1
As filed with the Securities and Exchange Commission on April , 1997
Registration No. 333-22129
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
AMENDMENT NO.1 TO
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-------------------------------
WELLINGTON HALL, LIMITED
(Exact name of registrant as specified in its charter)
-------------------------------
56-0815012 North Carolina 4010
(I.R.S. Employer Identification (State or other jurisdiction of (Primary Standard Industrial
No.) incorporation or organization) Classification Code Number)
ROUTE 1, U.S. HIGHWAY NO. 29 AND NO. 70
LEXINGTON, NORTH CAROLINA 27292
(910) 249-4931
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
-------------------------------
HOYT M. HACKNEY
PRESIDENT
WELLINGTON HALL, LIMITED
ROUTE 1, U.S. HIGHWAY NO. 29 AND NO. 70
LEXINGTON, NORTH CAROLINA 27292
(910) 249-4931
(Name, address, including zip code, and telephone
number, including area code, of
agent for service)
-------------------------------
with copies to.
KENNETH N. SHELTON
SCHELL BRAY AYCOCK ABEL & LIVINGSTON P.L.L.C.
POST OFFICE BOX 21847
GREENSBORO, NORTH CAROLINA 27403
(910) 370-8800
-------------------------------
Approximate date of commencement of proposed distribution of the securities to
the public: As soon as practicable after the Registration Statement becomes
effective.
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION (DATED APRIL 8, 1997)
PROSPECTUS
1,689,887 Shares of Common Stock
WELLINGTON HALL, LIMITED
Wellington Hall, Limited (the "Company") is offering to the holders of
its outstanding Common Stock of record on __________, ___ 1997 (the
"Shareholders") the nontransferable right to subscribe (a "Right") for one
additional share of Common Stock, no par value, for each share of Common Stock
held on the record date, with certain limited exceptions (the "Rights
Offering").
Except as provided below, each Shareholder may subscribe for shares
in addition to those shares that his Rights entitle him to purchase. If the
Shareholders in the aggregate do not subscribe for the maximum number of shares
to which they are entitled in the Rights Offering, such remaining shares will
be sold to Shareholders who have subscribed therefor, with certain limited
exceptions (the "Subscription Offering"). To the extent more shares are
subscribed for than are available, the available shares will be pro rated among
the subscribing Shareholders therefor based on the percentage that the amount
of shares that each Shareholder subscribed for over those which his Rights
entitled him to purchase in the Rights Offering bears to the total amount of
shares that all Shareholders in the aggregate subscribed for over those which
their Rights entitled them to purchase in the Rights Offering, with certain
limited exceptions.
Any of the 1,689,887 shares offered hereby that are not sold in the
Rights Offering and the Subscription Offering may be sold to persons who are
not directors, officers or Shareholders of the Company (the "Public Offering").
The Rights Offering, the Subscription Offering and the Public Offering are
sometimes referred to herein as the "Offerings." Directors and officers of the
Company who are Shareholders have indicated that they intend to subscribe for
approximately 105,000 of the 567,100 shares for which they are entitled to
subscribe in the Offerings.
Shareholders desiring to participate in the Offerings, including
owners of fewer than 1,000 shares, must subscribe for at least 1,000 shares of
Common Stock. A subscriber in the Public Offering must subscribe for a minimum
of 10,000 shares, and all subscriptions in the Public Offering are subject to
approval or rejection by the Company. Any subscription in the Offerings in
excess of 100,000 shares is subject to the approval of the Board of Directors
of the Company, except to the extent that a Shareholder is entitled to
subscribe for such shares in the Rights Offering.
Certain persons are not eligible to participate in the Offerings. No
shares will be offered to certain Shareholders or other persons who reside in
any foreign country or in a state of the United States where compliance by the
Company with the securities laws of such jurisdiction would be impractical for
reasons of cost or otherwise. See "The Offerings." In addition, as of
February 12, 1997, Arthur F. Bingham, the Company's Senior Executive Vice
President of Sales and Marketing, purchased 600,000 shares of Common Stock at a
price of $.50 per share. In connection therewith, Mr. Bingham and the Company
agreed that Mr. Bingham would not be eligible to participate in the Rights
Offering or Subscription Offering.
The Offerings will commence concurrently and subscriptions may be made
beginning on the date of this Prospectus. The Rights Offering and Subscription
Offering expire at 5:00 p.m., Eastern Standard Time, on _______________, 1997,
unless extended by not more than 30 days (the "Expiration Time"). The Public
Offering will terminate 30 days thereafter, unless extended by not more than
30 days (the "Public Offering Termination Time"). Accordingly, the Rights
Offering and Subscription Offering will terminate on or before ______________,
1997 and the Public Offering will terminate on or before _____________, 1997.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
SHAREHOLDERS AND OTHER SUBSCRIBERS IN THE OFFERINGS, SEE "RISK FACTORS"
BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
- ----------------------------------------------------------------------------------------------------------
Underwriting discounts and
Price to Public commissions. Proceeds to Company (1)
- ----------------------------------------------------------------------------------------------------------
PER SHARE $.50 n/a $.50
- ----------------------------------------------------------------------------------------------------------
Total $844,943.50 (2) n/a $844,943.50 (2)
- ----------------------------------------------------------------------------------------------------------
(1) Before deduction of expenses payable by the Company estimated to be
$45,000.
(2) Assumes that the Offerings are fully subscribed and all shares offered
hereby are sold.
Certificates for shares sold in the Rights Offering and Subscription
Offering will be delivered promptly after the Expiration Time and certificates
for shares sold in the Public Offering will be delivered promptly after the
Public Offering Termination Time.
The date of this Prospectus is April __, 1997.
3
TABLE OF CONTENTS
AVAILABLE INFORMATION . . . . . . . . . . . . . 2 CERTAIN TRANSACTIONS . . . . . . . . . . . . . 30
PROSPECTUS SUMMARY . . . . . . . . . . . . . . 3 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . 31
RISK FACTORS . . . . . . . . . . . . . . . . . 9
EXECUTIVE COMPENSATION . . . . . . . . . . . . 32
THE OFFERINGS . . . . . . . . . . . . . . . . . 12
DESCRIPTION OF SECURITIES . . . . . . . . . . . 36
USE OF PROCEEDS . . . . . . . . . . . . . . . . 15
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
CAPITALIZATION . . . . . . . . . . . . . . . . 16 MATTERS . . . . . . . . . . . . . . . . . 38
SELECTED FINANCIAL DATA . . . . . . . . . . . . 17 INDEMNIFICATION FOR SECURITIES ACT LIABILITIES. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL LEGAL OPINIONS . . . . . . . . . . . . . . . . 38
CONDITION AND RESULTS OF OPERATIONS . . . . 18
INDEPENDENT AUDITORS . . . . . . . . . . . . . 38
BUSINESS . . . . . . . . . . . . . . . . . . . 22
INDEX TO FINANCIAL STATEMENTS . . . . . . . . F-1
MANAGEMENT . . . . . . . . . . . . . . . . . . 30
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities and Exchange Act of 1934, as amended, and in according therewith
files reports, proxy statements, information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements, information statements and other information concerning the
Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. and at
the Commission's Regional Offices at Citicorp Center, 500 West Madison Street,
Suite 1500, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can also be obtained from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates, and also can be obtained
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's web site (http:\\www.sec.gov).
This Prospectus constitutes a part of a Registration Statement on Form
SB-2 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933 (the "Securities Act"). This Prospectus omits
certain of the information contained in the Registration Statement in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and related exhibits for further
information with respect to the Company and the Common Stock. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such
reference.
2
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated historical financial statements (including the
notes thereto) included elsewhere in this Prospectus. See "Risk Factors" for
certain factors that should be considered by Shareholders and other subscribers
before subscribing for shares of Common Stock. Unless the context requires
otherwise, the term "the Company" includes Wellington Hall, Limited and its
subsidiaries.
THE COMPANY
The Company manufactures high quality wooden home furniture. The
manufacturing operation involves the machining, sanding, assembling and
finishing of components and other raw materials. The Company's products are
distributed nationally through full-service retail stores and unaffiliated
trade showrooms that service the professional designer.
The Company owns a lumber processing mill and furniture manufacturing
facility located in San Pedro Sula, Honduras, Central America (the "Honduran
Facilities"). Wellington Hall Caribbean Corporation ("WHCC"), a wholly-owned
subsidiary of the Company, serves as a sales and distribution company for the
Honduran Facilities. WHCC is a North Carolina corporation organized in
December, 1988 and is located in Lexington, North Carolina. Muebles Wellington
Hall, S.A. ("MWH"), the Honduran subsidiary of WHCC, located in San Pedro
Sula, manages and operates the Honduran Facilities.
The Company has recently adopted specific strategies designed to improve
its results of operations and financial condition. These strategies involve a
more aggressive program of product development, improving marketing and
strengthening management, as well as increasing capital and reducing
indebtedness.
The Company has developed and adopted a comprehensive marketing plan that
includes strategic measures such as (i) augmenting the Company's traditional
product lines with more casual designs of furniture that management believes
reflect trends in consumer tastes, (ii) exploring new opportunities for its
Honduran Facilities and other offshore resources with designs employing
materials such as leather, marble, metal, wicker, bamboo and rattan, (iii)
updating and upgrading catalogs and other sales aids in all distribution
channels and (iv) developing more targeted programs with selected retail
distributors that include promotions, stock reserves for quicker shipments and
sales contests. See "Business--Markets."
In addition to the foregoing, the Company has recruited an experienced
senior executive to lead its sales and marketing function. In September 1996,
the Company employed Arthur F. Bingham for the newly created position of Senior
Executive Vice President of Sales and Marketing. Mr. Bingham directs and
oversees all aspects of the Company's sales and marketing activities with the
goal of assuring continuing growth in profitable sales. Mr. Bingham's
employment arrangement provides for several incentives for him to assist the
Company in increasing sales revenues. See "Management."
Management believes that the highly leveraged position of the Company has
impeded its ability to pursue strategies designed to improve its results of
operations. In response, the Company also is pursuing a number of strategies
to improve its financial condition by raising equity capital, reducing
indebtedness and increasing working capital. The Offerings are the primary
means of accomplishing these goals. See "Use of Proceeds" and
"Capitalization." In addition, in connection with the employment of Arthur F.
Bingham as Senior Executive Vice President of Sales and Marketing, Mr. Bingham
loaned to the Company $285,694. On February 12, 1997, Mr. Bingham purchased
600,000 shares of Common Stock at a price of $.50 per share, which purchase
price was paid by cancellation of the foregoing loan and for an additional
investment of $14,306. The Company has used the funds provided by Mr. Bingham
to reduce its indebtedness and provide working capital. The Company also has
granted stock options to Mr Bingham and to Mr. Ralph Eskelsen, manager of the
Honduran Facilities, that will provide incentives to these key employees and
may result in additional contributions to capital. Mr. Eskelsen has indicated
that he is likely to purchase between $135,000 and $150,000 of Common Stock
during calendar year 1997
3
5
through exercise of his options at $.50 per share. Because this purchase is at
the option of Mr. Eskelsen, the proceeds therefrom have not been reflected in
the "Capitalization" section of this Prospectus.
The Company has negotiated with its lenders to amend its loan agreements
therewith to provide more favorable terms. On January 16, 1997, the Company
obtained an additional $250,000 line of credit from Lexington State Bank. In
addition, on March 10, 1997, the Company entered into an agreement with the
Overseas Private Investment Corporation ("OPIC") to restructure its loan to
reduce principal payments until July 1997 (with the deferred payments to be
made in a larger balloon payment at the end of the term of the loan in 1999)
and to lower the interest rate. The effect of the restructured loan is a
reduction to the Company's cash requirements for scheduled principal payments
for fiscal 1997 and 1998 of $247,748 and $123,874, respectively, which will
contribute significantly to improving the Company's working capital and cash
flow for these years. The restructured OPIC loan also will reduce scheduled
interest expense by $9,910 in fiscal 1997 and $18,900 in fiscal 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Offerings, if fully subscribed, would increase the Company's equity
capital by about $800,000 and reduce indebtedness by a corresponding amount.
Interest expense would have been reduced by $79,744 and $83,201 in fiscal 1995
and 1996, respectively, and by $40,438 in the first half of fiscal 1997, on a
pro forma basis, if the Offerings were fully subscribed and consummated at the
beginning of the period. In addition to achieving a reduction in interest
expenses, management believes that the increase in equity and reduction of debt
service requirements in 1997 and 1998 that the foregoing strategies are
designed to achieve would make working capital and other funds available to
pursue its marketing and sales strategies more aggressively with the goal of
increasing funds generated by operations to fund future growth and debt service
requirements.
The Company's business was founded in 1964, and the Company is incorporated
in North Carolina The Company's principal office is located at Route 1, U.S.
Highway 29 and 70 North, Lexington, North Carolina 27292, telephone (910)
249-4931.
THE OFFERINGS
The Offerings . . . . . . . . . . . . . . The Company is offering to holders of its Common Stock of record at the
close of business on the Record Date (as defined) the nontransferable
Right to subscribe for one share of Common Stock at the Offering Price
for each share of Common Stock then held.
The issuance of shares pursuant to the Rights Offering is not
conditioned upon the sale of any minimum number of shares of Common
Stock pursuant thereto. No Shareholder is required to subscribe for any
shares.
4
6
Each Shareholder may subscribe for shares in addition to those
shares that his Rights entitle him to purchase. If the
Shareholders in the aggregate do not subscribe for the maximum
number of shares to which they are entitled in the Rights
Offering, such remaining shares will be sold in the Subscription
Offering to Shareholders who have subscribed therefor. To the
extent more shares are subscribed for than are available, the
available shares will be pro rated among the subscribing
Shareholders therefor based on the percentage that the amount of
shares that each Shareholder subscribed for over those which his
Rights entitled him to purchase in the Rights Offering bears to
the total amount of shares that all the subscribing Shareholders
in the aggregate subscribed for over those which their Rights
entitled them to purchase in the Rights Offering, with certain
limited exceptions.
Any available shares that are not sold in the Rights Offering
and Subscription Offering may be sold in the Public Offering to
persons not officers, directors or Shareholders of the Company,
provided that in no event shall shares be sold to such persons
prior to the Expiration Time (as defined) or after the Public
Offering Termination Time (as defined).
Shareholders desiring to participate in the Offerings, including
owners of fewer than 1,000 shares, must subscribe for a minimum
of 1,000 shares of Common Stock, and any shareholder who does not
wish to subscribe for at least that many shares may not participate
in the Offerings. A subscriber in the Public Offering must
subscribe for a minimum of 10,000 shares, and all subscriptions
in the Public Offering are subject to approval and rejection by
the Company. Any subscription in the Offerings in excess of
100,000 shares is subject to the approval of the Board of Directors
of the Company, except to the extent that a Shareholder is entitled
to subscribe for such shares in the Rights Offering.
Commencement of Offerings . . . . . . . The Offerings will commence concurrently and subscriptions may
be made beginning on the date of this Prospectus.
Expiration Time; Public Offering The Rights Offering and Subscription Offering will expire at
Termination Time . . . . . . . . . . . 5:00 P.M. Eastern Standard Time, on ______________ ________,
1997, unless extended by not more than 30 days, and the Public
Offering will expire 30 days thereafter, unless extended by not
more than 30 days. Accordingly, the Rights Offering and Subscription
Offering will terminate on or before _____________, 1997 and the
Public Offering will terminate on or before _____________, 1997.
Record Date; Eligible Shareholders . . The record date for purposes of determining Shareholders who are
eligible to receive Rights is ____________ ___, 1997 (the
"Record Date"). Certain Shareholders and other persons are not
eligible to participate in the Offerings. See "The Offerings."
Offering Price . . . . . . . . . . . . The Offering Price is $.50 per share of Common Stock.
Subscription Agent . . . . . . . . . . Lexington State Bank.
5
7
Method of Exercising Rights or Rights may be exercised by Shareholders in the Rights Offering
Otherwise Subscribing for Shares and and additional shares subscribed for in the Subscription
Payment . . . . . . . . . . . . . . . . Offering by completing and signing the Stock Order Form accompanying
this Prospectus and mailing or delivering to the Subscription Agent
the Stock Order Form, together with payment in full (in United
States dollars, by check or money order payable to the order of
Lexington State Bank) for all shares subscribed for in the
Rights Offering and Subscription Offering.
Persons not officers, directors or Shareholders of the Company
may subscribe in the Public Offering for any available shares by
completing and signing the Stock Order Form and mailing or
delivering to the Subscription Agent the Stock Order Form,
together with payment for all shares subscribed for, in the same
manner described hereinabove for the purchase of shares by
Shareholders.
The risk of delivery of all documents and payments is on
subscribers and not on the Company or the Subscription Agent.
If the mail is used, it is recommended that insured registered
mail be used and that a sufficient number of days be allowed to
ensure delivery to the Subscription Agent before the Expiration
Time or the Public Offering Termination Time as the case may be.
Except as described under "The Offerings - Late Delivery of
Subscription and Payment in Rights Offering and Subscription
Offering," completed and executed Stock Order Forms must be
received by the Subscription Agent by the Expiration Time (in
the case of the Rights Offering and Subscription Offering) or
the Public Offering Termination Time (in the case of the Public
Offering). SUBSCRIBERS WILL NOT HAVE ANY RIGHT TO REVOKE THEIR
SUBSCRIPTIONS AFTER DELIVERY IS MADE TO THE SUBSCRIPTION AGENT.
6
8
Escrow Arrangements . . . . . . . . . . All funds received by the Subscription Agent will be held in an
escrow account until the completion of the Rights Offering and
the Subscription Offering. In the event that shares for which
payment has been made by subscribing Shareholders in the
Subscription Offering are not available, payment attributable to
those shares shall be refunded to such subscribing Shareholders.
Any refund due a subscribing Shareholder will be mailed without
reduction or interest to the address designated on the
appropriate Stock Order Form promptly following the Expiration
Time.
If shares are available in the Public Offering, then funds will
be held by the Subscription Agent until acceptance of the
subscriptions therefor at or prior to the Public Offering
Termination Time. If no shares are available in the Public
Offering such that no subscriptions will be accepted in the
Public Offering, or a subscription is otherwise rejected,
payment for such subscriptions will be refunded to the
appropriate subscriber. Any such refund will be mailed without
reduction or interest to the address designated on the
appropriate Stock Order Form promptly following rejection of the
subscription.
Rights of Subscribers . . . . . . . . . Subscribers will have no rights as shareholders of the Company
with respect to the shares of Common Stock subscribed for until
stock certificates representing such shares are issued to them.
Shares to be Outstanding . . . . . . . 3,979,774, assuming that the Offerings are fully subscribed, and
all shares offered hereby are sold.
Use of Proceeds . . . . . . . . . . . . The net proceeds from the sale of 1,689,887 shares of Common
Stock offered hereby by the Company are estimated at $800,000,
assuming all shares are sold and after payment of expenses of
the Offerings. If all shares are sold, approximately $550,000
of the net proceeds will be used to reduce the outstanding
borrowings under the Company's primary line of credit with
Lexington State Bank and the remaining $250,000 of the net
proceeds will be used to reduce the principal amount of the loan
from OPIC. If all shares are not sold, the net proceeds will
first be allocated to reduce the Company's outstanding
borrowings under the primary line of credit with Lexington State
Bank up to $550,000 and any remainder will be used to reduce the
principal amount of the loan from OPIC.
7
9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following financial data should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited and unaudited Consolidated
Financial Statements included elsewhere in this Prospectus.
Nine Months Nine Months
Years Ended April 30 Ended Ended
-------------------- Jan. 31, Jan. 31,
1996 1997
1992 1993 1994 1995 1996 (Unaudited) (Unaudited)
---- ---- ---- ---- ---- ----------- -----------
INCOME STATEMENT DATA:
Net Revenue $6,369,602 $6,884,589 $7,296,892 $7,260,491 $5,989,959 $4,599,155 $4,390,979
Gross Profit 1,445,583 2,091,018 2,288,471 2,203,412 1,846,267 1,410,829 1,387,564
Income (Loss) From
Continuing Operations
before Extraordinary
Items and Cumulative
Effect of Change in
Accounting Principal (304,713) 226,137 300,514 222,655 73,574 27,105 (27,329)
Net Income (Loss) (304,713) 288,236(1) 384,398(2) 22,655 73,574 27,105 (27,329)
Per Common Share:
Net Income (Loss)
Primary 0.18 0.17 0.23 0.13 0.04 0.01 (0.01)
Net Income (Loss)
Fully diluted 0.18 0.17 0.23 0.13 0.04 0.01 (0.01)
Cash Dividends
Declared 0 0 0 0 0 0 0
BALANCE SHEET DATA:
Working Capital $2,365,060 $2,466,214 $3,182,938 $3,206,220 $2,920,606 $3,012,976 $3,196,607
Total Assets 6,904,303 7,403,705 7,234,384 7,108,221 6,601,314 6,884,997 6,821,559
Total Debt 3,276,681 3,456,298 3,262,893 3,013,612 2,892,360 2,996,148 3,076,811
Shareholder Equity 2,603,388 2,832,508 2,802,872 2,838,105 2,660,859 2,679,606 2,724,980
(1) Reflects an income tax benefit of $62,099 resulting from operating losses
carried forward from prior years.
(2) Reflects the cumulative effect of a change in accounting method for income
taxes of $83,884.
8
10
RISK FACTORS
A Shareholder should consider all the information contained in this
Prospectus before deciding whether to purchase shares of the Common Stock
offered hereby. In particular, Shareholders should carefully consider the
following factors:
1. HIGH DEGREE OF FINANCIAL LEVERAGE.
The Company has substantial leverage. As of January 31, 1997, the
Company's total indebtedness was 49.7% of total capitalization. Although the net
proceeds of the Offerings will be used to reduce indebtedness, there can be no
assurance that significant proceeds will be raised in the Offerings. The degree
to which the Company is leveraged may adversely affect the Company's ability to
finance its future operations, to compete effectively against better capitalized
competitors and to withstand downturns in its business or in the economy
generally, and could limit its ability to pursue business opportunities that may
be in the interests of the Company and its Shareholders. In addition, although
the Company has been able in the past to meet its debt service obligations and
believes it will continue to do so in the future either through repayment or
refinancings, there can be no assurance that the Company will be able to meet
such obligations or that any refinancing would be on terms favorable to the
Company.
2. FOREIGN MANUFACTURING FACILITY.
The Company currently devotes substantial financial and management
resources to its lumber processing mill and hardwood furniture manufacturing
facility located in San Pedro Sula, Honduras (the "Honduran Facilities"). The
Company's growth and future profitability are materially dependent upon the
growth, profitability and overall success of the Honduran Facilities.
In general, Central American countries tend to be susceptible to
substantial economic and political instability. While Honduras is more
politically and economically stable than some other Central American countries,
it is susceptible to the same types of instability characteristic of the region.
This political and economic instability could have a materially adverse impact
on the operations and profitability of the Honduran Facilities. There can be no
assurance that the Company will be able to continue to operate the Honduran
Facilities profitably or that the long-term profit potential of the Honduran
Facilities can be realized. The loss of the Honduran Facilities as a source of
wood and/or supplies for the Company's proprietary products would have a
materially adverse affect on the Company's operations, financial condition,
competitiveness and future prospects.
3. AVAILABILITY OF RAW MATERIALS.
The adequacy of the long-term supply of mahogany in Honduras is
uncertain. The agency of the Honduran government responsible for forest
resources in Honduras is not able to provide accurate information on the current
supply of mahogany available in Honduras. However, other types of wood such as
pine, laurel and cedar, are available and may be used in manufacturing furniture
products. These alternative types of wood may help to diminish the Company's
need for mahogany in the event the supply of mahogany proves inadequate.
Additionally, a supplemental supply of mahogany is readily and abundantly
available from import sources at prices somewhat higher than those found in the
Honduran market.
4. EFFECTS OF CHANGING CURRENCY EXCHANGE RATES
Since the acquisition of Company's Honduran subsidiary in 1989, the
Honduran currency (the lempira) has continually devalued against the U.S.
dollar, from 2.0 lempira to the dollar in 1989 to 13.03 lempira to the dollar at
January 31, 1997, and the devaluation has resulted in a reduction in the
historical book value of the Company's foreign
9
11
assets, a reduction in liabilities to foreign banks and a "Cumulative
Translation Adjustment" that has reduced Shareholders' Equity by approximately
$1.8 million. All of the Honduran subsidiary's sales are exported to the United
States, and the amount of lempira's invoiced reflect increasing operating costs
resulting from inflation in Honduras. However, export sales are paid in U.S.
dollars and when the export sales have been converted to U.S. dollars in the
past, rising operating costs have been effectively offset. Any future
stabilization of the Honduran currency or increase in value against the dollar,
or any future imposition of currency controls, might cause the costs in dollars
of the subsidiaries products to increase, and the Company's profit margins from
its products to erode, unless the Company raised the prices that it charges to
its customers which might have a material, adverse effect both on the Company's
ability to market its products and on its profits. The Company has not in the
past, and does not intend in the foreseeable future, to engage in any hedging of
exchange rate fluctuations because management believes hedging is unnecessary in
view of the long-term trend of the lempira devaluing and hedging would eliminate
or reduce the benefits of lower product costs to the Company of any continued
devaluation.
5. DETERMINATION OF OFFERING PRICE; ABSENCE OF ACTIVE TRADING MARKET.
The Company's Common Stock is traded on a limited basis on the NASD's
over-the-counter bulletin board. On April 8, 1997, the closing bid and asked
quotations were $.312 and $.468, respectively. The price to the public of the
Common Stock offered hereby (the "Offering Price") was the product of the
private negotiation between the Company and Arthur F. Bingham following the
employment of Mr. Bingham as of September 1, 1996 as Senior Executive Vice
President of Sales and Marketing of the Company, which negotiation culminated in
his purchase as of February 12, 1997 of 600,000 shares of Common Stock at a
price of $.50 per share. The Offering Price bears no relationship to the
Company's assets, net earnings, book value or recent market quotations for the
Common Stock or any other generally accepted criteria of value. The Offering
Price of $.50 per share is substantially lower than the net tangible book value
of $1.20 per share derived from the Company's January 31, 1997 pro forma
balance sheet. See "Capitalization."
6. SALES PRACTICE REQUIREMENTS FOR PENNY STOCKS
The Common Stock offered hereby may be deemed to be "penny stock"
within the meaning of Rule 3a51-1 promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934. Penny stocks are
low-priced shares of small companies not traded on an exchange or quoted on
NASDAQ. Prices are often not available, and investors are often unable to sell
stock back to the dealer that sold them the stock. Rule 15g-9 may place certain
limits on the persons to whom broker-dealers may sell the Common Stock offered
hereby, and such limits may have an adverse effect on the ability both of
broker-dealers to sell the Common Stock and of purchasers in the Offerings to
sell the Common Stock in the secondary market. Rule 15g-9 prohibits a broker or
dealer from selling a designated security to, or effecting the sale of a
designated security by, any person unless the broker or dealer has approved in
the manner described hereinbelow the prospective purchaser's account for
transactions in penny stocks and has received from the prospective purchaser a
written agreement to the transaction setting forth the identity and quantity of
the penny stock to be purchased. In order to approve the prospective purchaser's
account within the meaning of Rule 15g-9, the broker or dealer must obtain from
him certain information concerning the person's financial situation, investment
experience, and investment objectives and reasonably determine based on such
information that transactions in penny stock are suitable for him, and that he,
or his independent adviser, has sufficient knowledge and experience in financial
matters and may be reasonably expected to be capable of evaluating the risks of
transactions in penny stocks. In addition, the broker or dealer must deliver to
the prospective purchaser a written statement setting forth the basis for the
foregoing determination and containing other specific language and obtain from
him a signed copy of the foregoing written statement. The foregoing requirements
may affect a broker-dealer's willingness to endeavor to affect transactions in
the Common Stock.
7. COMPETITION.
10
12
The furniture industry is characterized by highly intense competition.
The Company, while unranked in any known comparative study of the industry,
competes with many nationally recognized and financially successful
manufacturers of high quality furniture. Many companies with which the Company
competes, both domestic and foreign, have substantially larger production
capacities, distribution networks and greater financial resources than has the
Company.
The furniture industry is a segmented industry whereby design, quality
and price place each manufacturer into one or more competitive market niches.
The Company competes in the medium-high price market, which normally requires a
larger number of items in the product line, smaller production lot sizes and
higher inventory requirements to maintain a competitive delivery cycle. While
the Company believes its pricing structure, product design and product quality
to be competitive with those of its competitors, the Company's limited financial
resources negatively affect its ability to compete effectively in its market
niche.
8. INDUSTRY CONDITIONS.
The furniture industry historically has been cyclical, fluctuating
sharply with the business cycle of the national economy. During economic
downturns, the furniture industry tends to experience longer periods of
recession and greater declines than does the general economy. The Company
believes that the industry is influenced significantly by economic conditions
generally and more specifically by consumer behavior and confidence, the level
of personal discretionary spending, housing activity, interest rates and credit
availability. These factors affect not only the ultimate consumer, but also
furniture retailers, the industry's primary direct customers. The cyclical
nature of the industry has contributed historically to fluctuations in the
Company's results of operations, and such fluctuations can be expected to occur
in the future.
9. DIVIDEND LIMITATIONS.
Since its formation in 1964, the Company has not paid any cash
dividends on its Common Stock and does not anticipate that any such dividends
will be paid in the foreseeable future. Pursuant to the terms of its
line-of-credit and long-term loan agreements with Lexington State Bank and the
loan of WHCC with OPIC, the Company may not pay any dividends, purchase, redeem
or otherwise retire any of its capital stock, or otherwise make any
distributions of its assets resulting in the reduction of its capital without
the prior written consent of Lexington State Bank and OPIC. See "Market For
Common Equity and Related Shareholder Matters."
10. GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL CONSIDERATIONS.
The Company's domestic operations must meet extensive federal, state
and local regulatory standards in the areas of safety, health and environmental
pollution controls. Historically, these standards have not had any material
adverse effect on the Company's sales or operations. The furniture industry
currently anticipates increased federal and state environmental regulation,
particularly with respect to emissions from paint and finishing operations and
wood dust levels in manufacturing operations. The industry and its suppliers are
attempting to develop water-based finishing materials to replace commonly-used
organic-based finishes which are a major source of regulated emissions. The
Company cannot at this time estimate the impact of these new standards on the
Company's operations or the cost of compliance thereof (including future capital
expenditure requirements).
11. DEPENDENCY ON KEY MANAGEMENT PERSONNEL.
The Company believes that it is highly dependent on the services of its
present executive officers. If any of these officers should die or otherwise
become inactive in the Company's business, the loss of such officer could have a
material adverse effect on the Company's business prospects. The Company carries
two key man life insurance policies on its President, Hoyt M. Hackney, in an
aggregate amount of $1,825,000 payable to the Company in the event of Mr.
Hackney's death. Approximately $1.4 million of the amount payable has
11
13
been assigned to the Company's lenders for payment in the event of Mr. Hackney's
death and the remainder would be used to pay death benefits to Mr. Hackney's
survivors. The Company also carries a key man life insurance policy on its
Senior Executive Vice President of Sales and Marketing, Arthur F. Bingham, in an
aggregate amount of $1,000,000, $500,000 of which has been assigned to the
Company's lenders for payment in the event of Mr. Bingham's death with the
remainder to be used to pay death benefits to Mr. Bingham's survivors.
12. ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE.
The Company is authorized to issue 6,000,000 shares of its Common
Stock. If all of the 1,689,887 shares offered hereby are sold, there will be a
total of 3,979,774 shares issued and outstanding. There is presently a total of
900,000 shares of Common Stock subject to outstanding options granted under the
Company's 1997 Stock Option and Restricted Stock Plan and another 300,000 shares
reserved for future issuance thereunder. Even after reserving these shares, the
Company will, after the Offerings, have at least 820,226 shares of authorized
but unissued Common Stock available for issuance without further Shareholder
approval. The issuance of any additional shares of Common Stock would reduce the
percentage of ownership of the Company held by the investors who purchase shares
of Common Stock pursuant to this offering.
The Board of Directors also has the authority to issue up to 5,000,000
shares of $5.00 Par Preferred Stock ("Preferred Stock") from time to time in one
or more series and with such voting powers, preferences and relative rights,
designations, qualifications and limitations as the Board may fix by resolution,
without shareholder approval. It is not possible to state the actual effect of
the authorization of Preferred Stock upon the rights of holders of the Common
Stock unless and until the Board of Directors determines the specific rights of
the holders of a series of the Preferred Stock. Such effects might include,
however, (i) restrictions on dividends on the Common Stock if dividends on
Preferred Stock have not been paid; (ii) dilution of the voting power of the
Common Stock to the extent that the Preferred Stock has voting rights; (iii)
dilution of the equity interest of the Common Stock unless the Preferred Stock
is redeemed by the Company; and (iv) the Common Stock not being entitled to
share in the Company's assets upon liquidation until satisfaction of any
liquidation preference granted the Preferred Stock. See "Description of
Securities- Preferred Stock."
THE OFFERINGS
PURPOSE OF THE OFFERINGS
The Rights Offering, the Subscription Offering and the Public Offering
(together, the "Offerings") are intended to strengthen the Company's capital
structure by increasing shareholders' equity and reducing indebtedness. The
proceeds from the sale of shares of Common Stock will improve the Company's debt
to equity ratio, increase working capital, reduce interest expense and improve
cash flow. The Rights Offering and Subscription Offering enable the Company's
Shareholders to purchase shares of Common Stock at the same price negotiated by
Mr. Bingham for his shares in a private purchase from the Company.
THE OFFERINGS
The Company is offering to holders of its Common Stock of record at the
close of business on __________ _____, 1997 (the "Shareholders") the
nontransferable right to subscribe (a "Right") for one share of Common Stock at
the offering price of $.50 per share (the "Offering Price") for each share of
Common Stock held on that date (the "Record Date").
The issuance of shares pursuant to the Rights Offering is not
conditioned upon the sale of any minimum number of shares of Common Stock
pursuant thereto. No Shareholder is required to subscribe for any shares, but a
12
14
subscribing Shareholder, including a Shareholder owning less than 1,000 shares,
must subscribe for a minimum of 1,000 shares. A Shareholder who does not wish to
subscribe for at least 1,000 shares may not participate in the Offerings.
Each Shareholder may subscribe for more shares than his Rights entitle
him to purchase. If the Shareholders in the aggregate do not subscribe for the
maximum number of shares to which they are entitled in the Rights Offering, such
remaining shares will be sold in the Subscription Offering to Shareholders who
have subscribed therefor. To the extent more shares are subscribed for than are
available, the available shares will be pro rated among the subscribing
Shareholders therefor based on the percentage that the amount of shares that
each Shareholder subscribed for over those which his Rights entitled him to
purchase in the Rights Offering bears to the total amount of shares that all the
subscribing Shareholders in the aggregate subscribed for over those which their
Rights entitled them to purchase in the Rights Offering. Notwithstanding the
foregoing, for purposes of calculating the above-referenced percentage, all
Shareholders who subscribe for the minimum number of 1,000 shares in the
Offerings will be treated together as a single Shareholder, with their excess
subscriptions aggregated. Each such Shareholder will then be allocated an equal
portion of the percentage of available shares as calculated.
Any shares that remain unsubscribed for at the Expiration Time may be
sold by certain directors and officers of the Company in the Public Offering to
persons not officers, directors or Shareholders of the Company, provided that in
no event shall shares be sold to such persons prior to the Expiration Time (as
defined) or after the Public Offering Termination Time (as defined). The
procedure for subscribing for shares in the Public Offering shall be identical
to that for the Rights Offering and Subscription Offering, provided that a
subscriber in the Public Offering must subscribe for a minimum of 10,000 shares.
All subscriptions in the Public Offering are subject to the approval of the
Board of Directors of the Company, and the Company is under no obligation to
accept any subscription in the Public Offering and may in fact reject in whole
or in part any subscription pursuant thereto.
Any subscription pursuant to the Offerings in excess of 100,000 shares
is subject to the approval of the Board of Directors of the Company, except to
the extent that a Shareholder is entitled to subscribe for such shares in the
Rights Offering.
The Offerings are being conducted by the directors and officers of the
Company, and such directors and officers of the Company shall not receive
additional compensation based either directly or indirectly in connection with
any such sales.
EXPIRATION TIME
The Rights Offering and Subscription Offering will expire at 5:00 P.M.
Eastern Standard Time, on ______________ ________, 1997 (the "Expiration Time"),
unless extended by not more than 30 days, and the Public Offering will expire
with 30 days thereafter, unless extended by not more than 30 days (the "Public
Offering Termination Time"). Accordingly, the Rights Offering and Subscription
Offering will terminate on or before ____________, 1997 and the Public Offering
will terminate on or before ____________, 1997.
OFFERING PRICE
The Offering Price is $.50 per share of Common Stock. The Offering
Price was the product of the negotiation between the Company and Arthur F.
Bingham for shares of Common Stock in a private purchase from the Company and
bears no relationship to the Company's assets, net earnings, book value or
recent market quotations for the Common stock or any other generally accepted
criteria of value.
SUBSCRIPTION AGENT
The Subscription Agent for this offering is Lexington State Bank.
13
15
SHARES HELD BY NOMINEE
Banks, trust companies, securities dealers and brokers that hold Common
Stock as nominees for more than one beneficial owner may, upon proper showing to
the Subscription Agent, exercise their Rights on the same basis as if the
beneficial owners were record holders on the Record Date. The Company reserves
the right to deny any division of Rights if in its opinion the result would be
inconsistent with the intent of this privilege.
METHOD OF EXERCISING RIGHTS OR OTHERWISE SUBSCRIBING FOR SHARES AND PAYMENT
Rights may be exercised in the Rights Offering and shares subscribed
for in the Subscription Offering by completing and signing the Stock Order Form
accompanying this Prospectus and mailing or delivering the Stock Order Form,
together with payment in full (in United States dollars, by check or money order
payable to the order of Lexington State Bank) for all shares subscribed for in
both the Rights Offering and the Subscription Offering, to the Subscription
Agent in the manner indicated below.
Persons who are not officers, directors or Shareholders of the Company
and desiring to subscribe for shares in the Public Offering must complete and
sign a Stock Order Form in the form accompanying this Prospectus and mailing or
delivering such Stock Order Form, together with payment in full (in United
States dollars, by check or money order payable to the order of Lexington State
Bank) for all shares subscribed for in the Public Offering, to the Subscription
Agent in the manner indicated below.
Stock Order Forms may be mailed or delivered to:
Lexington State Bank
By Mail: Trust Department By Delivery: Trust Department
Post Office Box 867 38 West First Avenue
Lexington, North Carolina 27293-0867 Lexington, North Carolina 27292
A STOCK ORDER FORM ONCE RECEIVED BY THE SUBSCRIPTION AGENT, IS
IRREVOCABLE AND CANNOT BE AMENDED, MODIFIED, OR RESCINDED BY THE SUBSCRIBER
WITHOUT THE CONSENT OF THE COMPANY.
The risk of delivery of all documents and payments is on subscribers
and not on the Company or the Subscription Agent. If the mail is used, it is
recommended that insured registered mail be used and that a sufficient number of
days be allowed to ensure delivery to the Subscription Agent before the
Expiration Time or the Public Offering Termination Date as the case may be.
All funds received by the Subscription Agent will be held in an escrow
account until the completion of the Rights Offering and the Subscription
Offering. In the event that shares for which payment has been made by
subscribing Shareholders in the Subscription Offering are not available, payment
attributable to those shares shall be refunded to such subscribing Shareholders.
Any refund due a subscribing Shareholder will be mailed without reduction or
interest to the address designated on the appropriate Stock Order Form promptly
following the Expiration Time.
If shares are available in the Public Offering, then funds will be held
by the Subscription Agent until acceptance of the subscriptions therefor at or
prior to the Public Offering Termination Time. If no shares are available in the
Public Offering such that no subscriptions will be accepted in the Public
Offering, or a subscription is otherwise rejected, payment for such
subscriptions will be refunded to the appropriate subscriber. Any such refund
will be mailed without reduction or interest to the address designated on the
appropriate Stock Order Form promptly following rejection of the subscription.
14
16
The instructions to the Stock Order Form should be read carefully and
strictly followed. Questions relating to the method of subscription and requests
for additional copies of the Prospectus should be directed to Hoyt M. Hackney,
telephone (910) 249-4931. All persons should carefully follow all instructions.
DO NOT SEND SUBSCRIPTION DOCUMENTS OR PAYMENT TO THE COMPANY. All questions with
respect to the validity, form and eligibility of any exercise of Rights or other
subscriptions will be determined solely by the Company. The Company in its sole
discretion may waive any defect or irregularity, permit a defect or irregularity
to be corrected within such time as it may determine, or reject the exercise of
any Right or other subscriptions. Subscriptions will not be deemed to have been
made until all irregularities have been waived or cured within such time as the
Company determines in its sole discretion. Neither the Company nor the
Subscription Agent shall be under any duty to give notification of defects in
subscription or incur any liability for failure to give such notification.
LATE DELIVERY OF STOCK ORDER FORM AND PAYMENT IN RIGHTS OFFERING AND
SUBSCRIPTION OFFERING
Except as provided immediately hereinafter, the failure of the
Subscription Agent for any reason to actually receive by the Expiration Time a
properly completed and executed Stock Order Form, accompanied by full payment,
from any Shareholder shall be deemed a waiver and release by such Shareholder of
all subscription rights held. However, if prior to the Expiration Time, the
Subscription Agent has received a written or telegraphic guarantee from a
commercial bank, a trust company having an office in the United States, or a
member firm of the New York Stock Exchange, another registered national
securities exchange or the National Association of Securities Dealers, Inc.,
stating the name of the subscribing Shareholder, the number of Rights to which
the subscribing Shareholder is entitled and the number of shares of Common Stock
subscribed for and guaranteeing that the Stock Order Form and the appropriate
payment will be promptly delivered to the Subscription Agent, such subscription
will be accepted subject to withholding the stock certificates for such shares
of Common Stock until receipt of the duly completed and executed Stock Order
Form and payment of the Subscription Price within five business days of the
Expiration Time.
RIGHTS OF SUBSCRIBERS
Subscribers will have no rights as Shareholders of the Company with
respect to the shares of Common Stock subscribed for until stock certificates
representing such shares are issued to them. Subscribers will not have any right
to revoke their subscriptions after delivery is made to the Subscription Agent.
NONTRANSFERABILITY OF RIGHTS
The Rights are nontransferable and may not be purchased or sold.
LIMITATIONS ON PURCHASES OF SHARES
The Company will make reasonable efforts to register, qualify, or
exempt from registration the shares of Common Stock offered hereby pursuant to
the securities laws of all jurisdictions of the United States in which
Shareholders reside. However, shares will not be offered to any person who
resides in a foreign country, or who resides in any jurisdiction in the United
States if (i) a small number of Shareholders reside in such jurisdiction; (ii)
the issuance of Rights or the offer or sale of shares of Common Stock under the
securities laws of such jurisdiction would require the Company to register as a
broker or dealer or otherwise qualify the shares of Common Stock for sale in
such jurisdiction; and (iii) such registration or qualification described in
clause (ii) above would be impracticable for reasons of cost or otherwise.
USE OF PROCEEDS
The net proceeds from the sale of 1,689,887 shares of Common Stock
offered hereby by the Company are estimated at $800,000, assuming all shares are
sold and after payment of expenses of the Offerings. If all shares are
15
17
sold, approximately $550,000 will be used to reduce the loans representing the
Company's primary revolving line of credit from Lexington State Bank and the
remaining $250,000 of the net proceeds will be used to reduce the principal
amount of the Company's OPIC loan.
The Company's primary line of credit with Lexington State Bank bears
interest at the rate of prime plus 1%. This line of credit was last renewed on
February 1, 1997 and is reviewed for renewal annually on each February 1, the
date on which the line of credit was established. The Company has used this line
of credit within the last twelve months for working capital. The balance
outstanding under this line of credit was $1,200,000 at January 31, 1997
compared to approximately $1,131,000 at January 31, 1996.
The OPIC loan, as amended, presently bears interest at a rate of 10%
per annum and matures on October 31, 1999, with final balloon payment of
$557,438. See "Business---General" and "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
The line of credit may be used for future working capital and other
liquidity needs. If all shares are not sold, the net proceeds will first be
allocated to reducing the line of credit up to $550,000 and any additional
proceeds would be used to reduce the OPIC loan.
CAPITALIZATION
The following table sets forth as of January 31, 1997 (i) the actual
consolidated capitalization of the Company and (ii) the pro forma capitalization
of the Company after giving effect to the sale after January 31, 1997 of 600,000
shares of Common Stock to Arthur F. Bingham at a purchase price of $.50 per
share. This table should be read in conjunction with the Company's consolidated
financial statements and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" appearing elsewhere in this Prospectus.
Actual
As of January 31,
DEBT(2) 1997 Pro Forma
- ------- ----------- -----------
Due on Demand Note................................... $ 25,000 $ 25,000
Short-Term Lines of Credit........................... 1,663,572 1,663,572
----------- -----------
Long-term debt, including current portion............ 1,698,263 1,412,569
----------- -----------
Total debt......................................... 3,386,835 3,101,141
----------- -----------
SHAREHOLDERS EQUITY
- -------------------
Preferred stock; authorized and -- --
unissued 5,000,000 shares; $5.00 par;
Common Stock; authorized 6,000,000
shares, no par; issued and outstanding 1,669,887;
Pro Forma 2,289,887................................ 3,054,431 3,354,431
Retained earnings.................................. 1,250,378 1,250,378
----------- -----------
Translation Adjustments.............................. (1,865,614) (1,865,614)
----------- -----------
Total common Shareholders' equity............... 2,439,295 2,739,295
----------- -----------
Total capitalization............................ $ 6,821,559 $ 6,821,559
=========== ===========
16
18
SELECTED FINANCIAL DATA
The following table presents selected financial data for the periods
indicated. The financial data presented should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited and unaudited Consolidated
Financial Statements included elsewhere in this Prospectus.
Nine
Nine Months Months
Ended Ended
Years Ended April 30 Jan. 31, Jan. 31,
------------------------------------------------------------------- 1996 1997
1992 1993 1994 1995 1996 (Unaudited) (Unaudited)
---- ---- ---- ---- ---- ----------- -----------
INCOME STATEMENT DATA:
Net Revenue $6,369,602 $6,884,589 $7,296,892 $7,260,491 $5,989,959 $4,599,155 $4,390,979
Gross Profit 1,848,731 2,203,412 2,288,471 203,412 1,846,267 1,410,829 1,387,564
Income (Loss) From
Continuing Operations
before Extraordinary
Items and Cumulative
Effect of Change in
Accounting Principal (304,713) 226,137 300,514 222,655 73,574 27,105 (27,329)
Net Income (Loss) (304,713) 288,236(1) 384,398(2) 222,655 73,574 27,105 (27,329)
Per Common Share:
Net Income (Loss)
Primary 0.18 0.17 0.23 0.13 0.04 0.01 (0.01)
Net Income (Loss)
Fully diluted 0.18 0.17 0.23 0.13 0.04 0.01 (0.01)
Cash Dividends
Declared 0 0 0 0 0 0 0
BALANCE SHEET DATA:
Working Capital $2,365,060 $2,466,214 $3,182,938 $3,206,220 $2,920,606 $3,012,976 $3,196,607
Total Assets 6,904,303 7,403,705 7,234,384 7,108,221 6,601,314 6,884,997 6,821,559
Total Debt 3,276,681 3,456,298 3,262,893 3,013,612 2,892,360 2,996,148 3,076,811
Shareholder Equity 2,603,388 2,832,508 2,802,872 2,838,105 2,660,859 2,679,606 2,724,980
(1) Reflects an income tax benefit of $62,099 resulting from operating
losses carried forward from prior years.
(2) Reflects the cumulative effect of a change in accounting method for
income taxes of $83,884.
17
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine Months Ended January 31, 1997 Compared to the Nine Months Ended January 31,
1996
Consolidated revenues were down approximately $208,200 or 4.5% for the
first nine months of fiscal 1997 compared to the first nine months of fiscal
1996. This decline was due entirely to a decrease in sales volume, as prices
remained constant for much of the period. Such decrease in sales volume was
largely the result of the current recession within the furniture segment of the
national economy, a shrinking distribution base and possibly a permanent
resistance by the consumer to purchasing the higher quality and higher priced
furniture of the type that historically been the Company's principal product
line. The Company has adopted various business strategies designed to counteract
the loss of revenues that these trends may cause in the future. See "Business."
It is uncertain whether these trends will continue and, if the Company's
strategies do not successfully counteract these trends, they could have a
material adverse effect on the Company's results of operations and financial
condition.
Sales for domestically produced products were down about 11.8% percent
for the three quarters. Sales of foreign produced goods increased by about 19%
for the nine month period.
New orders received during the nine-month period amounted to
approximately $4,368,000 in future sales, up slightly from the same period last
year. During much of the period, almost three months, the Company was without a
salesman in its territory encompassing North Carolina, South Carolina and
Virginia (the "North Carolina territory"), its most productive, while
negotiations were completed with a individual to fill the slot as an exclusive
representative and as sales and marketing manager. Despite the fact that the
Company actually received more new orders during the nine-month period than it
did during the same period last year, management believes that the absence of a
sales representative for a portion of the period negatively impacted orders
received.
Cost of Sales were down approximately $185,000 or 5.8% for the
nine-month period as compared with last year, reflecting the reduced level of
sales.
Selling, General and Administrative Expenses increased about $38,000 or
3.5 % for the nine-month period primarily as a result of increased marketing
cost.
Interest Expenses were $298,727 for the first nine months of the
current fiscal year, down slightly, $6,000, from the nine-month period of the
prior year.
For the nine-month period ending January 31, 1997, operating income
(earnings before interest and taxes) was $271,604, 11.8 cents per share,
compared to $332,396, 14.5 cents per share, for the same period of the prior
year. The net loss was $27,329 or $.01 per share, compared to a net profit of
$27,103 or $.01 per share for the same period of fiscal 1996.
Fiscal Year ended April 30, 1996 compared to Fiscal Year Ended April 30, 1995
Consolidated revenues for the fiscal year ended April 30, 1996 were
down $1,271,682 or 17.5 % as compared to those reported for the previous year.
This decline is primarily the result of a soft furniture economy that affected
the fourth quarter of the prior year and persisted throughout fiscal 1996.
Cost of Sales was down approximately $913,000 or about 18% for the year
as compared with the prior year, primarily as a result of a reduced level of
sales caused by the slow economy and management's responsive
18
20
efforts to curtail production and reduce inventories to manage the Company's
cash position worsened thereby.
Selling, General and Administrative Expenses decreased about $246,000
or approximately 15% during the year, primarily as a result of reduced sales
commissions.
Operating income (earnings before interest and taxes) for the year was
$458,338 (27 cents per share), down from $577,639 (34 cents per share)
reported for fiscal 1995. As a percent of sales, this income represented 7.6%
and 7.9% respectively.
Interest Expenses for the year were $388,829, up 15.7% from $335,951 as
a result of increased borrowing against foreign lines-of-credit and, to lesser
extent, higher interest rates being applied to domestic borrowings as compared
to last year.
Net income was $73,574, or $.04 per share, for the year ended April 30,
1996 as compared to $222,655, or $.13 per share, for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal long-term capital resources are shareholders'
equity, the term loan of Wellington Hall with Lexington State Bank and the term
loan of WHCC with the Overseas Private Investment Corporation (OPIC). As of
January 31, 1996, total shareholders' equity was $2,724,990 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$397,241 and $990,999, respectively.
The Lexington State Bank loan bears interest at the prime rate plus
1.5% and is payable in monthly installments of $7,000 until maturity on April
10, 2002. It is secured by substantially all of the Company's domestic assets.
The net proceeds of the loan were used to refinance indebtedness used to
purchase and expand the Company's Lexington, North Carolina facility.
Since July 1996, the Company has been negotiating with OPIC to amend
the OPIC loan agreement then in effect to provide more favorable terms.
Principal payments were scheduled to double from approximately $31,000 per
quarter to approximately $62,000 per quarter beginning on July 31, 1996 with a
final balloon payment of $185,812 due on October 31, 1999. Under the loan
agreement, WHCC was also obligated to make quarterly interest payments at the
rate of 12% per annum. On March 10, 1997, WHCC and OPIC executed an amended loan
agreement that, among other things, lowered the interest rate to 10% per annum
as of November 1, 1996 and waived principal payments from July 31, 1996 until
July 31, 1997, at which time quarterly payments of approximately $31,000 become
due and payable. Principal payments increase to approximately $62,000 on July
31, 1998 with a balloon payment of approximately $557,438 due on October 31,
1999. Upon execution of the amended documents, WHCC paid OPIC a rescheduling fee
of 1% of the principal balance. The proceeds from the OPIC loan, together with
funds generated internally by Wellington Hall, were used to acquire and improve
the Honduran Facilities.
The OPIC loan prohibits the payment of dividends and other
distributions by Wellington Hall and requires that it maintain a stated amount
of tangible net worth as well as certain financial ratios, including current
assets to current liabilities and total indebtedness to tangible net worth. In
addition, WHCC is required to maintain a stated amount of current assets in
excess of current liabilities, and WHCC and MWH are required to maintain stated
ratios of current assets to current liabilities and indebtedness to tangible net
worth. Wellington Hall, WHCC and MWH are each in compliance with the
requirements of the OPIC loan.
Under the OPIC loan arrangement, Wellington Hall, Limited is obligated
to supply any necessary funds to WHCC to meet WHCC's obligations thereunder, and
MWH has also guaranteed the obligations of WHCC. The OPIC loan is secured by
substantially all of the tangible assets of the Honduran Facilities.
19
21
The Company's primary sources of liquidity are bank lines of credit and
cash flow from operations. For its domestic operations, the Company has two
lines of credit with Lexington State Bank. Under its primary line, the Company
may borrow the lesser of (i) $1,2000,000 or (ii) the sum of 70% of the
Wellington Hall's accounts receivable less than 60 days old, 50% of its finished
good inventories and 10% of work in process and raw material inventories. As of
January 31, 1997, the Company had $1,200,000 in borrowings under this line of
credit. The Company pays interest monthly at the rate of prime plus 1% on
outstanding borrowings under the facility. Principal payments are due on demand.
The line of credit also contains restrictive covenants that prohibit Wellington
Hall from paying dividends and making other distributions with respect to its
capital stock and require it to maintain certain financial ratios, including
current assets to current credit. The line of credit is reviewed annually for
renewal.
On January 16, 1996, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount of
$250,000. No borrowings have been made to date. Outstanding borrowings under
this facility will bear interest at the rate of prime plus 1 1/2%, payable
monthly, and the outstanding balance as of January 31, 1997 was $13,000, leaving
$237,000 available for future borrowings.
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
Wellington Hall is also indebted to Lexington State Bank under a demand
loan for $100,000 borrowed in 1993 to finance working capital. The loan bears
interest at the prime rate plus 1% payable monthly, and the outstanding balance
at January 31, 1997 was $100,000.
MWH has lines of credit with two Honduran banks in an aggregate amount
of $500,000. As of October 31, 1996, an aggregate of $350,572 had been borrowed
under these lines, leaving approximately $149,000 for future borrowings.
Borrowings bear interest at 25% payable quarterly and principal is payable on
demand. The lines are secured by a second lien on the fixed assets of MWH and
current assets.
The Company's other primary source of liquidity is net cash provided by
operating activities which was $97,517 and $295,289 in fiscal 1996 and 1995,
respectively. However, operations used $465,338 during the first nine months of
the current fiscal year, primarily as a result of the increases in inventories
and account receivable discussed below.
As of January 31, 1997, accounts receivable had increased by
approximately $193,000 since the beginning of the fiscal year, mostly as a
result of a surge in sales late in the third quarter and extended term granted
certain dealers for payment of their invoices. The receivables represented a
turnover rate of about fifty-five days, an increase of about ten days when
compared to the turnover rate reported a April 30, 1996.
Inventories increased by about $286,000 during the first nine months of
the current fiscal year primarily a result of increased production to meet an
increased backlog of orders for foreign produced goods. The company believes
that the renewed and revised marketing effort that it put in place in early 1996
had some positive effect on the Company's level of incoming orders through the
second fiscal quarter ended October 31, 1996 but the rate of incoming orders did
decline during the third quarter, a decline however that may have been
experienced through out the industry. The Company had a backlog of orders of
approximately $1,558,000 at January 31, 1997 versus $1,454,000 on the same date
in 1996 and versus $1,853,000 at April 30, 1996. The increased inventories
consisted primarily of inventory in transit from the Honduran Facilities to the
Lexington, NC facility, which at quarter's end was about $212,000 versus about
$74,000 at year end April 30, 1996, and the inventory of raw materials and
supplies in transit to the Honduran Facilities from Lexington at January 31,
1997, which was about $40,000 versus about $5,000 on hand at April 30, 1996.
20
22
Property and Equipment is reported to be down about $25,000 as of
January 31, 1997 compared to year-end but, when expenditures of approximately
$75,000 are added, the decrease is actually about $100,000. The decline is
mostly the result of the devaluation of the Honduran currency relative to the
prior fiscal year end of approximately 18%. The historical value of the
Company's Honduran assets are carried on the subsidiaries' books in the local
currency, the lempira. Lempiras are converted to dollars at the spot rate in
effect at period end when the Company's financial statements are consolidated,
and the reduction to the reported value of these assets appears as part of the
translation adjustment.
The Company is subject to the risk that foreign currency fluctuations
may have an adverse impact on its operations. For example, if the Honduran
currency were to stabilize in the future or to increase in value against the
dollar, the Honduran subsidiary's operating costs might increase causing profit
margins to erode. The Company, however, does not engage in any hedging of
exchange rate fluctuations. Since the acquisition of the Honduran subsidiary in
1989, the lempira has continually devalued against the U.S. dollar, from 2.0
lempira to the dollar in 1989 to 13.03 lempira to the dollar at January 31,
1997. Although the devaluation of the lempira has resulted in reductions in the
historical book value of assets and liabilities and a corresponding reduction to
shareholders' equity in the form of a $1.8 million cumulative translation
adjustment, the Company also benefits from lower product costs from the
subsidiary as the lempira devalues. In view of the long-term trend of
devaluation, management believes that hedging of exchange rate fluctuations is
unnecessary and would reduce or eliminate the benefits of lower product costs
resulting from any continued devaluation.
There are no significant capital expenditures planned for the balance
of this fiscal year and expenditures for the remainder of the year will be
limited to maintenance needs which develop from time to time. The Company's
total outlay for capital improvements for the fiscal year ended April 30, 1996
was approximately $39,000.
As of September 1, 1996, the Company executed an Employment and Stock
Purchase Agreement with Arthur F. Bingham (the "Agreement"). On October 10, 1996
Mr. Bingham loaned the Company $285,694 at terms included in an addendum to the
Agreement. On February 12, 1997, Mr. Bingham purchased 600,000 shares of Common
Stock at a price of $.50 per share, which purchase price was paid by
cancellation of the foregoing loan and for an additional investment of $14,306.
Mr. Bingham has also been granted options to purchase 600,000 additional shares
at option prices ranging from $.50 to $1.30 per share, 450,000 of which are
subject to certain performance conditions.
In 1989, the Company acquired the Honduran Facilities and anticipated
raising $1,500,000 through the sale of the Company's stock by the board of
directors. The private placement ended early in 1990 having produced about
one-half the funds anticipated. The result of not raising all the funds has been
that the Company has had to incur more debt and restrict capital expenditures
that were both in its original plans at the time of the acquisition and that
have developed since the acquisition. Because of this debt, sales needed to grow
rapidly from the time of the acquisition to a level at which operating incomes
would be adequate to service the debt and to fund capital needs if the Company
was to grow. Maintaining an adequate level of sales since the acquisition has
been possible only for limited periods of time, mostly as a result of a sluggish
furniture economy that has existed over much of that time, a period that
includes two recessions. The sluggish furniture economy has also reduced the
industry's distribution base, especially the base of mid to small retailers more
committed to using smaller manufacturers, such as the Company, as a resource.
Furthermore, management believes that the consumer taste in home furnishings has
swung away from the more formal designs and executions that the Company has
marketed to more informal designs and execution.
Management believes that the resulting situation is that the Company
has too much debt service, given its sales volume most recently achieved, and
has inadequate funds for its plans to restoring and growing its sales to a level
where its operating profits can accommodate its needs. The Company's cash
position was tight during all of fiscal 1996, having experienced excessive wood
deliveries early in the year and then a slow economy and lower sales during the
balance of the year while the Company continued to service its high level of
indebtedness. The sale
21
23
of stock to Mr. Bingham has assisted the Company in meeting its working capital
and other cash needs and a significant portion of the Company's backlog and
orders expected to be received in the near future carry delayed payment terms
and/or will require reserved inventories. These terms will further stretch the
Company's cash resources until the payment for these sales becomes due. Delayed
payment terms have become expected within the industry and therefore necessary
for the Company to attract new distribution.
Having initiated in early 1996 a marketing effort to achieve sales
growth, and having begun to see results from this effort, the Company formulated
a strategy that addressed means of securing the necessary funding and solving
its debt-equity problem in general. The plan consists primarily of (i) the
private placement of stock to Mr. Bingham, (ii) the Company's debt
restructuring, both as discussed hereinabove, (iii) the offering of stock to the
shareholders of Company and to the public, as discussed hereinabove, and (iv)
the grant of options to certain key employees, as discussed in the Notes to the
Consolidated Financial Statements.
The success to date in the execution of this plan has removed some
immediate pressure on working capital, is making funds available to support
marketing requirements and slowed the effect of servicing the debt for the near
term. The balance of the plan is essentially aimed at reducing debt and the
corresponding costs thereof.
BUSINESS
GENERAL
The Company manufactures high quality wooden home furniture. The
manufacturing operation involves the machining, sanding, assembling and
finishing of components and other raw materials. The Company's products are
distributed nationally through full-service retail stores and unaffiliated trade
showrooms that service the professional designer.
The Company owns a lumber processing mill and furniture manufacturing
facility located in San Pedro Sula, Honduras, Central America (the "Honduran
Facilities"). Wellington Hall Caribbean Corporation ("WHCC"), a wholly-owned
subsidiary of the Company, serves as a sales and distribution company for the
Honduran Facilities. WHCC is a North Carolina corporation organized in December,
1988 and is located in Lexington, North Carolina. Muebles Wellington Hall, S.A.
("MWH"), the Honduran subsidiary of WHCC, located in San Pedro Sula, manages and
operates the Honduran Facilities.
The Company has recently adopted specific strategies designed to
improve its results of operations and financial condition. These strategies
involve a more aggressive program of product development, improving marketing
and strengthening management, as well as increasing capital and reducing
indebtedness.
The Company has developed and adopted a comprehensive marketing plan
that includes strategic measures such as (i) augmenting the Company's
traditional product lines with more casual designs of furniture that management
believes reflect trends in consumer tastes, (ii) exploring new opportunities for
its Honduran Facilities and other offshore resources with designs employing
materials such as leather, marble, metal, wicker, bamboo and rattan, (iii)
updating and upgrading catalogs and other sales aids in all distribution
channels and (iv) developing more targeted programs with selected retail
distributors that include promotions, stock reserves for quicker shipments and
sales contests. See "Business--Markets."
In addition to the foregoing, the Company has recruited an experienced
senior executive to lead its sales and marketing function. In September 1996,
the Company employed Arthur F. Bingham for the newly created position of Senior
Executive Vice President of Sales and Marketing. Mr. Bingham directs and
oversees all aspects of the Company's sales and marketing activities with the
goal of assuring continuing growth in profitable sales. Mr. Bingham's employment
arrangement provides for several incentives for him to assist the Company in
increasing sales revenues. See "Management."
Management believes that the highly leveraged position of the Company
has impeded its ability to pursue
22
24
strategies designed to improve its results of operations. In response, the
Company also is pursuing a number of strategies to improve its financial
condition by raising equity capital, reducing indebtedness and increasing
working capital. The Offerings are the primary means of accomplishing these
goals. See "Use of Proceeds" and "Capitalization." In addition, in connection
with the employment of Arthur F. Bingham as Senior Executive Vice President of
Sales and Marketing, Mr. Bingham made a loan to the Company of $285,694. On
February 12, 1997, Mr. Bingham purchased 600,000 shares of Common Stock at a
price of $.50 per share, which purchase price was paid by cancellation of the
foregoing loan and for an additional investment of $14,306. The Company has used
the funds provided by Mr. Bingham to reduce its indebtedness and provide working
capital. The Company also has granted stock options to Mr Bingham and to Mr.
Ralph Eskelsen, manager of the Honduran Facilities, that will provide incentives
to these key employees and may result in additional contributions to capital.
Mr. Eskelsen has indicated that he is likely to purchase between $135,000 and
$150,000 of Common Stock during calendar year 1997 through exercise of his
options. Because this purchase is at the option of Mr. Eskelsen, the proceeds
therefrom have not been reflected in the "Capitalization" section of this
Prospectus.
The Company has negotiated with its lenders to amend its loan
agreements therewith to provide more favorable terms. On January 16, 1997, the
Company obtained an additional $250,000 line of credit from Lexington State
Bank. In addition, on March 10, 1997, the Company entered into an agreement with
the Overseas Private Investment Corporation ("OPIC") to restructure its loan to
reduce principal payments until July 1997 (with the deferred payments to be made
in a larger balloon payment at the end of the term of the loan in 1999) and to
lower the interest rate. The effect of the restructured loan is a reduction to
the Company's cash requirements for scheduled principal payments for fiscal 1997
and 1998 of $247,748 and $123,874, respectively, which will contribute
significantly to improving the Company's working capital and cash flow for these
years. The restructured OPIC loan also will reduce scheduled interest expense by
$9,910 in fiscal 1997 and $18,900 in fiscal 1998. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Offerings, if fully subscribed, would increase the Company's equity
capital by about $800,000 and reduce indebtedness by a corresponding amount.
Interest expense would have been reduced by $79,744 and $83,201 in fiscal 1995
and 1996, respectively, and by $40,438 in the first half of fiscal 1997, on a
pro forma basis, if the Offerings were fully subscribed and consummated at the
beginning of the period. In addition to achieving a reduction in interest
expenses, management believes that the increase in equity and reduction of debt
service requirements in 1997 and 1998 that the foregoing strategies are designed
to achieve would make working capital and other funds available to pursue its
marketing and sales strategies more aggressively with the goal of increasing
funds generated by operations to fund future growth and debt service
requirements.
The Company's business was founded in 1964, and the Company is
incorporated in North Carolina. The Company's principal office is located at
Route 1, U.S. Highway 29 and 70 North, Lexington, North Carolina 27292,
telephone (910) 249-4931.
PRODUCTS
The Company's products include occasional living room tables, dining
room, and bedroom furniture, modular wall systems, entertainment cabinets (for
storage of televisions, stereo equipment and video cassette recorders),
bar/server cabinets, console tables, mirrors, and other occasional and accent
pieces. The product line generally represents an eclectic collection of
reproductions or renderings of 18th century English and French styles. Most of
the Company's 18th century English and French reproductions and other designs
are offered exclusively by the Company.
The Company imports certain of its designs for finishing when the
domestic production costs for such designs are prohibitive. The Company's
imported line is assembled in the Honduran Facilities and finished in the
Company's Lexington, North Carolina facility and includes solid mahogany dining
chair frames, occasional items and poster beds. Sales of imported designs have
increased over time as a result of the Company's acquisition of the
23
25
Honduran Facilities. As described hereinbelow, WHCC, the Company's North
American subsidiary, distributes the products manufactured at the Honduran
Facilities, and during fiscal 1996, such products accounted for approximately
23% of the Company's consolidated sales (net of intercompany sales), while
products produced domestically by the Company accounted for about 77% of its
consolidated sales. Unfinished furniture imported from the Honduran Facilities
accounted for about 13.2 of the Company's domestically-produced sales, and the
number imports for finishing from elsewhere is negligible. In addition, WHCC
furnished the Company's domestic operations with in excess of 80% of certain
forms of wood utilized in domestic production. The balance of the raw materials
utilized by the Company's domestic operations, including plywood, brass
decorating hardware, finishing material and packing material, are purchased from
domestic sources.
WHCC markets to the U.S. furniture industry (including the Company)
three categories of unfinished products manufactured by the Honduran Facilities,
including: (i) raw materials in the form of wooden dimension stock (rough
parts); (ii) unfinished assembled items for furniture such as occasional tables
and dining chair frames; and (iii) components (turnings and carvings) utilized
in domestic production (OEM sales). The majority of sales utilize solid
mahogany, but the Company also uses laurel, primarily in the production of its
French designs, pine and San Juan Areno. In April of 1996, the Company
successfully introduced items of furniture which employ leather as part of their
finish, such as inserts in desk tops or fully wrapped chest, and the first pine
occasional item for its domestic production.
WHCC also markets directly to the retail trade a bedroom, dining room
and occasional table group fully produced and finished in the Honduran
Facilities. By assembling and finishing the group in Honduras, significantly
greater advantage of plentiful, less costly labor and lower overhead can be
realized which result in a lower retail purchase price for the group ( as well
as that of the other Honduran - produced products). This lower price, along with
the utilization of solid "Honduran Mahogany," recognized by the world trade as
one of the premier hardwoods, allows the Company to compete within its market
niche. All of the wood utilized by the Company's Honduran Facilities comes from
forests under sustainable management programs.
MARKETS
The Company utilizes several different avenues of distribution. The
Company distributes its finished products to the designer trade, retail stores,
trade showrooms, buyers' clubs and consumer catalogues. The following discussion
describes the views of the Company regarding each avenue of distribution for its
finished products.
Designer Trade
The Company believes that the designer trade has become one of the more
viable outlets for its primary product niche, traditional, high-end furniture.
From the Company's perspective, the advantage of this outlet is that virtually
all sales are "special order," negating the need for promotional discounts, and
the disadvantages are the relatively low sales volume, the requirement that it
grant credit and the inadequate means the designer normally has available to
receive delivery and service his customer. Since decorators do not generally
stock or display products, they are largely dependent on the availability and
quality of the Company's sales materials, and as such, it is important for the
Company to create and/or improve and maintain its sales aids, including but not
limited to photography and catalogs for the Company's dining room pieces and
occasional program and for WHCC's bedroom pieces.
As part of the Company's strategy to increase its sales, the Company
plans to produce a new product catalog by April 1997 for a portion of its
product line. New finish samples have been completed and furnished the Company's
wall unit dealers and finish samples for the balance of the line will be ready
in the early spring of 1997.
Retail Stores
24
26
Retail stores are a desirable outlet for the Company's products because
the potential volume of sales is relatively high and certain retail stores do
stock and display the Company's products. The Company does not, however, have
contractual relationships with such retail stores. The Company and a particular
retail store may have an informal understanding at the time that the Company
sells its products to such a store, which understanding may relate to such
things as amount of the Company's products to be displayed on the store's floor
space, pricing and dating for payment purposes. The Company's use of this outlet
has declined over several years for various reasons, including but not limited
to the fact that many dealers within the industry have gone out of business due
perhaps to the soft furniture economy. In addition, the Company has been unable
to compete effectively with the invoice dating policy (e.g. "buy now, pay
nothing until later") employed by larger manufacturers because such a policy
increases receivables and drains available cash. The Company believes that its
inability to compete with such a policy has induced many dealers not to consider
the Company's products when assigning available floor space. Accordingly, a
growing percentage of the Company's distribution to retail stores are special
orders, necessitating the creation and/or improvement and maintenance of the
Company's sales aids. See--"Designer Trade."
The Company is having some success in expanding its retail distribution
though a program of "Target Accounts." The program involves the Company asking
certain moderate to large retailers that normally display products compatible
with the Company's price and design niche to purchase and maintain a display of
approximately 70 of the Company's products, including bedroom, dining room and
occasional items. In exchange for doing so, the dealer receives (i) a discount
on the original order for its floor samples, normally about 10%, (ii) two sales
periods annually, most often during February and August, in which the dealer
receives a 10% discount on all its orders from the Company, (iii) Company
sponsored sales incentive contests for the dealer's floor sales personnel, as
described below, (iv) participation in a stock reserve program , as described
below, to ensure quicker delivery from the Company, (v) better in-store training
and service from the Company's sales representative, (vi) exclusive distribution
from the Company in the dealer's trading area and (vi) sales leads received on
the Company's home page on the Internet, as described below.
With normal production runs, a particular item may not be available for
90-120 days. To assure quicker delivery to participants in the program, the
Company selected approximately 70 of its products to be offered in only one of
the Company's finishes, as opposed to the Company's normal policy under which
such items may be offered in as many as four standard finishes. The Company
reserves from earlier production runs a quantity of each of the selected items
such that participants in the program can receive new orders without having to
wait for future production runs.
The Company sponsored sales contests consist of offering weekend or
holiday trips to area resorts to the participating dealers' floor sales
personnel who sell minimum specified amounts of the Company's products within a
designated time frame. The contests are structured such that the value of the
prize awarded increases as the level of sales by the particular salesperson
increases.
Early in 1996 the Company added its own Home Page to the Internet
[firniture.com] and has experienced a much higher level of hits (site visits)
and resulting inquiries than was anticipated. These inquiries are forwarded to
the Company's appropriate area sales representative and to a local dealer when
possible. Priority for referral is given to the dealers participating in the
Company's "Target Account" program.
Trade Showrooms
The Company maintains a showroom in High Point, North Carolina to
display its product line during the semiannual International Furniture Market
held in that city in the fall and spring of each year and is affiliated with
trade showrooms, that are accessible only to the professional designer and not
generally open to the public, in all the major markets and design centers around
the country. Trade showrooms generally target the affluent customer, which tends
to be the Company's ultimate customer, and as such, they are an important outlet
for the Company. However, the Company believes that this outlet has diminished
in importance somewhat over the last decade
25
27
because of "Gallery Programs" sponsored by the larger manufacturers and
retailers under which retail stores act in large part as competing showrooms,
offering substantial discounts to induce designers to purchase from them. It is
the opinion of the Company, however, trade showrooms are still viable when
markups of wholesale prices can be held to 250%.
In April 1996, the Company received commitments from two major,
national showroom chains to display its products. The Company does not have
contractual agreements with such national chains, but, as is common in the
industry, has informal agreements with at the chains at the time that the
Company sells its products to them with respect to the kind and amount of
products to be stocked, the reordering procedure and the dating policy to be
pursued. One of the commitments involved only the Company's modular wall units,
while the others involved the balance of the domestic product (regular line)
lines. Most of the floor samples purchased reached the showroom floors early in
the fall of 1996, and management believes such floor displays are having a
favorable impact on sales.
Buyers Clubs
The Company became a vendor for the United Consumers Club ("UCC")
approximately two years ago. The UCC's members are required to pay an annual
fee, and the UCC distributes to them through its ninety catalog outlets (Clubs)
and its quarterly mailers. Any UCC member who wishes to purchase an item from
the catalog so informs UCC, and UCC places the order with the Company or another
vendor. In order to succeed in this particular means of distribution, it is
imperative that the Company create and/or improve and maintain high-quality
photography in its mailers, as well as a large supply of catalogs at the various
clubs. See--"Designer Trade." Though the Company and the UCC do not have a
contractual relationship, the Company does have an informal agreement with UCC
that the Company will not change its prices reflected in the UCC catalog or
mailer for the life of such catalog or mailer.
Similarly, consumer catalogs are a means of distribution that has not
been available to or utilized by the Company in the past. At the October 1996
Furniture Market held in High Point N.C., the Company received a commitment from
a major catalog company to include the Company's products in its catalogs.
Though the Company does not have a contractual relationship with the
aforementioned catalog company, certain of the Company's products will be
included in an April 1997 edition of its catalog, and the Company expects
certain of its products to be similarly included in future editions. The catalog
in which the Company's products will appear will include different types of
furniture, wooden and otherwise, in addition to that sold by the Company, and
may also include those other products that the catalog company markets in
addition to furniture like clothing or electronics.
OEM Sales
Following the acquisition and expansion of the Honduran Facilities in
1990, the Company aggressively sought to sell to other manufacturers ("OEM
sales") dimension stock, wood components (carvings and turnings), and unfinished
assemblies with significant success. However, in 1993 and early 1994, the
Company's sales of its proprietary products grew to such a level that it
appeared that it would be more profitable to use the majority, if not all, of
the capacity of the Honduran Facilities for the production of the Company's
products to the exclusion of its OEM business. During such time, the Company's
sales of its proprietary products were of sufficient magnitude that the Company
did not have the resources to continue to pursue its OEM business. However, very
late in 1994 the market for the Company's products became soft and, without the
OEM sales, it became necessary about mid-1995 and through much of calender 1996
to curtail production to avoid additional increases in inventory. For all of
1996, the Company's has directed its efforts with some success toward
establishing a distribution for its proprietary line but at the same time toward
rebuilding a dealer base for OEM sales. In the future, the Company will maintain
a presence in this area of distribution to assure its presence in a more
diversified market.
RESEARCH AND DEVELOPMENT
While neither the Company nor WHCC has a full-time employee or facility
devoted exclusively to research
26
28
and development and the Company does not spend a material amount of money on
research and development as such, the Company's President and sales and
marketing personnel, in consultation with design firms, devote substantial time
to the design and development of new products. Though, because of the nature of
the Company's designs, many of its products may remain marketable for a
significant period of time, the competition in and the fashion orientation of
the home furnishings market require that the Company's product line be
continually updated by the introduction of new products. It this development of
such new products, the cost of which is absorbed into production costs and not
borne directly by customers of the Company, that represents the extent of the
Company's research and development.
SALES
The Company's sales function is led by Arthur F. Bingham, its Senior
Executive Vice President of Sales and Marketing. The Company employs 16
independent, commissioned sales representatives who sell to retail stores and
service trade showrooms in the United States and Canada. The Company generally
sells its products on a net 30-day basis. The Company has advertised nationally,
to a limited extent, to improve its name recognition.
WHCC employs one independent, commissioned sales representative for
products sold to U.S. furniture manufacturers other than the Company, the
Company's OEM business, and that commissioned sales representative covers the
two eastern states in which the majority of the U.S. furniture industry is
located. WHCC utilizes the Company's independent representatives for products
finished in the Honduran Facilities and marketed directly to the retail trade.
BACKLOG
The Company's firm backlog of orders on January 31, 1997 was 1,558,000,
a 7% increase from its backlog of $1,454,000 on January 31, 1996. The January
31, 1997 backlog included $1,105,000 of domestically-manufactured products, as
opposed to $1,193,000 included in the 1996 backlog, which decrease reflects the
slow down in the home furnishing segment of the general economy. The backlog for
WHCC and Honduran-produced products, less intercompany orders, was $453,000 on
January 31, 1997 versus $261,000 on January 31, 1996 . The increase reflects
recent success in procuring orders from other manufacturers for their products.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal raw material is wood, and the Company utilizes
several different species including mahogany, laurel, pine and cedar. Wood is
purchased in the form of dimension stock (rough parts), components (turnings and
carvings) and plywood. The Company uses all of these forms of wood in the
manufacturing of its products. For example, in the production of a table,
turnings and carvings may be used for table legs and specialty designs, plywood
may be used for the tabletop and dimension stock (large pieces of wood that the
Company is able to process into the required dimensions) may be used for other
parts of the table. Plywood is generally available in adequate supply from
domestic resources. Dimension stock and components are generally supplied to the
Company by its Honduran Facilities. These same raw materials are available from
domestic sources but generally at higher prices and lower quality. Accordingly,
the loss of the Honduran Facilities as the Company's primary source of wood and
as its sole supplier of the Company's proprietary line of assembled items of
furniture would have a significant adverse effect on the Company's operations,
financial condition, competitiveness and future prospects.
Though the agency of the Honduran government responsible for forest
resources is not able to provide an accurate inventory of the supply of mahogany
or other species of wood available in Honduras and large quantities of mahogany
have previously been harvested from Honduras over the years, the Company
believes based upon all available information that an adequate supply of'
mahogany is available and will be available for many years to come. The
Company's belief is based on the fact that the Honduran government has always
made available to the
27
29
Company as much mahogany as it has requested and has never indicated that such
supply may be in future jeopardy. In addition to mahogany, the Company currently
utilizes the other species of wood referenced above and continually researches
whether other species of wood are available for manufacturing in commercial
quantities in order to expand its resource base.
The Honduran government has established programs such that all timber
harvested is in areas of forest under sustainable management. With respect to
the Company, sustainable management works as follows: the Honduran government
solicits the Honduran wood-working industry, of which the Company is a part, to
determine the need for various types of wood and takes a physical inventory on
the number of trees of a given variety in a particular portion of the forest;
the Honduran government then issues a permit to an entity to harvest that area
to a certain extent, based on the Honduran government's calculation of how
quickly that particular variety of tree in that particular area will regenerate,
and to furnish the Company with the requested amount of wood; the permit holder
is taxed based on the portion of the forest subject to its permit; the permit
holder harvests the area and sells the wood to the Company.
SEASONALITY
As is typical in the furniture industry, the Company's greatest volume
of incoming orders is received in the spring and fall of each year. This is due
primarily to the International Furniture Market held each April and October in
High Point, North Carolina. Careful scheduling of production minimizes the
effects of such seasonality on the Company's production and shipments. Orders
are generally shipped within 30 to 90 days of receipt.
COMPETITION
The furniture industry is highly competitive, and no single company
dominates the industry. The Company, while unranked in any known comparative
study of the industry, competes with many nationally-recognized manufacturers of
quality furniture. Many furniture manufacturers have substantially larger
production capabilities, and distribution networks, as well as greater financial
resources than has the Company. The Company's principal method of competing is
by product design (including items or categories of items not available from
other manufacturers), product quality (including high-grade hardwoods and other
materials used in construction and quality-constructed cabinetry and finish) and
price. Most of the Company's designs are offered by the Company exclusively. The
Company believes its pricing structure, product design and product quality to be
competitive with those of its competitors.
The furniture industry is a segmented industry in which design, quality
and price place each manufacturer into a competitive market niche. The Company
competes in the medium-to-high price market, which normally requires a larger
number of items comprising the product line, smaller production lot sizes and
higher inventory requirements to maintain a competitive delivery cycle. The
Company estimates that there approximately 12 to 15 furniture manufacturers
directly competing with the Company in the medium-to-high price market for case
goods. The Company's limited financial resources restrict its ability to compete
effectively in its market niche.
ENVIRONMENTAL CONTROL FACILITIES
The Company's domestic operations must meet extensive federal,
state and local regulatory standards in the areas of safety, health and
environmental pollution controls. Historically, these standards have not had any
material adverse effect on the Company's sales or operations. The furniture
industry currently anticipates increased federal and state environmental
regulation, particularly with respect to emissions from paint and finishing
operations and wood dust levels in manufacturing operations. The industry and
its suppliers are attempting to develop water-based finishing materials to
replace commonly-used organic-based finishes which are a major source of
regulated emissions. The Company cannot at this time estimate the impact of
these new standards on the Company's operations or the cost of compliance
thereof (including future capital expenditure requirements).
EMPLOYEES
28
30
As of February 10, 1997, the Company had approximately 375 employees,
including approximately 300 people currently employed at the Honduran
Facilities. Approximately 325 of the Company's employees are full-time
employees.
DESCRIPTION OF PROPERTY
The Company owns and operates one plant housing its United States
production facilities and general offices located on 17 acres of land in
Lexington, North Carolina. The 82,500 square foot facility is of brick, steel,
concrete and concrete block construction and is well-maintained and in adequate
condition. The Company's manufacturing facilities generally operate on a 40-hour
week. Substantially all of the Company's physical properties located in
Lexington, North Carolina, including inventory, machinery and equipment, are
pledged as collateral under the Company's loan agreements with Lexington State
Bank of North Carolina, the Company's primary bank lender.
The Company's Honduran Facilities consist of seven and one-half acres
of land located in San Pedro Sula, Honduras, a 21,120 square-foot, equipped
dimension mill, a 7,840 square-foot wood resaw operation, two dry kilns and
boilers and related processing equipment, two buildings for dry lumber storage
and a 6,408 square-foot building for "green" lumber storage. In July 1990, the
Company completed construction of a 45,000 square-foot addition to the
manufacturing facility and a 2,600 square-foot office building.
The Company believes its properties are generally suitable and adequate
to meet its intended uses and, in the opinion of management, it is adequately
covered by insurance.
The Honduran Facilities, including both real and personal property such
as plant and equipment but not including inventory or receivables, are pledged
to secure a loan from the OPIC. The loan proceeds were used to finance
completion of capital improvements to the Honduran Facilities. In addition,
Banchas, the Company's Honduran bank lender, holds a second mortgage on the
assets of the Honduran Facilities.
The lumber dimension mill, as well as the furniture manufacturing
operations of the Honduran Facilities, operate on a 44-hour work week (a
standard work week in Honduras). The Company believes that the mill and
furniture manufacturing facilities are in adequate condition and suitable for
its intended uses.
The Company leases a 8,800 square-foot showroom located in High Point,
North Carolina. The space is utilized to display the Company's products,
particularly new product introductions, during the semi-annual International
Furniture Markets. The Company believes the showroom is in good condition and
suitable for its intended use.
LEGAL PROCEEDINGS
There is no pending material litigation involving the Company or any of
its subsidiaries. To the best of management's knowledge, no legal proceedings or
proceedings by any governmental authorities are contemplated.
29
31
MANAGEMENT
Directors of the Company are elected at the annual meeting of
shareholders for one-year terms to expire at the next annual meeting. Officers
of the Company are elected to serve one-year terms by Board of Directors at the
regular meeting of the Board held annually immediately following the annual
meeting of shareholders. Messrs. Hackney and Bingham have each entered into
agreements that govern their respective employment with the Company. See
"Executive Compensation." The following table sets forth information concerning
each director and executive officer of the Company:
POSITION WITH THE COMPANY; PRINCIPAL OCCUPATION DURING
NAME AGE THE PRECEDING FIVE YEARS (IF DIFFERENT)
- ---- --- ---------------------------------------
Hoyt M. Hackney, Jr. 59 President, Chief Executive Officer, Chief Financial Officer
and Treasurer, Director since 1978
Donald W. Leonard (1) 77 Chairman of the Board of Directors, Director since 1965;
Private Investor
Ernst B. Kemm 60 Executive Vice President, Director since 1978
William W. Woodruff (1) 72 Secretary , Director since 1977; President and Owner of
Woodruff Shoe Store
Arthur F. Bingham 42 Senior Executive Vice President of Sales and Marketing (1996-
present), Director since 1996; Sales Representative for
Lexington Furniture Industries (1978-1996)
Ralph L. Eskelsen, Jr. 50 General Manager and Director of Muebles Wellington Hall, S.A.
- ----------
(1) Mr. Woodruff is Mr. Leonard's brother-in-law.
CERTAIN TRANSACTIONS
In connection with the employment of Arthur F. Bingham as Senior
Executive Vice President of Sales and Marketing, Mr. Bingham made a loan to the
Company in October 1996 of $285,694 for a term of up to two years and bearing
interest at the applicable federal rate under Section 1274(d) of the Internal
Revenue Code of 1986, as amended. On February 12, 1997, Mr. Bingham purchased
600,000 shares of Common Stock of the Company at a purchase price of $.50 per
share, which purchase price was paid by cancellation of the foregoing loan and
for an additional investment of $14,306. The Company paid to Mr. Bingham
interest on the loan in the amount of $6,368. Like those transactions, all
future material affiliated transactions and loans will be made or entered into
under terms that are no less favorable to the Company than those that can be
obtained from unaffiliated third parties. In addition, all future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of the independent outside members of the Company's Board
of Directors who do not have an interest in the transactions.
30
32
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding directors
and executive officers of the Company, as well as those persons known by the
Company to own beneficially more than 5% of the outstanding Common Stock of the
Company, as of April 1, 1997 and after the Offerings assuming all shares
offered hereby are sold:
Before Offerings After Offerings
-------------------------------------------- ---------------------------------
Name and Address Amount and Nature Percent Amount and Nature Percent
of Beneficial of Beneficial of Class of Beneficial of Class
Owner Ownership (1) Ownership (1)
- -------------------------------------------------------------------------------------------------------------
Hoyt M. Hackney, Jr. 226,958 (1) 9.9 302,958 7.6
409 Edgedale Drive
High Point, N.C. 27262
Ernst B. Kemm 297,280 (1) 13.0 298,280 7.5
1211 Lancaster Place
High Point, N.C. 27260
Donald W. Leonard 26,862 (1) 1.2 46,862 1.2
105 Westover Drive
Lexington, N.C. 27292
William W. Woodruff 16,000 (1) 0.7 24,000 0.06
320 Maegeo Drive
Lexington, N.C. 27292
Arthur F. Bingham 605,437 (2,3) 26.4 605,437 (2,3) 15.2
315 3rd Avenue N. W.
Hickory, N.C. 28601
Ralph L. Eskelsen, Jr. -- (3) -- -- (3) --
Tacao River
San Pedro Sula
Honduras, Central America
All executive officers 1,172,537 (3) 51.2 1,277,537 (3) 32.1
and Directors as a Group
(6 Persons)
- -----------------------------
(1) To the best of the Company's knowledge, all persons listed above own the
shares listed directly and have sole voting and investment power with respect
thereto unless otherwise noted.
(2) Mr. Bingham's shares include 605,000 shares owned in a retirement plan of
which he is beneficiary.
(3) Excludes options to purchase shares that have been granted but are not
currently exercisable and do not become exercisable within 60 days.
31
33
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid
to the Chief Executive Officer of the Company during the last three fiscal
years.
Fiscal Annual Compensation All Other
------ ------------------- ---------
Name/Positions Year Salary($) Bonus($) Compensation (1)
- ------------------------------------------------------------------------------------
Hoyt M. Hackney, Jr. 1996 128,878 0 26,577
President 1995 166,918 37,728 27,203
Treasurer, 1994 160,285 36,712 25,104
Chief Executive Officer
Chief Financial Officer
(1) The amounts reported in this column consist of the Company's matching
contribution under its 401(k) plan and deferred compensation plan.
Non-salaried directors are paid $100 for each meeting of the Board of
Directors they attend and a $1,000 annual directors' fee. The Company does not
pay Directors any additional amounts for committee participation.
Effective January 1, 1987, the Company entered into a 5-year employment
agreement with Mr. Hackney (the "Employment Agreement") that is automatically
extended for successive one-year terms unless and until either party to the
Employment Agreement gives written notice of' termination. Throughout the term
of the Employment Agreement, Mr. Hackney is to serve as President, Chief
Executive Officer and Chief Financial Officer of the Company, is to be
nominated for election as a Director of the Company and is to devote his full
time and attention to the Company's business affairs. If, for any reason other
than the termination of his employment "for cause," Mr. Hackney does not
continue in these positions, Mr. Hackney may elect to terminate the Employment
Agreement and receive as severance compensation an amount equal to one and
one-half times his then annual compensation. Under the Employment Agreement,
Mr. Hackney may be terminated only "for cause," which is defined to mean (1)
willful material breach of his obligations under the Employment Agreement; (2)
willful gross misconduct in the course of his employment that is substantially
injurious to the Company; or (3) conviction in any court of a felony which
results in incarceration for more than 90 consecutive days.
In conjunction with the execution of the Employment Agreement, the
Company and Mr. Hackney entered into an executive deferred compensation
agreement, effective May 8, 1987 (the "Deferred Compensation Agreement"), which
provides for the payment of $50,000 per year for a period of 10 years payable
in equal monthly installments, upon Mr. Hackney's retirement at age 62. The
monthly installment payments shall be paid to Mr. Hackney's beneficiary if he
dies prior to retirement or after retirement but prior to the expiration of the
ten-year payout period. $24,000 in deferred payments were accrued pursuant to
the Deferred Compensation Agreement for the benefit of Mr. Hackney during
fiscal 1996.
If the Company is (1) merged, liquidated, consolidated or otherwise
combined with any other company, or (2) if substantially all the assets or
shares of stock of the Company are acquired by any other person or entity (1
and 2 above hereinafter a "Change of Control Event"), the Employment Agreement
will, pursuant to its terms, automatically remain in full force and effect
until the end of the two-year period immediately following the date of the
Change of Control Event. Upon the occurrence of a Change of Control Event,
the Company or its successor in interest may terminate the Employment Agreement
upon the payment to Mr. Hackney of a cash amount equal to 1 1/2 times his then
annual compensation. The Company or its successor may terminate the Deferred
Compensation Agreement following the occurrence of a Change of Control event
upon the payment to Mr. Hackney of (a) $100,000 in cash or
32
34
(b) a cash amount for each share of the Company stock then owned by Mr. Hackney
equal to or greater than the lesser of (i) four times the book value per share
of such stock or (ii) 15 times the net after tax profits per share of such
stock, computed as of the Company's most recent fiscal year end in accordance
with Generally Accepted Accounting Principles.
Effective September 1, 1996, the Company entered into a 10-year
employment agreement with Arthur F. Bingham ("the Employment Agreement") that
is automatically extended for successive one-year terms unless and until either
party to the Employment Agreement gives written notice of termination pursuant
to the terms therein. Throughout the term of the Employment Agreement, Mr.
Bingham is to serve as Senior Executive Vice President of Sales and Marketing
and as an exclusive sales representative of the Company and is to devote his
full time and attention to such positions. The Employment Agreement
contemplates that, for the term thereof, Mr. Bingham shall also serve as a
Director of the Company. If, for any reason other than the termination of his
employment "for cause," Mr. Bingham does not continue in these positions, Mr.
Bingham may elect to terminate the Employment Agreement and receive as
severance compensation an amount equal to one and one-half times his then
annual compensation. Under the Employment Agreement, Mr. Bingham may be
terminated only "for cause," which is defined to mean (1) willful material
breach of his obligations under the Employment Agreement, which breach is not
substantially cured by Mr. Bingham within ten business days after the Company
gives to him written notice of the specific alleged breach (it being understood
that Mr. Bingham's failure to perform or discharge his duties and
responsibilities hereunder as a result of his incapacity due to physical or
mental illness or injury or accident or death shall not be deemed such a
breach); (2) willful gross misconduct in the course of his employment that is
substantially injurious to the Company; or (3) conviction in any court of a
felony that results in incarceration for more than ninety consecutive days
(unless such conviction is reversed in any final appeal thereof).
Pursuant to the Employment Agreement, Mr. Bingham is to be compensated
in an amount equal to a commission of 5% of all sales of products of WHCC and
6% of all sales of products of the Company, both to exclude what is commonly
referred to as OEM sales, a commission of 5% on all orders considered "House"
orders, a commission of 5% on inventory sales used to raise capital and reduce
inventory, annual compensation of $30,000 and an annual bonus equal to the
amount that 2% of the sales in the North Carolina territory from WHCC and 1%
of the sales in the North Carolina territory from the Company exceeds $30,000
for each fiscal year beginning September 1, 1996 through August 31, 1997.
If the Company is merged, liquidated, consolidated or otherwise combined
with any other company, or if substantially all the assets of the Company are
acquired by any other person or entity, or if the control of the Company shall
pass to any other person or entity not presently in control, the Employment
Agreement shall remain in full force and effect or, at the option of the
Company, upon the occurrence of any such event described hereinabove, the
Company or its successor may terminate this Employment Agreement upon the
payment to Mr. Bingham of an amount equal to 1 1/2 times his earnings for the
last fiscal year prior to termination, such payment to be made within thirty
days after the date of termination. For purposes of determining Mr. Bingham's
earnings, there shall be included both the commissions paid under Mr. Bingham's
sales territory and the annual compensation paid for Mr. Bingham's service as
Senior Executive Vice President of Sales and Marketing.
STOCK OPTION AND RESTRICTED STOCK PLAN
On February 10, 1997, the Board of Directors of the Company adopted,
subject to shareholder approval, the 1997 Stock Option and Restricted Stock
Plan (the "Plan"). The Plan has a ten year term and, unless sooner terminated
as provided in the Plan, will terminate on February 9, 2007.
The Plan will be administered by an option committee (the "Committee")
appointed by the Board of Directors of the Company. The Committee must consist
of no fewer than two directors appointed by the Board, none of whom is a
current employee of the Company, a former employee that receives compensation
for prior
33
35
services rendered during the taxable year, an individual receiving direct or
indirect remuneration from the Company in any capacity other than as a director
or a former or current officer of the Company, all with the intent of complying
Section 162(m) of the Internal Revenue Code of 1988, as amended (the "Code").
Under the Plan, the Company may grant incentive stock options ("ISOs"),
nonqualified stock options or restricted stock awards up to an aggregate of
1,200,000 shares of the Company's common stock, no par value (the "Common
Stock"). No individual may receive options or restricted stock under the Plan
aggregating more than 600,000 shares of Common Stock over the ten-year life of
the Plan. The number and class of shares available under the Plan will be
adjusted appropriately in the event of stock splits and combinations, share
dividends and similar changes in the capitalization of the Company. Any shares
of Common Stock that are subject to incentive stock options or nonqualified
stock options granted under the Plan and that are not issued, and any shares of
Common Stock that are issued pursuant to restricted stock awards under the Plan
and that are subsequently forfeited, may again be the subject of grants or
awards under the Plan.
Awards may be granted under the Plan only to key employees (including
statutory employees within the meaning of Section 3121(d)(3) of the Code),
officers or directors of the Company, whether or not employees. The Committee
will determine those persons who will receive ISOs, nonqualified stock options
and restricted stock awards under the Plan.
The Plan provides that the Board of Directors may terminate, amend or
revise the terms of the Plan at any time, except that no amendment or revision
shall (i) increase the maximum aggregate number of shares subject to the Plan,
except as permitted by the Plan in order to make appropriate adjustments for
stock splits, share dividends or similar changes in the Common Stock; (ii)
change the minimum purchase price for shares subject to options granted under
the Plan; (iii) extend the maximum duration of ten years established under the
Plan for any option or for a restricted stock award; or (iv) permit the
granting of an option or a restricted stock award to anyone other than eligible
recipients under the terms of the Plan.
With respect to nonqualified stock options or restricted stock awards,
the Committee is authorized under the terms of the Plan, in its discretion, to
make loans or payments to optionees or restricted stock award recipients for
the purpose of assisting such persons with payment of personal income taxes
incurred upon exercise of nonqualified stock options or the lapse of
restrictions to which restricted stock is subject.
If the Company becomes a party to any merger or consolidation in which
it is not the surviving entity or pursuant to which the shareholders of the
Company exchange their Common Stock, or if the Company dissolves or liquidates
or sells all or substantially all of its assets, the Committee may, in its
discretion, cause all ISOs and nonqualified stock options outstanding under the
Plan to become immediately exercisable and, to the extent not exercised, such
options will terminate on the effective date of such transaction. In addition,
the Committee may, in its discretion, cause all restricted stock awards that
are still subject to any restrictions or conditions to become fully vested, and
no longer subject to forfeiture, on such effective date, unless otherwise
provided in the applicable restricted stock agreement.
The price of shares subject to stock options granted under the Plan will
be determined by the Committee at the time of grant of the option, but may not
be less than 100% of the fair market value of the Common Stock at the time of
the grant. The Committee will determine at the time of grant the dates on
which stock options will become exercisable and may accelerate the scheduled
exercise date of an option if deemed appropriate. The Committee may, in its
discretion, make any ISO or nonqualified stock option subject to the
satisfaction of such corporate or individual performance or other vesting
standards as the Committee deems appropriate. No stock option may expire later
than ten years from the date of grant. ISOs granted under the Plan are subject
to the following additional conditions: (i) no ISO may be granted to a person
who owns, at the time of grant, stock representing more than 10% of the total
voting power of all classes of stock of the Company unless the option
34
36
price for the shares subject to such ISO is at least 110% of the fair market
value on the date of grant and such ISO award is exercisable only within five
years after its date of grant; and (ii) the total fair market value of shares
subject to ISOs which are exercisable for the first time by an optionee in a
given calendar year may not exceed $100,000, valued as of the date of the ISO's
grant.
Restricted stock may be issued under the terms of the Plan to eligible
recipients who are selected from time to time by the Committee. Such
restricted stock will be subject to such restrictions and conditions as may be
determined by the Committee at the time of the award. These restrictions and
conditions may include (but are not required to include) restrictions on
transfer of the awarded shares of Common Stock, vesting conditions based on
continued employment with the Company for a specified period of time following
the award or satisfaction of individual or corporate performance criteria, or
satisfaction of other vesting standards. The lapse of restrictions and
conditions with respect to restricted stock may be accelerated at any time by
the Committee in its discretion. Restrictions and conditions imposed on shares
of restricted stock shall lapse, in whole or in part, as provided in the
applicable agreement evidencing the restricted stock award, but must lapse, if
at all, not later than ten years from the date of the award.
On February 10, 1997 the Company granted stock options to Ralph L.
Eskelsen and Arthur F. Bingham pursuant to the Plan. These options may not be
exercised prior to shareholder approval of the Plan. Eskelsen was granted an
ISO to purchase 300,000 shares of Common Stock at $0.50 per share. Eskelsen
may exercise the ISO to the extent of 200,000 on or after September 1, 1997 up
to and including February 1, 1998 and may exercise the ISO in full on or after
January 1, 1998 up to and including February 1, 1998. If not sooner
terminated, the ISO will terminate three months after Eskelsen's termination of
employment with the Company for any reason other than death or three months
after Eskelsen's death. In no event will the ISO be exercisable after it
expires by its terms. The option price may be paid in U.S. dollars or in
Honduran currency at the exchange rate on the date of exercise.
Bingham received the following ISOs to purchase shares of Common Stock:
Option A. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.50 per share. Option A becomes exercisable
on September 1, 1998 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory (both as defined in the
option agreement) from May 1, 1997 through April 30, 1998 equal or
exceed $2,500,000.
Option B. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.80 per share. Option B becomes exercisable
on September 1, 1999 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory from May 1, 1998 through
April 30, 1999 equal or exceed $2,700,000.
Option C. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.50 per share. Option C becomes exercisable
on September 1, 2000 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory from May 1, 1999 through
April 30, 2000 equal or exceed $3,000,000.
Bingham also received nonqualified options to purchase 150,000 shares of
Common Stock at an exercise price of $1.30 per share. The options may be
exercised at any time from the date of grant until February 9, 2004.
If not sooner terminated, the options will terminate three months after
Bingham's termination of employment with the Company for any reason other than
death or twelve months after Bingham's death. In no event will any option be
exercisable after such option expires by its terms.
35
37
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 6,000,000 shares
of Common Stock with no par value and 5,000,000 shares of $5.00 Par Preferred
Stock ("Preferred Stock"). There are issued and outstanding 2,289,887 shares
of common Stock. No shares of Preferred Stock are issued and outstanding.
COMMON STOCK
Subject to prior rights of the holders of any Preferred Stock then
outstanding, the holders of outstanding shares of Common Stock are entitled to
receive dividends, if any, as may be declared and paid from time to time by the
Board of Directors, in its discretion, from funds legally available therefor.
See "Market For Common Equity and Related Shareholder Matters." Upon
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata all assets remaining available for
distribution to shareholders after satisfaction of creditors, subject to the
rights, if any, of the holders of any Preferred Stock then outstanding. There
are no conversion rights or redemption or sinking fund provisions applicable to
shares of Common Stock. Holders of Common Stock have no preemptive or other
subscription rights. All of the outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be outstanding upon
completion of this offering will be, when issued and delivered in the manner
contemplated hereby, fully paid and nonassessable.
Shareholders are entitled to one vote for each share of Common Stock
held of record on all matters submitted to a vote of shareholders.
Shareholders are not entitled to vote cumulatively in the election of
directors.
The Transfer Agent for the Common Stock is Wachovia Bank and Trust
Company, N.A., Winston-Salem, North Carolina.
PREFERRED STOCK
The Company's charter authorizes the Board of Directors to issue
Preferred Stock in one or more series from time to time, without action by the
shareholders. The terms of any such Preferred Stock may be fixed by the Board
of Directors and may be senior to the Common Stock with respect to dividends,
voting rights and redemption and liquidation preferences.
It is not possible to state the actual effect of the authorization of
Preferred Stock upon the rights of holders of the Common Stock unless and until
the Board of Directors determines the specific rights of the holders of a
series of the Preferred Stock. Such effects might include, however, (i)
restrictions on dividends on the Common Stock if dividends on Preferred Stock
have not been paid; (ii) dilution of the voting power of the Common Stock to
the extent that the Preferred Stock has voting rights; (iii) dilution of the
equity interest of the Common Stock unless the Preferred Stock is redeemed by
the Company; and (iv) the Common Stock not being entitled to share in the
Company's assets upon liquidation until satisfaction of any liquidation
preference granted the Preferred Stock. Issuance of Preferred Stock, while in
the judgment of the Company's Board of Directors desirable in order to provide
flexibility in connection with possible acquisitions and other corporate
purposes, could impede an attempt by a third party to acquire a majority of the
outstanding voting stock of the Company. The Board of Directors has no present
plans to authorize the issuance of any shares of Preferred Stock.
CERTAIN NORTH CAROLINA LEGISLATION
Article 9 of the North Carolina Business Corporation Act ("NCBCA") sets
forth the North Carolina Shareholder Protection Act (the "Shareholder
Protection Act"). The Shareholder Protection Act requires the
36
38
affirmative vote of the holders of 95% of the voting shares of a corporation,
voting as one class, for the adoption or authorization of a business
combination with any other entity if, as of the record date for the
determination of shareholders entitled to vote on such business combination,
the other entity is the beneficial owner, directly or indirectly, of more than
20% of the voting shares of the corporation. This 95% voting requirement is
not applicable if certain "fair price" standards are met or certain other
provisions relating to the other entity's control of the corporation have been
satisfied.
The Shareholder Protection Act originally allowed a 90-day period after
the effective date of the statute, such 90-day period to expire on July 22,
1987, during which the directors of an affected corporation could adopt an
opt-out bylaw stating that the provisions of the Shareholder Protection Act
would not be applicable to the corporation. The Shareholder Protection Act
expressly provides that an opt-out bylaw adopted during such 90-day period
continues to be effective unless it was rescinded on or before September 30,
1990. On July 20, 1987, the Board of Directors of the Company adopted such an
opt-out bylaw for the Company, and such bylaw has not been rescinded.
Article 9A of the NCBCA sets forth the North Carolina Control Share
Acquisition Act (the "Control Share Acquisition Act"). The Control Share
Acquisition Act generally prohibits an acquiring person from voting control
shares (as described below) of a North Carolina corporation acquired pursuant
to a control share acquisition (as described below), unless voting rights for
such shares shall have been approved by the shareholders of the corporation by
the affirmative vote of at least a majority of all outstanding shares entitled
to vote for the election of directors (other than interested shares as
described below), or, among other exceptions, the corporation's articles or
bylaws are amended to permit the voting of such shares prior to the acquiring
person's acquisition thereof. If the acquiring person so requests, the
corporation is required to hold a special meeting of its shareholders to
consider the authorization of voting rights of control shares within 50 days
after demand is made by the acquiring person, provided that, among other
things, such acquiring person has delivered to the corporation a statement
representing that the acquiring person has the financial capacity to make the
proposed control share acquisition and undertaking to pay certain expenses of
the special meeting of shareholders.
"Control shares" generally means shares of a corporation that, when
added to all other shares of the corporation beneficially owned by a person,
would entitle that person to voting power in the election of directors that is
equal or greater than any of the following levels of voting power: (i)
one-fifth of all voting power, (ii) one-third of all voting power, or (iii) a
majority of all voting power. "Control share acquisition" generally means the
acquisition by any person of beneficial ownership of control shares.
"Interested shares" generally means shares of a corporation in respect of which
an acquiring person, an officer of the corporation or an employee of the
corporation who is also a director of the corporation is entitled to exercise
voting power.
The Control Share Acquisition Act originally allowed a 90-day period
after the effective date of the statute, such 90-day period to expire on
November 10, 1987, during which the directors of an affected corporation could
adopt an opt-out bylaw stating that the provisions of the Control Share
Acquisition Act would not be applicable to the corporation. On July 20, 1987,
the Board of Directors of the Company adopted such an opt-out bylaw for the
Company. On November 12, 1987, the Board of Directors deleted from said bylaw
any reference to the Control Share Acquisition Act and to opting-out thereof
with the intent of subjecting the Company to the provisions thereof.
37
39
MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
Until October 1995, the Common Stock of the Company traded in the NASDAQ
over-the-counter market system. Since that time, the Company's Common Stock
has traded on the NASD's over-the-counter bulletin board. According to the
information furnished by Anderson & Strudwick, a market maker in the Company's
Common Stock, the high and low bid quotations for each quarterly period within
the last two fiscal years and the current fiscal year to date is as follows:
Quarter Ending High Low Quarter Ending High Low
- -------------- ---- --- -------------- ---- ---
January 1995 1.25 1.25 April 1996 0.50 0.25
April 1995 1.25 1.00 July 1996 0.344 0.25
July 1995 1.00 1.00 October 1996 0.50 0.281
October 1995 0.75 0.75 January 1997 0.375 0.187
January 1996 0.75 0.25 April 1997
(through March 27) 0.3125 0.25
These market quotations represent inter-dealer prices, without retail
mark-up, mark-down or commission, and do not necessarily represent actual
transactions.
As of February 10, 1997, there were approximately 572 holders of record
of the Company's Common Stock.
The Company has not paid any dividends since its inception. Pursuant to
the terms of its line-of-credit and long-term loan agreements with Lexington
State Bank, the Company may not pay any dividends, purchase, redeem or
otherwise retire any of its capital stock or otherwise make any other
distribution of its assets resulting in the reduction of its capital without
the prior written consent of Lexington State Bank. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Amended and Restated Bylaws of the Company provide that any person
who serves or has served as a director or officer of the Company or any
wholly-owned subsidiary (a "Claimant") shall have the right to be indemnified
and held harmless by the Company against all liabilities and litigation
expenses resulting from any claim, action, suit or proceeding, whether civil,
criminal, administrative or investigative, seeking to hold the Claimant liable
by reason of the fact that he is or was serving in such capacity, provided that
such indemnification shall not be effective with respect to any liabilities or
litigation expenses if the activities of the Claimant leading to such
liabilities or litigation expenses were at the time they were taken known or
believed by such Claimant to be clearly in conflict with the best interests of
the Company. This indemnification includes the right upon demand by the
Claimant to the advancement of litigation expenses, subject to receipt by the
Company of the Claimant's undertaking to repay such expenses if it is
ultimately determined that he was not entitled to indemnification.
The Amended and Restated Bylaws of the Company define (a) "liabilities"
to include without limitation, payments in satisfaction of any judgment, money
decree, excise tax, fine or penalty for which a Claimant had become liable in
any proceeding and (b) "litigation expenses" to include without limitation,
reasonable costs and expenses of attorneys' fees and expenses actually and
reasonably incurred by the Claimant in connection with any proceeding and
reasonable costs and expenses and attorneys' fees and expenses in connection
with the enforcement of rights to the indemnification granted hereby or by
applicable law, if such enforcement is successful in whole or in part.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
LEGAL OPINIONS
The legality of the securities being offered hereby will be passed upon
for the Company by Schell Bray Aycock Abel & Livingston P.L.L.C., Greensboro,
North Carolina.
INDEPENDENT AUDITORS
The audited financial statements included in this Prospectus have been
audited by Turlington and Company, L.L.P., independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
38
40
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheet as of January 31, 1997 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations for the nine months ended January 31, 1997, 1996 (unaudited) . . . . . . . F-3
Consolidated Statements of Cash Flows for the nine months ended January 31, 1997, 1996 (unaudited) . . . . . . . F-4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
ANNUAL FINANCIAL STATEMENTS
Reports of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Balance Sheets as of April 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated Statements of Stockholders' Equity for the years ended April 30, 1996 and 1995 . . . . . . . . . F-10
Consolidated Statements of Income for the years ended April 30, 1996 and 1995 . . . . . . . . . . . . . . . . F-11
Consolidated Statements of Cash Flows for the years ended April 30, 1996 and 1995 . . . . . . . . . . . . . . F-12
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
F-1
41
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
January 31,
ASSETS 1997
----------
Current assets:
Cash:
Cash on hand $ 50,085
Accounts Receivable:
Trade 939,832
Allowance for Bad Debt (43,800)
Inventories 4,675,775
Note Receivable - Officer 27,908
Prepaid Expenses 143,749
Deferred Taxes 14,327
----------
Total Current Assets 5,807,876
Deferred Income Taxes 94,537
Property and equipment
Cost 2,156,063
Less, accumulated depreciation (1,263,981)
----------
892,082
Other assets: 27,064
----------
Total Assets $6,821,559
==========
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 161,939
Notes payable, Bank 1,663,572
Accounts Payable
Trade 489,847
Sundry 69,251
Customer deposits 44,174
Other current liabilities 182,486
----------
Total Current Liabilities 2,611,269
Noncurrent liabilities:
Deferred Compensation Accrual 234,000
Long-Term Debt, Less Current Maturities 1,251,300
----------
Total Liabilities 4,096,569
SHAREHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares; No Par;
Shares Issued and Outstanding - 1,689,887 3,340,226
Preferred stock; Authorized 5,000,000 shares; $5 Par;
No Shares Issued or Outstanding -0-
Retained Earnings 1,250,378
Cumulative Translation Adjustments (1,865,614)
Total Stockholders' Equity 2,724,990
Total Liabilities & Equity $6,821,559
==========
Notes to consolidated financial statements are an integral part hereof
F-2
42
WELLINGTON HALL LIMITED, AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
January 31,
1997 1996
---- ----
Revenue:
Sale of Furniture $4,366,674 $4,584,248
Other Income 24,305 14,907
---------- ----------
Total 4,390,979 4,599,155
---------- ----------
Cost of Furniture Sold 3,003,415 3,188,326
---------- ----------
Gross Profit 1,387,564 1,410,829
Other Operating, Selling, General,
and Administrative Expenses 1,115,960 1,078,433
Income (Loss) From Operations 271,604 332,396
Other Deductions
Interest Expense-S/T 183,044 180,294
Interest Expense-L/T 115,683 124,572
---------- ----------
Total 298,727 304,866
Income Before Taxes and Extraordinary Items (27,123) 27,530
Income Taxes 206 427
---------- ----------
Net Income (27,329) 27,103
========== ==========
Earnings (Loss) Per Share Of Common Stock
Primary And Assuming Fully Diluted
Income Before Extraordinary Item (0.01) 0.01
Extraordinary Item 0.00 0.00
---------- ----------
Net Income (Loss) $ (0.01) $ 0.01
========== ==========
Notes to consolidated financial statements are an integral part hereof
F-3
43
WELLINGTON HALL LIMITED, AND SUBSIDIARIES
STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended January 31, 1997 1996
Cash flows from operating activities:
Net income for the years $ (27,329) $ 27,103
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 76,701 93,938
Deferred compensation 18,000 18,000
Deferred income taxes 0 0
Changes in assets and liabilities:
Accounts receivable (193,166) 78,776
Note receivable, officer 0 0
Inventories (286,002) (135,682)
Prepaid expenses (13,078) 27,870
Other assets (3,790) 797
Accounts payable, customer deposits,
and other current liabilities (36,674) (48,056)
Net cash provided by operating activities (465,338) 62,746
Cash flows from investing activities:
Purchase of equipment (75,458) (9,005)
Cash flows from financing activities:
Short-term borrowing 279,996 159,110
Long-term borrowing (58,422) (154,725)
Proceeds From Equity Capital 285,695 0
Net cash used for financing activities 507,269 4,384
Effect of exchange rate on cash 29,679 23,005
Net increase (decrease) in cash (3,848) 81,130
Cash, beginning of year 53,934 30,564
Cash, end of period 50,086 111,694
Cash paid during the year for:
Income taxes $ 0 $ 0
Interest $ 298,727 $ 304,866
The accompanying notes are an integral part
of the consolidated financial statements
F-4
44
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial
position of the Company for the interim period presented.
2. Promotional costs are expensed as they are incurred.
3. The Company takes a physical inventory at the end of the second quarter
(October 31,) and at year-end (April 30). At the end of each month and
at the end of the first quarter (July 31) and the third quarter
(January 31), inventories are adjusted to purchases, production and
shipments.
4. The financial statements of the Company's foreign subsidiary, Muebles
Wellington Hall, S.A., have been translated into U.S. dollars in
accordance with FASB Statement No. 52. All balance sheet accounts have
been translated using the current ("spot") exchange rates at the
balance sheet date or 13.03 lempiras to 1 U.S. Dollar. Income
statement amounts have been translated using the weighted average
exchange rate which for the period was 12.42 lempira to 1 U.S. Dollar.
The gains and losses resulting from the change in exchange rates
during the quarter have been reported separately as a component of
shareholders' equity entitled "Cumulative Translation Adjustments."
Net currency transaction gains or losses which occur during the
quarter are included in net earnings and amounted to approximately
$7,800 and $8,200, during the three quarters ended January 31, 1997
and 1996, respectively.
5. Subsequent significant events and changes following the third quarter
ended January 31, 1997 have occurred:
On March 10, 1997, the Company and the Overseas Private Investment
Corporation ("OPIC") executed an agreement restructuring the Loan
Agreement between Wellington Hall Caribbean Corporation and OPIC. The more
significant elements of the restructuring are:
A. A grace period on principal payments for one year beginning on
July 31, 1996
B. Reducing the amount of quarterly principal payments from
$61,937 to 30,969 beginning with the payment due on July 31,
1997.
C. The interest rate on the loan will be changed from 12% per annum
to 10% effective November 1, 1996.
As a result of the foregoing, "Current Maturities on Long Term Debt" was
reduced by $309,666 and added to "Long-Term Debt Less Current Maturities"
as reflected on the January 31, 1996 balance sheet.
As of September 1, 1996, the Company and Mr. Arthur F. Bingham entered
into an agreement that was amended as of February 10, 1997. Pursuant to
the agreement, Mr. Bingham advanced $285,694 to the Company in
October 1996 to be repaid within two years. On February 12, 1997,
Mr. Bingham purchased 600,000 shares of the Company's common stock at a
price of $.50 per share, which purchase price was paid by cancellation of
the foregoing loan and for an additional investment of $14,306.
As a result of this transaction, "Long Term Debt, Less Current
Maturities" will be reduced $285,304, "Other Current Liabilities" will
be reduced $14.306 and paid in capital will be increased by $300,000,
all during the quarter ended January 31, 1997. The total shares of
common stock outstanding will be increased by 600,000 shares to a
total of 2,289,887 shares.
F-5
45
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Subsequent significant events and changes following the third quarter
ended January 31, 1997 have occurred (Continued)
On January 16, 1996, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount
of $250,000. No borrowings have been made to date. Outstanding
borrowings under this facility will bear interest at the rate of prime
plus 1 1/2%, payable monthly. Principal payments will be due on
demand. The facility is secured by all of the present and future
personal property assets of Wellington Hall.
On February 10, 1997, the Board of Directors of the Company adopted,
subject to shareholder approval, the 1997 Stock Option and Restricted
Stock Plan (the "Plan") that permits the Company to grant incentive
stock options ("ISO's"), nonqualified stock options or restricted
stock awards up to an aggregate of 1,200,000 shares of the Company's
common stock. The Plan has a ten-year term, and will be administered
by an option committee of nonemployee directors (the "Committee").
On February 10, 1997 the Company granted stock options to Ralph L.
Eskelsen and Arthur F. Bingham pursuant to the Plan. These options
may not be exercised prior to shareholder approval of the Plan.
Eskelsen was granted an ISO to purchase 300,000 shares of Common Stock
at $0.50 per share. Eskelsen may exercise the ISO to the extent of
200,000 on or after September 1, 1997 up to and including February 1,
1998 and may exercise the ISO in full on or after January 1, 1998 up
to and including February 1, 1998. If not sooner terminated, the ISO
will terminate three months after Eskelsen's termination of employment
with the Company for any reason other than death or three months after
Eskelsen's death. In no event will the ISO be exercisable after it
expires by its terms. The option price may be paid in U.S. dollars or
in Honduran currency at the exchange rate on the date of exercise.
Bingham received the following ISOs to purchase shares of Common Stock:
Option A. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.50 per share. Option A becomes exercisable
on September 1, 1998 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory (both as defined in the
option agreement) from May 1, 1997 through April 30, 1998 equal or
exceed $2,500,000.
Option B. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.80 per share. Option B becomes exercisable
on September 1, 1999 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory from May 1, 1998 through
April 30, 1999 equal or exceed $2,700,000.
Option C. Option to purchase 150,000 shares of Common Stock
at an exercise price of $0.50 per share. Option C becomes exercisable
on September 1, 2000 up to and including February 9, 2004, if
Commissioned Retail Sales in the Territory from May 1, 1999 through
April 30, 2000 equal or exceed $3,000,000.
Bingham also received nonqualified options to purchase 150,000 shares
of Common Stock at an exercise price of $1.30 per share. The options
may be exercised at any time from the date of grant until February 9,
2004.
If not sooner terminated, the options will terminate three months
after Bingham's termination of employment with the Company for any
reason other than death or twelve months after Bingham's death. In no
event will any option be exercisable after such option expires by its
terms.
F-6
46
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Wellington Hall, Limited and Subsidiaries
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of Wellington
Hall, Limited and Subsidiaries as of April 30, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We did not audit the financial statements of Muebles Wellington Hall, S.A., a
wholly-owned subsidiary, which statements reflect total assets of $1,693,959
and $1,852,435, respectively, as of April 30, 1996 and 1995, and total revenues
of $1,273,301 and $1,897,449, respectively, for the years ended April 30, 1996
and 1995. These statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Muebles Wellington Hall, S.A., is based solely on the report of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wellington Hall, Limited and
Subsidiaries as of April 30, 1996 and 1995, and the results of their
operations, and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
TURLINGTON AND COMPANY, L.L.P.
Lexington, North Carolina
July 12, 1996
F-7
47
Report of Independent Auditors
(Translated from Spanish)
To the Stockholders of
Muebles Wellington Hall, S.A. de C.V.
We have audited the accompanying balance sheets of Muebles Wellington Hall,
S.A. de C.V. (a Honduran Corporation, 99.7% subsidiary of Wellington Hall
Caribbean Co.) as of April 30, 1996 and 1995, and the related statements of
income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Honduras. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
We converted Honduras Generally Accepted Accounting Principles Standards to
United States GAAP Standards which resulted in no material changes to the
financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Muebles Wellington Hall, S.A.
de C.V. as of April 30, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
principles in Honduras.
MORALES PALAO WILLIAM
Y ASOCIADOS
Ernst & Young International
May 22, 1996
Honduras, C.A.
F-8
48
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30
ASSETS 1996 1995
Current assets:
Cash:
Cash on hand $ 400 $ 400
Cash in demand deposits 55,356 30,892
Accounts receivable:
Trade 756,872 915,013
Less, allowance for doubtful accounts (43,800) (28,000)
Note receivable - officer (Note 2) 27,908 40,909
Inventories (Note 3) 4,571,015 4,718,867
Prepaid expenses 134,076 175,688
Deferred income taxes 14,327 10,967
------------ -----------
5,516,154 5,864,736
------------ -----------
Property and equipment:
Cost 2,173,110 2,258,950
Less, accumulated depreciation 1,218,540 1,142,886
------------ -----------
954,570 1,116,064
------------ -----------
Other assets:
Deferred income taxes 94,537 91,230
Other 36,053 36,197
------------ -----------
130,590 127,427
------------ -----------
$ 6,601,314 $ 7,108,227
============ ===========
LIABILITIES
Current liabilities:
Current maturities on long-term debt (Note 6) $ 347,755 $ 218,840
Notes payable - other (Note 5) 1,415,698 1,375,226
Accounts payable - trade 481,797 649,258
Customer deposits 74,139 104,370
Other current liabilities 276,159 310 ,822
------------ -----------
2,595,548 2,658,516
Noncurrent liabilities:
Long-term debt, less current maturities (Note 6) 1,128,907 1,419,606
Deferred compensation accrual 216,000 192,000
------------ -----------
3,940,455 4,270,122
------------ -----------
SHAREHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares; no par;
shares issued and outstanding 1996 and 1995
- 1,689,887 3,054,531 3,054,531
Preferred stock; authorized 5,000,000 shares; $5 par;
no shares issued and outstanding for 1996 and 1995 -0- -0-
Cumulative translation adjustments (1,669,945) (1,419,125)
Retained earnings 1,276,273 1,202,699
------------ -----------
2,660,859 2,838,105
------------ -----------
$ 6,601,314 $ 7,108,227
============ ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-9
49
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED SHAREHOLDERS' EQUITY
Years Ended April 30
1996 1995
---- ----
Common stock:
Authorized 6,000,000 shares; no par;
Balances, beginning and end of years
with no change during the years $ 3,054,531 $ 3,054,531
------------ ------------
Preferred stock:
Authorized 5,000,000 shares; $5 par;
issued and outstanding beginning and
end of years -0- -0-
------------ ------------
Cumulative translation adjustments:
Balances, beginning of years (1,419,125) (1,231,705)
Translation of foreign currency statements (250,820) (187,420)
------------ ------------
Balances, end of years (1,669,945) (1,419,125)
------------ ------------
Retained earnings:
Balances, beginning of years 1,202,699 980,044
Net income for the years 73,574 222,655
------------ ------------
Balances, end of years 1,276,273 1,202,699
------------ ------------
$ 2,660,859 $ 2,838,105
============ ============
The accompanying notes are an integral part
of the consolidated financial statements
F-10
50
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 30,
1996 1995
------ -----
Revenue:
Sale of furniture $ 5,989,959 $ 7,260,491
Other income 2,464 3,614
----------- -----------
5,992,423 7,264,105
----------- -----------
Costs and expenses:
Cost of goods sold 4,143,692 5,057,079
Other operating, selling, general,
and administrative expenses 1,390,392 1,629,387
Interest expense 388,829 335,951
----------- -----------
5,922,913 7,022,417
----------- -----------
Income before income taxes (benefits) 69,510 241,688
Income taxes (benefits) (4,064) 19,033
----------- -----------
Net income for the years $ 73,574 $ 222,655
=========== ===========
Earnings per share of common stock:
Primary and assuming full dilution:
Net income for the years $ .04 $ .13
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-11
51
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30,
1996 1995
---------- ----------
Cash flows from operating activities:
Net income for the years $ 73,574 $ 222,655
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 111,149 120,568
Deferred compensation 24,000 24,000
Deferred income taxes (6,667) 9,491
Changes in assets and liabilities:
Accounts receivable 164,231 98,130
Note receivable, officer 13,001 21,047
Inventories (71,750) (289,599)
Prepaid expenses 37,297 (2,866)
Other assets (6,363) (16,033)
Accounts payable, customer deposits,
and other current liabilities (240,955) 107,896
---------- ----------
Net cash provided by operating activities 97,517 295,289
---------- ----------
Cash flows from investing activities:
Purchase of equipment (26,947) (73,705)
---------- ----------
Cash flows from financing activities:
Short-term borrowings 69,533 (80,771)
Payments on long-term debt (125,354) (157,622)
---------- ----------
Net cash used for financing activities (55,821) (238,393)
---------- ----------
Effect of exchange rate changes on cash 9,715 6,416
---------- ---------
Net increase (decrease) in cash 24,464 (10,393)
Cash, beginning of years 31,292 41,685
---------- ---------
Cash, end of years $ 55,756 $ 31,292
========== =========
Cash paid during the years for:
Income taxes $ 10,499 $ 16,443
========== =========
Interest $ 415,494 $ 334,689
========== =========
The accompanying notes are an integral part
of the consolidated financial statements
F-12
52
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended April 30, 1996 and 1995
1. Summary of Significant Accounting Policies:
These consolidated financial statements were prepared on the basis
of generally accepted accounting principles. The more significant
of these principles are described as follows:
Inventories are stated at the lower of cost or market with cost
computed by use of the first-in, first-out method. Provision has
been made for obsolete and slow moving inventory.
Property and equipment is carried at cost less accumulated
depreciation. New assets and expenditures which substantially
increase the useful lives of the existing assets are capitalized.
Maintenance and repairs are expensed as incurred. Depreciation is
computed by use of the straight-line method over the estimated
useful lives of the assets.
The weighted average number of shares of common stock outstanding
and "common stock equivalents" are totaled in determining both
primary and fully diluted earnings per share.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Wellington Hall Caribbean
Corp. and Muebles Wellington Hall, S.A. All intercompany accounts
and transactions have been eliminated in consolidation. The Muebles
Wellington Hall, S.A. subsidiary was formed during the year ended
April 30, 1990 and accounted for as a purchase.
The financial statements of foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52. All balance sheet accounts
have been translated using the current exchange rates at the balance
sheet date. Income statement amounts have been translated using the
average exchange rate for the year. The gains and losses resulting
from the change in exchange rates during the year have been reported
separately as a component of shareholders' equity entitled
"Cumulative Translation Adjustments". Net currency transaction
gains and (losses) which occur during the year are included in net
earnings and amounted to approximately $11,969 and ($690),
respectively, during the years ended April 30, 1996 and 1995.
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-13
53
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Note Receivable - Officer:
On January 30, 1992, Hoyt Hackney, President and Chief Executive
Officer, exercised options and awards for 180,000 shares of common
stock at the option price of $.80 per share resulting in a net
increase in common stock of $144,000. This increase was
accomplished by cash of $40,000 being paid over to the Company
along with the issuance of a demand note to the Company by Hoyt
Hackney of $104,000. The note receivable - officer is
collateralized by the assignment of the interest the officer has in
the Company's deferred compensation accrual account and bears
interest at the federal rate as issued from time to time.
The note balance at April 30, 1996 and 1995 was $27,908 and $40,909,
respectively.
3. Inventories:
Inventories consisted of the following:
1996 1995
---- ----
Finished goods $1,642,115 $1,820,214
Work-in-process 2,057,076 1,734,905
Raw materials 871,824 1,163,748
---------- ----------
$4,571,015 $4,718,867
========== ==========
4. Property and Equipment:
The major classes are as follows:
1996 1995
---- ----
Land and buildings $1,121,207 $1,145,345
Machinery and equipment 887,479 932,840
Furniture, fixtures and other equipment 164,424 180,765
---------- ----------
$2,173,110 $2,258,950
========== ==========
Depreciation expense for the years ended April 30, 1996 and 1995
amounted to $111,149 and $120,568, respectively.
5. Short-term Loans:
The Company has a demand loan payable to Lexington State Bank for
$90,000 and $100,000, respectively, at April 30, 1996 and 1995.
The Company has a line of credit agreement for short-term debt with
Lexington State Bank. The bank agreed to extend to the Company in
the form of a line of credit the lesser of $1,200,000 or 70% of the
Company's accounts receivable less than 60 days old, 50% of the
finished goods inventory, and 10% of the work-in-process and raw
materials inventories which sum amounted to $973,964 at April 30,
1996 and $1,503,542 at April 30, 1995. The Company executed a
$1,200,000 demand promissory note against which the
F-14
54
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Short-term Loans (Continued):
bank shall advance funds at the Company's request. Interest is at
the rate of 1% above prime. This agreement is reviewed annually for
renewal.
At April 30, 1996 and 1995, $1,113,000 and $1,099,000, respectively,
was advanced under this agreement. This loan is secured by all
present and future personal property assets of the Company.
The Company had short-term loans with two Honduran banks with
interest rates of 25% in the amount of $212,698 and $176,226,
respectively, at April 30, 1996 and 1995. The banks have a second
mortgage on fixed assets as security for these loans.
6. Long-term Debt:
Long-term debt consisted of the following:
1996 1995
---- ----
E. Kemm:
Interest payable monthly at 1%
above prime $ 25,000 $ 25,000
Overseas Private Investment Corporation:
Interest rate 12.00%, payable in
quarterly installments of $61,937
plus interest 1,021,968 1,145,844
Lexington State Bank:
Interest rate 9.75% and 8.25%,
payable in monthly installments
of $7,000 with interest at 1.5%
above prime 429,694 467,602
---------- ----------
1,476,662 1,638,446
Less, current maturities 347,755 218,840
---------- ----------
$1,128,907 $1,419,606
========== ==========
The weighted average interest rate paid E. Kemm amounted to 9.61% and
9.00%, respectively, for the years ended April 30, 1996 and 1995.
E. Kemm is a stockholder and an officer of the Company.
The Overseas Private Investment Corporation loan is secured by a first
lien on all real estate and all current and future fixed assets of
Muebles Wellington Hall, S.A. and a security interest in the Sales
Agreement between Muebles Wellington Hall, S.A. and Wellington Hall
Caribbean Corp.
F-15
55
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Long-term Debt (Continued)
The Lexington State Bank loan is secured by a first lien on all assets
of Wellington Hall, Limited.
The projected payments of long-term debt in each of the five years
subsequent to April 30, 1996 are:
Year Ending April 30 Amount
-------------------- ------
1997 $347,755
1998 296,277
1999 301,226
2000 306,687
2001 64,941
7. Capital Stock:
The Company, in accordance with its long-term loan agreement and line
of credit with Lexington State Bank, is restricted from paying
dividends on its capital stock without prior written consent of the
bank.
F-16
56
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Income Taxes:
At April 30, 1996, the Company had federal operating loss
carryforwards of $62,373 that expire in 2010 and 2011, and state net
operating loss carryforwards of $975,358 that expire in 1997, 1998,
2000, and 2001. For financial reporting purposes, a valuation
allowance of $116,734 has been recognized to offset the deferred tax
assets related to the carryovers and certain other deferred tax
assets.
At April 30, 1995, the Company had a federal operating loss
carryforward of $24,282 that expires in 2010, and state net
operating loss carryforwards of $884,657 that expire in 1997, 1998,
and 2000. For financial reporting purposes, a valuation allowance
of $45,737 has been recognized to offset the deferred tax assets
related to the state net operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
assets and liabilities are as follows:
1996 1995
---- ----
Deferred tax assets:
Book over tax amortization $ 10,059 $ 16,024
Book allowance for doubtful accounts 14,327 10,967
Tax over book inventory 42,402
Deferred compensation 84,478 75,206
State net operating loss carryforward 49,938 45,737
Federal net operating loss carryforward 24,394
--------- --------
225,598 147,934
Valuation allowance for deferred
tax assets (116,734) (45,737)
--------- --------
Deferred tax assets $ 108,864 $102,197
========= ========
Classification of the Company's Consolidated Balance Sheets is as
follows:
1996 1995
---- ----
Current $ 14,327 $ 10,967
Noncurrent 94,537 91,230
-------- --------
$108,864 $102,197
======== ========
There follows reconciliations of the income taxes per the income tax
returns with the income tax deductions per the Consolidated Statements of
Income:
1996 1995
---- ----
Amounts shown by returns (net) $ 2,603 $ 9,542
Deferred income taxes (6,667) 9,491
-------- -------
(4,064) $19,033
======== =======
Effective income tax rates (5.8%) 7.8%
======== =======
F-17
57
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Income Taxes (Continued):
No provision has been made for U. S. income taxes on unremitted
earnings of the foreign subsidiary (approximately $1,094,000 and
$1,072,000, respectively, at April 30, 1996 and 1995) since it is
the present intention of management to indefinitely reinvest these
earnings.
The components of income before income taxes are as follows:
1996 1995
------- ---------
Domestic $47,499 $(134,286)
Foreign 22,011 375,974
------- ---------
$69,510 241,688
======= =========
Federal, foreign, and state income taxes consisted of the
following:
1996 1995
------- --------
Federal $(5,809) $ 9,491
Foreign 36 1,122
State 1,709 8,420
------- --------
$(4,064) $ 19,033
======= ========
The following schedule reconciles the differences between the U. S.
federal income tax rate and the effective tax rate:
1996 1995
-------- --------
Tax computed at the U. S. federal rate 34.0% 34.0%
Increases (decreases) resulting from:
State income tax, net of federal benefit 2.4 2.3
Foreign income taxed at
different rates (10.7) (34.0)
Deferred income taxes (9.6) 4.0
Nondeductible expenses and benefit
of domestic net operating loss (17.4)
Other (4.5) 1.5
(5.8%) 7.8%
----- ------
At April 30, 1994, the Company had the following carryovers subject
to certain restrictions of the tax laws and regulations. Generally,
jobs credits may be carried over for fifteen years subject to the
provisions in the Tax Reform Act of 1986:
Year Ended Jobs
April 30 Credits
-------------- -------
1985 $1,914
1986 2,754
1987 2,270
------
$6,938
======
F-18
58
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Financial Information Relating to Foreign and Domestic Operations and
Export Sales:
1996 1995
------------ --------------
Sales to unaffiliated customers:
United States $5,985,826 $7,226,030
Republic of Honduras 4,133 34,461
---------- ----------
Total sales $5,989,959 $7,260,491
========== ==========
Sales (export sales) or transfers between
geographic areas:
Sales from Republic of Honduras subsidiary
to United States parent company, at market
value (export sales) $1,269,168 $1,851,165
========== ==========
Transfers from United States parent
company to Republic of Honduras subsidiary
of materials and supplies, at cost $ 211,206 $ 316,244
========== ==========
1996 1995
---- ----
Operating profit:
United States $ 333,693 $ 129,033
Republic of Honduras 124,646 448,606
---------- ----------
Income before interest and
income taxes $ 458,339 $ 577,639
========== ==========
Identifiable assets:
United States $4,907,355 $5,255,792
Republic of Honduras 1,693,959 1,852,435
---------- ----------
Total assets $6,601,314 $7,108,227
========== ==========
10. Leases:
The Company leases showroom space and office equipment under
noncancelable leases expiring April 14, 1999.
Net minimum annual lease payments on the foregoing leases amount to
$104,066 for 1997, $103,007 for 1998, and $34,218 for 1999.
Net lease expenses of the foregoing leases for the years are
summarized as follows:
1996 1995
--------- ----------
Lease expense $ 86,478 $ 103,717
========= ==========
F-19
59
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Contingent Liability:
In accordance with the Honduran Labor Code, the Company has the
obligation to pay severance compensation to its employees in the
event of dismissal under certain specific circumstances. It is the
policy of the Company to pay such severance payments in accordance
with the law. At April 30, 1996 and 1995, the estimated contingent
liability aggregated approximately $133,488 and $74,242,
respectively. The contingent liability of $133,488 represents the
amount of severance pay owed if the Company's entire Honduran
operation were closed down during fiscal 1997. FAS 112 requires that
a liability be accrued only if the triggering event is probable. In
the opinion of management of the Company, it was not deemed probable
that the Honduran operations would be closed during fiscal 1997.
12. Earnings Per Share:
Earnings per share of common stock are based on the average number
of shares of common stock outstanding during each period.
For the years ended April 30, 1996 and 1995, there were no common
share equivalents were outstanding. When dilutive, stock options
are included as share equivalents using the treasury stock
method. The number of shares used in computing primary and fully
diluted earnings per share were 1,689,887.
13. Incentive Plan:
The Company has an Incentive Plan covering certain officers and key
employees who have the greatest opportunities to contribute to
current earnings and the future success of the Company's operations.
The amount determined under the Incentive Plan is based upon profits
of the Company.
On January 1, 1987, the President of the Company executed a new
employment contract and forfeited his rights under the Incentive
Plan as one of the conditions of the new contract.
14. Deferred Compensation Agreement:
On May 8, 1987, the Company adopted a Deferred Compensation
Agreement with the President of the Company which will provide for
the payment of $50,000 per year for 10 years in monthly installments
when the President reaches age 62 and retires. The Agreement
provides that if he dies before he has received the total payments
or if he dies before retirement, then his beneficiary shall receive
the benefit balance thereof in monthly installments. In future
years, the deferred compensation will be accrued over the remaining
term of service by the President on a present value basis. The
accruals for the years ended April 30, 1996 and 1995 were $24,000.
15. Profit Sharing Plan:
During the year ended April 30, 1987, the Company adopted a combined
Profit Sharing and Salary Reduction Plan. The Company contributes
50% of the employee contributions with a 2% maximum Company
contributions on each employee's salary. The Plan also has a
feature whereby the Directors can set aside certain profits as
determined annually by the Directors. The Profit Sharing and Salary
Reduction Plans are tax exempt under applicable sections of the
Internal Revenue Code. The contributions by the Company for the
years ended April 30, 1996 and 1995 were $8,143 and $9,650,
respectively.
F-20
60
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. Quarterly Financial Data (Unaudited):
The following is a summary of the quarterly results of operations
for the years ended April 30, 1996 and 1995:
Fiscal 1996 Quarters
--------------------
First Second Third Fourth
----- ------ ----- ------
Net Sales $1,473,474 $1,614,388 $1,496,387 $1,405,710
Cost of goods sold 981,741 1,095,476 1,111,108 955,367
Net income (loss) 44,756 13,361 (31,015) 46,472
Net income (loss) per
common share (primary
and fully diluted) .03 .01 (.02) .03
Quarterly Financial Data (Unaudited):
Fiscal 1995 Quarters
First Second Third Fourth
----- ------ ----- ------
Net Sales $1,823,644 $1,848,345 $1,975,615 $1,612,887
Cost of goods sold 1,192,351 1,161,284 1,356,594 1,346,850
Net income (loss) 131,891 170,660 113,678 (193,574)
Net income (loss) per
common share (primary
and fully diluted) .08 .10 .07 (.12)
17. Nature of Operations and Concentration of Credit Risk:
Wellington Hall, Limited and Subsidiary, Muebles Wellington Hall,
S.A., are manufacturers of wall systems, dining room, bedroom and
accent and occasional furniture, with plant facilities located in
Lexington, North Carolina and San Pedro Sula, Honduras. The accent
and occasional furniture accounts for approximately 40% of the
Company's total sales. The remaining 60% of total sales is split
about evenly over the other three product lines. Wellington Hall
Caribbean Corp., the other subsidiary, is a sales organization
located in Lexington, North Carolina that is responsible for selling
Muebles Wellington Hall, S.A.'s products to both the general public
and Wellington Hall, Limited. The Company grants credit to customers
who are located primarily in the United States.
The Company's policy is to maintain its cash balances in reputable
financial institutions insured by the Federal Deposit Insurance
Corporation which provides $100,000 of insurance coverage on each
customer's cash balances.
F-21
61
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosure
About Fair Value of Financial Instruments", requires that the
Company disclose estimated fair values for its financial
instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash:
The carrying amount approximates fair value.
Notes receivable - officer:
The carrying amount approximates fair value.
Note payable - other:
Due to the fact that these are short-term notes payable within
one year, the carrying amount approximates fair value.
Long-term debt:
The fair value of long-term debt is estimated based on the
current rates the Company could obtain on debt of the same
remaining maturities.
The estimated fair values of the Company's financial instruments as
of April 30, 1996 are as follows:
Carrying Fair
Amount Value
------ -----
Cash $ 55,756 $ 55,756
Note receivable - officer 27,908 27,908
Notes payable - other 1,415,698 1,415,698
Long-term debt 1,476,662 1,520,652
F-22
62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article IX of the Company's Amended and Restated Bylaws provides:
ARTICLE IX
Indemnification of Officers and Directors
Section 1. Indemnification Provisions. Any person who at any time
serves or has served as a director or officer, employee or agent of the
corporation or of any wholly-owned subsidiary of the corporation, or in any
such capacity at the request of the corporation for any other corporation,
partnership, joint venture, trust or other enterprise, or as a trustee or
administrator under any employee benefit plan of the corporation or of any
wholly-owned subsidiary thereof (a "Claimant"), against whom a claim shall be
made after September 25, 1986, in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
and whether or not brought by or on behalf of the corporation, including all
appeals therefrom (a "proceeding"), seeking to hold the Claimant liable by
reason of the fact that he is or was serving in such capacity (whether the
basis of such proceeding is alleged action in such official capacity or in any
other capacity while serving in such official capacity), shall have a right to
be indemnified and held harmless by the corporation against all liabilities and
litigation expenses (as hereinafter defined); provided that such
indemnification shall not be effective with respect to (a) that portion of any
liabilities or litigation expenses with respect to which the Claimant is
entitled to receive payment under any insurance policy other than a directors'
and officers' insurance policy maintained by the corporation or (b) any
liabilities or litigation expenses if the activities of the Claimant leading to
such liabilities or litigation expenses were at the time taken by such Claimant
known or believed by him to be clearly in conflict with the best interests of
the corporation.
Section 2. Definitions. As used in this Article, (a) "liabilities"
shall include, without limitation, (1) payments in satisfaction of any
judgment, money decree, excise tax, fine or penalty for which a Claimant had
become liable in any proceeding and (2) payments in settlement of any such
proceeding, subject, however, to Section 4 hereof; and (b) "litigation
expenses" shall include, without limitation, (1) reasonable costs and expenses
and attorneys' fees and expenses actually and necessarily incurred by the
Claimant in connection with any proceeding and (2) reasonable costs and
expenses and attorneys' fees and expenses in connection with the enforcement of
rights to the indemnification granted hereby or by applicable law, if such
enforcement is successful in whole or in part. The term "disinterested
directors," as used in this Article IX, shall mean directors who are not party
to the proceeding in question.
II-1
63
Section 3. Litigation Expense Advances. (a) Any litigation expenses
shall be advanced to any Claimant within 15 days of receipt by the Secretary of
the corporation of his demand therefor, together with his undertaking to repay
to the corporation such amount unless it is ultimately determined that Claimant
is entitled to be indemnified by the corporation against such expenses. The
Secretary shall forward notice of such demand and undertaking immediately to
all directors of the corporation. Any disinterested director may then, if
desired, call a meeting of a committee which shall include all disinterested
directors. No such advance shall be made if a majority of the disinterested
directors shall have determined that the litigation expenses are or have been
incurred on account of activities which at the time taken by such Claimant were
known or believed by him to be clearly in conflict with the best interests of
the corporation.
(b) No such advance of any particular items of litigation expenses
shall be made if a majority of the disinterested directors affirmatively
determines that such particular items are unreasonable. In any such case, such
directors must determine the excessive amount by which such item or items of
expense were unreasonable and the corporation shall withhold advances of
expenses only in the excessive dollar amount so determined unreasonable.
Section 4. Settlements. The corporation shall not be liable to
indemnify the Claimant for any amounts paid in settlement of any proceeding
effected without the corporation's written consent. The corporation will not
unreasonably withhold its consent to any proposed settlement.
Section 5. Approval of Indemnification Payments. Except as may be
determined in an action brought pursuant to Section 6 below, indemnification
payments by the corporation for liabilities and litigation expenses (or a
termination of the undertaking required under Section 3 above with respect to
advanced expenses) may be made only following a determination that the
activities of the Claimant were not of the kind described in Section 1(b),
which determination shall be made (a) by a majority of the disinterested
directors (if there are at least two such directors), (b) if there are not two
such directors, or if a majority of the disinterested directors so directs, by
independent legal counsel in a written opinion, (c) by a majority of the
shareholders or (d) in accordance with any other reasonable procedures
prescribed by the Board of Directors prior to the assertion of the claim for
which indemnification is sought. The reasonableness of amounts of settlements
and litigation expenses may be approved by a majority of the Board of
Directors.
Section 6. Right of Claimant to Bring Suit. If a claim under Section
1 is not paid in full by the corporation within ninety days after a written
claim has been received by the corporation, or a demand for advances is not
paid within 15 days of receipt by the corporation thereof with an undertaking
as described in Section 3, the Claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim or demand.
It shall be a defense to any such action that the Claimant's liabilities or
litigation expenses were incurred on account of activities which were at the
time taken known or believed by him to be clearly in conflict with the best
interests of the corporation, or were unreasonable, but the burden of proving
such defense shall be on the corporation. Neither the failure of the
corporation (including its
II-2
64
disinterested directors, independent legal counsel, or shareholders) to have
made a determination prior to the commencement of such action that
indemnification of the Claimant is proper in the circumstances nor an actual
determination by the corporation (including its disinterested directors,
independent legal counsel, or its shareholders) that the Claimant had not met
such applicable standard of conduct shall be a defense to the action or create
a presumption that Claimant has not met the applicable standard of conduct.
Section 7. Consideration; Personal Representatives and Other Remedies.
Any person who during such time as this Article IX of the Bylaws is in effect
serves or has served in any of the aforesaid capacities for or on behalf of the
corporation shall be deemed to be doing so or to have done so in reliance upon,
and as consideration for, the right of indemnification provided herein. The
right of indemnification provided herein shall inure to the benefit of the
legal representatives of any person who qualifies or would qualify as a
Claimant hereunder and such right shall not be exclusive of any other rights to
which such person or legal representative may be entitled apart from these
resolutions.
The North Carolina General Statutes contain provisions prescribing the
extent to which directors and officers shall or may be indemnified. These
statutory provisions are set forth below:
CH. 55 N.C. BUSINESS CORPORATION ACT
Part 5. Indemnification.
Section 55-8-50. Policy Statement and Definitions.
(a) It is the public policy of this State to enable corporations
organized under this Chapter to attract and maintain responsible, qualified
directors, officers, employees and agents, and, to that end, to permit
corporations organized under this Chapter to allocate the risk of personal
liability of directors, officers, employees and agents through indemnification
and insurance as authorized, in this Part.
(b) Definitions in this Part:
(1) "Corporation" includes any domestic or foreign
predecessor entity of a corporation in a merger or other transaction
in which the predecessor's existence ceased upon consummation of the
transaction.
(2) "Director"means an individual who is or was a director of
a corporation or an individual who, while a director of a corporation,
is or was serving at the corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A director is considered to be serving an
employee benefit plan at the
II-3
65
corporation's request if his duties to the corporation also impose
duties on, or otherwise involve services by, him to the plan or to
participants in or beneficiaries of the plan. "Director" includes,
unless the context requires otherwise, the estate or personal
representative of a director.
(3) "Expenses" means expenses of every kind incurred in
defending a proceeding, including counsel fees.
(4) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) or reasonable expenses incurred
with respect to a proceeding.
(5) "Official capacity" means: (i) when used with respect to
a director, the office of director in a corporation; and (ii) when
used with respect to an individual other than a director, as
contemplated in G.S. 55-8-56, the office in a corporation held by the
officer or the employment or agency relationship undertaken by the
employee or agent on behalf of the corporation. "Official capacity"
does not include service for another foreign or domestic corporation
or any partnership, joint venture, trust, employee benefit plan, or
other enterprise.
(6) "Party" includes an individual who was, is, or is
threatened to be made a named defendant or respondent in a proceeding.
(7) "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative,
or investigative and whether formal or informal.
Section 55-8-51. Authority to Indemnify.
(a) Except as provided in subsection (d), a corporation may
indemnify an individual made a party to a proceeding because he is or was a
director against liability incurred in the proceeding if:
(1) He conducted himself in good faith; and
(2) He reasonably believed (i) in the case of conduct in
his official capacity with the corporation, that his conduct was in
its best interests; and (ii) in all other cases, that his conduct was
at least not opposed to its best interests; and
(3) In the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
(b) A director's conduct with respect to an employee benefit plan
for a purpose he
II-4
66
reasonably believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of
subsection (a)(2)(ii).
(c) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of no contest or its equivalent is not,
of itself, determinative that the director did not meet the standard of conduct
described in this section.
(d) A corporation may not indemnify a director under this section:
(1) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation; or
(2) In connection with any other proceeding charging improper
personal benefit to him, whether or not involving action in his
official capacity, in which he was adjudged liable on the basis that
personal benefit was improperly received by him.
(e) Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation that is concluded
without a final adjudication on the issue of liability is limited to reasonable
expenses incurred in connection with the proceeding.
(f) The authorization, approval or favorable recommendation by the
board of directors of a corporation of indemnification, as permitted by this
section, shall not be deemed an act or corporate transaction in which a
director has a conflict of interest, and no such indemnification shall be void
or voidable on such ground.
Section 55-8-52. Mandatory Indemnification.
Unless limited by its articles of incorporation, a corporation shall
indemnify a director who was wholly successful, on the merits or otherwise, in
the defense of any proceeding to which he was a party because he is or was a
director of the corporation against reasonable expenses incurred by him in
connection with the proceeding.
Section 55-8-53. Advance For Expenses.
Expenses incurred by a director in defending a proceeding may be paid
by the corporation in advance of the final disposition of such proceeding as
authorized by the board of directors in the specific case or as authorized or
required under any provision in the articles of incorporation or bylaws or by
any applicable resolution or contract upon receipt of an undertaking by or on
behalf of the director to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation against
such expenses.
Section 55-8-54. Court-ordered indemnification.
II-5
67
Unless a corporation's articles of incorporation provide otherwise, a
director of the corporation who is a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court of
competent jurisdiction. On receipt of an application, the court after giving
any notice the court considers necessary may order indemnification if it
determines:
(1) The director is entitled to mandatory indemnification under G.S.
55-8-52, in which case the court shall also order the corporation to pay the
director's reasonable expenses incurred to obtain court-ordered
indemnification; or
(2) The director is fairly and reasonably entitled to indemnification
in view of all the relevant circumstances, whether or not he met the standard
of conduct set forth in G.S. 55-8-51 or was adjudged liable as described in
G.S. 55-8-51(d), but if he was adjudged so liable his indemnification is
limited to reasonable expenses incurred.
Section 55-8-55. Determination and Authorization of Indemnification.
(a) A corporation may not indemnify a director under G.S. 55-8-51
unless authorized in the specific case after a determination has been made that
indemnification of the director is permissible in the circumstances because he
has met the standard of conduct set forth in G.S. 55-8-51.
(b) The determination shall be made:
(1) By the board of directors by majority vote of a quorum consisting
of directors not at the time parties to the proceeding;
(2) If a quorum cannot be obtained under subdivision (1), by majority
vote of a committee duly designated by the board of directors (in
which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to
the proceeding;
(3) By special legal counsel (i) selected by the board of directors
or its committee in the manner prescribed in subdivision (1) or (2);
or (ii) if a quorum of the board of directors cannot be obtained under
subdivision (1) and a committee cannot be designated under subdivision
(2), selected by majority vote of the full board of directors (in
which selection directors who are parties may participate); or
(4) By the shareholders, but shares owned by or voted under the
control of directors who are at the time parties to the proceeding may
not be voted on the determination.
(c) Authorization of indemnification and evaluation as to reasonableness
of expenses shall be
II-6
68
made in the same manner as the determination that indemnification is
permissible, except that if the determination is made by special legal counsel,
authorization of indemnification and evaluation as to reasonableness of
expenses shall be made by those entitled under subsection (b)(3) to select
counsel.
Section 55-8-56. Indemnification Of Officers, Employees, and Agents.
Unless a corporation's articles of incorporation provide otherwise:
(1) An officer of the corporation is entitled to mandatory
indemnification under G.S. 55-8-52, and is entitled to apply for court-ordered
indemnification under G.S. 55-8-54, in each case to the same extent as a
director.
(2) The corporation may indemnify and advance expenses under this
Part to an officer, employee, or agent of the corporation to the same extent as
to a director; and
(3) A corporation may also indemnify and advance expenses to an
officer, employee, or agent who is not a director to the extent, consistent
with public policy, that may be provided by its articles of incorporation,
bylaws, general or specific action of its board of directors, or contract.
Section 55-8-57. Additional Indemnification and Insurance.
(a) In addition to and separate and apart from the indemnification
provided for in G.S. 55-8-51, 55-8-52, 55-8-54, 55-8-55 and 55-8-56, a
corporation may in its articles of incorporation or bylaws or by contract or
resolution indemnify or agree to indemnify any one or more of its directors,
officers, employees, or agents against liability and expenses in any proceeding
(including without limitation a proceeding brought by or on behalf of the
corporation itself) arising out of their status as such or their activities in
any of the foregoing capacities; provided, however, that a corporation may not
indemnify or agree to indemnify a person against liability or expenses he may
incur account of his activities which were at the time taken known or believed
by him to be clearly in conflict with the b interests of the corporation. A
corporation may likewise and to the same extent indemnify or agree to indemnify
a person who, at the request of the corporation, is or was serving as a
director, officer, partner, trustee, employee, agent of another foreign or
domestic corporation, partnership, joint venture, trust or other enterprise or
as a trust or administrator under an employee benefit plan. Any provision in
any articles of incorporation, bylaw, contract, resolution permitted under this
section may include provisions for recovery from the corporation of reasonable
costs, expenses, and attorneys' fees in connection with the enforcement of
rights to indemnification granted therein and may further include provisions
establishing reasonable procedures for determining and enforcing the rights
granted therein.
(b) The authorization, adoption, approval, or favorable
recommendation by the board of directors of a public corporation of any
provision in any articles of incorporation, bylaw, contract
II-7
69
or resolution, as permitted in this section, shall not be deemed an act or
corporate transaction in which a director has a conflict of interest, and no
such articles of incorporation or bylaw provision or contract or resolution
shall be void or voidable on such grounds. The authorization, adoption,
approval, or favorable recommendation by the board of directors of a nonpublic
corporation of any provision in any articles of incorporation, bylaw, contract
or resolution, as permitted in this section which occurred prior to July 1,
1990, shall not be deemed an act or corporate transaction in which a director
has a conflict of interest, and no such articles of incorporation, bylaw
provision, contract or resolution shall be void voidable on such grounds.
Except as permitted in G.S. 55-8-31, no such bylaw, contract, or resolution not
adopted, authorized, approved or ratified by shareholders shall be effective as
to claims made or liabilities asserted again any director prior to its
adoption, authorization, or approval by the board of directors.
(c) A corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise, against liability asserted against or incurred by him in that
capacity or arising from his status as a direct officer, employee, or agent,
whether or not the corporation would have power to indemnify him against the
same liability under any provision of this Chapter.
Section 55-8-58. Application of Part.
(a) If articles of incorporation limit indemnification or advance for
expenses, indemnification and advance for expenses are valid only to the extent
consistent with the articles.
(b) This Part does not limit a corporation's power to pay or
reimburse expenses incurred by a director in connection with his appearance as
a witness in a proceeding at a time when he has not been made a name defendant
or respondent to the proceeding.
(c) This Part shall not affect rights or liabilities arising out of
acts or omissions occurring before July 1, 1990.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses of issuance and distribution are estimated as follows:
Registration Fees $ 292
Subscription Agent Fees $ 4,000
Costs of Printing $ 4,000
II-8
70
Legal Fees and Expenses $30,000
Accounting Fees and Expenses $ 3,000
Miscellaneous Expenses $ 3,708
Total Expenses $45,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the employment of Arthur F. Bingham as Senior
Executive Vice President of Sales and Marketing, Mr. Bingham made a loan to the
Company of $285,694 at terms included in an addendum to his Employment and
Stock Purchase Agreement with the Company. On February 12, 1997, Mr. Bingham
purchased 600,000 shares of Common Stock of the Company at a purchase price of
$.50 per share, which purchase price was paid by cancellation of the foregoing
loan and for an additional investment of $14,306. Inasmuch as Mr. Bingham is an
executive officer of the Company and had access to all available information
about the Company, the Company relied on Section 4(2) of the Securities Act to
exempt said offer and sale from registration.
ITEM 27. EXHIBITS.
The following exhibits, listed in accordance with the number assigned
to each in the exhibit table of Item 601 of Regulation S-B, are included in
Part II of this Registration Statement. Exhibit numbers omitted are not
applicable.
EXHIBIT NO. EXHIBIT
- ----------- -------
*3(a) Amended and Restated Charter of Wellington Hall, Limited, filed as Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1987
*3(b) Amended and Restated Bylaws of Wellington Hall, Limited, filed as Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1987
5 Opinion of Schell Bray Aycock Abel & Livingston P.L.L.C.
*10(a) Wellington Hall Executive Stock Plan, filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended April 30, 1986
II-9
71
*10(b) Employment and Executive Deferred Compensation Agreement between the Company and Hoyt M. Hackney Jr.,
effective January 1, 1987 and May 8, 1987, respectively, filed as Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1987
*10(c) Note - Security Agreement dated April 23, 1986 between the Company and Lexington State Bank, filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1987
*10(d) Loan Agreement dated April 15, 1987 between the Company and Lexington State Bank, filed as Exhibit 4.2
to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1987
*10(e) Note - Security and North Modification Agreements dated April 26, 1988 between the Company and
Lexington State Bank, filed as Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1988
*10(f) Loan Agreement dated December 22, 1989, as amended on July 19, 1990, between Wellington Hall Caribbean
Corporation and the Overseas Private Investment Corporation, filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended April 30, 1990
*10(g) Subordination Agreement, dated December 22, 1989 between Wellington Hall Limited, Wellington Hall
Caribbean Corporation, Muebles Wellington Hall, S.A., and the Overseas Private Investment Corporation,
filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30,
1990
**10(h) Loan Agreement dated July 24, 1990 between the Company and Lexington State Bank
*10(i) Amendment to Loan Agreement dated February 1, 1991 between the Company and Lexington State Bank, filed
as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1991
*10(j) Loan Agreement dated August 20, 1991 between Muebles Wellington Hall, S.A. and Banco de Honduras, S.A.,
filed as Exhibit A to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1991
*10(k) Amendment to Loan Agreement dated April 10, 1992 between the
II-10
72
Company and Lexington State Bank, filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1992
*10(l) Promissory Note dated January 23, 1992 between the Company and Hoyt M. Hackney, Jr., filed as Exhibit
10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1992
*10(m) Amendment to Executive Deferred Compensation Agreement dated January 23, 1992 between the Company and
Hoyt M. Hackney, Jr., filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1992
*10(n) Loan Agreement, dated June 28, 1993, between the Company and Lexington State Bank, filed as Exhibit
10.14 to the Company's Annual Report on Form 10-KSB for the fiscal year ended April 30, 1993
*10(o) Lease Agreement dated November 1, 1993 by and between North Hamilton Corporation and the Company, filed
as Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1994
*10(p) Amendment to the Loan Agreement dated September 1, 1994 between Wellington Hall Caribbean Corporation
and the Overseas Private Investment Corporation, filed as Exhibit 10.16 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended April 30, 1995
**10(q) Promissory Note dated January 16, 1997 between the Company and Lexington State Bank
*10(r) Amended Loan Agreement dated March 10, 1997 with the Overseas Private Investment Corporation,
filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1997
*10(s) Employment and Stock Purchase Agreement dated September 1, 1996 between the Company and Arthur F.
Bingham, filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended July 31, 1996.
**10(t) Employment Agreement dated December 1, 1997 between the Company and Ralph L. Eskelsen
**10(u) Addenda to Employment and Stock Purchase Agreement dated September 1, 1996 between the Company and
Arthur F. Bingham dated February 10,
II-11
73
1997
**10(v) 1997 Stock Option and Restricted Stock Plan
**10(w) Nonqualified Stock Option Agreement dated as of February 10, 1997 between the Company and Arthur F.
Bingham
**10(x) Incentive Stock Option Agreement dated as of February 10, 1997 between the Company and Arthur F.
Bingham
**10(y) Incentive Stock Option Agreement dated as of February 10, 1997 between the Company and Ralph L.
Eskelsen
**10(z) Form of Letter Agreement between the Company and Lexington State Bank
**11 Statement re Computation of Per Share Earnings
*22 Subsidiaries of the Registrant, filed as Exhibit 22 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended April 30, 1996
23(a) Consent of Schell Bray Aycock Abel & Livingston P.L.L.C. is contained in its opinion filed as Exhibit 5
23(b) Consent of Turlington & Company, L.L.P.
23(c) Consent of Morales Palao William Y Asociados, Ernst & Young International
**25 Power of Attorney (included on Signature Page)
**99(a) Form of Stock Order Form
**99(b) Form of Transmittal Letter to Shareholders
- ----------------------------------
* Incorporated by reference to the statement or report indicated
**Previously filed
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes: (1) To file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by section
10(a)(3) of the Securities Act of 1933, as amended; (ii) to reflect in the
prospectus any facts or events which, individually or together, represent a
fundamental change from the information included in this registration
statement; and (iii) to include any additional or changed material information
with respect to the plan of distribution from that which is included in this
registration statement. (2) That, for the purpose of
II-12
74
determining liability under the Securities Act of 1933, as amended, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at such time shall be treated as the initial bona fide offering thereof. (3)
That, for the purpose of determining liability under the Securities Act of 1933,
as amended, information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1) or (b)(4) or Rule
497(h) under the Securities Act shall be treated as part of this registration
statement at the time of effectiveness. (4) To remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned registrant undertakes to, before any unsubscribed for
shares of Common Stock are offered and sold to the public, supplement the
Prospectus to include the results of the subscription offer and the terms of
any later reoffering. If the registrant makes any public offering of the
securities on terms different from those on the cover page of the Prospectus,
the Registrant will file a post-effective amendment to state the terms of such
offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-13
75
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of
Lexington, State of North Carolina, on April 8, 1997.
WELLINGTON HALL, LIMITED
By: /s/ Hoyt M. Hackney
-------------------------------------
Hoyt M. Hackney, President, Chief
Executive Officer, Chief Financial
Officer, Treasurer and Director
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Hoyt M. Hackney President, Chief Executive April 8, 1997
- ---------------------------------- Officer, Chief Financial
Hoyt M. Hackney Officer, Treasurer (Chief
Accounting Officer) and Director
* Executive Vice President April 8, 1997
- ---------------------------------- and Director
Ernst B. Kemm
* Chairman of the Board April 8, 1997
- ---------------------------------- of Directors
Donald W. Leonard
* Secretary and Director April 8, 1997
- ----------------------------------
William W. Woodruff
* Senior Executive Vice President April 8, 1997
- ---------------------------------- of Sales and Marketing and Director
Arthur F. Bingham
* Hoyt M. Hackney, by signing his name hereto, does sign this document on behalf
of the person indicated above pursuant to a Power of Attorney duly executed by
such person and filed with the Securities and Exchange Commission.
By: /s/ Hoyt M. Hackney
-------------------------------------
Hoyt M. Hackney
Attorney-in-Fact
II-14