 

    

 

 

    

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

March 31, 2015

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Book Value
     Average
Life in
Years
 

Manufacturer representative relationships

   $ 41,700      $ (6,988    $ 34,712        15  

Technology

     26,786        (6,084      20,702        10  

Customer relationships

     42,000        (2,303      39,697        15  

Noncompete agreement

     14,400        (6,093      8,307        5  

Order backlog

     230        (230      —       
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets

     125,116        (21,698      103,418     
  

 

 

    

 

 

    

 

 

    

Indefinite-lived trade names

     70,690        —          70,690     
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 195,806      $ (21,698    $ 174,108     
  

 

 

    

 

 

    

 

 

    

During the fiscal year ended March 31, 2017, the Company evaluated its indefinite-lived trade names for impairment. The fair value of the Rabbit, Houdini, and Metrokane trade names were lower than the carrying values and, therefore, the Company recognized impairment charges of $800, $1,200, and $100 related to these trade names, respectively.

Lower than expected sales from these brands led to the decrease in fair value. The total impairment charge of $2,100 is included in income from operations on the consolidated statements of operations. The fair values were determined using an income approach and Level 3 inputs.

During the fiscal year ended March 31, 2016, the Company evaluated its indefinite-lived trade names for impairment. The fair value of the Houdini and Metrokane trade names were lower than the carrying values and, therefore, the Company recognized impairment charges of $700 and $3,600 related to these trade names, respectively.

Lower than expected sales from these brands led to the decrease in fair value. The total impairment charge of $4,300 is included in income from operations on the consolidated statements of operations. The fair values were determined using an income approach and Level 3 inputs.

During the fiscal year ended March 31, 2015, the Company evaluated its indefinite-lived trade names for impairment. The fair value of the Rabbit, Houdini, and Metrokane trade names were lower than the carrying values and, therefore, the Company recognized impairment charges of $5,600, $3,500, and $100 related to these trade names, respectively. As a result of impairment recorded to the Rabbit, Houdini, and Metrokane trade names, the Company also evaluated the technology definite-lived intangible assets for impairment. The fair value of the technology definite-lived intangible asset was lower than the carrying value and, therefore, the Company recognized an impairment charge of $1,654.

Lower than expected sales from these brands led to the decrease in fair value. The total impairment charge of $10,854 is included in income from operations on the consolidated statements of operations. The fair values were determined using an income approach and Level 3 inputs.

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

Amortization expense was $11,663, $11,641, and $9,442 for the fiscal years ended March 31, 2017, 2016, and 2015, respectively, and is included in selling, general, and administrative expenses in the consolidated statements of operations. A summary of estimated future amortization of intangible assets for the next five fiscal years and thereafter is as follows:

 

Year ending March 31,

      

2018

   $ 9,641  

2019

     8,407  

2020

     8,279  

2021

     8,279  

2022

     8,279  

Thereafter

     37,581  
  

 

 

 

Total

   $ 80,466  
  

 

 

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

7. Debt

Total borrowings as of March 31, 2017, 2016, and 2015 consisted of the following:

 

March 31,

   2017      2016      2015  

Senior debt

   $ 133,772      $ 137,738      $ 152,287  

Subordinated debt

     51,700        51,700        51,700  
  

 

 

    

 

 

    

 

 

 

Total

     185,472        189,438        203,987  

Less current portion

     (3,586      (614      (2,066

Less unamortized debt issuance costs

     (1,780      (2,818      (3,861
  

 

 

    

 

 

    

 

 

 

Long-term debt, net

   $ 180,106      $ 186,006      $ 198,060  
  

 

 

    

 

 

    

 

 

 

In December 2014, the Company amended its Senior Credit Agreement (“Credit Agreement”) dated June 8, 2012, which was previously amended in November 2013. The Credit Agreement consists of a revolving line of credit (the “Revolver”), which was subsequently increased from $15,000 to $20,000. As of March 31, 2017, 2016, and 2015, there were no borrowings outstanding on the Revolver. In addition, the original agreement dated June 8, 2012 provided for $66,600 in term debt, of which $54,780 was outstanding at the time of amendment (“Senior Debt”). The first amendment provided for an increase in the term loan of $70,000, for a total of $124,780. The second amendment provided for supplemental term loans of $41,310.

The Company is required to make quarterly principal payments, adjusted for any prepayments, on the Senior Debt and the supplemental term loan in the amount of 0.625% of outstanding principal for quarters in fiscal year 2016, and 1.25% of outstanding principal for quarters thereafter, with the remainder due on November 6, 2018, the maturity date. The Company may make prepayments as allowed under the Credit Agreement, which are applied against future principal installments. At the Company’s option, borrowings under the Revolver and Senior Debt are based on London InterBank Offered Rate (LIBOR) plus 4.5% or the base rate, as defined by the terms of the agreement, with a floor of 5.5%. At March 31, 2017, 2016, and 2015, the interest rate for the Senior Debt was based on LIBOR and stated at 5.5%. At March 31, 2017, 2016, and 2015, interest payable of $1,275, $1,294, and $464, respectively, was outstanding and is included within accrued liabilities on the consolidated balance sheets.

In December 2014, the Company amended its Subordinated Credit Agreement (“Subordinated Debt”) dated June 8, 2012, which was previously amended in November 2013. The original agreement dated June 8, 2012 provided $25,600 in term debt which was outstanding at the time of amendment. The first amendment provided for an increase in the Subordinated Debt of $19,200, for a total of $44,800, with the ability to draw additional notes under the amended agreement of up to $22,100. The second amendment provided for an increase in the Subordinated Debt of $6,900, for a total of $51,700.

Subordinated Debt under the amended agreements matures on May 6, 2019. No principal payments are required until maturity. The Subordinated Debt carries cash interest of 13% including, at the option of the Company, payment-in-kind interest of 2% payable quarterly. At March 31, 2017, 2016, and 2015, interest payable of $0, $1,680, and $0, respectively was outstanding and is included within accrued liabilities on the consolidated balance sheets.

The Company capitalized $232 and $2,522 of additional debt fees in December 2014 and November 2013, respectively, associated with the amended Senior Credit and amended Subordinated Credit Agreements, which are being amortized on a straight-line basis through the maturity date of the agreements, which does not materially differ from the effective interest rate method.

 

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Notes to Consolidated Financial Statements

(In Thousands)

 

 

The Credit Agreement and Subordinated Debt agreement contain restrictive covenants, including, but not limited to, limitations on capital expenditures and require maintenance of minimum leverage and fixed charge coverage ratios. The outstanding debt is collateralized by substantially all of the Company’s assets. The Company was in compliance with all covenants as of March 31, 2017.

Aggregate maturities of long-term debt are as follows:

 

Year ending March 31,

      

2018

   $ 3,586  

2019

     130,186  

2020

     51,700  
  

 

 

 

Total

   $ 185,472  
  

 

 

 

8. Income Taxes

The income tax benefit (expense) consists of the following:

 

Year ended March 31,

   2017      2016      2015  

Current Income Tax Expense

        

Federal

   $ (584    $ (1,519    $ (2

State and local

     (12      (133      (329
  

 

 

    

 

 

    

 

 

 

Total Current Income Tax Expense

     (596      (1,652      (331
  

 

 

    

 

 

    

 

 

 

Deferred Income Tax (Expense) Benefit

        

Federal

     1,062        3,581        2,950  

State

     156        (277      420  
  

 

 

    

 

 

    

 

 

 

Total Deferred Income Tax Benefit

     1,218        3,304        3,370  
  

 

 

    

 

 

    

 

 

 

Total Income Tax Benefit

   $ 622      $ 1,652      $ 3,039  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

Significant components of the Company’s deferred tax assets (liabilities) at March 31, 2017, 2016, and 2015 are as follows:

 

     2017      2016      2015  

Deferred Tax Assets

        

Transaction costs

   $ 2,096      $ 2,167      $ 2,427  

Inventory capitalization

     614        743        388  

Net operating loss carryforwards

     290        237        306  

Reserves and accrued liabilities

     2,154        1,790        961  

Preferred interest

     4,438        3,269        2,378  
  

 

 

    

 

 

    

 

 

 

Total Deferred Tax Assets

     9,592        8,206        6,460  
  

 

 

    

 

 

    

 

 

 

Deferred Tax Liabilities

        

Prepaid expenses

     158        69        227  

Depreciation and amortization

     14,495        14,371        15,816  

Other

     —          45        —    
  

 

 

    

 

 

    

 

 

 

Total Deferred Tax Liabilities

     14,653        14,485        16,043  
  

 

 

    

 

 

    

 

 

 

Total Net Deferred Tax Liabilities

   $ 5,061      $ 6,279      $ 9,583  
  

 

 

    

 

 

    

 

 

 

The difference between the financial statement benefit for income taxes and the amount that would result from applying the statutory federal income tax rate to the Company’s loss before income taxes is principally related to state income taxes and the non-deductible portion of meals and entertainment expenses.

9. Mandatorily Redeemable Preferred Units

The Company has authorized and issued 12,000 Mandatorily Redeemable Preferred Units (“Redeemable Preferred Units”). Each Redeemable Preferred Unit accrues an annual yield of 15% on the sum of (i) the unreturned capital value, which was $12 million upon formation of the Company, plus (ii) the unpaid yield for all quarterly periods (“Liquidation Value”).

The Company is obligated to purchase all of the Redeemable Preferred Units by June 8, 2018 (“Mandatory Redemption Date”). At the Mandatory Redemption Date the Liquidation Value of Redeemable Preferred Units will approximate $29,000. The Company may also purchase the Redeemable Preferred Units prior to the Mandatory Redemption Date on or any time after the second anniversary of the closing date, which was June 8, 2012, or upon a change in control of the Company, at a redemption price equal to the Liquidation Value at the date of redemption payable in cash.

The Redeemable Preferred Units are accounted for under ASC Topic 480-10, Accounting for Redeemable Equity Instruments. As of March 31, 2017, 2016, and 2015, there are 12,000 Redeemable Preferred Units outstanding with a Liquidation Value of $24,374, $21,036, and $18,156, respectively, presented as mandatorily redeemable preferred units as a noncurrent liability on the consolidated balance sheets.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Consolidated Financial Statements

(In Thousands)

 

 

10. Commitments and Contingencies

The Company leases buildings and equipment under various operating leases expiring through 2022. Total rent expense under these operating leases was $828, $1,061, and $777 for the fiscal years ended March 31, 2017, 2016, and 2015, respectively. Future lease payments under all operating leases in effect at March 31, 2017, that have initial or remaining lease terms in excess of one year are as follows:

 

Year ending March 31,

      

2018

   $ 1,040  

2019

     985  

2020

     590  

2021

     206  

2022

     116  
  

 

 

 

Total

   $ 2,937  
  

 

 

 

Periodically, the Company is subject to lawsuits and other claims. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. Based on the facts and circumstances of such matters and, where necessary, advice of legal counsel, no matters currently pending will have a material impact on the Company’s consolidated financial position or results of operations.

11. Subsequent Events

Subsequent events are events or transactions that occur after the consolidated balance sheet date but before the consolidated financial statements are issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated balance sheet but arose after the consolidated balance sheet date and before the consolidated financial statements are available to be issued.

On December 1, 2017, the Company acquired 100% of the outstanding shares of PlanetBox, LLC, a privately owned company that designs, markets, and distributes high quality food containment solutions, focused primarily on the school lunch market. The acquisition included a cash payment of $9 million plus an additional $4 million in potential earn-out payments based on future performance. The identifiable assets included in the purchase primarily relate to inventory, with the majority of the purchase price expected to be allocated to intangible assets. As of December 23, 2017, the Company had not completed the allocation of the purchase price to the net assets acquired. The purchase price allocation will be completed within twelve months of the date of acquisition.

On December 22, 2017, the Company entered into an agreement with Lifetime Brands (NasdaqGS:LCUT), a leading global provider of branded kitchenware, tableware and other products used in the home, under which Lifetime will acquire the Company in a cash and stock transaction. Based on the closing price of Lifetime common stock on December, 21, 2017, the transaction values the Company at approximately $313 million. Lifetime will issue to the Company’s equity holders at closing newly-issued shares representing 27 percent of Lifetime Brands common stock and will also pay an agreed amount of cash, which is expected to be used to repay preferred equity holders, fund other transaction related obligations, and repay certain outstanding debt. The transaction is expected to close in the first half of calendar 2018.

The Company has evaluated subsequent events through December 23, 2017, which is the date the consolidated financial statements are available to be issued.

 

2 3

EX-99.2
Table of Contents

Exhibit 99.2

 

 

 

  

        Taylor Holdco, LLC and Subsidiaries        

 

Condensed Consolidated Financial Statements (unaudited)

As of December 31, 2017 and for the Nine Months Ended December 31, 2017 and 2016

 

 


Table of Contents

Taylor Holdco, LLC and Subsidiaries

Contents

 

 

Condensed Consolidated Financial Statements (unaudited)

  

Condensed Consolidated Balance Sheet as of December 31, 2017

  

Condensed Consolidated Statements of Operations for the Nine Months Ended December 31, 2017 and 2016

     3-5  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2017 and 2016

     6  

Notes to Condensed Consolidated Financial Statements

     7-20  

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Condensed Consolidated Balance Sheet (unaudited)

(In Thousands)

 

 

December 31,

   2017  

Assets

  

Current Assets

  

Cash and cash equivalents

   $ 7,652  

Receivables, net

     27,505  

Inventories, net

     29,108  

Current deferred income taxes

     2,066  

Prepaid expenses and other current assets

     779  
  

 

 

 

Total Current Assets

     67,110  
  

 

 

 

Noncurrent Assets

  

Property and equipment, net

     3,010  

Goodwill

     75,439  

Intangible assets, net

     142,431  

Other assets

     225  
  

 

 

 

Total Noncurrent Assets

     221,105  
  

 

 

 

Total Assets

   $ 288,215  
  

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Condensed Consolidated Balance Sheet (unaudited)

(In Thousands)

 

 

December 31,

   2017  

Liabilities and Member’s Capital

  

Current Liabilities

  

Accounts payable

   $ 13,851  

Accrued liabilities

     6,950  

Current portion of contingent consideration

     8,352  

Mandatorily redeemable preferred units

     27,220  

Current portion of long-term debt

     128,459  
  

 

 

 

Total Current Liabilities

     184,832  
  

 

 

 

Long-Term Liabilities

  

Contingent consideration

     1,795  

Deferred income taxes

     4,760  

Long-term debt, net of current portion and debt issuance costs

     50,698  
  

 

 

 

Total Long-Term Liabilities

     57,253  
  

 

 

 

Total Liabilities

     242,085  
  

 

 

 

Commitments and Contingencies (Note 10)

  

Member’s Capital

     46,130  
  

 

 

 

Total Liabilities and Member’s Capital

   $ 288,215  
  

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(In Thousands)

 

 

Nine months ended December 31,

   2017     2016  

Net Sales

   $ 123,159     $ 128,619  

Cost of Goods Sold

     71,867       72,521  
  

 

 

   

 

 

 

Gross Profit

     51,292       56,098  
  

 

 

   

 

 

 

Operating Expenses

    

Selling, general, and administrative expenses

     38,511       40,871  

Change in fair value of contingent consideration

     63       —    
  

 

 

   

 

 

 

Total operating expenses

     38,574       40,871  
  

 

 

   

 

 

 

Income from operations

     12,718       15,227  
  

 

 

   

 

 

 

Other Expense

    

Interest expense

     (11,576     (11,743

Redeemable preferred interest

     (2,846     (2,456

Other, net

     (75     (86
  

 

 

   

 

 

 

Total other expense

     (14,497     (14,285
  

 

 

   

 

 

 

Income/(Loss) before income tax benefit

     (1,779     942  

Income Tax Benefit (Expense)

     2,198       (960
  

 

 

   

 

 

 

Net Income/(Loss)

   $ 419     $ (18
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(In Thousands)

 

 

Nine Months ended December 31,

   2017     2016  

Cash Flows From Operating Activities

    

Net Income/(Loss)

   $ 419     $ (18

Adjustments to reconcile net income/(loss) to net cash provided by operating activities:

    

Depreciation and amortization

     8,913       9,775  

Redeemable preferred interest

     2,846       2,457  

Change in fair value of contingent consideration

     63       —    

Amortization of debt origination fees

     779       778  

Deferred income taxes

     (2,367     (283

Changes in operating assets and liabilities:

    

Receivables

     (2,679     (9,793

Income tax receivable

     —         1,176  

Inventories

     (1,240     (4,077

Prepaid expenses and other assets

     (17     (103

Accounts payable

     (2,285     2,872  

Accrued liabilities

     1,946       1,270  
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,378       4,054  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Cash paid for acquisition of business

     (9,002     —    

Capital expenditures

     (1,321     (600

Acquisition of intangible assets

     (28     —    
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,351     (600
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Principal payments of long-term debt

     (5,312     (3,966
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,312     (3,966
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (9,285     (512

Cash and equivalents, beginning of period

     16,937       7,270  
  

 

 

   

 

 

 

Cash and equivalents, end of period

   $ 7,652     $ 6,758  
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Net cash used during the period for:

    

Interest

   $ 11,390     $ 13,211  

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

1. Description of Business

Taylor Holdco, LLC and subsidiaries dba Filament Brands (the “Company”) primarily design, market, and distribute consumer and food service precision measurement products, including kitchen scales, thermometers and timers, bath scales, wine accessories, kitchen tools, food and beverage containers, and select outdoor products to major retailers in the United States, Canada and select distributors throughout Europe and Asia. The Company distributes products under the Taylor, Salter, Springfield, HoMedics, Rabbit, Houdini, Metrokane, EatSmart, TravelWise, Chef’n, Vibe, d.stil, RBT, PlanetBox, and private label brand names. The Company is majority owned by Taylor Parent, LLC (“Parent Company”).

Taylor Finance, LLC is a wholly-owned subsidiary of Taylor Holdco, LLC (“Holdco”). Taylor Precision Products, Inc. is a wholly owned subsidiary of Taylor Finance, LLC.

On June 8, 2012, Taylor Acquisition, Inc. was formed and subsequently acquired the net assets of Taylor North American Scales from FKA Distributing Co. d/b/a HoMedics, Inc. Taylor North American Scales was a combination of Taylor Precision Products, the HoMedics USA bath scale business segment, the HoMedics Group Canada measurement products business segment, and Springfield Acquisition Co. LLC intellectual property. Upon formation, Taylor Acquisition, Inc. changed its name to Taylor Precision Products, Inc.

The Company acquired the assets of Health Tools LLC on November 8, 2013 and Metrokane Inc. on November 12, 2013. Health Tools LLC sources and sells precision kitchen and bathroom scales to customers based in the United States and Canada under the “EatSmart” brand name. Metrokane Inc. designs, sources, markets, and distributes high quality wine corkscrews, barware, and wine accessories under the “Rabbit,” “RBT,” “Houdini,” and, “Metrokane” brand names.

The Company acquired the stock of Chef’n Corporation (“Chef’n”) on December 23, 2014 in a cash and stock transaction. Chef’n designs, sources, markets, and distributes worldwide innovative kitchen tools and hydration products under the Chef’n, Vibe, d.stil and private label brand names.

On December 1, 2017, the Company acquired 100% of the outstanding shares of PlanetBox, LLC, a privately owned company that designs, markets, and distributes high quality food containment solutions, focused primarily on the school lunch market. The acquisition included a cash payment plus additional potential earn-out payments based on future performance.

2. Summary of Significant Accounting Policies

Basis for Presentation

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and include the accounts of Taylor Holdco, LLC and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our unaudited condensed consolidated financial statements reflect all adjustments, which only include normal recurring adjustments, and are in the opinion of management, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the interim periods and are not necessarily indicative of results to be expected for the full fiscal year or for any other future annual or interim periods. The unaudited condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto for the fiscal year ended March 31, 2017.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

Use of Estimates

The preparation of Condensed Consolidated 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 amounts reported in the Condensed Consolidated Financial Statements and notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Trade Receivables

Collateral or other security is generally not required on trade receivables. The Company monitors the credit quality of its customers, and an allowance for doubtful accounts is maintained at a level management believes is sufficient to cover potential credit losses based on historical bad debt write-off experience and specific risks identified for uncollected accounts. Trade receivables are charged off against the allowance when it is determined that the receivable will not be collected. The allowance for doubtful accounts as of December 31, 2017 was $333. Trade receivables are presented net of reserves for estimated customer returns and allowances, at net realizable value.

Customer Concentration

One customer accounted for 21% of sales during the nine months ended December 31, 2017. As of December 31, 2017, one customer accounted for 36% of accounts receivable.

One customer accounted for 29% of sales during the nine months ended December 31, 2016.

Inventories

Inventories consist primarily of finished goods and are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. Certain slow-moving items have been reduced to net realizable value based on recent sales activity and management’s best estimate of future transactions. The reserve to reduce inventories to net realizable value as of December 31, 2017 was $375.

Property and Equipment

Property and equipment are stated at cost and depreciated on a straight-line basis over estimated useful lives, which range from two to five years. Upon sale or retirement of property and equipment, the cost and accumulated depreciation are eliminated from the respective accounts, and a gain or loss is recorded. Normal repair and maintenance costs are expensed as incurred. Expenditures for renewals and betterments are capitalized and depreciated over their estimated

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

useful lives. Assets classified as held for sale are stated at the lower of carrying amount or estimated fair value less cost to sell. Leasehold improvements are depreciated over the lesser of the expected lease term or estimated useful life.

Long-Lived Assets

Long-lived assets and identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of long-lived assets or groups of assets is assessed based on a comparison of the carrying amount to the estimated, future net cash flows. If estimated future undiscounted net cash flows are less than the carrying amount, the asset is considered impaired and expense is recorded at an amount required to reduce the carrying amount to fair value.

Intangible assets with finite lives are generally amortized using the straight-line method over their estimated economic useful lives ranging from 5 to 15 years.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the acquisition method of accounting. Goodwill is not amortized. We test goodwill annually as of March 31 at the reporting unit level. We have determined the Company has one reporting unit. At each impairment testing date, we perform a quantitative assessment of goodwill and compare the fair value of the reporting unit to its carrying amount. To the extent the carrying amount exceeds its fair value, a second step would be performed to compute the amount of impairment as the difference between the implied fair value of goodwill and the carrying value.

The second impairment assessment, if required, involves allocating the reporting unit’s fair value to all of its recognized and unrecognized assets and liabilities in order to determine the implied fair value of the reporting unit’s goodwill as of the assessment date. The implied fair value of the reporting unit’s goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date. There are no circumstances or events that have occurred during the period which would indicate goodwill is impaired as of December 31, 2017.

Indefinite-lived intangible assets are reviewed for impairment annually as of March 31 and whenever events or circumstances indicate that the carrying value may not be recoverable. There are no circumstances or events that have occurred during the period which would indicate the carrying value of indefinite-lived intangible assets are not recoverable as of December 31, 2017.

Income Taxes

The Company’s subsidiary, Taylor Precision Products, Inc., is a corporation formed under Subchapter C of the Internal Revenue Code and is subject to corporate taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax expense is measured by the change in the deferred tax assets or liabilities during the year.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act revises the U.S. corporate income tax by, among other things, lowering the corporate income tax rate from 35% to 21%, adopting a quasi-territorial income tax system and imposing a one-time transition tax on foreign unremitted earnings, and setting limitations on deductibility of certain costs (e.g., interest expense) among other changes.

The Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) 118 to provide guidance to companies that have not yet completed their accounting for the Tax Act in the period of enactment. SAB 118 provides that the Company include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined.

As of December 31, 2017, the Company has not completed its assessment of the accounting impact of the tax effects of the Tax Act. The Company recorded a provisional income tax expense of $1.7 million for the nine months ended December 31, 2017 associated with the re-measurement of the Company’s deferred tax assets and liabilities stemming from the reduction of the U.S. federal income tax rate based on the reasonable estimate guidance provided by SAB 118.

The Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Management believes the Company has no unrecognized tax benefits. The Company’s policy for recording interest and penalties associated with examinations by tax authorities is to record such items as a component of income tax expense.

The Company and its subsidiaries’ tax years ending in 2013 through 2017 remain open to examination by federal and state tax authorities. The Company files state income tax returns in multiple jurisdictions, each with unique laws regarding statutes of limitations.

Fair Value Measurements

The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the most advantageous market for the asset or liability in an orderly transaction. Fair value measurement is based on a hierarchy of observable or unobservable inputs. The standard describes three levels of inputs that may be used to measure fair value.

 

  Level 1 — Inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date;

 

  Level 2 — Inputs to the valuation methodology other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and the fair value can be determined through the use of models or other valuation methodologies; and

 

  Level 3 — Inputs to valuation methodology are unobservable inputs in situations where there is little or no market activity of the asset and liability and the reporting entity makes estimates or assumptions relating to the pricing of the asset or liability including assumptions regarding risk.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

The Company followed purchase accounting conventions as prescribed by ASC 805, Business Combinations, to establish the opening balance sheet of the acquired entities for all its acquisitions. The fair value measurement methods used to estimate the fair value of the assets acquired and liabilities assumed at the acquisition date utilized a number of significant unobservable inputs of Level 3 assumptions. These assumptions included projections of future operating results, the implied fair value of assets using an income approach by preparing a discounted cash flow analysis, and other subjective assumptions.

The carrying values of financial instruments such as cash, accounts receivable, accounts payable, and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes that the current carrying amount of its long-term debt approximates fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates.

Revenue Recognition

The Company recognizes revenues when the following criteria are met: persuasive evidence of an agreement exists, upon the later of shipment of product to the customer or when title to the product transfers to the customer per the terms of the sales contract, the Company’s price to the buyer is fixed and determinable, and collectability is reasonably assured. Revenues are recorded net of estimated sales returns and allowances.

Customer Rebates and Consumer Advertising

The Company participates in cooperative advertising and other rebate programs with its customers, including volume rebates. During the nine months ended December 31, 2017 and 2016, $4,078 and $4,795 was incurred under these programs, respectively. These amounts are reflected as a reduction to net sales. The Company expenses all consumer advertising costs as incurred.

As of December 31, 2017, the reserves for cooperative advertising and other rebates were $1,041, which are included in net receivables. Reserves are estimated using historical experience and terms of existing arrangements with customers.

Merchandise Returns

For the nine months ended December 31, 2017 and 2016, sales returns under merchandise returns programs were $3,301 and $3,030, respectively. Sales returns are reflected in the calculation of net sales. Reserves for estimated merchandise returns as of December 31, 2017 included in net receivables were $1,185 and are estimated using historical experience.

Shipping and Handling Costs

Shipping and handling costs of $1,588 and $1,648 are classified as selling, general, and administrative expenses in the consolidated statements of operations for the nine months ended December 31, 2017 and 2016, respectively. Amounts charged to customers for recovery of shipping and handling costs are included in net sales.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

Research and Development

Research and development expenses consist primarily of outside contract costs incurred in the development or testing of prototype products. These costs are expensed as incurred in selling, general and administrative expenses in the consolidated statements of operations.

Employee Benefits

The Company sponsors a 401(k) defined contribution savings plan for its U.S. employees. The Company provides a matching contribution up to a maximum of 3% of a participant’s eligible compensation, and employees become immediately vested. The Company made employer contributions of $185 and $108 to the plan for the nine months ended December 31, 2017 and 2016, respectively.

Recently Adopted Accounting Standards

In April 2017, the Company adopted ASU 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 requires that an entity measure inventory at the lower of cost and net realizable value. The adoption of this standard did not have a material impact on the consolidated financial statements.

Recently Issued Accounting Standards

In May 2014, the FASB issued new authoritative accounting guidance on revenue from contracts with customers. The new standard provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. It also requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. In August 2015, the FASB changed the effective date of the new revenue recognition accounting guidance for private companies to be for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for annual periods beginning after the original effective date of December 15, 2016. The Company is in the process of reviewing customer contracts and evaluating the impact of the new standard on the Condensed Consolidated Financial Statements and the timing of the adoption.

In November 2015, the FASB issued new authoritative accounting guidance on simplifying the presentation of deferred income taxes, which requires that deferred income tax liabilities and assets be presented as a net non-current deferred tax asset or liability by jurisdiction on the balance sheet. The current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is unchanged. This guidance is effective for periods beginning after December 15, 2017; however, earlier adoption is permitted for all entities for any interim or annual statements that have not been issued. The Company is in the process of evaluating the impact of the new standard on the Condensed Consolidated Financial Statements and the timing of adoption.

In February 2016, the FASB issued new authoritative accounting guidance on leases which increases transparency and comparability for lease transactions. The new standard brings substantially all leases on the balance sheets for operating lease arrangements with lease terms greater than 12 months for lessees. This update will require a modified retrospective application, which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. The new standard is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is in the process of assessing the impact of the new standard on the Condensed Consolidated Financial Statements and the timing of adoption.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies how entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The ASU is effective for the Company’s fiscal year ended March 31, 2023. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of assessing the impact of the new standard on the Condensed Consolidated Financial Statements upon adoption.

3. Acquisitions

During December 2014, the Company acquired the stock of Chef’n Corporation (“Chef’n”) for $66,656. Consideration paid for the Chef’n acquisition included an estimate of contingent consideration payable in cash to the former owners should certain gross profit targets be met in the future. The fair value of the contingent consideration was determined using Level 3 inputs. At the acquisition date, the Company estimated the fair value was $6,540, determined using the probability of potential payout.

As of December 31, 2017, the Company revalued the contingent consideration payable to $8,352. The fair value of the contingent consideration is determined based on a discounted cash flow analysis using market and operating performance projections available at the balance sheet dates, a risk free interest rate of approximately 1%, and discounted over the remaining months until expiration of the agreement on December 23, 2017. For the nine months ended December 31, 2017 and 2016, there was a change in the estimated fair value of the contingent consideration of $63 and $0, respectively. The contingent consideration payable is due within 60 days of the expiration of the agreement. The contingent consideration has been paid in full subsequent to December 31, 2017.

Acquisition of PlanetBox LLC

On December 1, 2017, the Company acquired 100% of the outstanding shares of PlanetBox, LLC, for $10,776, including transaction costs of $537. The Company acquired the business to continue to expand the product offerings and brands to the retail trade and expansion of the Company’s internet channel. The following table summarizes the allocation of the consideration transferred to assets acquired and liabilities assumed:

 

13


Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

Receivables, net

   $ 52  

Inventories, net

     636  

Property and equipment, net

     68  

Goodwill

     4,820  

Intangible assets, net

     5,200  
  

 

 

 

Total Assets

     10,776  
  

 

 

 

Total purchase price

     10,776  

Less: Contingent consideration

     (1,774
  

 

 

 

Total Cash Paid for Acquisition

   $ 9,002  
  

 

 

 

Consideration paid for the PlanetBox acquisition includes an estimate of contingent consideration payable in cash to the former owners should certain profitability and gross profit targets be met in the future. The fair value of the contingent consideration was determined based on a discounted cash flow analysis using market and operating performance projections available at the acquisition date, a risk free interest rate of approximately 1%, and discounted over the remaining months until the date of expected payment. At the acquisition date, the Company estimated the fair value was $1,774, based on the probability of potential payout.

Other than goodwill, the acquired intangible assets primarily consist of trade names, technology, non-compete agreements, and customer relationships. The weighted-average amortization period for the acquired finite-lived intangible assets is 13 years. The fair value measurement methods used to estimate the fair value of the finite-lived assets at the acquisition date utilized a number of significant unobservable inputs of Level 3 assumptions. These assumptions included, among other things, projections of future operating results, the implied fair value of assets using an income approach by preparing a discounted cash flow analysis, and other subjective assumptions.

The goodwill recognized in connection with the acquisition is deductible for tax purposes.

4. Related-Party Transactions

The management fee incurred under the arrangement with the majority unitholder of Parent Company was $567 and $449 for the nine months ended December 31, 2017 and 2016, respectively, and is included within selling, general, and administrative expenses in the consolidated statements of operations.

 

14


Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

5. Property and Equipment

Property and equipment at December 31, 2017 consist of the following:

 

Description

   2017      Useful Life
In Years
 

Leasehold improvements

   $ 764        Lease life  

Machinery, molds, and equipment

     5,014        2-3  

Computers, furniture and fixtures

     3,375        3-5  

Construction in process

     89     
  

 

 

    

Total property and equipment

     9,242     

Less accumulated depreciation

     (6,232   
  

 

 

    

Total Property and Equipment, net

   $ 3,010     
  

 

 

    

Depreciation expense totaled approximately $1,360 and $1,104 for the nine months ended December 31, 2017 and 2016, respectively.

6. Goodwill and Other Intangible Assets

During the nine months ending December 31, 2017 $4,820 of goodwill was booked related to the acquisition of PlanetBox LLC. There were no changes in carrying amounts of goodwill during the nine months ended December 31, 2016.

At December 31, 2017, the net book value of intangible assets is as follows:

 

December 31, 2017

   Gross
Carrying
Amount
     Accumulated
Amortization
     Net Book
Value
     Average
Life in
Years
 

Manufacturer representative relationships

   $ 41,700      $ (14,634    $ 27,066        15  

Technology

     26,886        (13,277      13,609        10  

Customer relationships

     45,200        (10,119      35,081        15  

Noncompete agreement

     14,500        (14,218      282        5  

Patents

     382        (79      303        15  

Order backlog

     230        (230      —       
  

 

 

    

 

 

    

 

 

    

Total amortizable intangible assets

     128,898        (52,557      76,341     

Indefinite-lived trade names

     66,090        —          66,090     
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 194,988      $ (52,557    $ 142,431     
  

 

 

    

 

 

    

 

 

    

No impairments were recorded during the nine months ended December 31, 2017 and 2016.

Amortization expense totaled approximately $7,553 and $8,671 for the nine months ended December 31, 2017 and 2016, respectively.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

A summary of estimated future amortization of intangible assets is as follows:

 

Years ending March 31,

      

2018 (Less amortization from April 1, 2017 to December 31, 2017)

   $ 2,423  

2019

     8,684  

2020

     8,555  

2021

     8,555  

2022

     8,555  

Thereafter

     39,569  
  

 

 

 

Total future amortization

   $ 76,341  
  

 

 

 

7. Debt

Total borrowings as of December 31, 2017 consist of the following:

 

December 31,

   2017  

Senior debt

   $ 128,459  

Subordinated debt

     51,700  
  

 

 

 

Total

     180,159  

Less current portion of above

     (128,459

Less unamortized debt issuance costs

     (1,002
  

 

 

 

Long-term debt, net

   $ 50,698  
  

 

 

 

In December 2014, the Company amended its Senior Credit Agreement (“Credit Agreement”) dated June 8, 2012, which was previously amended in November 2013. The Credit Agreement consists of a revolving line of credit (the “Revolver”), which was subsequently increased from $15,000 to $20,000. As of December 31, 2017, there were no borrowings outstanding on the Revolver. In addition, the original agreement dated June 8, 2012 provided for $66,600 in term debt, of which $54,780 was outstanding at the time of amendment (“Senior Debt”). The first amendment provided for an increase in the term loan of $70,000, for a total of $124,780. The second amendment provided for supplemental term loans of $41,310.

The Company is required to make quarterly principal payments, adjusted for any prepayments, on the Senior Debt and the supplemental term loan in the amount of 0.625% of outstanding principal for quarters in fiscal year 2016, and 1.25% of outstanding principal for quarters thereafter, with the remainder due on November 6, 2018, the maturity date. The Company may make prepayments

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

as allowed under the Credit Agreement, which are applied against future principal installments. At the Company’s option, borrowings under the Revolver and Senior Debt are based on London InterBank Offered Rate (LIBOR) plus 4.5% or the base rate, as defined by the terms of the agreement, with a floor of 5.5%. At December 31, 2017 and 2016, the interest rate for the Senior Debt was based on LIBOR and stated at 5.5%. At December 31, 2017, interest payable of $1,461 as outstanding and is included within accrued liabilities on the consolidated balance sheets.

In December 2014, the Company amended its Subordinated Credit Agreement (“Subordinated Debt”) dated June 8, 2012, which was previously amended in November 2013. The original agreement dated June 8, 2012 provided $25,600 in term debt which was outstanding at the time of amendment. The first amendment provided for an increase in the Subordinated Debt of $19,200, for a total of $44,800, with the ability to draw additional notes under the amended agreement of up to $22,100. The second amendment provided for an increase in the Subordinated Debt of $6,900, for a total of $51,700.

Subordinated Debt under the amended agreements matures on May 6, 2019. No principal payments are required until maturity. The Subordinated Debt carries cash interest of 13% including, at the option of the Company, payment-in-kind interest of 2% payable quarterly. At December 31, 2017, there was no interest payable outstanding.

The Company capitalized $232 and $2,522 of additional debt fees in December 2014 and November 2013, respectively, associated with the amended Senior Credit and amended Subordinated Credit Agreements, which are being amortized on a straight-line basis through the maturity date of the agreements, which does not materially differ from the effective interest rate.

The Credit Agreement and Subordinated Debt agreement contain restrictive covenants, including, but not limited to, limitations on capital expenditures and require maintenance of minimum leverage and fixed charge coverage ratios. The outstanding debt is collateralized by substantially all of the Company’s assets. The Company was in compliance with all covenants as of December 31, 2017.

Aggregate maturities of long-term debt are as follows:

 

Year ending March 31,

      

2018 (three months from December 31, 2017 to March 31, 2018)

   $ 1,911  

2019

     128,459  

2020

     49,789  
  

 

 

 

Total

   $ 180,159  
  

 

 

 

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

8. Income Taxes

The income tax benefit consists of the following:

 

For 9 months ended December 31,

   2017      2016  

Current Income Tax Expense

     

Federal

   $ 169        1,144  

State and local

     —          40  
  

 

 

    

 

 

 

Total Current Income Tax Expense

     169        1,184  
  

 

 

    

 

 

 

Deferred Income Tax (Benefit) Expense

     

Federal

     (2,328      (421

State

     (39      197  
  

 

 

    

 

 

 

Total Deferred Income Tax Benefit

     (2,367      (224
  

 

 

    

 

 

 

Total Income Tax (Benefit) Expense

   $ (2,198      960  
  

 

 

    

 

 

 

Significant components of the Company’s deferred tax assets and liabilities at December 31, 2017 are as follows:

 

     2017  

Deferred Tax Assets

  

Transaction costs

   $ 1,305  

Inventory capitalization

     465  

Net operating loss carryforwards

     300  

Reserves and accrued liabilities

     1,621  

PIK Interest Liability

     3,465  
  

 

 

 

Total Deferred Tax Assets

     7,156  
  

 

 

 

Deferred Tax Liabilities

  

Prepaid expenses

     143  

Depreciation and amortization

     9,707  
  

 

 

 

Total Deferred Tax Liabilities

     9,850  
  

 

 

 

Total Net Deferred Tax Liabilities

   $ (2,694
  

 

 

 

The difference between the financial statement benefit for income taxes and the amount derived by applying the statutory federal income tax rate to loss before income taxes is principally related to state income taxes and the nondeductible portion of meals and entertainment expenses.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

9. Mandatorily Redeemable Preferred Units

The Company has authorized and issued 12,000 Mandatorily Redeemable Preferred Units (“Redeemable Preferred Units”). Each Redeemable Preferred Unit accrues an annual yield of 15% on the sum of (i) the unreturned capital value, which was $12 million upon formation of the Company, plus (ii) the unpaid yield for all quarterly periods (“Liquidation Value”).

The Company is obligated to purchase all of the Redeemable Preferred Units by June 8, 2018 (“Mandatory Redemption Date”). At the Mandatory Redemption Date the Liquidation Value of Redeemable Preferred Units will approximate $29,000. The Company may also purchase the Redeemable Preferred Units prior to the Mandatory Redemption Date on or any time after the second anniversary of the closing date, which was June 8, 2012, or upon a change in control of the Company, at a redemption price equal to the Liquidation Value at the date of redemption payable in cash.

The Redeemable Preferred Units are accounted for under ASC Topic 480-10 Accounting for Redeemable Equity Instruments. As of December 31, 2017, there are 12,000 Redeemable Preferred Units outstanding with a Liquidation Value of $27,220 presented as mandatorily redeemable preferred units as a current liability on the consolidated balance sheets.

10. Commitments and Contingencies

The Company leases buildings and equipment under various operating leases expiring through 2022. Total rent expense under these operating leases was $806 and $688 for the nine months ended December 31, 2017 and 2016, respectively. Future lease payments under all operating leases in effect at December 31, 2017, that have initial or remaining lease terms in excess of one year are as follows:

 

Year ending March 31,

      

2018 (three months from January 1, 2018 to March 31, 2018)

   $ 279  

2019

     985  

2020

     590  

2021

     206  

2022

     116  
  

 

 

 

Total

   $ 2,176  
  

 

 

 

Periodically, the Company is subject to lawsuits and other claims. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. Based on the facts and circumstances of such matters and, where necessary, advice of legal counsel, no matters currently pending will have a material impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents

Taylor Holdco, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(In Thousands)

 

 

11. Subsequent Events

Subsequent events are events or transactions that occur after the consolidated balance sheet date but before the Condensed Consolidated Financial Statements are issued. The Company recognizes in the Condensed Consolidated Financial Statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the consolidated balance sheet, including the estimates inherent in the process of preparing the Condensed Consolidated Financial Statements. The Company’s Condensed Consolidated Financial Statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the consolidated balance sheet but arose after the consolidated balance sheet date and before the Condensed Consolidated Financial Statements are available to be issued.

On December 22, 2017, the Company entered into an agreement with Lifetime Brands (NasdaqGS:LCUT) (“Lifetime”), a leading global provider of branded kitchenware, tableware and other products used in the home, under which Lifetime will acquire the Company in a cash and stock transaction. The transaction closed on March 2, 2018. The aggregate consideration was approximately $295.8 million, $218.9 million of cash consideration and 5,593,116 newly issued shares of Lifetime’s common stock, with a value equal to $76.9 million, based on the market value of Lifetime’s common stock as of March 2, 2018. Consideration was used to repay certain indebtedness of the Company.

The Company has evaluated subsequent events through May 17, 2018, which is the date the Condensed Consolidated Financial Statements were available to be issued.

 

2 0

EX-99.3

Exhibit 99.3

Unaudited Pro Forma Condensed Combined Financial Information

On December 22, 2017, Lifetime Brands, Inc. (the “Company” or “Lifetime Brands”), entered into a merger agreement (the “Merger Agreement”) by and among the Company, certain of the Company’s wholly-owned subsidiaries created for the purpose of entering into the Merger Agreement and performing the transactions contemplated thereby, Taylor Parent, LLC, a Delaware limited liability company (“Taylor Parent”) and Taylor Holdco, LLC, a Delaware limited liability company (“Taylor” or “Filament”), providing for the acquisition of Filament by the Company. At a special meeting of stockholders held on February 28, 2018, stockholders approved the issuance of shares of common stock of the Company pursuant to the Merger Agreement and the acquisition was completed on March 2, 2018 (the “Acquisition”).

The following unaudited pro forma condensed combined financial statements and explanatory notes are presented to illustrate the effects of the Acquisition on the historical financial position and results of operations of the Company.

The unaudited pro forma condensed combined balance sheet gives effect to the Acquisition as if it had occurred on December 31, 2017 and the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 is presented as if the Acquisition had occurred on January 1, 2017. The unaudited pro forma combined statement of operations for the year ended December 31, 2017 combines the Company’s audited consolidated statement of operations for the year ended December 31, 2017 with Filament’s unaudited consolidated statement of operations for the twelve months ended December 31, 2017 (comprised of the nine months ended December 31, 2017 and the three months ended March 31, 2017).

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 Lifetime Brands’ preliminary estimate and are subject to change once the detailed analyses are completed. These adjustments may be material.

The unaudited pro forma condensed consolidated financial information is presented for informational and illustrative purposes in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”), including Article 11 of Regulation S-X promulgated thereby. Such information is preliminary and based on currently available information, assumptions and adjustments that the Company believes are reasonable, however the ultimate amounts recorded may be different. The Company’s historical condensed consolidated financial information has been adjusted in the unaudited pro forma condensed financial information to give effect to pro forma events that are (1) directly attributable to the Acquisition (2) factually supportable and (3) with respect to the statement of operations, expected to have a continuing impact on the consolidated results.

The Unaudited Pro Forma Condensed Consolidated Statement of Operations does not include: (1) any revenue or cost saving synergies 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.

 

1


The pro forma condensed consolidated financial information is unaudited, is presented for informational purposes only, and is 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 consolidated financial information does not purport to project the future consolidated financial position or operating results of the consolidated companies. The unaudited pro forma condensed consolidated financial information and the accompanying notes should be read together with:

 

    the separate audited historical consolidated financial statements of Lifetime Brands, Inc. for the year ended December 31, 2017 (as contained in Lifetime Brands’ Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 16, 2018);

 

    the separate audited consolidated financial statements as of March 31, 2017 and March 31, 2016 and for the fiscal years ended March 31, 2017, 2016, and 2015 of Taylor Holdco, LLC and Subsidiaries and the related notes to such audited consolidated financial statements (included as Exhibit 99.1 to the Form 8-K/A to which these Unaudited Pro Forma Condensed Combined Financial Statements are Exhibit 99.3);

 

    the separate unaudited consolidated financial statements as of December 31, 2017 and for the nine months ended December 31, 2017 and 2016 of Taylor Holdco, LLC and Subsidiaries and the related notes to such unaudited consolidated financial statements (included as Exhibit 99.2 to the Form 8-K/A to which these Unaudited Pro Forma Condensed Combined Financial Statements are Exhibit 99.3).

 

2


Lifetime Brands, Inc.

Unaudited Pro Forma Condensed Combined Balance Sheet

December 31, 2017

(in thousands)

 

     Historical                      
     Lifetime Brands,
Inc.
     Taylor Holdco,
LLC
     Pro Forma
Adjustments
    Notes      Pro Forma
Combined
 

ASSETS

             

CURRENT ASSETS

             

Cash and cash equivalents

   $ 7,600      $ 7,652      $ (7,652     4 (a)      $ 7,600  

Accounts receivable

     108,033        27,505        —            135,538  

Inventory

     132,436        29,108        1,455       4 (b)        162,999  

Prepaid expenses and other current assets

     10,354        779        —            11,133  
  

 

 

    

 

 

    

 

 

      

 

 

 

TOTAL CURRENT ASSETS

     258,423        65,044        (6,197        317,270  

PROPERTY AND EQUIPMENT, net

     23,065        3,010        —            26,075  

INVESTMENTS

     23,978        —          —            23,978  

INTANGIBLE ASSETS, net

     88,479        217,870        62,237       4 (c)        368,586  

DEFERRED INCOME TAXES

     5,826        2,066        —            7,892  

OTHER ASSETS

     1,750        225        718       4 (d)        2,693  
  

 

 

    

 

 

    

 

 

      

 

 

 

TOTAL ASSETS

   $ 401,521      $ 288,215      $ 56,758        $ 746,494  
  

 

 

    

 

 

    

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

CURRENT LIABILITIES

             

Short term loan

   $ 69      $ —        $ —          $ 69  

Accounts payable

     25,461        13,851        —            39,312  

Accrued expenses

     44,121        6,950        4,054       4 (e), 4 (h)        55,125  

Income taxes payable

     1,864        —          3,541       4 (h)        5,405  

Current portion of contingent consideration

     —          8,352        (8,352     4 (f)        —    

Mandatorily redeemable preferred units

     —          27,220        (27,220     4 (g)        —    

Current portion of long-term debt

     —          128,459        (127,174     4 (d)        1,285  
  

 

 

    

 

 

    

 

 

      

 

 

 

TOTAL CURRENT LIABILITIES

     71,515        184,832        (155,151        101,196  

DEFERRED RENT & OTHER LONG-TERM LIABILITIES

     20,249        1,795        —            22,044  

DEFERRED INCOME TAXES

     4,423        4,760        21,938       4 (i)        31,121  

INCOME TAXES PAYABLE, LONG-TERM

     311        —          —            311  

REVOLVING CREDIT FACILITY

     94,744        —          (52,684     4 (d)        42,060  

LONG-TERM DEBT

     —          50,698        212,761       4 (d)        263,459  

STOCKHOLDERS’ EQUITY

             

Preferred stock, $1.00 par value

     —          —          —            —    

Common stock, $.01 par value

     149        —          56       4 (j)        205  

Other stockholders’ equity

     210,130        46,130        29,838       4 (j)        286,098  
  

 

 

    

 

 

    

 

 

      

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     210,279        46,130        29,894          286,303  
  

 

 

    

 

 

    

 

 

      

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 401,521      $ 288,215      $ 56,758        $ 746,494  
  

 

 

    

 

 

    

 

 

      

 

 

 

 

3


Lifetime Brands, Inc.

Unaudited Pro Forma Condensed Combined Statement of Operations

Year ended December 31, 2017

(in thousands except per share amounts)

 

     Historical                   
     Lifetime
Brands, Inc.
    Taylor
Holdco, LLC
    Pro Forma
Adjustments
    Notes    Pro Forma
Combined
 

Net sales

   $ 579,476     $ 168,073     $ —          $ 747,549  

Cost of sales

     364,319       98,159       —            462,478  
  

 

 

   

 

 

   

 

 

      

 

 

 

Gross margin

     215,157       69,914       —            285,071  

Distribution expenses

     58,050       8,107       —            66,157  

Selling, general and administrative expenses

     140,903       45,948       (2,162   4 (k)      184,689  

Intangible asset impairment

     —         2,100       —            2,100  

Restructuring expenses

     1,024       —         —            1,024  
  

 

 

   

 

 

   

 

 

      

 

 

 

Income from operations

     15,180       13,759       2,162          31,101  

Interest expense

     (4,291     (15,319     2,435     4 (d)      (17,175

Loss on early retirement of debt

     (110     —         —            (110

Redeemable preferred interest

     —         (3,760     3,760     4 (g)      —    

Other income (expense)

     —         (131     —            (131
  

 

 

   

 

 

   

 

 

      

 

 

 

Income (loss) before income taxes and equity in earnings

     10,779       (5,451     8,357          13,685  

Income tax (provision) benefit

     (9,032     3,621       (3,176   4 (l)      (8,587

Equity in earnings, net of taxes

     407       —         —            407  
  

 

 

   

 

 

   

 

 

      

 

 

 

NET INCOME (LOSS)

   $ 2,154     $ (1,830   $ 5,181        $ 5,505  
  

 

 

   

 

 

   

 

 

      

 

 

 

BASIC INCOME PER COMMON SHARE

   $ 0.15            $ 0.27  
  

 

 

          

 

 

 

DILUTED INCOME PER COMMON SHARE

   $ 0.14            $ 0.27  
  

 

 

          

 

 

 

WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING

           

Basic

     14,505         5,593     4 (m)      20,098  

Diluted

     14,955         5,593     4 (m)      20,548  

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Note 1. Description of the Transactions

On December 22, 2017, the Company entered into a merger agreement (the “Merger Agreement”) by and among the Company, certain of the Company’s wholly-owned subsidiaries created for the purpose of entering into the Merger Agreement and performing the transactions contemplated thereby, Taylor Parent, LLC, a Delaware limited liability company (“Taylor Parent”) and Taylor Holdco, LLC, a Delaware limited liability company (“Taylor” or “Filament”), providing for the acquisition of Taylor by the Company. At a special meeting of stockholders held on February 28, 2018, stockholders approved the issuance of shares of common stock of the Company pursuant to the Merger Agreement and the acquisition was completed on March 2, 2018 (the “Acquisition”).

In connection with the Acquisition, on March 2, 2018 (1) the Company entered into a new credit agreement (the “ABL Agreement”), in the maximum aggregate principal amount of $150.0 million, which will mature on March 2, 2023, and (2) the Company entered into a new loan agreement (the “Term Loan” and together with the ABL Agreement, the “Debt Agreements”), providing for a senior secured term loan credit facility to the Company in the principal amount of $275.0 million, which will mature on February 28, 2025. The Company utilized the proceeds of borrowings under the Debt Agreements (i) to repay in full all existing indebtedness for borrowed money under its former Credit Agreement and (ii) to finance the Acquisition, the refinancing of certain indebtedness of Filament, and the payment of fees and expenses in connection with the foregoing.

Note 2. Basis of presentation

The accompanying unaudited pro forma financial statements are intended to reflect the impact of the Acquisition on the Company’s historical financial statements and present the pro forma condensed combined financial position and results of operations of the Company based on the historical financial statements of the Company and Filament after giving effect to the Acquisition and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The Company’s underlying financial information has been derived from the consolidated financial statements and notes thereto of the Company, which are included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Filament’s underlying financial information has been derived from its unaudited financial statements for the twelve months ended December 31, 2017.

The unaudited pro forma condensed combined balance sheet combines the unaudited historical condensed consolidated balance sheets of the Company and Filament as of December 31, 2017, giving effect to the Acquisition as if it had occurred on December 31, 2017.

The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2017 assume the Acquisition took place on January 1, 2017, the beginning of the Company’s most recently completed fiscal year. The Company’s audited consolidated statement

 

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of operations for the fiscal year ended December 31, 2017 has been combined with Filament’s unaudited consolidated statement of operations for the twelve months ended December 31, 2017 (comprised of the nine months ended December 31, 2017 and the three months ended March 31, 2017).

Note 3. Consideration and preliminary purchase price allocation

Consideration

The aggregate consideration for the Acquisition is approximately $295.8 million, consisting of $218.9 million of cash consideration and 5.6 million newly issued shares of the Company’s common stock, with a value equal to $76.9 million, based on the market value of the Company’s common stock as of March 2, 2018 (collectively, the “consideration”). The following table sets forth the components of the total consideration (in thousands).

 

Cash consideration

   $ 218,918  

Consideration common shares issued

     5,593  

Company’s share price

   $ 13.75  
  

 

 

 

Equity consideration

   $ 76,904  
  

 

 

 

Total consideration

   $ 295,822  
  

 

 

 

The cash portion of the consideration was subject to adjustments as defined in the Merger Agreement. Funded Debt (as defined in the Merger Agreement) was paid by the Company on behalf of Filament at the closing and is included in the calculation of the cash portion of the consideration.

Preliminary purchase price allocation

The Acquisition will be accounted for as a business combination using the acquisition method of accounting in accordance with Financial Accounting Standards Board, Accounting Standard Codification Topic 805, which will establish a new basis of accounting for all identifiable assets acquired and liabilities assumed at fair value. Accordingly, the costs to acquire such interests will be allocated to the underlying net assets based on their respective fair values. Any excess of the purchase price over the estimated fair value of the net assets acquired will be recorded as goodwill.

The following table summarizes the preliminary allocation of the purchase price as of December 31, 2017 (in thousands):

 

Net assets acquired

   $ 42,989  

Fair value adjustment to inventory

     1,455  

Intangible assets

     201,000  

Deferred income tax adjustment

     (21,938

Other liabilities

     (6,791

Goodwill

     79,107  
  

 

 

 

Total consideration

   $ 295,822  
  

 

 

 

 

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The fair values of net assets acquired are based on management’s preliminary estimate of the respective fair values. The final valuation of net assets may result in material adjustments to the respective fair values and resulting goodwill. The final valuation of net assets will be completed as soon as possible but no later than one year from the acquisition date.

The unaudited pro forma financial statements do not reflect all reclassifications or adjustments to conform Filament’s financial statement presentation or accounting policies to those adopted by the Company. The Company has made estimates based on the best available information and is not aware of any material impacts that are not reflected. The unaudited pro forma financial statements also do not reflect potential fair value adjustments for certain tax assets and liabilities.

Note 4. Pro forma adjustments

 

(a) Cash and cash equivalents

Reflects adjustments to cash and cash equivalents for the impacts of cash proceeds and expenditures directly attributable to the Acquisition as follows (in thousands).

 

Proceeds from Term Loan

   $ 275,000  

Proceeds from ABL Agreement

     42,060  

Repayment of former credit facility

     (94,744

Debt issuance costs related to Debt Agreements

     (11,050

Cash consideration paid at closing

     (218,918
  

 

 

 

Pro forma adjustment to cash and cash equivalents

   $ (7,652
  

 

 

 

 

(b) Inventory

Reflects a preliminary estimate of the step-up in fair value of Filament’s inventory to reflect the estimated selling price of the inventory, less the remaining selling costs and normal profit margin on the selling efforts. The increase is not reflected in the unaudited pro forma condensed combined statement of operations because it does not have a continuing impact.

 

(c) Intangible assets, net and amortization

Reflects $62.2 million net increase to intangible assets to reflect the preliminary allocation of the purchase price to the fair value of Filament’s intangible assets. A preliminary estimate of amortization for these intangibles is reflected in the unaudited pro forma condensed combined statement of operations using the straight-line amortization method as noted below (in thousands, except years).

 

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Acquired Intangible Assets:

   Estimated
Fair Value
    

Estimated Useful Life

   Estimated
Amortization
Expense
 

Customer relationships- 15 year

   $ 88,000      15    $ 5,867  

Customer relationships- 12 year

     51,200      12      4,267  

Technology

     4,500      10      450  

Other

     100      5      20  
  

 

 

       

 

 

 

Total finite-lived acquired intangible assets

     143,800      Total amortization expense    $ 10,604  

Indefinite -lived intangible assets

     57,200        
  

 

 

       

Total identified intangible assets

     201,000        

Goodwill

     79,107        

Historical intangible assets

     (217,870    Historical amortization expense      (10,449
  

 

 

       

 

 

 

Pro forma intangible adjustment

   $ 62,237      Pro forma amortization adjustment    $ 155  
  

 

 

       

 

 

 

The detailed valuation studies necessary to arrive at the required estimates of the fair values for these assets and useful lives are not yet complete. Changes to the fair values of these assets could have a material impact on the accompanying unaudited pro forma financial statements and will also result in changes to goodwill and deferred tax liabilities.

 

(d) Debt and interest expense

Reflects the change in financing as a result of the Acquisition.

The pro forma financial statements give effect to financing the Acquisition by executing the Term Loan and ABL Agreement. The Company incurred approximately $11.0 million in debt issuance costs. The Term Loan has a term of 7 years and the interest rate on borrowings calculated below is based on one-month LIBOR and a margin of 3.5%, or 5.17%. The ABL Agreement has a term of 5 years and the interest rate on borrowings calculated below is based on one-month LIBOR and a margin of 1.5%, or 3.17%.

Filament’s current and long-term debt and certain other debt obligations were repaid by the Company upon completion of the Acquisition as a portion of the cash consideration.

 

 

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Pro forma debt increases (decreases) are as follows (in thousands):

 

Repayment of the current portion of Filament’s long-term debt

   $ (128,459

Current portion of Term Loan

     2,750  

Current portion of debt issuance cost related to the Term Loan

     (1,465
  

 

 

 

Pro forma current portion of long-term debt adjustment

   $ (127,174
  

 

 

 

Repayment of Filament’s long-term debt, net of issuance costs

   $ (50,698

Long-term portion of Term Loan

     272,250  

Debt issuance costs related to the Term Loan

     (8,791
  

 

 

 

Pro forma long-term debt adjustment

   $ 212,761  
  

 

 

 

ABL Agreement borrowings

   $ 42,060  

Repayment of the Company’s former credit facility

     (94,744
  

 

 

 

Pro forma adjustment to revolving credit facility

   $ (52,684
  

 

 

 

When the Acquisition was completed, the Company’s borrowings under the ABL Agreement were approximately $34.7 million. Pro forma adjustment represents borrowings under the ABL Agreement as of December 31, 2017.

Debt issuance costs associated with the Term Loan are presented net of the borrowings and debt issuance costs associated with the ABL Agreement are presented as a non-current asset. A pro forma adjustment to other assets for the debt issuance costs related to the ABL Agreement is as follows (in thousands):

 

Debt issuance costs related to the ABL Agreement

   $ 794  

Write-off of the Company’s former credit facility’s unamortized debt issuance costs

     (76
  

 

 

 

Pro forma other asset adjustment

   $ 718  
  

 

 

 

Pro forma interest expense increases (decreases) for the year ended December 31, 2017 is as follows (in thousands):

 

Interest expense on Term Loan

   $ 14,218  

Amortization of Term Loan debt issuance costs

     1,465  

Interest expense on ABL Agreement

     1,333  

Amortization of ABL Agreement debt issuance costs

     159  

Elimination of the Company’s historical interest expense

     (4,291

Elimination of Taylor’s historical interest expense

     (15,319
  

 

 

 

Pro forma interest expense adjustment

   $ (2,435
  

 

 

 

 

(e) Accrued expenses

Includes acquisition related costs incurred by the Company during the year ended December 31, 2017 of $1.5 million, which were unpaid and accrued as of December 31, 2017. In addition, approximately $0.8 million of additional Acquisition related costs were incurred on the acquisition date. The $0.8 million of Acquisition related costs that were not incurred as of December 31, 2017 are included as a pro forma adjustment to accrued expenses and to stockholders equity (see Note 4 (j) below).

 

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(f) Contingent consideration

Reflects elimination of the current portion of contingent consideration of $8.4 million. Filament’s historical current liabilities includes contingent consideration which was repaid prior to the Acquisition.

 

(g) Redeemable preferred units

Reflects adjustments to eliminate Filament’s historical outstanding preferred units held by an unaffiliated third party, which were redeemed by Filament and repaid by the Company as a portion of the cash consideration.

Reflects adjustments to eliminate Filament’s preferred interest expense on outstanding preferred units held by an unaffiliated third party as if such preferred units had been redeemed on January 1, 2017.

 

(h) Other liabilities

Reflects the preliminary estimate of the fair value of uncertain tax positions and contingent liabilities.

 

(i) Deferred income taxes

Represents an adjustment to deferred income taxes, which was calculated using a blended 24.75% U.S. federal, state and local statutory tax rate, net of federal tax benefit, multiplied by the fair value adjustments made to assets acquired and liabilities assumed, excluding goodwill, as calculated below (in thousands):

 

Intangible assets identified

   $ 201,000  

Historic tax basis of intangible assets

     (113,816
  

 

 

 

Increase in intangible assets not deductible

     87,184  

Increase in fair value of inventory acquired

     1,455  
  

 

 

 

Total fair value adjustment

     88,639  

Blended U.S. federal, state and local statutory tax rate, net of federal tax benefit

     24.8
  

 

 

 

Pro forma deferred income tax adjustment

   $ 21,938  
  

 

 

 

 

(j) Equity

Reflects adjustments to eliminate Filament’s historical equity balances, record estimated equity consideration at fair value and eliminate historical assets for the Acquisition (in thousands).

 

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Par value of shares issued as consideration

   $ 56  
  

 

 

 

Pro forma common stock adjustment, at par value

   $ 56  
  

 

 

 

Additional paid-in capital for shares issued as consideration

   $ 76,848  

Acquisition expenses incurred at closing

     (804

Elimination of Filament’s historical members’ equity

     (46,130

Elimination of the Company’s historical debt issuance costs

     (76
  

 

 

 

Pro forma other equity adjustment

   $ 29,838  
  

 

 

 

 

(k) Selling, general and administrative expenses

Reflects adjustments to selling, general and administrative expenses for the year ended December 31, 2017 (in thousands).

 

Pro forma amortization expense adjustments shown in 4(c) above

   $ 155  

Pro forma compensation expense adjustment

     768  

Elimination of Acquisition related expenses

     (2,351

Elimination of Filament’s management fee expenses

     (734
  

 

 

 

Pro forma selling, general and administrative expense adjustment

   $ (2,162
  

 

 

 

The Company entered into a new employment agreement with a key executive in connection with the Acquisition, resulting in a $0.3 million increase in the annual compensation for this executive from his previous compensation and a $0.5 million increase in annual equity compensation.

The Company incurred $2.4 million of Acquisition related expenses, which primarily include legal and advisory fees, in the year ended December 31, 2017. These expenses are reversed as they represent non-recurring charges directly related to the Acquisition.

 

(l) Provision for income taxes

Reflects the income tax effect of the pro forma adjustments for the year ended December 31, 2017, which was calculated using a blended 38% U.S. federal, state and local statutory tax rate, net of federal tax benefit. The effective tax rate of the combined company could be significantly different from what is presented in these unaudited pro forma financial statements for a variety of reasons, including post Acquisition activities (in thousands).

 

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Pro forma selling, general and administrative expense adjustment

   $ (2,162

Pro forma interest expense adjustment

     (2,435

Pro forma redeemable preferred interest adjustment

     (3,760
  

 

 

 

Pro forma adjustments

     (8,357

Estimated effective tax rate

     38.0
  

 

 

 

Pro forma income tax provision adjustment

   $ (3,176
  

 

 

 

 

(m) Income per common share

For the year ended December 31, 2017, pro forma combined basic and diluted net income per common share is calculated using the Company’s historical basic and diluted weighted average shares outstanding during the period plus the issuance of 5.6 million shares of the Company’s common stock.

The pro forma combined earnings per basic and diluted share outstanding was calculated as follows (in thousands, except per share amounts).

 

Pro forma net income

   $ 5,505  

Weighted average shares outstanding- basic

     14,505  

Common shares issued as equity consideration

     5,593  
  

 

 

 

Pro forma combined weighted average shares outstanding- basic

     20,098  

Weighted average shares outstanding- diluted

     14,955  

Common shares issued as equity consideration

     5,593  
  

 

 

 

Pro forma combined weighted average shares outstanding- diluted

     20,548  

Pro forma combined basic income per common share

   $ 0.27  
  

 

 

 

Pro forma combined diluted income per common share

   $ 0.27  
  

 

 

 

 

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