Form 8-K/A HOOKER FURNITURE CORP For: Dec 07

December 7, 2017 12:38 PM



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 

 
FORM 8-K/A
 
(AMENDMENT NO. 1)
 

 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report: December 7, 2017
(Date of earliest event reported: September 29, 2017)

Hooker Furniture Corporation
(Exact Name of Registrant as Specified in Its Charter)

Virginia
(State or other jurisdiction
of incorporation)
000-25349
(Commission
File Number)
54-0251350
(IRS Employer
Identification No.)

440 East Commonwealth Boulevard
Martinsville, Virginia
(Address of Principal Executive Offices)
24112
(Zip Code)
  (276) 632-0459
Registrant’s Telephone Number,
Including Area Code)
 

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

 
On September 29, 2017, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Shenandoah Furniture, Inc. (“Shenandoah”) pursuant to the Asset Purchase Agreement the Company and Shenandoah entered into on September 6, 2017.

The Company filed a Current Report on Form 8-K on September 29, 2017 (the “Original Form 8-K”) announcing the completion of the Acquisition and providing the disclosure items required in Items 1.01, 2.01, 2.03, 3.02, 8.01 and 9.01 of Form 8-K.

This Current Report on Form 8-K/A is being filed with the SEC to amend and supplement the Original Form 8-K to provide the disclosures required by Item 9.01 of Form 8-K, including the required historical financial information of Shenandoah 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 Business Acquired
 
99.1
Audited balance sheets of Shenandoah as of December 31, 2015 and 2016, the related audited statement of operations and stockholders’ equity for the year ended December 31, 2016 and the related notes to such audited financial statements.

99.2
Unaudited balance sheets of Shenandoah as of June 30, 2016 and 2017, the related unaudited statement of operations for the six-months ended June 30, 2016 and 2017.
 
(b)           Pro Forma Financial Information
 
99.3
Unaudited pro forma condensed combined balance sheet as of July 30, 2017, the related unaudited pro forma condensed combined statement of income for the year ended January 29, 2017 and the six-month period ended July 30, 2017 and the related notes to such unaudited pro forma condensed combined financial statements.
 
The pro forma condensed combined financial statements are unaudited, are presented for informational purposes only, and are not necessarily indicative of the financial position or results of operations that would have occurred had the Acquisition been completed as of the dates or at the beginning of the periods presented. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future consolidated financial position or operating results of the combined companies.
 
(c)           Not applicable.
 
(d)           Exhibits
 
EXHIBIT INDEX
 
Exhibit No.
Description
 
 
23.1*
 
 
99.1*
 
 
99.2*
 
 
99.3*
 
 
* Filed herewith.
 

Forward-Looking Statements
 
Certain statements made in this Form 8-K/A, other than those based on historical facts, may be forward-looking statements. Forward-looking statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.  Those risks and uncertainties include but are not limited to: (1) general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; (2) the risks related to the recent acquisition (the “Acquisition”) of substantially all of the assets and certain liabilities of Shenandoah Furniture, Inc., (“SFI”) including  integration costs, costs related to acquisition debt, maintaining SFI’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, financial statement charges related to the application of current accounting guidance in accounting for the Acquisition, the recognition of significant additional depreciation and amortization expenses by the combined entity,  the loss of key employees from SFI, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the companies which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Acquisition; (3) the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers; (4) achieving and managing growth and change, and the risks associated with new business lines, acquisitions (including the recent Shenandoah Acquisition), restructurings, strategic alliances and international operations; (5) risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs; (6) adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, including the implementation of a possible border-adjustment tax; (7) our ability to successfully implement our business plan to increase sales and improve financial performance; (8) changes in actuarial assumptions, the interest rate environment, the return on plan assets and future funding obligations related to the Pulaski Furniture Pension Plan for Employees (“Pension Plan”), which can affect future funding obligations, costs and plan liabilities; (9) the possible impairment of our long-lived assets, which can result in reduced earnings and net worth; (10) the cost and difficulty of marketing and selling our products in foreign markets; (11) disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships; (12) the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet; (13) disruptions affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices in Vietnam and China; (14) when or whether our new business initiatives, meet growth and profitability targets; (15) price competition in the furniture industry; (16) changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials; (17) the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; (18) risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs and environmental compliance and remediation costs; (19) risks associated with distribution through third-party retailers, such as non-binding dealership arrangements; (20) capital requirements and costs, including the servicing of our floating-rate term loans; (21) competition from non-traditional outlets, such as catalog and internet retailers and home improvement centers; (22) changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, declines in consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit; (23) higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products; and (24) higher than expected employee medical and workers’ compensation costs that may increase the cost of our self-insured healthcare and workers’ compensation plans; and  (25) Other risks and uncertainties as described in Item 1A, “Risk Factors” in our 2017 annual report on Form 10-K and any subsequent update to those risks and uncertainties as described in Item 1A “Risk Factors” in any Form 10-Q filed during our 2018 fiscal year. Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different Additionally, actual results may differ materially from these forward looking statements for other reasons including that while the Shenandoah Acquisition will be accounted for under the acquisition method of accounting (whereby the assets acquired and liabilities assumed will be measured at their respective fair values with any excess reflected as goodwill), the determination of the fair values of the net assets acquired, including intangible and net tangible assets, is based upon certain valuations that have not been finalized, and while the adjustments to record the assets acquired and liabilities assumed at fair value reflect our best estimates, such valuations are subject to change once the detailed analyses are completed, which adjustments may be material. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

 
SIGNATURE


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


HOOKER FURNITURE CORPORATION


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

Date: December 7, 2017
 
EXHIBIT 23.1

 
The Board of Directors
Hooker Furniture Corporation

We hereby consent to the inclusion in this Form 8-K/A of Hooker Furniture Corporation of our report dated September 5, 2017 relating to the financial statements of Shenandoah Furniture, Inc. as of December 31, 2016.

/s/ Davidson, Holland,Whitesell & Co. PLLC
December 7, 2017

EXHIBIT 99.1











SHENANDOAH FURNITURE, INC.

FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

December 31, 2016 and 2015

(With Independent Auditors' Reports Thereon)

















SHENANDOAH FURNITURE, INC.

Table of Contents

December 31, 2016

 
 
Page
   
   
Independent Auditors' Report on the Financial Statements
1
   
Financial Statements:
 
   
   Balance Sheets
2 - 3
   
   Statement of Operations
4
   
   Statement of Stockholders' Equity
5
   
   Statement of Cash Flows
6
   
   Notes to Financial Statements
7 - 11
   
Supplementary Information:
 
   
   Independent Auditors' Report on Supplementary Information
12
   
   Cost of Goods Sold
13
   
   Selling, General and Administrative Expenses
14

 

 

 
Independent Auditors' Report on the Financial Statements
The Board of Directors
Shenandoah Furniture, Inc.:
We have audited the accompanying financial statements of Shenandoah Furniture, Inc. (a Virginia corporation), which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2016, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these 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 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 financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 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 financial statements referred to above present fairly, in all material respects, the financial position of Shenandoah Furniture, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.



Hickory, North Carolina
September 5, 2017
1

 
SHENANDOAH FURNITURE, INC.

Balance Sheets

December 31, 2016 and 2015
 
Assets
 
             
   
2016
   
2015
 
             
Current assets:
           
Cash and cash equivalents
 
$
4,475,761
     
4,981,150
 
Accounts receivable, net of allowance for doubtful
               
 accounts of $76,133 in 2016 and $89,737 in 2015
   
3,332,699
     
2,790,449
 
Inventories
   
2,212,667
     
2,531,097
 
Prepaids and other
   
6,875
     
124,207
 
Total current assets
   
10,028,002
     
10,426,903
 
                 
Property and equipment:
               
Land
   
70,740
     
70,740
 
Building and improvements
   
738,913
     
738,913
 
Land improvements
   
293,295
     
275,795
 
Leasehold improvements
   
2,929,627
     
2,638,445
 
Machinery and equipment
   
3,942,229
     
3,041,509
 
Manufacturing software
   
840,202
     
569,588
 
Automobiles and trucks
   
209,430
     
209,430
 
Office and computer equipment
   
593,006
     
555,695
 
Showroom improvements
   
57,221
     
57,221
 
     
9,674,663
     
8,157,336
 
Less accumulated depreciation
   
4,024,241
     
3,742,576
 
     
5,650,422
     
4,414,760
 
                 
Other assets:
               
Cash value of life insurance
   
496,580
     
433,007
 
Other
   
5,838
     
5,838
 
Total other assets
   
502,418
     
438,845
 
   
$
16,180,842
     
15,280,508
 
 
 
2

 

Balance Sheets

December 31, 2016 and 2015
 
Liabilities and Stockholders' Equity
 
             
   
2016
   
2015
 
             
Current liabilities:
           
Accounts payable
 
$
493,619
     
684,125
 
Wages payable
   
213,769
     
224,444
 
Other accrued expenses
   
190,151
     
244,410
 
                 
                 
Total current liabilities
   
897,539
     
1,152,979
 
                 
Stockholders' equity:
               
Common stock, par value $1 per share, 25,000 shares
               
authorized and outstanding in 2016 and 2015
   
25,000
     
25,000
 
Paid-in capital
   
25,000
     
25,000
 
Retained earnings
   
15,233,303
     
14,077,529
 
Total stockholders' equity
   
15,283,303
     
14,127,529
 
                 
                 
                 
                 
                 
   
$
16,180,842
     
15,280,508
 
 
 
3

 
SHENANDOAH FURNITURE, INC.

Statement of Operations

Year Ended December 31, 2016
 
   
2016
 
       
Net sales
 
$
42,347,388
 
Cost of goods sold
   
31,648,375
 
Gross profit
   
10,699,013
 
         
Selling, general and administrative expenses
   
2,781,243
 
Operating income
   
7,917,770
 
         
Other income (expense):
       
Interest and dividend income
   
14,661
 
Loss on sale of property and equipment
   
(16,169
)
Other
   
78,972
 
Total other income
   
77,464
 
Net income
 
$
7,995,234
 
 
4

 
 
SHENANDOAH FURNITURE, INC.

Statement of Stockholders' Equity

Year Ended December 31, 2016
 
                     
Total
 
   
Common
   
Paid – In
   
Retained
   
Stockholders
 
   
Stock
   
Capital
   
Earnings
   
Equity
 
                         
Balance, December 31, 2015
   
25,000
     
25,000
     
14,077,529
     
14,127,529
 
                                 
Net income, December 31, 2016
   
-
     
-
     
7,995,234
     
7,995,234
 
                                 
Dividends paid
   
-
     
-
     
(6,839,460
)
   
(6,839,460
)
                                 
Balance, December 31, 2016
 
$
25,000
     
25,000
     
15,233,303
     
15,283,303
 
                                 
 
5

 

SHENANDOAH FURNITURE, INC.

Statement of Cash Flows

Year Ended December 31, 2016
 
   
2016
 
       
Net income
 
$
7,995,234
 
Adjustments to reconcile net income to net cash
       
provided by operating activities:
       
Depreciation
   
507,665
 
Loss on sale of property and equipment
   
16,169
 
Increase in cash value of life insurance
   
(63,573
)
Increase in accounts receivable
   
(542,250
)
Decrease in inventories
   
318,430
 
Decrease in prepaids and other
   
117,332
 
Decrease in accounts payable
   
(190,506
)
Decrease in wages payable
   
(10,675
)
Decrease in other accrued expenses
   
(54,259
)
Net adjustments
   
98,333
 
Net cash provided by operating activities
   
8,093,567
 
         
Cash flows from investing activities:
       
Proceeds from sale of equipment
   
16,999
 
Purchases of property and equipment
   
(1,776,495
)
Net cash used by investing activities
   
(1,759,496
)
         
Cash flows from financing activities:
       
Cash dividends paid
   
(6,839,460
)
Redemption of common stock
   
-
 
Net cash used by financing activities
   
(6,839,460
)
Net decrease in cash and cash equivalents
   
(505,389
)
         
Beginning cash and cash equivalents
   
4,981,150
 
Ending cash and cash equivalents
 
$
4,475,761
 
 
6

SHENANDOAH FURNITURE, INC.

Notes to Financial Statements

December 31, 2016 and 2015
 
(1)    Nature of Business and Significant Accounting Policies

(a) Nature of Business

Shenandoah Furniture, Inc. ("Company") is a Virginia corporation engaged in the manufacture of furniture.  The Company's manufacturing plants and business operations are located in Martinsville, Virginia, Mt. Airy, North Carolina and Valdese, North Carolina.  Sales are on individual credit terms to customers located throughout the United States.

(b) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash in banks, and highly liquid debt instruments with an original maturity date of three months or less.

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 and believes it is not exposed to any significant credit risk relating to cash and cash equivalents.

(c) Inventories

Inventories are valued at the lower of cost, on the first-in, first-out basis, or market.

(d) Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances.  Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable.  The Company's valuation allowance at December 31, 2016 and 2015, was $76,133 and $89,737, respectively.




7

SHENANDOAH FURNITURE, INC.

Notes to Financial Statements

December 31, 2016 and 2015
 

(1)          Nature of Business and Significant Accounting Policies, Continued

(e) Property and Equipment

Property and equipment is stated at cost.  The Company capitalizes property and equipment if its value is greater than $500 and its useful life is more than one year.    Depreciation is computed over the following estimated service lives of depreciable assets using principally the straight-line method:

 
 
Years
 
Building and leasehold improvements
   
7 - 40
 
Land improvements
   
15 - 20
 
Machinery and equipment
   
5 - 10
 
Manufacturing software
   
5 - 7
 
Automobiles and trucks
   
5 - 10
 
Office and computer equipment
   
3 - 10
 
Showroom improvements
   
39
 

(f) Income Taxes

The Company has elected to be taxed as a Small Business Corporation.  Accordingly, no provision has been made for Federal and state income taxes because these taxes are the responsibility of the individual shareholder.

The Company has implemented the accounting guidance for uncertainty in income taxes using the provisions of accounting principles generally accepted in the United States of America.  Using that guidance, tax positions initially need to be recognized in the financial statements when it is more-likely-than-not the position will be sustained upon examination by the tax authorities.  It also provides guidance for derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  As of December 31, 2016 and 2015, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements and recognized no such interest or penalties during the years ended December 31, 2016 and 2015.

(g) Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of financial statements and revenue and expenses during the periods reported.  Estimates are used when accounting for allowance
8

SHENANDOAH FURNITURE, INC.

Notes to Financial Statements

December 31, 2016 and 2015

(1)          Nature of Business and Significant Accounting Policies, Continued

for uncollectable accounts receivable, inventory obsolescence, depreciation, and contingencies, among others. Actual results could differ from these estimates.

 (h) Advertising Costs

Advertising costs are expensed when incurred.  Advertising costs totaled $148,338 for 2016.

(i) Shipping and Handling Costs

It is the Company's policy to classify freight from sales as a selling expense.


(2) Inventories

Inventories at December 31, 2016 and 2015, consist of the following:

   
2016
   
2015
 
             
Finished goods
 
$
80,591
     
74,973
 
Work-in-process
   
615,441
     
571,401
 
Raw materials
   
1,516,635
     
1,884,723
 
 
 
$
2,212,667
     
2,531,097
 


(3) Life Insurance-Cash Value

The Company is the owner and beneficiary of life insurance policies on key employees. These policies have an aggregate cash value of $496,580 and $433,007 at December 31, 2016 and 2015, respectively.


(4) Profit-Sharing Bonus Plan and Retirement Plan

The Company maintains a profit-sharing bonus plan for the benefit of its employees.  All full-time employees with six months of service at the end the semi-annual period are eligible to receive payments based on profitability.  The payment is determined by a formula which gives credit for years of service and gross earnings.  Profit-sharing bonus plan expenses were $190,151 for the year end December 31, 2016.
9

SHENANDOAH FURNITURE, INC.

Notes to Financial Statements

December 31, 2016 and 2015
(4) Profit-Sharing Bonus Plan and Retirement Plan, Continued

During the year ended December 31, 2015, the Company implemented a contributory profit-sharing plan as defined under Section 401(k) of the U.S. Internal Revenue Code covering substantially all employees.  Employer contributions during the year ended December 31, 2016 were $54,737.


(5) Medical Benefits Plan

The Company has a partially self-insured medical benefits plan that covers all employees who meet eligibility requirements.  It has contracted with an administrative service company to supervise and administer the program and act as its representative.  Provisions for expected future payments are accrued based on the Company's experience and includes amounts for claims incurred but not reported.  The Company insures for excessive and unexpected health claims and is liable for claims not to exceed $125,000 for each employee per plan year and an aggregate annual amount of $1,301,160.  The estimated health plan claims incurred but not reported at December 31, 2016 and 2015, was approximately $136,000 and $100,000, respectively.


(6) Commitments

The Company leases certain manufacturing facilities and a showroom on a month to month basis from businesses related through common ownership.  Rental expense for 2016 on these facilities is as follows:

   
2016
 
       
225 Beaver Creek Drive
 
$
231,916
 
Showroom Facilities
   
96,317
 
Valdese, North Carolina
   
240,000
 
Mt. Airy, North Carolina
   
204,100
 
    $
772,333
 




10


SHENANDOAH FURNITURE, INC.

Notes to Financial Statements

December 31, 2016 and 2015


(6) Commitments, Continued

The Company also leases equipment under operating leases that expire at various times through 2020.  At December 31, 2016, the future minimum rental commitments for the non-cancelable long-term leases are as follows:

Fiscal Years Ending
 
Amount
 
       
2017
 
$
29,470
 
2018
   
32,579
 
2019
   
17,012
 
2020
   
2,182
 
    $
81,243
 

The total rent expense applicable to the leases described in the preceding paragraph for the year ended December 31, 2016, is $22,375.

(7) Major Customers

Net sales for the year ended December 31, 2016, include sales to two major customers of $36,756,357. Outstanding accounts receivable from these customers was $2,728,665 at December 31, 2016


(8) Subsequent Events

Effective June 30, 2017, the Company signed a letter of intent for the acquisition of substantially all of its assets and the assumption of substantially all of its liabilities.  The transaction will exclude cash and cash equivalents, investments, cash surrender value of life insurance policies and the Collinsville, Virginia plant and land.  Excluded liabilities will exclude any long-term or short-term debt.

The Company has evaluated subsequent events through September 5, 2017, the date which the financial statements were available to be issued. 
11

 
Independent Auditors' Report on Supplementary Information


The Board of Directors
Shenandoah Furniture, Inc.:

We have audited the financial statements of Shenandoah Furniture, Inc. as of December 31, 2016 and 2015 and for the year ended December 31, 2016, and our report thereon dated September 5, 2017, which expressed an unmodified opinion on those financial statements, appears on page one. Our audits were conducted for the purpose of forming an opinion on the financial statements as a whole. The cost of goods sold and selling, general and administrative expenses for the year ended December 31, 2016 is presented for purposes of additional analysis and are not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.




September 5, 2017

12


SHENANDOAH FURNITURE, INC.

Cost of Goods Sold

Year Ended December 31, 2016
             
         
Percent of
 
   
2016
   
Net Sales
 
Raw materials:
           
Inventory, beginning
 
$
1,884,723
     
4.45
%
Purchases, net
   
16,704,935
     
39.45
 
Freight-in
   
179,628
     
0.42
 
     
18,769,286
     
44.32
 
Inventory, ending
   
(1,516,635
)
   
(3.58
)
Raw materials used
   
17,252,651
     
40.74
 
                 
Labor expense:
               
Direct labor
   
8,762,197
     
20.69
 
Contract labor
   
23,319
     
0.06
 
Total labor expense
   
8,785,516
     
20.75
 
                 
Manufacturing expenses:
               
Salaries - supervisors
   
789,951
     
1.86
 
Other indirect labor
   
178,370
     
0.42
 
Depreciation - machinery and equipment
   
343,167
     
0.81
 
Depreciation - building
   
100,514
     
0.24
 
Insurance - general
   
366,733
     
0.87
 
Insurance - group
   
901,715
     
2.13
 
Machine rental
   
78,403
     
0.18
 
Miscellaneous
   
290,950
     
0.68
 
Repairs and maintenance
   
483,781
     
1.14
 
Shop supplies
   
96,904
     
0.23
 
Taxes - payroll
   
811,961
     
1.92
 
Taxes and licenses
   
43,463
     
0.10
 
Utilities
   
497,938
     
1.18
 
Rent
   
676,016
     
1.60
 
Total manufacturing expense
   
5,659,866
     
13.36
 
Cost of goods manufactured
   
31,698,033
     
74.85
 
                 
Finished goods and work-in-process variation
               
Inventory, beginning
   
646,374
     
1.53
 
Inventory, ending
   
(696,032
)
   
(1.64
)
Cost of goods sold
 
$
31,648,375
     
74.74
%
 
13

SHENANDOAH FURNITURE, INC.

Selling, General and Administrative Expenses

Year Ended December 31, 2016
 
         
Percent of
 
   
2016
   
Net Sales
 
             
Selling expenses:
           
Advertising
 
$
148,338
     
0.35
%
Depreciation - showroom
   
2,474
     
0.01
 
Freight-out
   
98,207
     
0.23
 
General insurance
   
60,091
     
0.14
 
Showroom expense
   
112,714
     
0.27
 
Travel and entertainment
   
20,721
     
0.05
 
Wages
   
614,682
     
1.45
 
Payroll taxes
   
28,818
     
0.07
 
Miscellaneous
   
6,940
     
0.01
 
Total selling expense
   
1,092,985
     
2.58
 
                 
Administrative expenses:
               
Salaries - officers
   
198,365
     
0.47
 
Salaries - office
   
541,369
     
1.28
 
For hire advertisements
   
2,427
     
0.01
 
Contributions
   
13,275
     
0.03
 
Depreciation - office equipment
   
54,024
     
0.13
 
Depreciation - vehicles
   
7,486
     
0.02
 
Dues and subscriptions
   
11,275
     
0.03
 
Insurance - officers' life/disability
   
5,233
     
0.01
 
Group general insurance
   
74,885
     
0.18
 
Office supplies
   
49,212
     
0.12
 
Postage
   
14,240
     
0.03
 
Professional fees
   
111,731
     
0.26
 
Consulting - IT
   
61,327
     
0.14
 
Repairs and maintenance
   
14,365
     
0.03
 
Taxes - licenses, etc.
   
15,352
     
0.04
 
Taxes - payroll
   
62,677
     
0.15
 
Telephone
   
89,909
     
0.21
 
Internet and electronic data interface
   
525
     
-
 
Miscellaneous
   
64,490
     
0.15
 
Employee benefits - other
   
13,835
     
0.03
 
Employee benefits - profit sharing
   
190,150
     
0.45
 
401(k) match
   
54,737
     
0.13
 
Travel
   
37,369
     
0.09
 
Total administrative expense
   
1,688,258
     
3.99
 
Total selling and administrative expenses
 
$
2,781,243
     
6.57
%
 
14
Exhibit 99.2

Shenandoah Furniture, Inc.
 
Balance Sheet
 
As of June 30, 2017
 
unaudited
 
             
   
Jun-17
   
Jun-16
 
Cash
   
5,473,178
     
3,119,020
 
Accounts Receivable
   
3,545,894
     
3,970,283
 
Inventory
   
1,440,549
     
2,355,719
 
Prepaid Insurance
   
163,775
     
128,861
 
                 
Current assets
   
10,623,396
     
9,573,883
 
                 
PP&E
   
9,853,477
     
8,948,896
 
Accumulate Depr
   
(4,214,999
)
   
(3,963,826
)
Net Fixed Assets
   
5,638,478
     
4,985,070
 
                 
CSV life insurance
   
496,580
     
433,007
 
                 
Total assets
   
16,758,454
     
14,991,960
 
                 
Accounts Payable
   
792,015
     
949,615
 
Other payables
   
392
     
57
 
Accrued salaries, wages & taxes
   
499,124
     
493,312
 
accrued expenses
   
139,189
     
89,970
 
                 
Current Liabilities
   
1,430,720
     
1,532,954
 
                 
common Stock
   
50,000
     
50,000
 
Retained earnings
   
722,989
     
722,990
 
current retained earnings
   
3,664,982
     
3,010,923
 
accumulated adjustment
   
10,889,763
     
9,675,093
 
                 
Stockholders equity
   
15,327,734
     
13,459,006
 
                 
Total Liabilities & equity
   
16,758,454
     
14,991,960
 
 
 

 
Shenandoah Furniture, Inc.
 
Statement of Operations
 
As of June 30, 2017
 
unaudited
 
                         
   
Six Months Ended
         
Six Months Ended
       
   
June 30, 2017
         
June 30, 2016
       
                         
Net Sales
   
21,653,173
           
20,358,143
       
                             
COGS
                           
  Materials
   
9,473,263
     
43.7
%
   
8,906,824
     
43.8
%
  Labor
   
4,314,478
     
19.9
%
   
4,321,778
     
21.2
%
  Overhead
   
2,784,221
     
12.9
%
   
2,804,350
     
13.8
%
Total COGS
   
16,571,962
     
76.5
%
   
16,032,952
     
78.8
%
                                 
Gross Profit
   
5,081,211
     
23.5
%
   
4,325,191
     
21.2
%
                                 
Selling
   
577,983
     
2.7
%
   
556,901
     
2.7
%
Admin
   
904,805
     
4.2
%
   
870,080
     
4.3
%
SG&A
   
1,482,788
     
6.8
%
   
1,426,981
     
7.0
%
                                 
Operating Income
   
3,598,423
     
16.6
%
   
2,898,210
     
14.2
%
                                 
Other
   
66,559
     
0.3
%
   
112,713
     
0.6
%
                                 
Net income
   
3,664,982
     
16.9
%
   
3,010,923
     
14.8
%
 

EXHIBIT 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On September 29, 2017, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Shenandoah Furniture. Inc. (“Shenandoah”) pursuant to the Asset Purchase Agreement the Company and Shenandoah entered into on September 6, 2017.

The following unaudited pro forma condensed combined financial statements and explanatory notes present how the consolidated financial statements of Hooker Furniture Corporation and Shenandoah may have appeared had the Acquisition been completed at earlier dates. The unaudited pro forma condensed combined financial statements show the impact of the Acquisition on the companies’ respective historical financial positions and results of operations under the acquisition method of accounting with Hooker Furniture Corporation treated as the acquirer of Shenandoah as if the Acquisition had been completed on February 1, 2016.

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

The Unaudited Pro Forma Condensed Combined Statements of Operations do not include: (1) any revenue or cost savings that may be achieved subsequent to the completion of the business combination; or (2) the impact of non-recurring items directly related to the business combination which are expected to be incurred during the Company’s fiscal year 2018.
 
The pro forma condensed combined financial statements are unaudited, are presented for informational purposes only, and are not necessarily indicative of the financial position or results of operations that would have occurred had the Acquisition been completed as of the dates or at the beginning of the periods presented. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future consolidated financial position or operating results of the combined companies. The unaudited pro forma condensed combined financial statements and the accompanying notes should be read together with:
 
§
the separate audited historical consolidated financial statements of Hooker Furniture Corporation for the year ended January 29, 2017 (as filed with the SEC on April 15, 2016 in Hooker Furniture Corporation’s Annual Report on Form 10-K for the fiscal year ended January 29, 2017);

·
the separate unaudited historical consolidated financial statements of Hooker Furniture Corporation for the quarter ended April 30, 2017 (as filed with the SEC on June 8, 2017 on a Quarterly Report on Form 10-Q) and the quarter ended July 30, 2017 (as filed with the SEC on September 8, 2017 on a Quarterly Report on Form 10-Q); and
 
§
the audited and unaudited historical consolidated financial statements of Shenandoah Furniture, Inc. included in this filing.
 
 

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE PERIOD ENDED JULY 30, 2017
(In thousands)
 
           
Pro forma
       
Pro Forma
 
   
Hooker
   
Shenandoah
   
Adjustments
       
Combined
 
Assets
                           
Current assets
                           
    Cash and cash equivalents
 
$
45,818
   
$
5,473
   
$
(26,123
)
 
a,b
   
25,168
 
    Trade accounts receivable, less
                                   
    allowance for doubtful accounts
   
75,371
     
3,546
     
-
         
78,917
 
    Inventories
   
82,036
     
1,441
     
-
         
83,477
 
    Prepaid expenses and other current assets
   
4,246
     
164
     
-
         
4,410
 
         Total current assets
   
207,471
     
10,624
     
(26,123
)
       
191,972
 
Property, plant and equipment, net
   
25,507
     
5,638
     
(232
)
 
a
   
30,913
 
Cash surrender value of life insurance policies
   
23,178
     
497
     
(497
)
 
a
   
23,178
 
Deferred taxes
   
6,019
     
-
     
-
         
6,019
 
Intangible assets
   
25,256
     
-
     
13,193
   
d
   
38,449
 
Goodwill
   
23,187
             
17,645
   
c
   
40,832
 
Other assets
   
2,241
     
-
     
-
         
2,241
 
         Total non-current assets
   
105,388
     
6,135
     
30,109
         
141,632
 
               Total assets
 
$
312,859
   
$
16,759
   
$
3,986
       
$
333,604
 
                                     
Liabilities and Shareholders’ Equity
                                   
Current liabilities
                                   
    Current portion of term loan
 
$
5,822
             
1,578
   
b
   
7,400
 
    Trade accounts payable
   
27,712
     
792
     
-
         
28,504
 
    Accrued salaries, wages and benefits
   
7,049
     
499
     
-
         
7,548
 
    Income tax accrual
   
953
     
-
     
-
         
953
 
    Customer deposits
   
5,993
     
-
     
-
         
5,993
 
    Other accrued expenses
   
3,288
     
139
     
-
         
3,427
 
         Total current liabilities
   
50,817
     
1,430
     
1,578
         
53,825
 
Long term debt
   
38,858
     
-
     
10,422
   
b
   
49,280
 
Deferred compensation and pension obligations, non-current
   
11,041
     
-
     
-
         
11,041
 
Pension Plan
   
3,008
     
-
     
-
         
3,008
 
Other long-term liabilities
   
793
     
-
     
-
         
793
 
Total long-term liabilities
   
53,700
     
-
     
10,422
         
64,122
 
              Total liabilities
   
104,517
     
1,430
     
12,000
         
117,947
 
                     
-
             
Shareholders’ equity
                   
-
             
    Common stock, no par value
   
40,403
     
50
     
8,346
   
b
   
48,799
 
    Retained earnings
   
167,434
     
15,279
     
(16,360
)
 
a
   
166,353
 
    Accumulated other comprehensive income
   
505
     
-
     
-
         
505
 
    Non-controlling interest
           
-
     
-
         
-
 
               Total shareholders’ equity
 
$
208,342
   
$
15,329
   
$
(8,014
)
     
$
215,657.00
 
                   Total liabilities and shareholders’ equity
 
$
312,859
   
$
16,759
   
$
3,986
       
$
333,604
 
 
See accompanying Notes to Consolidated Combined Financial Statements.


HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED JANUARY 29, 2017
(In thousands)
 
               
Pro forma
       
Pro forma
 
   
Hooker
   
Shenandoah
   
adjustment
       
Consolidated
 
                             
Net sales
 
$
577,219
   
$
42,347
             
$
619,566
 
                                   
Cost of sales
   
451,098
     
31,664
               
482,762
 
                                   
      Gross profit
   
126,121
     
10,683
     
-
         
136,804
 
                                     
Selling and administrative expenses
   
83,767
     
2,781
     
284
   
d
   
86,832
 
Amortization of acquired intangibles
   
3,134
     
-
     
1,408
   
f
   
4,542
 
                                     
        Operating income
   
39,220
     
7,902
     
(1,692
)
       
45,430
 
                                     
Other Income (expense), net
                                   
      Interest expense
   
(954
)
   
15
     
(303
)
 
e
   
(1,242
)
      Other, net
   
930
     
79
     
-
         
1,009
 
                                     
      Income before income taxes
   
39,196
     
7,996
     
(1,995
)
       
45,197
 
                                     
Income tax expense
   
13,909
     
-
     
2,131
   
g
   
16,040
 
                                     
       Net income
 
$
25,287
   
$
7,996
   
$
(4,126
)
     
$
29,157
 
                                     
Earnings per share
                                   
       Basic
 
$
2.19
                       
$
2.49
 
       Diluted
 
$
2.18
                       
$
2.48
 
                                     
Weighted average shares outstanding:
                                   
       Basic
   
11,531
             
176
   
h
   
11,707
 
       Diluted
   
11,563
             
176
         
11,739
 
 
 
See accompanying Notes to Consolidated Combined Financial Statements.
 
 

 
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
 
FOR THE SIX MONTHS ENDED JULY 30, 2017
 
(In thousands)
 
                             
               
Pro forma
       
Pro forma
 
   
Hooker
   
Shenandoah
   
adjustment
       
Consolidated
 
                             
Net sales
 
$
287,180
   
$
21,653
             
$
308,833
 
                                   
Cost of sales
   
225,920
     
16,572
               
242,492
 
                                   
      Gross profit
   
61,260
     
5,081
     
-
         
66,341
 
                                     
Selling and administrative expenses
   
41,690
     
1,483
     
142
   
d
   
43,315
 
Amortization of acquired intangibles
   
667
             
464
   
f
   
1,131
 
                                     
        Operating income
   
18,903
     
3,598
     
(606
)
       
21,895
 
                                     
Other Income (expense), net
                                   
      Interest expense
   
(533
)
           
(131
)
 
e
   
(664
)
      Other, net
   
722
     
67
     
-
         
789
 
                                     
      Income before income taxes
   
19,092
     
3,665
     
(737
)
       
22,020
 
                                     
Income tax expense
   
6,568
     
-
     
1,039
   
g
   
7,607
 
                                     
       Net income
 
$
12,524
   
$
3,665
   
$
(1,776
)
     
$
14,413
 
                                     
Earnings per share
                                   
       Basic
 
$
1.08
                       
$
1.23
 
       Diluted
 
$
1.08
                       
$
1.23
 
                                     
Weighted average shares outstanding:
                             
       Basic
   
11,554
             
176
   
h
   
11,730
 
       Diluted
   
11,587
             
176
         
11,763
 
 
See accompanying Notes to Consolidated Combined Financial Statements.

 
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1. Description of the Transactions

Acquisition of the Assets of Shenandoah International, Inc.

On September 29, 2017, the Company completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Shenandoah Furniture, Inc. (“Shenandoah”) pursuant to the Asset Purchase Agreement the Company and Shenandoah entered into on September 6, 2017 (the “Asset Purchase Agreement”).  Upon completion, the Company paid $32.65 million in cash (the “Cash Consideration”) and issued 176,018 shares of the Company’s common stock (the “Stock Consideration”) to the shareholders of Shenandoah as consideration for the Acquisition. The Cash Consideration included an additional payment of approximately $650,000 pursuant to working capital adjustments provided for in the Asset Purchase Agreement (such working capital adjustment still subject to further adjustment as set forth in the Asset Purchase Agreement).  The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45).  
 
Amended Credit Facilities

On September 29, 2017, Hooker Furniture Corporation (the “Company”) and its wholly owned subsidiaries, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (together with the Company, the “Borrowers”), entered into a second amended and restated loan agreement (the “Amended and Restated Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the acquisition discussed in Item 2.01 below.  The Loan Agreement amends and restates the amended and restated loan agreement that the Company, Bradington-Young, LLC and Sam Moore Furniture LLC entered into with BofA on February 1, 2016.

The Company’s existing $30 million unsecured revolving credit facility (the “Existing Revolver”), $41 million unsecured term loan (the “Existing Unsecured Term Loan”), and $19 million term loan secured by a security interest in certain Company-owned life insurance policies (the “Existing Secured Term Loan”) all remain outstanding under the Amended and Restated Loan Agreement.  In addition to these facilities, the Amended and Restated Loan Agreement provides the Borrowers with a new $12 million unsecured term loan (the “New Unsecured Term Loan”).

Amounts outstanding under the New Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%.  The Borrowers must repay the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 and the expiration of the Existing Revolver, at which time all amounts outstanding under the New Unsecured Term Loan will become due and payable.  The Borrowers may prepay the outstanding principal amount under the New Unsecured Term Loan, in full or in part, on any interest payment date without penalty.  On September 29, 2017, the Borrowers borrowed the full $12 million available under the New Unsecured Term Loan.

Under the Amended and Restated Loan Agreement, the sublimit under the Existing Revolver available for the issuance of letters of credit remains $4 million.  Any amounts outstanding under the Existing Revolver will continue to bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%.  The Borrowers must also continue to pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter.

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

Under the Amended and Restated Loan Agreement, any accrued and unpaid interest on the Existing Revolver, the Existing Unsecured Term Loan and the Existing Secured Term Loan that remained unpaid as of September 29, 2017 became due and payable by the Borrowers on October 1, 2017.  Similarly, any accrued and unpaid letter of credit fees that remained unpaid as of September 29, 2017 became due and payable by the Borrowers on October 1, 2017.  As of September 29, 2017, the principal amounts outstanding under the Existing Unsecured Term Loan and the Existing Secured Term Loan were approximately $26,726,190 and $17,079,417, respectively.

The Amended and Restated Loan Agreement includes customary representations and warranties and requires the Borrowers to comply with certain customary covenants, including, among other things, the following financial covenants on a consolidated basis: (i) maintaining a ratio of funded debt to EBITDA not exceeding a specified amount and (ii) maintaining a basic fixed charge coverage ratio equal to or exceeding a specified range.  The agreement also limits the right of the Borrowers to make capital expenditures, to incur other indebtedness and to create liens upon their assets, subject to certain exceptions.  Under the Amended and Restated Loan Agreement, the Borrowers are no longer required to maintain, on a consolidated basis, a specified minimum level of tangible net worth.
 

The Amended and Restated Loan Agreement does not restrict the Company’s ability to pay cash dividends on, or repurchase, shares of its common stock, subject to the Company’s compliance with the financial covenants discussed above.

Note 2. Basis of Pro Forma Presentation
 
The unaudited pro forma condensed combined financial statements are presented to illustrate the effects of the Acquisition on the historical financial position and operating results of Hooker Furniture and Shenandoah. The Unaudited Pro Forma Condensed Combined Balance Sheets combine Hooker Furniture’s balance sheet as of July 30, 2017 and Shenandoah’s balance sheet as of June 30, 2017 and the Unaudited Pro Forma Condensed Combined Statements of Operations reflects Hooker Furniture’s fiscal year ended January 29,2017 and Shenandoah’s fiscal year ended December 31, 2016 and the six-month periods ended July 30,2017 and June 30,2017 respectively.  All financial statements assume the transaction took place on February 1, 2016, the beginning of Hooker Furniture’s 2017 fiscal year and January 1, 2016, Shenandoah’s calendar year reporting period.
 
The fair values of the assets acquired and liabilities assumed are provisional based on management’s preliminary estimate of the respective fair values. U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The process for estimating the fair values of identifiable intangible assets requires the use of significant estimates and assumptions, including estimating future cash flows and developing appropriate discount rates. The excess of the purchase price over the estimated fair value of identifiable assets and liabilities of Shenandoah as of the acquisition date will be reflected as goodwill. The fair values of net assets and resulting goodwill are subject to finalizing our analysis of the fair value of Shenandoah’s assets and liabilities as of the acquisition date and will be adjusted upon completion of the valuation. The use of different estimates could yield materially different results.
 
The pro forma financial statements are derived from the historical financial statements of the two companies and the adjustments applied to those historical statements are intended to illustrate the effect of the Acquisition, including the related financing transaction and the assignment of fair value to the acquired assets.  The pro forma financial statements should be read in conjunction with the audited historical financial statements of Hooker Furniture filed with the SEC on April 14, 2017 and unaudited historical financial statements of Hooker Furniture filed with the SEC on June 8, 2017 and September 8, 2017 and the Shenandoah audited and unaudited financial statements and accompanying notes included in this filing.

The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

The combined pro forma financial information does not reflect the realization of any expected cost savings or other synergies from the acquisition of Shenandoah following the completion of the business combination.
 


Note 3. Fair Value Estimates of Assets Acquired and Liabilities Assumed
 
The consideration and components of Hooker Furniture’s initial fair value allocation of the purchase price paid at closing and in the subsequent Net Working Capital Adjustment consisted of the following:
 
Fair value estimates of assets acquired and liabilities assumed
     
Purchase price consideration
     
     Cash paid for assets acquired
 
$
32,000
 
     Value of shares issued for assets acquired
   
8,396
 
     Cash paid for net working capital adjustment
   
650
 
 
       
 
       
Total purchase price
 
$
41,046
 
 
 
Fair value allocation of purchase price
     
   Accounts receivable
 
$
3,576
 
   Inventory
   
2,380
 
   Prepaid expenses and other current assets
   
52
 
   Property and equipment
   
5,418
 
   Intangible assets
   
13,193
 
   Goodwill
   
17,645
 
   Accounts payable and accrued expenses
   
(699
)
   Accrued expenses
   
(519
)
         
 
       
Total purchase price
 
$
41,046
 
  
Substantially all of these amounts are subject to subsequent adjustment as the Company continues to gather information during the measurement period. Certain intangible assets were acquired as part this transaction.  Trade names, customer relationships, and order backlog have been assigned preliminary fair values subject to additional analysis during the measurement period.  Some of these intangible assets have been assigned useful lives while others have been determined to be indefinite-lived.
 
Fair Value of identified intangible assets
 
Fair Value
 
  Trade names
 
$
645
 
  Order backlog
   
479
 
  Customer relationships
   
12,069
 
 
       
 
 
$
13,193
 
 
Expected amortization of identified intangible assets
 
Fiscal year
     
2018
 
$
789
 
2019
   
928
 
2020
   
928
 
2021
   
928
 
2022
   
928
 
2023 and thereafter
   
8,046
 
         
         
         
         
         
 
       
 
 
$
12,547
 
 

 
Note 4. Pro forma adjustments
 
The following adjustments give pro forma effect to the Shenandoah acquisition.
 
a)  
To eliminate the historical balances not acquired

Cash
 
$
(5,473
)
Plant, property and equipment
   
(95
)
Cash surrender value, company owned life insurance
   
(497
)
Capital stock
   
50
 
Retained earnings
   
15,279
 
   
$
9,264
 
 
 
b)  
To record the initial cash purchase price and net working capital adjustment and related debt and equity issued (see Note 3).
 
c)  
To record the initial fair value estimates of identified intangible assets, leasehold improvements and residual goodwill (see Note 3).
 
d)  
Reflect new compensation arrangements with two key employees in connection with the business combination as per employment agreements which were a condition of the Asset Purchase Agreement, which resulted in a potential increase in total annual compensation of $284 or $142 for the six-month period, if bonus objectives are met.

e)
Record interest expense related to the Bank of America Acquisition Credit Facility. Interest is computed using variable rates as discussed in Note 1 ($303 for the year and $131 for the six-month period).  The initial interest rate on the $12 million Unsecured Term Loan was 2.74%.  A 1/8% variance in the variable interest rate would have an annual impact of $15,000 on interest expense.
 
f)  
Record amortization of identified intangible assets. Margin in the acquired backlog ($479) is amortized during the first four months after the Acquisition and the value of Customer Relationships is amortized over 13 years, using the straight- line method ($928 annually or $464 for the six-month period)

g)
Record corporate income tax expense, acquired company was previously taxed as a subchapter S corporation, net of the tax impact of other income statement adjustments

h)
Represents the increase in the weighted average shares in connection with the issuance of 176,018 Company common shares in the Acquisition.
 
The income tax effect of pro forma adjustments was calculated using the statutory federal rate of 35% and the Company’s effective state rate of 3.6%.

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