FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 30, 1998
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from
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Commission File Number 0 3928
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WELLINGTON HALL, LIMITED
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(Name of small business issuer in its charter)
NORTH CAROLINA 56-0815012
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
425 JOHN WARD ROAD 27295
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 336-249-4931
Securities registered under section 12 (b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes ( X ) No ( )
Check if there is no disclosure of delinquent filers in response to item
405 of regulation 5-b contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment. (X)
State issuer's revenues for its most recent fiscal year: $ 5,668,472
State the aggregate market value of the voting stock held by
non-affiliates, computed by reference to the price as which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act): Approximately $174,586 as of July 30, 1998.
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable dated: 2,289,887 shares of Common
Stock (No Par) as of July 30, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III
Transitional Small Business Disclosure Form (Check One)
Yes ( ) No ( X )
Page 1 of 26
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PART I
Item 1. Description of 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 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, and (iii)
updating and upgrading catalogs and other sales aids in all distribution
channels. See "Business--Markets."
In addition to the foregoing, the Company 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.
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 has pursued a number of strategies to
improve its financial condition by raising equity capital, reducing indebtedness
and increasing working capital. Certain elements of management's plan were
implemented or developed in fiscal year 1997.
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.
The Company successfully 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 has been 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 reduced scheduled interest
expense by $9,910 in fiscal 1997, $18,900 in fiscal 1998 and will reduce
scheduled interest expense by about $18,900 in fiscal 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
On February 21,1997, the Company filed a registration statement with the
Securities and Exchange Commission for the offer and sale of 1,689,887 shares of
its common stock. The shares were to be offered first to the holders of record
of its outstanding common stock as of a date at or about the time that the
registration statement was to becomes effective, who would have had the right
for thirty days to purchase one additional share for each share then held at a
price of $.50 per share. Each Wellington Hall shareholder as of that date could
also have subscribe within that thirty day period for additional shares, and any
available shares would have been sold to shareholders who have subscribed
therefor on a pro rata basis. Any shares still remaining after the expiration of
the offering to Wellington Hall shareholders could have been sold to persons who
were not directors, officers or shareholders of Wellington Hall.
Primarily because of the operating losses experience in fiscal 1997 and
beyond, the aforementioned stock offering has been canceled and there are no
plans to pursued the matter further. The legal and related costs associate with
the offering were expensed during fiscal 1998.
The Offerings, had it been fully subscribed, would have increased the
Company's equity capital by about $800,000 and reduce indebtedness by a
corresponding amount. In addition to achieving a reduction in interest expenses,
management believes that the increase in equity and reduction of debt service
would have made 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
Page 2
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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 (336)
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, etc.), console
tables, mirrors, coffee tables, commodes 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 Honduran Facilities. As
described hereinbelow, WHCC, the Company's North American subsidiary,
distributes the products manufactured at the Honduran Facilities, and during
fiscal 1998, such products accounted for approximately 36% of the Company's
consolidated sales (net of intercompany sales), while products produced
domestically by the Company accounted for about 64% of its consolidated sales.
Unfinished furniture imported from the Honduran Facilities accounted for about
26% of the Company's domestically-produced sales, and the number of imports for
finishing from elsewhere was negligible. In addition, WHCC furnished the
Company's domestic operations with approximately 50% 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.
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 Honduran - produced group.
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 is harvested from segments of 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 per account versus the
cost of sales aids necessary to service the account, the requirement that it
grant credit to accounts with limited assets and with a limited credit
histories, and the inadequate means the designer normally has available to
receive delivery and service his customer. Since decorators do not generally
stock or display a significant amount of 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 both the
Company's and WHCC's products.
As part of the Company's strategy to increase its sales, the Company is
giving a high priority to maintaining quality sales materials. During fiscal
1998, one new " Accent and Occasional" product catalog was printed and
distributed to the Company's dealers. This catalogue included selected items
from the domestically produced product line including new introductions made at
the April 1997 furniture market. Other more recent activities include the
preparation of new finish samples for the Company's wall unit dealers, a new
catalog on the Woodward Collection, finish samples for the balance of the line ,
and finish display boards are being prepared for major dealers.
Page 3
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Retail Stores
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. 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 and when assigning resources for warehouse stock.
Accordingly and in the absence of a display or stock, a growing percentage of
the Company's orders received from retail stores are for items which the dealer
can only sale by utilizing the Company's catalogs, a circumstance that further
necessitates the creation and/or improvement and maintenance of the Company's
sales aids. See--"Designer Trade."
The Company had some initial success in expanding its retail distribution
or display with existing dealers though a program of "Target Accounts"
instituted in early 1996. The program involved 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 received (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
received 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 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.
By late fall of 1996 the program of "Target Accounts" stalled, perhaps due
to its substantial administrative requirements, and thereafter did not produce
additional or expanded distribution for the Company. The modest gains that the
Company realized from this program were limited to the Southeast region of the
United States. Additional marketing cost associated with this program were
expensed as they occurred and were not material. Though many elements of the
program remain part of the Company's overall marketing plan and the Company
continues its relationship with the dealers that participated in the program,
the Company has ceased sponsoring sales incentive contests for the dealers'
floor sales personnel.
Early in 1996 the Company added its own Home Page to the Internet
(furniture.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.
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 have been an important
outlet for the Company. However, the Company believes that this outlet has
diminished in importance somewhat over the last decade 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 that
trade showrooms sales have diminished to such a low level that they are no
longer of significant to the Company's marketing efforts.
Buyers Club
The Company became a vendor for the United Consumers Club ("UCC")
approximately three 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.
Page 4
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Similarly, consumer catalogs are a means of distribution that has not been
available to or utilized by the Company prior to late 1996. Since the October
1996 Furniture Market held in High Point N.C., the Company has had a limited
portion of its product lines included from time to time in the catalogs of a
major catalog company. The Company does not have a contractual relationship with
the aforementioned catalog company though the Company does expects certain of
its products to be similarly included in future editions. The catalog in which
the Company's products appeared included different types of furniture, wooden
and otherwise, in addition to that sold by the Company, as well as those
products that the catalog company markets in addition to furniture like,
clothing or electronics. Sales from theses catalog represent only a small
portion of the Company's total annual sales.
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 al 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 expected to
direct available resources to reducing indebtedness as opposed to continuing to
expand 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 calendar 1996 to curtail production to avoid
additional increases in inventory. For all of fiscal year 1998, the Company's
directed its efforts with some success toward establishing a distribution for
its proprietary line and, at the same time, toward rebuilding a dealer base for
OEM sales. During fiscal year 1998, OEM sales increased by 7.3% and accounted
for 8.5% of the Company's consolidated 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 and development, the Company's President, in
consultation with design firms, devotes 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. The development of such new products involves
producing samples of the new items for display and for the production of sales
aids with respect to such new products. The samples are constructed utilizing
production labor and facilities and from raw materials that are purchased in
very small quantities. The Company does not account the associated cost of these
samples separately, instead absorbing the expenses as production costs. The
labor costs, lost production volume and overhead absorption, and the premium
prices charged on the small quantities of raw materials that such samples
require can, in the aggregate, have a significant impact on operation results.
The Company's does not otherwise spend a material amount on 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 15
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. In addition to this sales representative, the Company's president
devotes a substantial amount of time to marketing certain categories of the
Company's products to customers not specifically covered by the sales
representative. WHCC utilizes the Company's 15 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 April 30, 1998 was $2,382,421 a
16.4 % increase from its backlog of $2,047,369 on April 30, 1997. The April 30,
1998 backlog included $1,327,111 of domestically-manufactured products, as
opposed to $1,289,542 included in the 1997 backlog. The backlog for WHCC and
Honduran-produced products, less intercompany orders, was $1,055,321 on April
30, 1998 versus $757,827 on April 30, 1997. The increases mostly reflects orders
from a new off shore account and an order from that account of approximately
$450,000 received and confirmed by a Letter of Credit received in the fourth
quarter of fiscal 1998.
In addition, the Company had a backlog of orders for new products developed
for a new import program of $631,000 at April 30,1998. Management has not
included this in the total reported backlog because of uncertainties about
quality and delivery from a new off-shore vendor.Company management is working
directly with the vendor to resolve any prohibitive problem. The Company has no
contractual relationship with this vendor.
Page 5
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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, san juan areno,
walnut, poplar, cherry, oak, maple 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 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. The program
requires that a physical inventory be taken by representatives of the government
to determine the number of suitable trees of a given variety in a particular
portion of the forest. From the inventory data, the Honduran government
calculates how quickly that particular variety of tree in that particular area
will regenerate and, then, how much can be harvested annually such the supply of
such variety can be sustained. Wood cannot be harvested or transported without a
permit that the Honduran government issues with a termination date, that
specifies the species to be harvested, the amount of wood to be harvested, and
the particular portion of forest is to be harvested and the delivery point for
the harvested wood. is to be delivered.
With respect to the Company, sustainable management works as follows: the
Honduran government solicits the Honduran wood-working industry (users), of
which the Company is a part, to determine the need for various types of wood.
The Honduran government then issues permits to various entities (suppliers) to
harvest their assigned areas of forest until the aggregate amount of permitted
harvesting satisfies the users' requested needs. Once the permits are issued
specifying the Company as the exclusive recipient; price, delivery and payment
terms can be negotiated with the supplier. Once the permits are issued,
harvesting can not commence until a stumpage tax is paid by the supplier. Most
often the supplier does not have the resources to pay the tax and the Company
effectively prepays the tax.
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.
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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
As of April 30, 1998 the Company had approximately 355 employees, including
approximately 300 people currently employed at the Honduran Facilities.
Approximately 225 of the Company's employees are full-time employees.
Description of Property
The Company owns and operates one plant that houses its United States
production facilities and general offices and is 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, 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, they are 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. Approximately 4,400 square feet of space is utilized to display
the Company's products, particularly new product introductions, during the
semiannual International Furniture Markets. The balance of the space is
subleased to another manufacturer. The Company believes the showroom is in good
condition and suitable for its intended use.
Item 3. 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.
Item 4. Submission of Matters to Vote of Security Holders.
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Page 13
Item 6. Management's Discussion and Analysis or Plan of Operation
Omitted from Report
Page 7
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Item 7. Financial Statements
Omitted from Report
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information required by Item 9 of Form 10-KSB appears in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption
"Election of Directors", reference to which is hereby made and the information
there is incorporated herein by reference.
Item 10. Executive Compensation
The information required by Item 10 of Form 10-KSB appears in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption
"Executive Compensation", reference to which is hereby made and the information
there is incorporated herein by reference.
Item 11. Security Ownership of certain Beneficial Owners and Management
The information required by Item 11 of Form 10-KSB appears in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption
"Voting Securities and Principal Shareholders" and "Election of Directors",
reference to which is hereby made and the information there is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
None
Item 13. Exhibits, Lists and Reports on Form 8-K
(a) The following Financial Statements, Financial Statement Schedules
and Exhibits are filed as part of this report:
(1) Financial Statements:
Omitted from Report
(3) EXHIBITS FILED
--------------
(a) List of exhibits is included in the accompanying index to
exhibits
(b) Reports on Form 8-K: No reports on Form 8-K were filed
during the fourth quarter of the fiscal year ended April 30,
1998.
Page 8
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
WELLINGTON HALL, LIMITED
Date: By: /s/ Hoyt M. Hackney, Jr.
--------------------------
Hoyt M. Hackney, Jr.
President, (Principal Executive
Officer, Principal Accounting
Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
Name and Signature Position Date
- ------------------ -------- ----
/s/ Hoyt M. Hackney, Jr.
- ----------------------- President (Chief
Hoyt M. Hackney, Jr. Executive Officer
and Chief Financial
Officer), Treasurer
/s/ Ernst B. Kemm
- ----------------------- Executive Vice
Ernst B. Kemm President and Director
/s/ Donald W. Leonard
- ----------------------- Chairman of the Board
Donald W. Leonard
- ----------------------- Secretary and Director
William W. Woodruff
- ----------------------- Senior Executive Vice
Arthur F. Bingham President and Director
Page 9
<PAGE>
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-KSB
OF
WELLINGTON HALL, LIMITED
FOR
YEAR ENDED APRIL 30, 1998
Exhibit No. Description
3.1 Amended and Restated Charter of Wellington Hall Limited. *
3.2 Bylaws of Wellington Hall, Limited, as amended. *
10.1 Wellington Hall Executive Stock Plan. **
10.2 Employment Agreement and Executive Deferred Compensation Agreement
between the Company and Hoyt M. Hackney Jr., effective January 1,
1987 and May 8, 1987, respectively. *
10.3 Note - Security Agreement, dated April 23, 1986, between the Company
and Lexington State Bank is incorporated herein by reference to
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1987.
10.4 Loan Agreement, dated April 15, 1987, between the Company and
Lexington State Bank is incorporated herein by reference to Exhibit
4.2 to the Company's Annual Report on Form 10-K for the fiscal year
ended April 30, 1987.
10.5 Note - Security and Note Modification Agreements, dated April 26,
1988, between the Company and Lexington State Bank is incorporated
herein by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for fiscal year ended April 30, 1988.
10.6 Loan Agreement between Wellington Hall Caribbean Corporation and the
Overseas Private Investment Corporation, dated December 22, 1989, as
amended on September 1, 1990. ***
10.7 Subordination Agreement, dated September 1, 1994, between Wellington
Hall, Limited, Wellington Hall Caribbean Corporation, Muebles
Wellington Hall, S.A. and the Overseas Private Investment
Corporation. ***
10.9 Amendment to Loan Agreement, dated February 1, 1991m, between the
company and Lexington State Bank is incorporated herein by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1991.
10.10 Loan Agreement, dated August 20, 1991, between Muebles Wellington
Hall, S.A. and Banco de Honduras, S.A. is incorporated herein by
reference to Exhibit A to the Company's Form 10-Q for the quarter
ended July 31, 1991.
10.11 Amendment to Loan Agreement, dated April 10, 1992 between the
Company and Lexington State Bank. ****
10.12 Promissory note, dated January 23, 1992 between the Company and Hoyt
M. Hackney, Jr. ****
10.13 Amendment to Executive Deferred Compensation Agreement , dated
January 23, 1992, between the Company and Hoyt M. Hackney Jr. ****
10.14 Loan Agreement, dated June 28, 1993, between the Company and
Lexington State Bank. *****
Page 10
<PAGE>
10.15 Lease Agreement dated November 1, 1993 by and between North Hamilton
Corporation and the Company, is incorporated herein by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1994.
10.16 Amendment to the Loan Agreement, dated September 1, 1994 between
Wellington Hall Caribbean Corporation and the Overseas Private
Investment Corporation.******
10.17 Employment and Stock Purchase Agreement dated September 1, 1996
between the Company and Arthur F. Bingham, filed as Exhibit (a) to
the Company's Quarterly Report on Form 10-QSB for the quarterly
period ended July 31, 1996
10.18 Amended Loan Agreement dated March 10, 1997 with the Overseas
Private Investment Corporation, filed as Exhibit (a) to the
Company's Quarterly Report on Form 10-QSB for the quarterly period
ended January 31, 1997
10.19 Promissory Note dated January 16, 1997 between the Company and
Lexington State Bank filed as exhibit 10 (q) in Part II to the
Registration Statement filed February 20, 1997
10.20 Employment Agreement dated December 1, 1997 between the Company and
Ralph L. Eskelsen filed as exhibit 10 (t) in Part II to the
Registration Statement filed February 20, 1997
10.21 Addenda to Employment and Stock Purchase Agreement dated September
1, 1996 between the Company and Arthur F. Bingham dated February 10,
1997 filed as exhibit 10 (u) in Part II to the Registration
Statement filed February 20, 1997
10.22 1997 Stock Option and Restricted Stock Plan filed as exhibit 10 (v)
in Part II to the Registration Statement filed February 20, 1997
10.23 Nonqualified Stock Option Agreement dated as of February 10, 1997
between the Company and Arthur F. Bingham filed as exhibit 10 (w) in
Part II to the Registration Statement filed February 20, 1997
10.24 Incentive Stock Option Agreement dated as of February 10, 1997
between the Company and Arthur F. Bingham filed as exhibit 10 (x) in
Part II to the Registration Statement filed February 20, 1997
10.25 Incentive Stock Option Agreement dated as of February 10, 1997
between the Company and Ralph L. Eskelsen filed as exhibit 10 (y) in
Part II to the Registration Statement filed February 20, 1997
10.26 Note Modification Agreement dared January 16, 1998 between the
company and Lexington State Bank is incorporated herein by reference
to Exhibit 10.25 to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended January 31, 1998.
10.27 Amendment to Lease Agreement dated March a, 1998 by and between
Phillips Interest 3, Inc. and the Company, is incorporated herein by
reference to Exhibit 10.26 to the Company's Quarterly Report on Form
10-QSB for the fiscal quarter ended January 31, 1998.
11 Earnings Per Share Computation
13 Annual Report to Shareholders of Wellington Hall, Limited for the
year ended April 30, 1996, portions of which are incorporated by
reference into this report.
22 Subsidiaries of the Company
Page 11
<PAGE>
* Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1987.
** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1986.
*** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1990.
**** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1992.
***** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-KSB for the year
ended April 30, 1993.
****** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-KSB for the year
ended April 30, 1995
Page 12
<PAGE>
MARKET PRICES, DIVIDENDS 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
- -------------- ---- --- -------------- ---- ---
July 1996 0.344 0.25 July 1997 0.25 0.25
October 1996 0.50 0.281 October 1997 0.25 0.25
January 1997 0.375 0.187 January 1998 0.22 0.19
April 1997 0.313 0.313 April 1998 0.25 0.22
These market quotations represent inter-dealer prices, without retail
mark-up, mark-down or commission, and do not necessarily represent actual
transactions.
As of July 27, 1998, there were approximately 562 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."
Page 13
<PAGE>
OFFICERS AND DIRECTORS
OFFICERS
Hoyt M. Hackney, Jr. Ralph L. Eskelson, Jr.
President and Treasurer General Manager
Muebles Wellington Hall, S.A.
Ernst B. Kemm William W. Woodruff
Executive Vice President Secretary
DIRECTORS
Donald W. Leonard William W. Woodruff
Chairman of the Board President of Woodruff
Shoe Store
Hoyt M. Hackney, Jr. Ernst B. Kemm
President and Treasurer Executive Vice President
Arthur F, Bingham
Senior Executive Vice President
TRANSFER AGENT
Wachovia Bank and Trust Company
Page 14
EXHIBIT 22
SUBSIDIARIES OF WELLINGTON HALL, LIMITED
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
1. Wellington Hall Caribbean Corporation North Carolina
2. Muebles Wellington Hall, S.A. Honduras, Central America
Both of the above-listed subsidiaries do business under their full corporate
names.
WELLINGTON HALL, LIMITED
425 John Ward Rd
Post Office Box 1354
Lexington, North Carolina 27293-1354
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
XXXXXXX, 1998
The undersigned hereby appoints DONALD W. LEONARD, HOYT M. HACKNEY, JR. AND
WILLIAM W. WOODRUFF, and each of them, as Proxies, each with full power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, all the shares of Common Stock of Wellington Hall, Limited held of record
by the undersigned on XXXXXXXX, 1998 at the Annual Meeting of shareholders to be
held in Lexington, N.C. on XXXXXX, 1998 or at any adjournments thereof. The
following proposals to be brought before the meeting are more specifically
described in the accompanying Proxy Statement.
(1) ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY to vote
(except as marked to contrary all nominees listed
below) below ( )
INSTRUCTIONS: To withhold authority to vote for any individual
nominees strike a line through the nominee's name in the list
below.)
Hoyt M. Hackney Jr., Ernst B. Kemm, Donald W. Leonard,
William W. Woodruff, Arthur F. Bingham
(2) To ratify the selection of Turlington and Company, independent
public accountants, as auditors of the Company for the fiscal
year ending April 30, 1998
VOTE FOR ( ) VOTE AGAINST ( ) ABSTAIN ( )
(3) In their discretion, the Proxies are authorized to vote upon such
other matters as may properly come before the meeting.
Continued and to be signed on Reverse side
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned shareholder. If no direction is made, this proxy
will be voted FOR proposals 1,2, and 3
Please date and sign exactly as
name appears hereon, Joint Owners ----------------------------------------
should each sign personally. Signature
Trustees, custodians, executors,
and others signing in a
representative capacity should ----------------------------------------
indicate the capacity in which they Signature
sign.
PLEASE MARK, SIGN, DATE AND RETURN
THE PROXY CARD PROMPTLY USING THE 1998
ENCLOSED ENVELOPE, WHETHER OR NOT ------------------------------------
YOU PLAN TO BE PRESENT AT THE DATE:
MEETING. IF YOU ATTEND THE MEETING
YOU CAN VOTE EITHER IN PERSON OR BY
YOUR PROXY.
<PAGE>
WELLINGTON HALL, LIMITED
425 John Ward Rd
Post Office Box 1354
Lexington, North Carolina 27293-1354
(336) 249-4931
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held on October 1, 1997
To the Shareholders of Wellington Hall, Limited:
Notice is hereby given that the Substitute Annual Meeting of Shareholders
of Wellington Hall, Limited ("the Company") will be held on XXXXXXX, 1998, at
10:00 A.M. Eastern Time, at the offices of Turlington and Company, the Company's
independent auditors, located at 509 East Center Street, Lexington, North
Carolina for the following purposes:
1. To elect a Board of five directors to serve until the next Annual
Meeting of the Shareholders and until their successors are elected and
qualified.
2. To ratify the selection by the Board of Directors of Turlington and
Company as independent auditors of the Company for fiscal year ending
April 30, 1998.
3. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on XXXXX, 1998, as
the record date for the determination of shareholders entitled to notice of, and
to vote at the meeting and any adjournment or adjournments thereof.
The Company's Proxy Statement is submitted herewith along with the Annual
Report for the year ended April 30, 1998.
Lexington, North Carolina
XXXXXXX, 1998
By Order of The Board of Directors
William W. Woodruff, Secretary
<PAGE>
WELLINGTON HALL, LIMITED
425 John Ward Rd
Post Office Box 1354
Lexington, North Carolina 27293-1354
PROXY STATEMENT
The enclosed proxy is solicited on behalf of the Board of Directors of
Wellington Hall, Limited (the "Company") and is to be used at the Substitute
Annual Meeting of Shareholders to be held at the offices of Turlington and
Company, the Company's independent auditors, located at 509 East Center Street,
Lexington, North Carolina on XXXXXX, 1998 at 10:00 A.M. Eastern Time, and at any
adjournments thereof. Any shareholder submitting the accompanying proxy may
revoke it at any time before it is voted by: (a) giving written notice to the
Secretary of the Company before the Annual Meeting; (b) attending the Annual
Meeting and announcing at the meeting that he elects to revoke his proxy and to
vote in person; or (c) delivering a proxy bearing a later date to the Company
before the Annual Meeting.
Proxies will be solicited by mail. Proxies may also be solicited personally
or by telephone by employees of the Company who will not be additionally
compensated therefor, or by the Company's transfer agent. The cost of such
solicitation will be borne by the Company. The Company intends to mail copies of
the Proxy Statement and the accompanying proxy card to the shareholders on or
soon after XXXXX, 1998.
Only shareholders of record at the close of the business on XXXXXX, 1998,
are entitled to notice of and to vote at the meeting. The shares represented by
all properly executed proxies which are received in time for the meeting will be
voted in accordance with the directions given thereon. If no directions are
given on a proxy, the shares represented by such proxy will be voted "FOR" the
five nominees for election as Directors named herein. Shareholders will be
entitled on vote each share of Common Stock held on the record date. As of
XXXXX, 1998, there were 2,289,887 shares of the Company's Common Stock, no par
value (the "Common Stock"), issued and outstanding, and each share is entitled
to one vote.
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 XXXXXXX, 1998:
Name and Address Amount and Nature Percent
of Beneficial of Beneficial of Class
Owner Ownership (1)
- --------------------------------------------------------------------------------
Hoyt M. Hackney, Jr. 226,958 (1) 9.9
409 Edgedale Drive
High Point, N.C. 27262
Ernst B. Kemm 297,280 (1) 13.0
1211 Lancaster Place
High Point, N.C. 27260
Donald W. Leonard 26,862 (1) 1.2
105 Westover Drive
Lexington, N.C. 27292
William W. Woodruff 16,000 (1) 0.7
320 Maegeo Drive
Lexington, N.C. 27292
Arthur F. Bingham 605,437 (2,3) 26.4
315 3rd Avenue N. W.
Hickory, N.C. 28601
<PAGE>
Ralph L. Eskelsen, Jr. -- (3) --
Tacao River
San Pedro Sula
Honduras, Central America
All executive officers 1,172,537 (3) 51.2
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.
To the best of the Company's knowledge, all persons listed above have sole
voting and investment power over the shares which they own directly.
ELECTION OF DIRECTORS
The Company's Bylaws provides that a minimum of three and a maximum of nine
directors shall serve on the Board of Directors, with the exact number of
directors within such limitations to be fixed by resolution of the Board prior
to the annual meeting at which directors are to be elected. The Board of
Directors has fixed the number of directors to be elected at the Annual Meeting
of Shareholders at five. It is intended that Proxies received in response to
this solicitation will be voted to elect five directors to hold office until the
next Annual Meeting and until their successors are elected and qualified. The
enclosed Proxy can not be voted for more than five persons.
The requisite quorum for the Annual Meeting will be a majority of the
outstanding shares of Common Stock entitled to vote. The directors will be
elected by a plurality of the shares voted at the Annual Meeting. Abstentions
and broker non-votes will not be treated as a vote for or against any particular
nominee and will not effect the outcome of the election of directors.
Management knows of no reason why any of the five nominees will be unable
or unwilling for good cause to serve; but if that should occur, it is the
intention of those persons named in the Proxy to vote for such other person or
persons as the Board of Directors may recommend. Unless otherwise directed, the
enclosed Proxy will be voted in favor of the five nominees for election as
Directors.
The following table sets forth certain information, as of August 25, 1997
concerning the five persons nominated by the Board to serve as Directors.
Position with the Company; Principal Occupation
Name Age During the Preceding Five Years (if different)
- ---- --- -----------------------------------------------
Hoyt M. Hackney, Jr. 60 President, Chief Executive Officer, Chief
Financial Officer and Treasurer, Director since
1978
Donald W. Leonard (1) 79 Chairman of the Board of Directors, Director
since 1965; Private Investor
Ernst B. Kemm 62 Executive Vice President, Director since 1978
William W. Woodruff (1) 74 Secretary , Director since 1977; President and
Owner of Woodruff Shoe Store
Arthur F. Bingham 43 Senior Executive Vice President of Sales and
Marketing (1996- present), Director since 1996;
Sales Representative for Lexington Furniture
Industries (1978-1996)
<PAGE>
Ralph L. Eskelsen, Jr. 52 General Manager and Director of Muebles
Wellington Hall, S.A. (1989-present)
(1) Mr. Woodruff is Mr. Leonard's brother-in-law.
The executive officers are elected by the Board of Directors to serve until
the next annual meeting of the Board and until their successors have been
elected and qualified.
The Board of Directors of the Company met two times during the year ended
April 30, 1998. The Compensation Committee met once during fiscal 1996. The
Board does not have standing audit, nominating or other committees performing
similar functions. All Directors attended at least 75% of the total number of
the meetings of the Board of Directors and committees on which they served
during fiscal 1998.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid to
the Chief Executive Officer of the Company's during the last three fiscal years.
Fiscal Annual Compensation All Other
Name/Position Year Salary($) Bonus($) Compensation (1)
- --------------------------------------------------------------------------------
Hoyt M. Hackney, Jr. 1998 107,943 0 25,738
President 1997 130,183 0 25,738
Treasurer 1996 128,878 0 26,577
Chief Executive Officer
Chief Financial Officer
(1) The amounts reported in this column consists 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 will automatically
be 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 his
"for cause" termination) 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 a 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
1998.
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. If the Employment Agreement is extended beyond December 31, 1991
due to the
<PAGE>
occurrence of a Change of Control Event, Mr. Hackney is to be paid an annual
salary of $155,000 throughout the term of extension. 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 (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. No bonuses were paid
during fiscal year ending April 30, 1998..
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.
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
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
<PAGE>
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. On July 28, 1998, the fair market value of the common stock was $ .25.
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 year 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 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.
Because the Plan is a discretionary plan, it is not possible to determine
what awards the Committee will grant thereunder.
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES OF STOCK OPTION AND RESTRICTED STOCK PLAN
ISOs granted under the Plan are intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). The grant of an ISO generally does not result in taxable income to the
participant at the time of grant or at the time of exercise. however, for any
year in which Common Stock is purchased upon exercise of an ISO, the difference
between the fair market value of the Common Stock at the time of exercise and
its adjusted basis to the participant will be treated as an item of adjustment
for purposes of computation of the employee's alternative minimum taxable income
under Section 55 of the Code. If the participant exercises and ISO and sells the
Common Stock purchased thereunder at a gain, the excess of the sales price of
the Common Stock over its adjusted basis to the participant will be taxable as a
long-term capital gain if the sale is made more than two years from the granting
of the ISO and more than one year from the transfer of the stock to the
participant. If the sale is made within two years after the granting of the
option or within one year after the Common Stock is transferred to the
participant and if sales proceeds exceed the fair market value of the Common
Stock on the date of exercise, the participant generally will recognize ordinary
income, equal to the fair market value of the Common Stock on the date of
exercise less the option price, and capital gain (long-term or short-term as the
case may be), equal to the amount realized in excess of the fair market value of
the Common Stock on the date of exercise. No tax deduction will be available to
the Company as a result of the granting of ISOs, the exercise of such options,
or the sale by participants of the Common Stock purchased. However, the Company
will be entitled to a deduction in an amount equal to the ordinary income, if
any, realized by a participant on the sale of Common Stock purchased pursuant to
the exercise of an ISO.
Nonqualified stock options granted under the plant are not intended to
qualify as ISOs under the Code. The grant of a nonqualified stock option will
not result in taxable income to the participant or a deduction to the Company.
On the date any such option is exercised, a participant generally will be deemed
to receive ordinary income equal to the amount by which the fair market value of
the Common Stock on the exercise date exceeds the option price, and the Company
will generally receive a deduction in the same amount.
Participants will recognize taxable income at the time unrestricted stock
is received under the Plan equal to the fair market value of the shares
received. The Company will be entitled to a deduction equal to the amount
includable in the participant's income.
In general, there will be no federal income tax consequences to either the
Company or the participant upon the grant of restricted stock. At that time, the
participant will recognize taxable income equal to the then fair market value of
the Common Stock and the Company will generally receive a corresponding
deduction. However, participants may elect, within 30 days after the date of
grant, to recognize ordinary income equal to the fair market value of the
restricted stock on the date of grant and the Company will be entitled to a
corresponding deduction at that time.
Any discussion herein pertaining to a deduction for the Company is
qualified by application of Section 162(m) of the Code and the regulations
thereunder. Section 162(m) limits to $1,000,000 per year the allowable deduction
for compensation paid to or accrued by the chief executive officer and the four
most highly compensated officers (other than the chief executive officer)
("Covered Employees"), except that such limit does not include "performace-based
compensation," as that term is defined therein. If the Plan is approved by
shareholders in the manner prescribed by applicable regulations, compensation
realized upon the exercise of options will be "performance-based" if the
exercise price is at least equal to the fair market value of the underlying
stock on the date of grant. The Plan is intended to meet the provisions of
Section 162(m) such that any deductions realized from stock option transactions
thereunder will not be limited. Compensation derived from other awards that may
be granted under the Plan may be deemed "performance-based" if they are
designated as such by the Committee and if the grant thereof is subject tot he
attainment of certain performance goals. Except as permitted by Section 162(m)
and the regulations promulgated thereunder, compensation derived by Covered
Employees from awards that are not "performance-based" will not be deductible by
the Company.
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
<PAGE>
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transactions.
SELECTION OF INDEPENDENT AUDITORS
Subject to ratification by the shareholders, the Board of Directors has
selected Turlington and Company, an independent public accounting firm, to audit
the accounts of the Company for the fiscal year ending April 30, 1999.
Turlington and Company has acted as auditors for the Company since 1978. A
representative of Turlington and Company is expected to be present at the Annual
Meeting, will have the opportunity to make a statement and will be available to
respond to appropriate questions.
The Board of Directors recommends a vote FOR ratifying the selection of
Turlington and Company as auditors for the Company for fiscal year ending April
30, 1999.
SHAREHOLDERS PROPOSALS
Any shareholder desiring to present a proposal for action at the next
annual meeting of shareholders must submit his proposal in writing to the
Secretary of the Company in Lexington, North Carolina by May 8, 1998, if a
description of such proposal is to be included in the Proxy Statement issued by
the Company.
OTHER MATTERS
No business other than that set forth herein is expected to come before the
meeting, but should any other matters requiring a vote of the shareholders
arise, including a question of adjourning the meeting, the persons names in the
accompanying Proxy will vote thereon according to their best judgment in the
interests of the Company.
Where a choice is specified on any Proxy as to the vote on any matter to
come before the meeting, the Proxy will be voted in accordance with such
specifications. If no specification is made by the Proxy is properly signed, the
shares represented thereby will be voted in favor of each proposal set forth
herein.
Order of the Board of Directors
William W. Woodruff
Secretary
XXXXXX, 1998
WHETHER OR NOT YOU PLAN TO BE PRESENT AT THE MEETING, YOU ARE URGED TO SIGN,
DATE AND MAIL THE ENCLOSED PROXY PROMPTLY. IF YOU ATTEND THE MEETING, YOU CAN
VOTE EITHER IN PERSON OR BY YOUR PROXY.
