FORM 10-AKSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) AMMENDED 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
------------------------------------------
Commission File Number 0 3928
--------
WELLINGTON HALL, LIMITED
------------------------
(Name of small business issuer in its charter)
NORTH CAROLINA 56-0815012
-------------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
425 JOHN WARD ROAD 27295
(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 Annual Report to Shareholders for the fiscal
year ended April 30, 1998, are incorporated by reference into Part II.
2. 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)
-1-
<PAGE>
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.
-2-
<PAGE>
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 herein below, 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.
-3-
<PAGE>
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.
-4-
<PAGE>
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
-5-
<PAGE>
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.
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
-6-
<PAGE>
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
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.
The information required by Item 5 of Form 10-KSB appears under the caption
" Market Prices, Dividends and Related shareholder Matters" in the Company's
Annual Report to Shareholders for fiscal year ended April 30, 1998, reference to
which is hereby made and the information there is incorporated herein by
reference.
-7-
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
The information required by Item 6 of Form 10-KSB appears under the heading
"Management's Discussion and Analysis" in the Company's Annual Report to
Shareholders for fiscal year ended April 30, 1998, reference to which is hereby
made and the information there is incorporated herein by reference.
Item 7. Financial Statements
The information required by Item 7 of Form 10-KSB appears in the Company's
Annual Report to Shareholders for the year ended April 30, 1998, at page 17
through 22, reference to which is hereby made and the information therein
incorporated herein by reference.
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
The information required by Item 12 of Form 10-KSB appears in the company's
Proxy Statement for the 1998 Annual Meeting of Shareholders under the caption
"Certain Transactions", reference to which is hereby made and the information
there is incorporated herein by reference. 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:
The following consolidated financial statements of the Company, included in
the Annual Report to Shareholders for the year ended April 30, 1998, are
incorporated herein by reference to the pages indicated:
Consolidated Balance Sheets - April 30, 1998, and 1997 (page 27)
Consolidated Stockholders' Equity - Years ended April 30, 1998 and 1997
(page 28)
Consolidated Statements of Income - Years Ended April 30, 1998 and 1997
(page 29)
Consolidated Statements of Cash Flows - Years Ended April 30, 1998 and 1997
(page 30)
Notes to Consolidated Financial Statements (Pages 31-38)
-8-
<PAGE>
Independent Auditors' Report (page 10-11)
(Financial Statements to be filed by Amendment Pursuant to Rule 126-25)
All other schedule for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable or the required information is given in
the financial statements including the notes thereto, and therefore, have been
omitted.
(3) EXHIBITS FILED
(a) 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 fiscal year ended April 30,
1998.
-9-
<PAGE>
TURLINGTON AND COMPANY, L.L.P.
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of Wellington Hall, Limited and Subsidiaries, 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
$1,522,535 and $1,591,286, respectively as of April 30, 1998 and 1997, and total
revenues of $1,870,046 and $1,995,456, respectively for the years ended April
30, 1998 and 1997. These statements were audited by others auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included in 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 required 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 financial statements. An
audit also include 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 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, 1998 and 1997, and the results of their operations,
and their cash flows for the years ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern at April 30, 1998.
Management's plans in regard to that matter also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result form the outcome of this uncertainty.
July 28, 1998
-10-
<PAGE>
KPMG PEAT MARWICK ASEORES, S.DE R.L.
Report of Independent Auditors
------------------------------
Board of Directors
Muebles Wellington Hall, S.A. de C.V.:
We have audited the accompanying balance sheet de Muebles Wellington Hall, S.A.
de C.V., San Pedro Sula, Honduras, as of April 30, 1998 and the related
statements of loss, retained earnings and cash flows for the year ended. Such
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. The financial statements of Muebles Wellington Hall, S.A de C.V., as
of April 30, 1997, was audited by other auditors, whose reported dated July 15,
1997, expressed an unqualified opinion on such financial statements.
We conducted our audit in accordance with auditing international standards.
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 an 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 audit provides a reasonable basis for our opinion.
In our opinion, the above mentioned financial statements present fairly, in all
material respects, the financial position of Muebles Wellington Hall, S.A. de
C.B., as of April 30, 1998, the results of its operations and its cash flows for
the year then ended, in conformity with the accounting international standards.
/s/ KPMG Peat Marwick
July 28, 1998
-11-
<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
- ------------------------- Executive Officer
Hoyt M. Hackney, Jr. and Chief Financial
Officer), Treasurer
/s/ Ernst B. Kemm Executive Vice
- ------------------------- President and Director
Ernst B. Kemm
/s/ Donald W.Leonard Chairman of the Board
- -------------------------
Donald W.Leonard
/s/ William W. Woodruff Secretary and Director
- -------------------------
William W. Woodruff
/s/ Arthur F. Bingham Senior Executive Vice
- ------------------------- President and Director
Arthur F. Bingham
-12-
<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, 1991, 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. *****
-13-
<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 dated 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 1, 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, 1998, portions of which are incorporated by
reference into this report.
-14-
<PAGE>
22 Subsidiaries of the Company
27 Financial Data Schedule (For SEC Use Only)
* 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
-15-
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
EXHIBIT 11 - EARNINGS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
Years ended April 30
1998 1997 1996
Basic
<S> <C> <C> <C>
Weighted Average Shares Outstanding 2,289,887.00 1,839,887.00 1,689,887.00
============== ============== ==============
Net Loss ($1,013,225.00) ($ 507,212.00) $ 73,574.00
============== ============== ==============
Per share amount ($ 0.45) ($ 0.28) $ 0.04
============== ============== ==============
Diluted
Weighted Average Shares Outstanding 2,289.887.00 1,839.887.00 1,689,887.00
============== ============== ==============
Diluted potential common shares
outstanding during the years 0 0 0
Total Shares 2,289,887.00 1,839,887.00 1,689.887.00
============== ============== ==============
Net Loss ($1,013,225.00) ($ 507,212.00) $ 73,574.00
============== ============== ==============
Per Share Amount ($ 0.45) ($ 0.28) $ 0.04
============== ============== ==============
</TABLE>
-16-
EXHIBIT
13
1998
ANNUAL REPORT
WELLINGTON HALL, LIMITED
Lexington, North Carolina
-17-
<PAGE>
TO THE SHAREHOLDERS OF WELLINGTON HALL LIMITED
Sales declined by about $151,000 or 3%, the third consecutive year of a
decline and though relatively small this year the resulting sales were and/or
remained well below the level of sales necessary for the company to be
profitable. During the previous year, 1997, the company received $300,000 of
equity capital and new credit of $250,000 that allowed the company to remain
viable while solutions were pursued. For fiscal 1998, however, the only option
to generating cash, in absence of significant growth in orders, was the disposal
of inventory at highly discounted prices. The results were not only losses form
low production operations but also losses form large amounts of discounted
inventories. For the fiscal year, the loss was $1,013,000 versus a loss last
year of $507,000.
The most immediate positive development is an order for the Company's
products of approximately $450,000 received in January of 1998 from a new
offshore dealer. The order was essentially confirmed with a Letter of Credit in
March and though too late to affect fiscal year 1998, the order has allowed the
Honduran operation to raise its production levels to a degree that should return
it to profitability in the first fiscal quarter of next year ending July 31,
1998.
With possible sales improvements also expected from domestic operation,
though probably short of profitability, management believes a profit on
consolidated sales will be reported for the fiscal quarter.
On the longer term, Management has concluded that off shore, out-sourcing
of the Company's products could be a means of increasing sales and utilizing the
domestic facility profitably. To accomplish this, management plans to find
foreign resources, design and develop product for manufacture by those
resources, work closely with the sources to develop quality execution, and to
market, import and distribute the products through the Lexington, N.C. facility.
In pursuit of the out-source solution, management contacted and established
a relationship with a potential resource in January of 1998. The designs were
developed and the Company's sales force began taking orders in March with
significant success. To date, the source has not satisfactorily satisfied
management that it has the capability to produce the product in acceptable
quality but it is important to point out that the product required very high
standards. The source could be used for less demanding designs and a
determination is scheduled for late August of 1998 as to the future of this
relationship. If production is released on the new designs, sales could be
affected in the second fiscal quarter of 1999 ending October 31 1998.
A second new or alternative source, of what could become several resources,
will have an on site evaluation before the end of August, 1998. This second
source, different from the before mentioned, may have product already in
production suitable for marketing and distribution by the Company. New designs
have been developed specifically for this potential source and will be presented
during the on site visit to determine their ability and interest in developing
suitable samples. If the source's established product is suitable, samples could
be available for introduction at the High Point International Furniture Market
to be held in October. If successfully introduced, the product could possible
begin shipping in February of 1999. The new designs, if pursued, would not
likely begin shipping before the spring of 1999.
Management will continue to pursue solutions to its marketing and to it's
debt or financial condition as situations might develop.
Sincerely,
Hoyt Hackney, Jr.
President
Upon written request directed to the Secretary of the Company at P.O. Box 1354,
Lexington, North Carolina 27293-1354, Shareholders will be furnished a copy of
the Company's Annual Report on form 10-KSB without charge
-18-
<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."
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
April 30, 1998, total stockholders' equity was $1,239,492 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$338,197 and $898,092, 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.
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 the Company began making quarterly payments of approximately $31,000.
Principal payments were scheduled to 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.
On July 22, 1998, WHCC requested that OPIC waiver the principal due on July
30, 1998 and on October 31, 1998. As of August 14, 1998, WHCC had not been
notified as to the final disposition of that request but WHCC only paid the
interest due on July 31, 1998.
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 an MWH are each in compliance with the requirements of the OPIC loan.
Under the OPIC loan arrangement, Wellington Hall 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.
The Company's primary sources of liquidity are bank lines of credit and
cash flow from operations. For its domestic operations, the Company has three
lines of credit with Lexington State Bank. Under its primary line, the Company
may borrow the lesser of (i) $1,200,000 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 April
30, 1998, the Company had $1,168,172 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.
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 April 30, 1998 was $93,600.
On January 16, 1997, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount of
$250,000. 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
April 30, 1998 was $246,000. The line of credit was reviewed on January 16, 1998
and renewed until July 16, 1998. Management has been informed by LSB that the
loan will be extended to January 16, 1999. In aggregate $42,000 was available
from LSB for future borrowings at April 30, 1998.
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
MWH has lines of credit with two Honduran banks in an aggregate amount of
$590,000. As of April 30, 1997, an aggregate of $490,000 had been borrowed under
these lines, leaving approximately $100,000 for future borrowings. Borrowings
bear interest at a rate that ranges between 28% and 35% 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 $96,316 and ($729,951) in fiscal 1998 and 1997,
respectively. The positive cash contribution in fiscal 1998 were primarily as a
result of reductions in account receivable, reductions in inventories and an
increase in current liabilities. If the Company is to meet its liquidity needs
in the future, it must continue to generate positive cash flows and avoid any
significant losses in the future.
As of April 30, 1998, accounts receivable had decreased by approximately
$262,000 since the beginning of the fiscal year, mostly as a result of lower
sales in the fourth quarter which were down $152,265 or 10% as compared to the
same period last year. The receivables represented a turnover rate of about
fifty-one days, a decrease of about four days when compared to the turnover rate
reported at April 30, 1997. The company's normal terms of sale for the payment
of invoices is Net 30 days for domestically produced goods (DPG) and 3% 10; Net
30 for foreign
-20-
produced goods (FPG). In the case of export sales an Irrevocable
Letter-Of-Credit is required.
Current liabilities increased by approximately $520,000 including a
$155,821 increase in current maturities and about a 62,000 increase in notes
payables. All other current liabilities increased about 299,000 with half of the
total being incurred by the foreign subsidiary as a result of wood purchases at
the very end of the fourth quarter and an increase in a reserve for a the
contingent liability for severance pay of approximately $36,000. The WHL and
WHCC accounts payable increased by $64,660 and $49,252 respectively during
fiscal year 1998 and accounted for most of the balance of the aggregate increase
in current liabilities.
Consolidated inventories decreased by about $352,066 during the fiscal year
primarily a result of a decrease of about $495,000 to the inventory of
domestically produced goods in response to reduced levels of incoming orders,
excessive inventories relative to sales, and the highly discounted sale of
inventory to generate operating funds. The Company utilized about $171,000 to
increase domestic inventories of foreign produced products of which
approximately $150,000 was in transit and was in response to an increased
backlog of orders for foreign produced goods. Sales and backlogs are further
discussed herein below.
Property and equipment is reported to be up about $45,000 reflecting
capital expenditures for the fiscal years. The value of the Company's foreign
fixed assets are revalued to reflect the fluctuation in the value of the foreign
currency. The decline in that value during the fiscal year 1998 was minimal
since the devaluation of the Honduran currency relative to the prior fiscal year
end was only approximately 1.6%. 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.
There are no significant capital expenditures planned for fiscal year 1999
and expenditures are expected to 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, 1998 was approximately $45,000 used primarily to
upgrading the Company's domestic operations water supply piping and to
completing the retubing of its boiler at the Honduran facilities used to dry
wood, and to install electrical equipment required by the power company to
reduce and control consumption. . The Company is subject to the risk that
foreign currency fluctuation 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 cost might increase
causing profit margins to erode. The Company, however, does not engage in any
hedging of the 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 13.24 lempira to the dollar at
April 30, 1998. Although the devaluation of the lempira has resulted in
reductions in the historical book value of the assets and liabilities and a
corresponding reduction to shareholders' equity in the form of a $1.87 million
cumulative translation adjustment, the Company also benefits from lower product
cost from the subsidiary as the lempira devalues. In view of the long-term trend
of the devaluation, management believes that hedging of the exchange rate
fluctuation is unnecessary and could reduce or eliminate the benefits of lower
product costs resulting from any continued devaluation.
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 and, during the Company's last fiscal quarter,
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 450,000 additional shares at option prices ranging from $.80
to $1.30 per share, 300,000 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.
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 years 1996, 1997 and 1998, having
experienced excessive wood deliveries early in the fiscal year 1996 and then a
slow furniture economy and lower sales during the balance of these fiscal years
while the Company continued to service its high level of indebtedness. The sale
of stock to Mr. Bingham assisted the Company in meeting its working capital and
other cash needs during fiscal 1997.
Management recognized early in fiscal year 1997, that if sales, then in
decline, were to be restored to a level necessary to achieving adequate profits
it would first be necessary to manage the Company's limited finances in a
-21-
<PAGE>
manner that would maintain sufficient funds to support continued operations
until its marketing efforts produced increased sales volume. In addition
management believed it essential that the Company's financial condition be
strengthened by providing funds both to finance a recovery and to addressing the
debt-equity problem in general. A strategy was formulated that addressed
securing the necessary funding and improving the debt-equity problem. 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
hereinbelow, (iv) the grant of options to certain key employees, discussed in
the Notes to the Consolidated Financial Statements, and (v) reducing inventories
to finance continued operations, as discussed hereinbelow .
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 have been 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 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 subscribed within that thirty day period for additional shares, and any
available shares would have been sold to shareholders who had 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.
The aforementioned stock offering has been canceled because of the
operating losses and all related cost, estimated to have been about $65,000,
have been expensed.
The foregoing plan, during fiscal year 1997 removed some of the pressure on
the Company's working capital, made funds available to support marketing
requirements and slowed the negative effect of servicing the debt. During fiscal
year 1998, the sale of excessive inventories at highly discounted prices
generated funds to support continued operations.
The Company leased a 8,800 square-foot showroom located in High Point,
North Carolina. Approximately 4,400 square feet of space was utilized to display
the Company's products, particularly new product introductions, during the
semiannual International Furniture Markets. The balance of the space was
subleased to another manufacturer. On March 1, 1998 the Company's lease was
amended to include only the 4,400 square feet of space the Company was actually
using. The Company believes the showroom is in good condition and suitable for
its intended use and the amendment to the lease will have no material effect on
the Company's intended use of the space. The Company's monthly obligation for
rent will be be $4,025 versus approximately $9,050 prior to the execution of the
amendment.
RESULTS OF OPERATIONS
Fiscal Year ended April 30, 1998 compared to Fiscal Year ended April 30, 1997
Consolidated revenues for the fourth quarter and fiscal year ended April
30, 1998 were down $152,265 or 11% and for the year the results were down
$157,035 or 3% compared with results reported last year. The decline for the
quarter reflects a drop in sales of both domestically produced goods (DPG) and
the company's foreign produced goods (FPG). For the year the decline for DPG
sales were almost offset by increased sales of FPG experienced in the first
three quarters. The increase in FPG was the result of an 53% increase in OEM
sales, (products sold to other manufacturers), and a 2.5% increase in products
sold to the retail trade. These results were affected by changes in the
Company's prices on those product distributed through retailers. Those prices
were increased between four and five percent in October 1997.
Sales of domestically produced goods for the fourth quarter were about
$834,000, down $139,000 or 14% from the $973,340 reported last year while sales
for the fiscal year were $3,673,000 down $425,000 or 10% from the $4,098,000
recorded last year. Sales of foreign produced goods, net of inter company sales,
for the quarter were approximately $458,000 down $14,000 from the previous
year's fourth quarter and were $2,075,000 for the the year versus $1,713,709
last year, an increase of $361,000 or 21% .
The consolidated sales included $31,000 and $592,000, for the fourth
quarter and fiscal year, respectively, of highly discounted sales of inventories
deemed to be slow moving, of unacceptable quality or discontinued product. These
sales were generated at the Furniture Clearance Center or at two "Tent" sales
held at the Lexington N.C. facility in May and October of 1997. In addition,
management estimates that a list of inventory items published to the Company's
sales force early in the fourth quarter account for another $200,000 or more in
highly discounted sales. All of the sales from the published list were at 50% of
the regular wholesale price. Without these highly discounted sales, revenues
would have been significantly less. All of these sales contributed significantly
and materially to cost of goods sold and to the reported operating losses.
The sales of domestic products during the fourth quarter and fiscal year
were at a levels below those sales reported over the last two years and remains
well below the Company's production capacity and an estimated level of sales
necessary for the operation to be profitable. The Company experienced a
significant drop in the rate of incoming orders for these products last in 1994
and has experienced a continuing downward trend since that time. Several
fundamental factors probably contribute to the cause of this trend including the
somewhat distress level of the furniture economy during the period relative to
the strong nation economy, a shrinking distribution base, more and more
retailers have gone out of business, changing consumer taste away from more
formal designs such as the Company's products, and imports which have possibly
undercut the value of domestically produced goods.
-22-
<PAGE>
Means of reversing the downward trend regarding sales of domestically
produced products and returning those operations back to profitability have been
elusive, and several avenues pursued over time have shown initial promise only
to stall and have little lasting material effect. It is uncertain whether these
trends will continue but, if the Company's strategies do not successfully
counteract these trends, they could continue to have a material adverse effect
on the Company's results of operations and financial condition.
The decline in domestic sales has also negatively effected the Company's
foreign operations. The domestic operation was consuming a significant portion
of the foreign output as dimension stock, carved and/or turned components and
unfinished assemblies into domestic production. The decline has effectively cost
the foreign operation its best and largest customer. To counteract this loss and
to increase revenues and operations at the Honduran facility, effort has been
directed at selling other manufactures and wood consumers their products and
production requirements; OEM sales. These sales during the quarter ended April
30, 1998 were about $33,000, down about $79,000 as compared to last year's
fourth quarter. For the fiscal year, sales were approximately $488,000 an
increase of about $170,000 or 54% and accounted for 78% of all the growth in
foreign produced goods and 8.41% of total consolidated sales up from 5.0% last
year.
The company introduced a number of new designs to its domestic product line
at the International Furniture Market held in High Point, N.C. in April of 1998.
These new items have been selected to better utilize the component and assembly
capacity of the Honduran operation and the finishing capacity of the domestic
operation. The resulting sales of those introductions were marginal. However,
all the items have been committed to production though on a somewhat delayed
schedule and November-December delivery such that additional orders can be
solicited at the October 1998 market to assure all the production is sold.
The Company's firm backlog of orders on April 30, 1998 is reported as about
$2,382,000, a 16.4% increase when compared with the backlog of $2,047,000 on
April 30, 1997. The backlog included $1,327,000 of domestically produced goods
(DPG) as opposed to $1,289,500 included in the April 30, 1997 backlog. The
backlog included $1,055,000 of foreign produced goods (FPG), less inter company
orders, versus $758,000 on April 30, 1997. Both the backlogs for DPG and FPG
were significantly increased by a large order received from a new dealer late in
January for export. If this new distribution becomes an ongoing process, as
expected, annual sales to this singular account could exceed 10% of the
company's projected fiscal 1998 revenues.
The company had at April 30, 1998 an additional backlog of approximately
$640,000 for products it has begun marketing under the name Wellington Hall
Imports. These new company sponsored designs will be manufactured exclusively
for the company by a foreign manufacturer with whom management has established a
relationship. The Company has no contractual relationship with the supplier. The
company planned to officially introduce the line at the International Furniture
market held in High Point, NC in April of 1998 but samples did not arrive and
now the plan is to introduce the products at the market scheduled for October of
1998. Pre-marketing began throughout the country in early February, 1998. To
date the response has been very significant, and by mid-March the company had
received most of the orders reflected in the above mentioned backlog. The
backlog has been excluded from the total because of uncertainties about this
manufactures ability to produce the quality of product the Company requires.
Presently, the Company hopes to make a determination about this sources quality
in August of 1998 and, if favorable, to release production which would become
available to begin shipping by the end of the second fiscal quarter ending
October 31, 1998.
Cost of sales increased approximately $24,000 to about $1,446,000 for the
fourth quarter and about $373,000 to $4,833,000 for the fiscal year ended April
30, 1998. For the quarter the Cost of Sales were 112% of sales mostly as a
result of $385,000 of domestic inventories being charge to Cost of Sales during
the quarter. For the fiscal year the Cost of Sales were 86% of sales mostly as a
result of $495,000 of domestic inventories being charge to Cost of Sales during
the year. The decline in inventory mostly reflects the highly discounted sale of
inventory to generate operating funds and to rid the Companys inventory of
discontinued or distressed goods. Over the last two years the Company has
continually discontinued products as rate of sales on items became to low to
justify their continued production. These Cost of Sales increases also
reflecting reduced level of domestic and foreign production during the fourth
quarter and through out much of the year to levels below the estimated break
even points.
Selling, general and administrative expenses decreased about $29,000 or 9%
for the fourth fiscal quarter and about $61,000 during the fiscal year mostly as
a result of less commissions paid on lower sales and reduction in administration
and marketing costs. The reported level of sales & administrative expenses are
expected to continue through the next quarter with the exception of increased
commissions, if sales increase. The decrease for the year came about even though
sales aids expense (catalogs) increase $61,000 and an additional $35,000 in "
Legal and Professional" cost as a result of the aborted stock offering were
expensed.
Interest expenses of $106,113 for the fiscal fourth quarter represent an
increase of about $1,000 over that paid during the previous year fourth quarter.
For the fiscal year 1998, interest expenses were $448,510, up about $44,000 over
the prior year, as a result of added borrowing during the previous fiscal year.
The additional borrowing in fiscal 1997 covered operating losses and increased
wood purchases at the Honduras facility to raise production in response to
higher backlog. Long-term debt declined during the year by about $170,000 and
short term borrowing increased by approximately $70,000 since the beginning of
the current fiscal year. Of that sum, $10,000 were for domestic operations and
the balance of the additional borrowing were for foreign operations and were
used to finance various elements of the operating losses.
For the the fiscal quarter ended April 30, 1998, operating income (earnings
before interest and taxes) was a loss of about ($519, 000), (23) cents per
share, compared to a loss of ($384,000), (17.0) cents per share for quarter
-23-
<PAGE>
ended April 30, 1997. For the fiscal year ended April 30, 1998 the operating
income was a loss of ($572,220), ($.25) per share versus the previous year's
loss of ($112,000) or ($.05) per share. The net loss for the fourth quarter was
($615,000), (27.0) cents per share versus a loss of ($479,000) or (26.0) cents
per share, while for the fiscal year there is a net loss of ($1,013,225) or
($.45) per share, compared to a net loss of ($507,212) or ($.28) per share for
the prior year, fiscal 1997.
The net loss reported in the fourth quarter and fiscal year ended April 30,
1998 are a result generally of slow sales and the company's limited operating
capital. Because of the slow sales and to avoid increasing inventories, it was
necessary, during the fourth quarter and most of the year, to reduce production
volumes, primarily assembled production, in the Company's domestic and foreign
operations to levels below that required to manage labor and overhead cost. In
addition, the Company sold off inventories at discounted prices to generate cash
to cover the operating loss and to finance continued operations.
Sales of foreign produced products for the upcoming quarter are expected to
improve as production at the Honduras facility rises allowing the higher backlog
of orders for these products to be shipped. There remains some doubt as to the
performance that might be expected from the domestic operations which will be
more dependent on the amount of orders received for those products as the
quarter progresses.
-24-
<PAGE>
TURLINGTON AND COMPANY, L.L.P.
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of Wellington Hall, Limited and Subsidiaries, 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
$1,522,535 and $1,591,286, respectively as of April 30, 1998 and 1997, and total
revenues of $1,870,046 and $1,995,456, respectively for the years ended April
30, 1998 and 1997. These statements were audited by others auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included in 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 required 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 financial statements. An
audit also include 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 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, 1998 and 1997, and the results of their operations,
and their cash flows for the years ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern at April 30, 1998.
Management's plans in regard to that matter also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result form the outcome of this uncertainty.
/s/ Turlington and Company, L.L.P.
July 28, 1998
-25-
<PAGE>
KPMG Peat Marwick Aseores, S.de R.L.
Report of Independent Auditors
------------------------------
Board of Directors
Muebles Wellington Hall, S.A. de C.V.:
We have audited the accompanying balance sheet de Muebles Wellington Hall, S.A.
de C.V., San Pedro Sula, Honduras, as of April 30, 1998 and the related
statements of loss, retained earnings and cash flows for the year ended. Such
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. The financial statements of Muebles Wellington Hall, S.A de C.V., as
of April 30, 1997, was audited by other auditors, whose reported dated July 15,
1997, expressed an unqualified opinion on such financial statements.
We conducted our audit in accordance with auditing international standards.
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 an 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 audit provides a reasonable basis for our opinion.
In our opinion, the above mentioned financial statements present fairly, in all
material respects, the financial position of Muebles Wellington Hall, S.A. de
C.B., as of April 30, 1998, the results of its operations and its cash flows for
the year then ended, in conformity with the accounting international standards.
/s/ KPMG Peat Marwick
July 28, 1998
-26-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
April 30
ASSETS 1998 1997
----------- -----------
Current assets:
Cash:
<S> <C> <C>
Cash on hand $ 400 $ 400
Cash in demand deposits 32,114 53,715
Accounts receivable:
Trade 726,612 986,954
Less, allowance for doubtful accounts (66,947) (63,843)
Note receivable - officer 12,605 28,393
Inventories 4,010,961 4,363,027
Prepaid expenses 79,568 170,434
Deferred income taxes 18,165 19,713
----------- -----------
4,813,478 5,558,793
----------- -----------
Property and equipment:
Cost 2,187,922 2,150,193
Less, accumulated depreciation 1,366,915 1,281,690
----------- -----------
821,007 868,503
----------- -----------
Other assets:
Deferred income taxes 107,686 98,532
Other 35,059 34,735
----------- -----------
142,745 133,267
----------- -----------
$ 5,777,230 6,560,563
=========== ===========
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 356,264 $ 196,443
Notes payable - other 1,998,360 1,935,972
Accounts payable - trade 567,100 372,139
Customer deposits 64,177 45,757
Other current liabilities 382,813 298,014
----------- -----------
3,368,712 2,848,325
Noncurrent liabilities:
Long-term debt, less current maturities 905,026 1,205,294
Deferred compensation accrual 264,000 240,000
----------- -----------
4,537,738 4,293,619
----------- -----------
STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
no par shares issued and outstanding
1998 - 2,289,887 and 1997 - 2,289,887 3,354,531 3,354,531
Preferred stock; authorized 5,000,00 shares; $5 par;
no shares issued and outstanding for 1997 and 1996 -0- -0-
Cumulative translation adjustments (1,870,875) (1,856,648)
Retained earnings (244,164) 769,061
----------- -----------
1,239,492 2,266,944
----------- -----------
$ 5,777,230 $ 6,601,314
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
-27-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS' EQUITY
---------------------------------
Years Ended April 30
1998 1997
---- ----
Common stock:
Authorized 6,000,000 shares; no par
Balances, beginning of years $ 3,354,531 $ 3,054,531
Shares issued during the years -- 300,000
----------- -----------
Balances, end of years 3,354,531 3,354,531
----------- -----------
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 (1,856,648) (1,669,945)
Translation of foreign currency statements (14,227) (186,703)
----------- -----------
Balances, end of years (1,870,875) (1,856,648)
----------- -----------
Retained earnings:
Balances, beginning of years 769,061 1,276,273
Net loss for the years (1,013,225) (507,212)
----------- -----------
Balances, end of year (244,164) 769,061
----------- -----------
$ 1,239,492 $ 2,266,944
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-28-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended April 30, 1997
1998 1997
---- ----
Revenue:
Sale of furniture $ 5,661,309 $ 5,812,344
Other income 5,859 3,925
----------- -----------
5,667,168 5,816,269
----------- -----------
Costs and expenses:
Cost of goods sold 4,833,077 4,460,775
Other operating, selling, general,
and administrative expenses 1,406,412 1,467,940
Interest expense 448,510 404,147
----------- -----------
6,687,999 6,332,862
----------- -----------
Income (loss) before income taxes
(benefits) (1,020,831) (516,593)
Income tax benefits (7,606) (9,381)
Net income (loss) for the years ($1,013,225) ($ 507,212)
=========== ===========
Earnings (loss) per share of common stock:
Basic and assuming full dilution:
Net income (loss) for the years ($ .45) ($ .28)
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-29-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended April 30
1998 1997
---- ----
Cash flows form operating activities:
Net income (loss for the years) ($1,013,225) ($ 507,212)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 88,694 102,473
Gain on sale of equipment (1,200)
Deferred compensation 24,000 24,000
Allowance for slow-moving inventory (45,271) 115,176
Deferred income taxes (7,606) (9,381)
Changes in assets and liabilities:
Accounts receivable 262,034 (220,543)
Note receivable, officer 15,788 (485)
Inventories 381,037 (83,840)
Prepaid expenses 90,608 (39,444)
Other assets (898) (4,276)
Accounts payable, customer deposits,
and other current liabilities 301,155 (105,219)
----------- -----------
Net cash provided by (used for)
operating activities 96,316 (729,951)
----------- -----------
Cash flows from investing activities:
Purchasing of equipment (46,566) (73,922)
Proceeds from sale of equipment 1,200
----------- -----------
Net cash used for investing activities (46,566) (72,722)
----------- -----------
Cash flows from financing activities:
Short-term borrowings 70,077 664, 942
Payments on long-term debt (140,446) (182,620)
Proceeds from issuance of stock -- 300,000
----------- -----------
Net cash provided by (used for)
financing activities 70,369 782,322
----------- -----------
Effect of exchange rate changes on cash (982) 18,710
----------- -----------
Net increase (decrease in cash (21,601) (1,641)
Cash, beginning of years 54,115 55,756
----------- -----------
Cash, end of years $ 32,514 $ 54,115
=========== ===========
Cash paid during the years for
Income taxes $-0- $-0-
=========== ===========
Interest $ 425,831 $ 402,975
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-30-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of and for the Years Ended April 30, 1998 and 1997
-----------------------------------------------------
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.
Net assets and expenditures which substantially increase the useful lives
of the existing assets are capitalized. Maintenance and repairs are
expenses as incurred. Depreciation is computed by use of the straight-line
method over the estimated useful lives of the assets.
Earnings per share are computed by dividing net income (loss) by the
weighted average shares outstanding and diluted share equivalents
outstanding.
Revenue from sales is recognized when materials are shipped to the
customers.
The consolidated financial statements include the accounts of Wellington
Hall, Limited and its wholly-owned subsidiaries, Wellington Hall Caribbean
Corp., Muebles Wellington Hall, S.A., and Palmetto Furniture Galleries,
Inc. was formed during the year ended April 30, 1998. Both of these
subsidiaries were accounted for as purchases.'
The financial statements of foreign subsidiaries have been translated into
U.S dollars in accordance with Statement of Financial Accounting Standards
(SFAS) 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 form the year. The
gains and losses resulting from the change in exchange rates during the
year have been reported separately as a component of stockholders' equity
entitled "cumulative translation adjustments". Net currency transaction
gains which occurred during the year are included in net earnings and
amounted to approximately $936 and $9,970, respectively, during the years
ended April 30, 1998 and 1997.
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
revenue and expenses during the reporting period. Actual results could
differ form those estimates.
2. 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 50% of the Company's total sales. The remaining
50% of total sales is split about evenly over the other three product
lines. Wellington Hall Caribbean Corp. is a sales organization located in
Lexington, North Carolina responsible for selling Muebles Wellington Hall,
S.A.'s products to both the general public and Wellington Hall, Limited.
Palmetto Furniture Galleries, Inc. is also a sales organization located in
Lexington, North Carolina responsible for selling second quality furniture
of both manufacturing affiliates. The Company grants credit to customers
who are located primarily in the U.S.
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 one each customer's cash
balances. At times during the years, the Company's cash balances exceeded
$100,000. Management believes that this policy will not cause any adverse
effect to the Company.
3. 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 form time to time.
-31-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
The note balance at April 30, 1998 and 1997 was $12,605 and $28,393,
respectively.
4. Inventories:
Inventories consisted of the following:
1998 1997
---- ----
Finished goods $ 1,867,072 $ 1,912,759
Work-in- process 1,482,191 1,702,500
Raw materials 730,144 862,944
----------- -----------
4,079,407 4,478,203
Less, allowance for slow-moving inventory (68,446) (115,176)
$ 4,010,961 $ 4,363,027
=========== ===========
5. Property and Equipment:
The major classes are as follows:
1998 1997
---- ----
Land and buildings $1,117,651 $1,107,151
Machinery and equipment 889,574 869,883
Furniture, fixtures, and other equipment 180,697 173,159
---------- ----------
$2,187,922 $2,150,193
========== ==========
Depreciation expense for the years ended April 30 1998 and 1997 amounted to
$88,694 and $102,473, respectively.
6. Short-term Loans:
The Company has a demand loan payable to Lexington State Bank for $93,600
and $85,600, respectively, at April 30, 1998 and 1997.
The Company has a line of credit agreement for short-term debt with
Lexington State Bank. The Bank agreed to extend the Company in the form of
a lone 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 $820,047 at April 30, 1998 and $1,055,579 at April 30, 1997. The Company
executed a $1,200,000 demand promissory note against which the 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, 1998
and 1997, $1,168,172 and $1,178,400, respectively, was advance under this
agreement. This loan is secured by all present and future personal property
assets of the Company.
During the year ended April 30, 1997, the Company obtained an additional
line of credit agreement for short-term debt with Lexington State Bank for
up to $250,000, bearing interest at the rate of 1.5% above prime. The loan
is secured by substantially all of the assets of Wellington Hall, Limited.
At April 30, 1998 and 1997, $246,000 and $233,000 respectively, was
advanced under this agreement.
The weighted average interest rate on the above short-term loans for the
years ended April. 30, 1998 and 1997 was 9.56% and 9.44% respectively.
The Company had line of credit agreements with two Honduran banks bearing
interest rates ranging from 29% to 40% with outstanding balances of
$490,588 and $438,972 respectively, at April 30, 1998 and 1997. The banks
have a second mortgage on fixed assets and a lien on inventories as
security for these loans. The Company's unused credit lines with Honduran
banks approximated $35,000 and $155,000 respectively, as of April 30, 1998
and 1997.
-32-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
7. Long-term Debt:
Long-term debt consisted of the following:
1998 1997
---- ----
E. Kemm
Interest payable monthly at 1% above prime $ 25,000 $ 25,000
Overseas Private Investment Corporation
Interest rate 10.00%, payable in quarterly
installments of $30,969 plus interest
through April 30, 1998. Beginning July 31,
1998, quarterly installments increase to
$61,937 plus interest with a balloon
payment due October 1999 898,092 990,999
Lexington State Bank
Interest rate 10.00% payable in monthly
installments of $7,000 with interest at
1,5% above prime 338,196 385,738
---------- ----------
1,261,288 1,401,737
Less, current maturities 356,262 196,443
---------- ----------
$ 905,026 $1,205,294
========== ==========
The weighted average interest rate paid E. Kemm amounted to 9.50% and
9.56%, respectively, for the years end April 30, 1998 and 1997.
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.
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, 1998 are:
Year Ending April 30 Amount
-------------------- ------
1999 $ 356,262
2000 677,423
2001 64,126
2002 70,841
2003 and After 92,636
During the year ended April 30, 1997, the Overseas Private Investment
Corporation suspended quarterly principal payments from the period July 31
1996 through April 30, 1997. The interest rate was reduced from 12.00% to
10.00% effective November 1, 1996.
8. Stock Option Plan:
On February 10, 1997, the Board of Directors approved the Wellington Hall,
Limited 1997 Stock Option and Restricted Stock Plan (the Plan). The Plan
has a term of ten years, expiring on February 9, 2007. Under the Plan, the
Company may grant options or restricted stock awards to key employees,
officers, or directors for up to an aggregate of 1,200,000 shares of common
stock, with no individual receiving more than 600,000 shares. The price of
the shares issued under the Plan are to be determined at the time of the
grant, not to be below 100% of the fair market value of the common stock at
the time of the grant. The Plan was approved by the stockholders of the
Company at the October 1, 1997 annual stockholders' meeting. At April 30,
1998, no options or stock awards had been granted.
9. Capital Stock and Capital Structure:
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.
-33-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
-----------------------------------------------------
9. Capital Stock and Capital Structure (Continued):
All shares of capital stock represent voting shares.
During the year ended April 30, 1997, the Company issued an additional
600,000 shares of common stock at $.50 per share to an existing
officer/stockholder. In addition, the officer was given a stock option
plant as described in Note 8.
Also in 1997, the Company filed a registration statement with the
Securities and Exchange Commission for the offer and sales of 1,689,887
shares of its common stock at $.50 per share. During the fiscal year ended
April 30, 1998, the proposed stock offering was abandoned.
10. Income Taxes:
At April 30, 1998, the Company had federal net operating loss carryforwards
of $1,219,735 that expire in 2010 through 2013, and state net operating
loss carryforwards of $1,452,677 that expire in 1999 through 2003. For
financial reporting purposes, a valuation allowance of $488,284 (an
increase of $243,323 during the year) has been recognized to offset the
deferred tax assets related to the carryovers and certain other deferred
tax assets.
At April 30, 1997 the Company had federal operating loss carryforwards of
$490,517 that expire in 2010 through 2012, and state net operating loss
carryforwards of $782,266 that expire in 1998 through 2002. For financial
reporting purposes, a valuation allowance of $244,961 has been recognized
to offset the deferred tax assets related to the carryovers and certain
other deferred tax assets.
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:
1998 1997
---- ----
Deferred tax assets:
Book over tax depreciation $ $ 4,668
Book allowance for doubtful accounts 19,596 19,713
Tax over book inventory 38,311 38,810
Deferred compensation 102,828 93,864
State net operating loss carryforwards 74,475 41,772
Federal net operating loss carryforwards 380,481 164,379
--------- ---------
615,691 363,206
Valuation allowance for deferred tax assets (488,284) (244,961)
127,407 118,245
Deferred tax liability:
Tax over book depreciation 1,556
--------- ---------
Net deferred tax asset $ 125,851 $ 118,245
========= =========
Classification on the Company's Consolidated Balance Sheets is as follows:
1998 1997
---- ----
Current assets $ 18,165 $ 19,713
Noncurrent asset 107,686 98,532
--------- ---------
$ 125,851 $ 118,245
========= =========
-34-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
10. Income Taxes (Continued):
There follows a reconciliation of the income taxes per the income tax
returns with the income tax deductions per the Consolidated Statement of
Income:
1998 1997
---- ----
Amounts shown by returns (net) $ -0- $ -0-
Deferred income taxes (7,606) (9,381)
---------- ----------
($ 7,606) ($ 9,381)
========== ==========
Effective income tax rates (.75%) (1.8%)
========== ==========
No provision has been made for U.S. income taxes on unremitted earnings of
the foreign subsidiary (approximately $155,289 and 408,725, respectively)
at April 30, 1998 and 1997) since it is the present intention of management
to indefinitely reinvest these earnings.
The components of income (loss) before income taxes are as follows:
1998 1997
---- ----
Domestic ($ 778,955) ($ 445,698)
Foreign (241,876) (70,895)
---------- ----------
($1,020,831) ($ 516,593)
========== ==========
Federal, foreign, and state income taxes (benefits) consisted of the
following:
1998 1997
---- ----
Federal ($ 5,800) ($ 7,036)
Foreign -0- -0-
State (1,806) ($ 2,345)
---------- ----------
($ 7,606) ($ 9,381)
========== ==========
The following schedule reconciles the difference between the U.S. federal
income tax rate and the effective tax rate:
1998 1997
---- ----
Tax computed at the U.S. federal rate 34.0% 34.0%
Increases (decreases) resulting from:
Deferred income taxes (.75) (1.8)
Nondeductible expenses and benefit
of domestic net operating loss (34.0) (34.0)
---------- ----------
( .75%) (1.8%)
---------- ----------
11. Financial Information Relating to Foreign and domestic Operations and
Export Sales:
1998 1997
---- ----
Sales to unafilliated customers
United States $5,661,309 $5,802,687
Republic of Honduras $ 9,657
---------- ----------
Total sales $5,661,309 $5,812,344
========== ==========
Sales (export sales) or transfers
between geographic areas:
Sales from Republic of Honduras
subsidiary to United States parent
company, at market value
(export sales) $1,866,247 $1,985,799
========== =========
-35-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
11. Financial Information Relating to Foreign and Domestic Operations and
Export Sales (Continued):
1998 1997
---- ----
Transfers from United States parent
company to Republic of Honduras
subsidiary of materials and supplies,
at cost $ 228,421 $ 237,235
========== ==========
Operating profit:
United States ($ 504,788) ($ 178,275)
Republic of Honduras (67,533) 65,829
---------- ----------
Loss before interest and
income taxes ($ 572,321) ($ 112,446)
========== ==========
1998 1997
---- ----
Identifiable assets:
United States $4,305,277 $5,112,362
Republic of Honduras 1,471,953 1,448,201
---------- ----------
Total assets $5,777,230 $6,560,563
========== ==========
12. Leases
The Company leases showroom space under a five and one-half year operating
lease expiring in April 1999. This lease was amended in March 1998. The
Company formerly sublet a portion of this showroom space to another
company.
The Company also leases office equipment under noncancelable leases
expiring in 1998 through 2001.
Net minimum lease payments on the foregoing leases amount to $43,043 for
1999, $1,695 for 2000, and $1,695 for 2001.
Net lease expenses of the foregoing leases for the years are summarized as
follows:
1998 1997
---- ----
Lease expense $ 97,634 $ 109,210
Sublease income 46,214 46,776
---------- ----------
Net lease expense $ 51,420 $ 62,434
========== ==========
13. 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, 1998
and 1997, the estimated contingent liability aggregated approximately
$153,030 and $155,564, respectively.
14. Earnings Per Share:
During the year ended April 30, 1998, Wellington Hall, Limited and
Subsidiaries adopted Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share". SFAS No. 128 requires entities to present basic
earnings per share computed by dividing income available to common
stockholders by the weighed average number of common shares outstanding
(2,289,887 shares in 1998 and 1,839,887 shares in 1997). The company has no
diluted share equivalents outstanding and, therefore, the computation of
diluted earnings per share results in the same earnings as basic earnings
per share. The adoption of SFAS No 128 had no material impact on the
calculation of earnings per share for the year ended April 30, 1997.
15. 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.
-36-
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
--------------------------------------------
16. 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, 1998 and 1997 were
$24,000.
17. 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 contribution 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, 1998 and 1997 were $2,714 and $7,259,
respectively.
18. Quarterly Financial Data - Unaudited:
The following is a summary of the quarterly results of operations for the
years ended April 30, 1998, and 1997:
<TABLE>
<CAPTION>
Fiscal 1998 Quarters
--------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net Sales $ 1,572,819 $1,467,983 $ 1,327,101 $ 1,293,406
Cost of goods sold 1,350,591 1,004,333 1,032,302 1,445,851
Gross profit 222,228 463,650 294,799 (152,445)
Net income (loss) (289,389) 5,783 (114,505) (615,114)
Net income (loss) per
common share (primary
and fully diluted) (.13) -0- (.05) (.27)
<CAPTION>
Fiscal 1997 Quarters
--------------------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net Sales $ 1,246,698 $1,586,709 $ 1,533,266 $ 1,445,671
Cost of goods sold 850,591 1,066,480 1,086,343 1,457,361
Gross profit 396,107 520,229 446,923 (11,690)
Net income (loss) (15,016) 51,478 (63,809) (479,865)
Net income (loss) per
common share (Primary
and fully diluted) (.01) .03 (.04) (.26)
</TABLE>
19. Disclosures about Fair Value of Financial Instruments:
Statement of Financial Account Standards (SFAS0 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 fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash:
The carrying amount approximates fair value.
Note receivable - officer
The carrying amount approximates fair value.
-37-
<PAGE>
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
19. Disclosures About Fair Value of Financial Instruments (continued):
Notes payable - other:
Due to the fact that these 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 are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Case $ 32,514 $ 32,514 $ 54,115 $ 54,115
Note receivable-officer 12,605 12,605 28,393 28,393
Note payable-other 1,998,360 1,998,360 1,935,972 1,935,972
Long-term debt 1,261,288 1,261,288 1,401,737 1,401,737
</TABLE>
20. Going Concern Considerations:
As reflected in the accompanying consolidated financial statements, the
Company incurred a $1,013,225 net loss for the year ended April 30, 1998.
The Company's gross profit percentage decreased from 23% for the year ended
April 30, 1997 to 15% for the year ended April 30, 1998. Accounts
receivable turnover declined during the year ended April 31, 1998. The
Company's lines of credit and short-term borrowings were at near maximum
levels at April 30, 1998. Principal payments on the Overseas Private
Investment Corporation loan are scheduled to increase from $30,969 to
$61,937 beginning with the July 31, 1998 payment.
Management is currently developing new product lines with a concentration
on higher volume items which should result in lower unit costs. In
addition, increased foreign business is expected as well as an increased
cash flow from the usage of existing inventories. Management may also
dispose of certain assets.
The consolidated financial statements do not include any adjustments that
might result from the outcome' of this uncertainty.
21. Statutory Reserve:
According to the Commercial code of the Republic of Honduras, the statutory
reserve must be constituted annually appropriating at least 5% of the
period's earnings until it reaches 20% of capital stock. The statutory
reserve, which is included in retained earnings, amounted to $23,558 and
$23,948, respectively, at April 30, 1998 and 1997.
22. Subsequent Event:
On June 26, 1998, the Board of Directors of Wellington Hall Caribbean Corp.
voted to pursue the sale of its Honduran subsidiary, Muebles Wellington
Hall, S.A.
-38-
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
-39-
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.
-40-
WELLINGTON HALL, LIMITED
425 John Ward Rd
Post Office Box 1354
Lexington, North Carolina 27293-1354
PROXY FOR SUBSTITUTE ANNUAL MEETING OF SHAREHOLDERS
September 30, 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 August 24, 1998 at the Annual Meeting of shareholders to
be held in Lexington, N.C. on Septebmer 30, 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
-41-
<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.
-42-
<PAGE>
WELLINGTON HALL, LIMITED
425 John Ward Rd
Post Office Box 1354
Lexington, North Carolina 27293-1354
(336) 249-4931
NOTICE OF SUBSTITUTE ANNUAL MEETING OF SHAREHOLDERS
To be held on September 30, 1998
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 September 30, 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 August 24, 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
September 8, 1998
By Order of The Board of Directors
William W. Woodruff, Secretary
-43-
<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 September 30, 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
before September 7, 1998.
Only shareholders of record at the close of the business on August 24,
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 August 24, 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 August 24, 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
-44-
<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)
-45-
<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
-46-
<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
-47
<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.
-48-
<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
-49-
<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
September 7, 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.
-50-
