2
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ____________.
Commission file number 1-3329
WILSON BROTHERS USA, INC.
(Exact name of registrant as specified in its charter)
(Each name of registrant as specified in its charter)
ILLINOIS 36-1971260
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No)
902 South Main Street 15474
Point Marion, PA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, (412) 725-5231
including area code:
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock. $1.00 Par Value
Title of Class
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or l5(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting stock held by non-
affiliates cannot be determined since no established market
exists for the Company's common stock.
There were 3,321,039 shares of the registrant's common
stock ($l.00 par value) outstanding at April 1, 1998, of which
non-affiliates and affiliates held 1,544,653 and 1,776,386
shares, respectively, representing 46.5% and 53.5%, respectively,
of the registrant's common stock outstanding.
PART I
Item 1. Business.
Forward-Looking Statements
The following discussion contains certain forward-looking
statements with respect to anticipated results, which are subject
to a number of risks and uncertainties. From time to time, the
Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects,
technological developments, new products, research and
development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides safe harbor for
forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance,
development and results of the Company's business include, among
other things, the following: business conditions and growth in
the Company's industry; general economic conditions; the addition
or loss of significant customers; the loss of key personnel;
product development; competition; fluctuations in foreign
currency exchange rates; rising costs of raw materials and the
unavailability of sources of supply; the timing of orders placed
by the Company's customers; failure by the Company's subsidiary,
Houze, to renegotiate its credit facility beyond the current
expiry date of September 30, 1998; and other risk factors listed
from time to time in the Company's quarterly reports.
General Development of Business
Wilson Brothers USA, Inc. was incorporated in Illinois in
1898. Reference herein to "the Company" includes collectively
Wilson Brothers USA, Inc. and its subsidiaries unless the content
indicates otherwise. As of December 31, 1997, the Company has
three wholly owned subsidiaries, Numo Manufacturing Acquisition,
Inc. ("Numo"), Houze Glass Company ("Houze"), Houze West LLC
("Houze West"), and a 90 percent owned subsidiary, LM Plastics,
Inc. ("LMP"). Houze West was formed prior to, but had not
commenced operations as of December 31, 1997, and LMP had
discontinued substantially all of its operations as of that date.
All subsidiaries operate in the specialty advertising business
and engage in the decoration of glass, ceramic and plastic items,
cloth and vinyl bags, and visor style caps. Their products are
primarily distributed throughout the United States through sales
representatives. The Company's principal executive offices are
located at 902 South Main Street, Point Marion, PA 15474.
The LMP Acquisition
On April 9, 1997, the Company entered into a stock purchase
agreement with G&L Consultants, Inc. to purchase a 90 percent
ownership, represented by 171,000 shares of the outstanding
common stock of LMP, a North Carolina corporation with its
principal office in Shelby, North Carolina. The purchase price
for the common stock consisted of the payment of $1, plus a
personal indemnity by John Sanford, the Company's President, to
G&L Consultants, Inc. for the payment of a promissory note from
LMP to a bank in the original principal amount of $70,000. The
Company has the option to purchase at any time, or after 3 years
is obliged to purchase at the request of G&L Consultants, Inc.,
the remaining 10 percent outstanding shares for the amount of
$10,450, with such price increasing at an annual rate of 20
percent for each month after April 9, 1997. The acquisition is
accounted for using the purchase method of accounting, of which
the purchase price over net assets acquired was insignificant.
The NUMO Acquisition
On April 30, 1997, Numo, a newly formed wholly-owned
subsidiary of the Company, purchased certain assets and assumed
certain liabilities of Numo Manufacturing Company, Inc. and its
wholly-owned subsidiary Diamond Cap Company, Inc. (the "Seller"),
each of which has principal offices in Mesquite, Texas. The
aggregate purchase price for the acquired assets of both
companies and covenants not to compete given by the Seller and
their shareholders, was $1,100,000 consisting of $45,000 paid in
cash and the execution and delivery of promissory notes
("Purchase Notes") in the aggregate principal amount of $855,000
and $200,000 payable pursuant to non-compete agreements,
described as follows. The Purchase Notes and amounts payable
under the non-compete agreements bear interest initially at the
rate of 8% per annum subject to adjustment on each April 1 and
October 1, with the first adjustment occurring on October 1,
1997. On each adjustment date (October 1 and April 1) the
interest rate shall be increased or decreased (but not below 8%
per annum or above 11% per annum) by an amount equal to 50% of
the difference between the prime rate published by The Wall
Street Journal on the adjustment date in question and the
immediately preceding adjustment date. Principal and interest
payable on the Purchase Notes and under the non-compete
agreements will be paid on the first day of each January, April,
July and October, commencing on July 1, 1997. The entire unpaid
principal balance on all such obligations shall be due and
payable April 1, 2004. The Purchase Notes are secured by a
pledge of substantially all of the acquired assets. In addition,
payment of the Purchase Notes is guaranteed by the Company. Numo
also entered into consulting agreements with the two shareholders
of the Seller for a term of one year pursuant to which Numo paid
each of such consultants $224,000 on May 1, 1997.
In order to finance the cash portion of the purchase price
and the consulting fees paid at the time of the closing, the
Company borrowed $550,000 from Blind John, LLC which is wholly-
owned by members of the family of John Sanford, the Company's
President, of which Mr. Sanford is a less than 1% owner. The
loan bore interest at the annual rate of 10 percent and the
outstanding principal balance was repaid in full, with interest
on July 9, 1997. The Company paid an origination fee to the
lender in the amount of $3,500 and an additional loan origination
fee in the amount of $30,000 is payable on or before May 1, 1998.
At the option of the lender exercisable before May 1, 1998, in
lieu of receiving payment of the $30,000 additional origination
fee, the lender shall have the right to purchase the number of
shares of Common Stock of the Company equal to 3% of the
Company's fully diluted shares of Common Stock at the time of
such election or a cash fee of $10,000 and 2% of the Company's
fully diluted shares of Common Stock at the time of such election
or a cash fee of $20,000 and 1% of the Company's fully diluted
shares of Common Stock at the time of such election, provided the
Company has sufficient shares of Common Stock which are then
authorized and unissued available for purchase by the lender. On
April 16, 1998, the Company and Blind John, LLC agreed to extend
the option to May 1, 1999.
Numo continues the pre-existing business activities of Numo
Manufacturing Company, Inc. and Diamond Cap Company, Inc. at the
same premises in Mesquite, Texas for which it entered into a
lease agreement with one of the selling entities for a term of 7
years at an annual base rent of $76,000. Numo's primary
business activity is custom manufacturing, sewing and decorating
of a variety of cloth and vinyl bags and related accessories and
visor style caps. Similarly to Houze Glass Corporation, Numo's
sales are made through sales representatives and are generally
for advertising specialties, premiums, souvenirs and the retail
trade.
The acquisition was accounted for using the purchase method
of accounting and, accordingly, the consolidated financial
statements include Numo's operations from the date of
acquisition. The amounts paid in connection with consulting
agreements of $450,000 are being amortized over the terms of such
agreements, which is 12 months. The amounts paid for covenants
not to compete of $224,000 are being amortized over the terms of
those agreements, which is 3 years. The Company allocated the
remaining excess of purchase price over net assets acquired,
which is approximately $95,000 to goodwill, which is being
amortized over 20 years. Acquisition costs incurred in
connection with this purchase transaction which consisted
principally of professional and borrowing fees, were not
material.
Acquisition of Houze West
On November 12, 1997, the Company became the sole owner of a
newly formed Nevada limited-liability company, Houze West, LLC
("Houze West"). In January 1998, the Company ownership interest
changed to 75 percent, an unaffiliated company, Cactus
Enterprises, LLC, purchased the remaining 25 percent interest.
House West will maintain its manufacturing operations in
Henderson, Nevada, where it has entered into a lease agreement
for approximately 15,000 square feet of manufacturing facilities.
Houze West will operate in the same business segment as the
Company, primarily in the decoration of mugs and glassware, and
will be a manufacturing and sales distribution center to the
Company's customers in the western United States.
The Company has agreed to make an initial capital
contribution to Houze West of cash and other assets in the
approximate aggregate amount of $133,000.
Shareholder Changes
At the beginning of fiscal year 1993 approximately 53.7% of
the Company's common stock was owned by DWG Corporation ("DWG").
On April 23, 1993, DWG Acquisition Group L.P. acquired 28.6% of
DWG's then outstanding shares of common stock. DWG Acquisition
Group L.P. subsequently changed its name to Triarc Companies,
Inc. ("Triarc").
On September 28, 1993, the Company's Board of Directors
authorized the sale or liquidation of all of its operating
businesses. On December 28, 1993, Triarc entered into a
Securities Purchase Agreement with Bruce Paparella and Warren B.
Kanders (the "Purchase Agreement"). Pursuant to the Purchase
Agreement, on January 10, 1994, Mr. Paparella acquired from
Triarc 1,296,436 shares of the Company's common stock, Mr.
Kanders acquired from Triarc 648,217 shares of the Company's
common stock, Triarc assigned to Mr. Paparella and Mr. Kanders
that certain note made by the Company and owned by Triarc with a
remaining principal balance of $1,500,000 which note bears
interest at the prime rate and at the time was convertible into
956,937 shares of the Company's common stock (the "Convertible
Note"), and Triarc assigned to Mr. Paparella and Mr. Kanders cer
tain accounts receivable by Triarc in the amount at September 30,
1993 of $1,230,000 (the "Accounts Receivable"). As a consequence
of said transactions, Mr. Paparella owned a 75% interest in the
Convertible Note and the Accounts Receivable and Mr. Kanders ob
tained a 25% interest in the Convertible Note and the Accounts
Receivable and, Mr. Paparella and Mr. Kanders together owned ap
proximately 59% of the Company's outstanding common stock and, as
a result of such transactions, may be deemed to have controlled
the Company. Effective December 30, 1994, Mr. Kanders entered
into three separate stock purchase agreements pursuant to which
Mr. Kanders transferred the aggregate of 648,217 shares of the
Company's common stock owned by him to four individuals,
including Mr. Paparella who purchased 348,217 shares for $5,000.
Mr. Kanders sold the remainder of these shares to three
individuals who are not related to Mr. Paparella. On December 22,
1994 Mr. Kanders made a gift of his 25% portion of the
Convertible Note, which was convertible into 239,234 shares of
Common Stock (representing 6.9% of the Common Stock on a fully
diluted basis assuming the Convertible Note was fully converted
into such shares of Common Stock), and Mr. Kanders' 25% interest
in the Accounts Receivable to a charitable foundation, Choate
Rosemary Hall Foundation, Inc., leaving Mr. Kanders with no
remaining beneficial interest in the Company's common stock. On
April 18, 1995, John Sanford, the Company's then Vice President
and Chief Financial Officer, acquired in a private transaction
with Mr. Walter Carucci, a $362,500 interest in such convertible
note which is convertible into 231,259 shares of the Company's
Common Stock and, as such, Mr. Sanford may be deemed to be the
beneficial owner of 231,259 shares issuable to him upon his
election to convert his interest in the notes. On April 21,
1996, Mr. Bruce Paparella, the Company's President, Chief
Executive Officer and a Director died from cancer. On September
6, 1996, in a private transaction, the Estate of Mr. Paparella
sold to Mr. Sanford 1) a 37.5% interest in such Note in the
principal sum of $562,500, which is convertible into 358,852
shares of the Company's Common Stock, 2) certain accounts
receivable in the amount of $461,250 of the Company, and 3)
1,644,653 shares of the Company's common stock, for an aggregate
purchase price of $330,000. On November 22, 1996, Mr. Sanford,
in a private transaction, made gifts to non-affiliated persons of
1) 100,000 shares of the Company's Common Stock, and 2) $56,250
of the principal amount plus accrued interest of the Convertible
Note, which is convertible into 35,886 shares of the Company's
Common Stock. On February 13, 1997, in a private transaction,
Choate Rosemary Hall Foundation, Inc. sold to Mr. Sanford
pursuant to a Note and Accounts Receivable Purchase Agreement (i)
their interest of $375,000 principal amount of the Convertible
Note, which is convertible into 239,234 shares of the Company's
Common Stock, and (ii) their interest in the Accounts Receivable
for an aggregate purchase price of $200,000. On August 12, 1997,
in private transactions, Mr. Sanford pursuant to separate Note
and Accounts Receivable Purchase Agreements sold his interest in
$375,000 principal amount and accrued interest of the Convertible
Note and $307,500 in the Accounts Receivable for an aggregate
amount of $226,445. Of this amount, $187,000 principal amount
and accrued interest on the Convertible Note and 12.5% interest
in the Accounts Receivable were purchased by Carucci Family
Partners, (the "Partnership" ) in which Mr. Walter P. Carucci is
a general partner, for $113,223. As a result of the above
transaction, Mr. Carucci may be considered the beneficial owner
of an aggregate of $387,500 of the Convertible Note, consisting
of (i) $200,000 of the Convertible Note convertible into 127,592
shares of Common Stock previously owned by Mr. Carucci, and (ii)
$187,500 of the Convertible Note convertible into 119,617 shares
of Common Stock owned by the Partnership, of which the aggregate
principal and accrued interest thereon is convertible at any time
into 247,209 shares and 101,112 shares, respectively, of the
Company's Common Stock, constituting 7.5% of the Company's Common
Stock. As a result of the above transactions, as of August 12,
1997, Mr. Sanford is the beneficial holder of (i) $868,750 of the
Convertible Note of which the principal and accrued interest
thereon is convertible at any time into approximately 554,226
shares and 226,686 shares, respectively, of Common Stock, and
(ii) 1,544,653 shares of the Company's Common Stock, constituting
approximately 49.8 percent of the Company's outstanding Common
Stock.
Mr. Sanford is the Company's President, Chief Executive
Officer and a member of the Board of Directors.
Discontinued Operations
From September 28, 1993 through January 9, 1994, the
Company's two wholly-owned subsidiaries, Houze and Northern
Engineering Corporation, a Delaware corporation ("Northern"),
were treated as discontinued operations. As of January 10, 1994,
however, the Company's Board of Directors deemed it in the
Company's best interest to continue the operations of Houze.
Accordingly, the consolidated financial statements for each of
the periods presented have been restated to reflect only the
operations of Northern as discontinued.
On May 12, 1994, the Company sold all of the outstanding
shares of Northern to a corporation controlled by a former
director of the Company. In consideration for the sale of the
Northern shares, the Company received $10,000, plus a secured
promissory note (the "Note") in the principal amount of $750,000
repayable on or before May 1, 1999, which bears interest payable
quarterly at 8 percent per annum. Such note is collateralized by
certain real property of Northern (the "Mortgaged Property").
The Mortgaged Property was not appraised in connection with the
transaction. Effective October 28, 1994, the Company agreed to
reduce the percentage from 50 percent to 30 percent of the amount
that the Company shall be entitled to receive if the Mortgaged
Property is sold in excess of $750,000. In exchange, the
purchaser made a partial prepayment of the principal of the Note
in the amount of $150,000, which was paid by November 7, 1994,
and agreed to make an additional $150,000 partial prepayment
which was paid on January 15, 1995. The purchaser had the option
to prepay the remaining principal balance of the Note by June 30,
1995. Such prepayment was not made, and therefore, the purchaser
was to additionally compensate the Company $50,000 by July 15,
1995, of which only $10,000 has been paid. As a result, the
Company believed that the principal amount of the Note and
accrued interest thereon was not collectible, and therefore as of
September 30, 1995 made a full valuation reserve in the financial
statements of $450,000 for the principal balance and $6,000 for
the accrued interest balance on the note as well as the $40,000
balance on the option fee. On July 1, 1997, the principal and
accrued interest on the Note were paid in full in the aggregate
amount of $539,700, including accrued interest of $6,200 and
$43,500 representing 30 percent of the amount that the Company
shall be entitled to receive if the Mortgaged Property is sold in
excess of $750,000. As a result, as of June 30, 1997, the
valuation reserve for principal of $490,000 and interest of
$6,000 were reversed, and included in other income and interest
income, respectively.
On November 16, 1995, the Company received $472,541
representing the net proceeds distributed in connection with the
resolution of all litigation claims of Northern, retained by the
Company after the sale of Northern, with Pennsylvania Engineering
Corporation. These proceeds were applied to interest and
principal under the Note. The Consolidated Financial Statements
included elsewhere in this Annual Report on Form 10-K reflect the
stock sale of Northern.
Industry Segments
The Company presently operates in one business segment, the
specialty advertising business.
Business
The Company is a holding company whose business is conducted
through its wholly-owned subsidiaries, Numo Manufacturing
Acquisition, Inc. ("Numo"), Houze Glass Company ("Houze"), its 75
percent owned subsidiary Houze West LLC ("Houze West"), and its
90 percent owned subsidiary, LM Plastics, Inc. ("LMP"). Houze
West was formed prior to, but had not commenced operations as of
December 31, 1997. LMP's operations are substantially
discontinued. All subsidiaries operate in the specialty
advertising business and engage in the decoration of glass,
ceramic and plastic items, cloth and vinyl bags, and visor style
caps. Their products are primarily distributed throughout the
United States through sales representatives.
Except as described below, the Company does not anticipate
that present environmental regulations will materially affect its
capital expenditures, earnings or competitive position. To date,
the Company has not been required to make significant capital
expenditures in order to meet current environmental standards.
As of December 31, 1997, the Company had approximately 219
employees of which 33 were salaried employees and the remainder
were hourly personnel. The workers at Houze are represented by
the American Flint Glass Workers Union under a contract, which
expires in March 1999. The employees at Numo are not under a
union contract. The Company believes its relations with its
employees are satisfactory.
Except as described below, patents, trademarks, licenses,
franchises and concessions are not material to the business of
the Company. Working capital requirements of the Company are
expected to be fulfilled from operating cash flow supplemented by
a revolving line of credit facility arranged with a bank on March
4, 1994 and extended on various dates through maturity on
September 30, 1998. During the last three years, the Company has
not had any material expenditures for Company or customer
sponsored research and development activities. No single
customer accounted for more than 10% of the Company's
consolidated revenues in 1997.
The Company is engaged in the decoration of glass, ceramic
and plastic items, cloth and vinyl bags, and visor style caps.
Sales are made through sales representatives and are generally
for advertising specialties, premiums, souvenirs and the retail
trade. The Company's business is highly competitive. Custom
imprinted items generally lend more exposure per advertising
dollar to customers because of their frequency of use in the
business atmosphere. From time to time, the Company also obtains
special contract orders. Such special contract orders do not
necessarily occur each year and there were no significant
contract orders in 1995, 1996 or 1997. The decorative specialty
advertising products business is highly competitive, particularly
in connection with items such as tumblers, mugs and glasses. The
Company competes on the basis of price, quality, design and
customer service. Many of its competitors are much larger
companies, with far greater resources. Competing with the
Company in the specialty advertising products business are
companies such as Norwood Promotional Products and Bemrose USA
that are dominant in this industry. Using price, quality,
service and expertise of design as priorities, the Company
believes that it can maintain a competitive edge in the
advertising specialty market.
For the last two years the custom decorated ceramic mug
product line has been approximately 85% of the Company's overall
business. Through certain acquisitions, management has expanded
the Company's decorative products to include a large variety of
custom imprinted glass, plastic, foam and ceramic beverage ware,
visor style caps, Igloor plastic products, and vinyl and cloth
beverage coolers, bags, and notepads. Additionally, the Company
has expanded its traditional decorating processes, which
principally included direct screening multiple colors onto
glassware and ceramic mugs. The Company's imprinting processes
now include, direct embroidery for bags and caps, debossing and
hot stamping for vinyl products, and up to four color process
sublimation for selected ceramic and steel mugs, tote bags, mouse
pads, foam beverage ware and ceramic tiles and magnets.
The Company incorporates the use of "special effects"
processes in certain of its decorating applications. The "magic"
process is a thermal chromatic process whereby ceramic pigment is
activated by either high or low temperatures. This allows for a
visual change in the product to reveal an advertisement or
artistic effect, making images appear and/or disappear when a hot
or cold beverage is added. The Company offers the "magic"
process as an option for most ceramic and glass beverage ware.
This process is now available through other manufacturers in
United States. Consequently, competition in this market area is
increasing to some extent. Other "special effects" processes
include the use of iridescent colors, and "see-vue" decorating,
which enables an message or decorative imprint to be seen on the
inside of a glassware product through the design of an clear
opening on the opposite side of the glass.
The Company purchases much of its raw material supplies of
glass and ceramic items from five principal suppliers.
Management believes that such raw materials are readily available
from other sources at competitive prices.
The Company enters into licensing agreements with customers
who permit it to imprint specific logos or designs directly on
products.
In recent years, the Company's sales have been greatest
during the fall quarter as a result of customers' holiday
programs. Backlog or orders believed to be firm as of December
31, 1997 were $400,000 compared to $223,000 at year-end 1996.
Backlog orders are filled within the current fiscal year.
Certain of the Company's inventory, such as ceramic mugs
must be imported, and therefore, the Company is required to
maintain inventories in those items to cover needs for 45 - 60
days at a minimum. If a shortfall occurs, inventory is
supplemented with items purchased from distributors located in
the United States. Because of the Company's method of
distribution, it is not dependent on any single customer. The
Company's subsidiaries are members of the Advertising Specialty
Institute and are suppliers to the advertising industry. The
Company maintains a nationwide distribution network through over
12,500 distributors offering its products. The Company does not
offer extended payment terms to customers.
As an advertising specialty supplier, no material portion of
the Company's business is affected by renegotiation of profits or
termination of contracts at the election of any governmental
agency.
In February 1993, the Company became aware that certain of
Houze's products might have concentrations of lead and cadmium at
levels, which might constitute hazardous waste. While after
testing, it was ascertained that products currently being
produced are within acceptable levels, certain products,
generally those produced prior to 1980, had unacceptable levels
of lead and cadmium. These products had been disposed of in a
disposal site located on Houze's property. The Pennsylvania
Department of Environmental Protection (PDEP) and the Company
agreed to a consent order on September 22, 1994, which outlined a
plan for Houze to remove and encapsulate all of the hazardous
waste and thereby comply with residual waste pile closure
requirements. The estimated cost of the Company's original plan
of remediation was increased during 1993 by $700,000 from
$200,000, based on advice from its consultant, which was provided
for in the 1993 consolidated financial statements. The Company
incurred actual remediation expenses in the aggregate amount of
$215,000, of which $45,000, $25,000 and $41,000 were charged to
the reserve in 1997, 1996 and 1995, respectively. On February
12, 1998, a final closure inspection was conducted by the PDEP.
On February 23, 1998, the PDEP determined that the Company had
satisfactorily complied with the requirements of the consent
order, and the Company was released from any further obligation
with respect to such consent order. Accordingly, as of December
31, 1997, the balance of the reserve in the amount of $775,000
was reversed into other income.
The Company has no foreign operations or any material export
sales.
Subsequent Events
On February 18, 1998, the Company formed a new subsidiary,
Surplus Salvage Supply, LLC ("Surplus Salvage"), a Texas Limited-
Liability Company, which on February 26, 1998, agreed to purchase
certain assets of B.J.'s Warehouse, a Texas company. The
purchase price is $150,000, of which $125,000 was paid in cash,
and the balance payable in the form of a promissory note in the
amount of $25,000, over 24 months with interest calculated at 8
percent per annum.
In order to finance the purchase, the Company capitalized
Surplus Salvage in the amount of $76,500, and made a demand loan
in the amount of $73,500. To finance the capitalization and loan
to Surplus Salvage, the Company borrowed $140,000, including
$60,000 from Margaret Peyton, the mother of Mr. Sanford, and
$40,000 from a company of which a member of the Board of
Directors is the principal owner. These loans are payable on
demand.
Effective March 1, 1998, Harris Trust and Savings Bank
("Harris") terminated its appointment as the Company's transfer
agent and registrar due to overdue balances and non-payment of
its invoices for fees. Until such time that the Company pays
Harris for all past due fees plus reimbursement of reasonable
expenses, Harris will not release the Company's records and stock
certificate inventory for further processing.
Item 2. Properties.
Operations of Houze occupy a facility in Point Marion,
Pennsylvania which has approximately 175,000 square feet of
manufacturing and office space on a 16 acre site. The operations
of Numo occupy a facility in Mesquite, Texas under a lease
agreement, which has approximately 35,000 square feet of
manufacturing and office space on a 9-acre site. Such facilities
are substantially utilized.
Item 3. Legal Proceedings.
While the Company is not currently engaged in litigation,
the Company is from time to time involved in routine litigation
incidental to its business. The Company does not believe that
any of such routine litigation will have a material adverse
effect on its consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
There is no current established public trading market for
the Company's common stock.
On September 14, 1993, the Company's common stock was
delisted from the Pacific Stock Exchange for failure to comply
with minimum listing criteria. Since that time the Company's
common stock has been traded over the counter through National
Quotation Bureau's "pink sheets". Since December 12, 1993, the
"pink sheets" has listed no bid for the Company's common stock.
As of December 31, 1996, there were 3,027 record holders of
the Company's common stock. Effective March 1, 1998, Harris Trust
and Savings Bank ("Harris") terminated its appointment as the
Company's transfer agent and registrar due to overdue balances
and non-payment of its invoices for fees. Until such time that
the Company pays Harris for all past due fees plus reimbursement
of reasonable expenses, Harris will not release the Company's
records and stock certificate inventory for further processing.
While the Company is not aware of any transactions regarding its
common stock, or changes in ownership during the year ended
December 31, 1997, Harris will not confirm such information.
The Company did not declare or pay any cash dividends during
the past three years. The applicable provisions of the Business
Corporation Act of Illinois, the Company's jurisdiction of
incorporation, limit the payment of dividends to an amount equal
to the difference between the assets of a corporation and its
liabilities. Under such provisions at December 31, 1997, no
dividends were permitted to be paid. The Company has no present
plans for the payment of any dividends.
On January 10, 1994, pursuant to a Securities Purchase
Agreement dated December 28, 1993 among Bruce Paparella, Warren
B. Kanders and Triarc Companies, Inc. ("Triarc"), (i) Mr.
Paparella acquired from Triarc 1,296,436 shares of the Company's
common stock, (ii) Mr. Kanders acquired from Triarc 648,217
shares of the Company's common stock, (iii) Triarc assigned to
Mr. Paparella and Mr. Kanders that certain note made by the
Company and owned by Triarc with a remaining principal balance of
$1,500,000 which note bears interest at the prime rate and at the
time was convertible into 956,937 shares of Common Stock (the
"Note"), and (iv) Triarc assigned to Mr. Paparella and Mr.
Kanders certain accounts receivable held by Triarc in the amount
at September 30, 1993 of $1,230,000 (the "Accounts Receivable").
Triarc is the successor to DWG Corporation ("DWG"), the former
controlling shareholder of the Company. As a consequence of said
transactions, Mr. Paparella obtained a 75% interest in the Note
and the Accounts Receivable and Mr. Kanders obtained a 25%
interest in the Note and the Accounts Receivable.
Effective December 30, 1994, Mr. Kanders entered into
three separate stock purchase agreements pursuant to which Mr.
Kanders transferred the aggregate of 648,217 shares of the Com
pany's Common Stock owned by him to four individuals, including
Mr. Paparella who purchased 348,217 shares for $5,000. The
remainder of these shares were sold by Mr. Kanders to three
individuals who are not related to Mr. Paparella. In addition,
the Company has been informed that, on December 22, 1994 Mr.
Kanders made a gift of his 25% portion of the Convertible Note
which was convertible into 239,234 shares of Common Stock (repre
senting 6.9% of the Common Stock on a fully diluted basis assum
ing the Convertible Note was fully converted into such shares of
Common Stock) and Mr. Kanders 25% interest in the Accounts Receiv
able to a charitable foundation, Choate Rosemary Hall Foundation,
Inc., leaving Mr. Kanders with no remaining beneficial interest
in the Company's Common Stock. On April 18, 1995, John Sanford,
the Company's then Vice President and Chief Financial Officer,
acquired, in a private transaction with Mr. Carucci, a $362,500
interest in such convertible note which is convertible into
231,259 shares of the Company's Common Stock and, as such, Mr.
Sanford may be deemed to be the beneficial owner of 231,259
shares issuable to him upon his election to convert his interest
in the notes. On April 21, 1996, Mr. Bruce Paparella, the
Company's President, Chief Executive Officer and a Director died
from cancer. On September 6, 1996, in a private transaction, the
Estate of Mr. Paparella sold to Mr. Sanford 1) a 37.5% interest
in such Note in the principal sum of $562,500, which is
convertible into 358,852 shares of the Company's Common Stock, 2)
certain accounts receivable in the amount of $461,250 of the
Company, and 3) 1,644,653 shares of the Company's common stock,
for an aggregate purchase price of $330,000. November 22, 1996,
Mr. Sanford, in a private transaction, made gifts to non-
affiliated persons of 1) 100,000 shares of the Company's Common
Stock, and 2) $56,250 of the principal amount plus accrued
interest of the Convertible Note, which is convertible into
35,886 shares of the Company's Common Stock. On February 13,
1997, in a private transaction, Choate Rosemary Hall Foundation,
Inc. sold to Mr. Sanford pursuant to a Note and Accounts
Receivable Purchase Agreement (i) their interest of $375,000
principal amount of the Convertible Note, which is convertible
into 239,234 shares of the Company's Common Stock, and (ii) their
interest in the Accounts Receivable for an aggregate purchase
price of $200,000. On August 12, 1997, in private transactions,
Mr. Sanford pursuant to separate Note and Accounts Receivable
Purchase Agreements sold his interest in $375,000 principal
amount and accrued interest of the Convertible Note and $307,500
in the Accounts Receivable for an aggregate amount of $113,227.
Of this amount, $187,000 principal amount and accrued interest on
the Convertible Note and 12.5% interest in the Accounts
Receivable were purchased by Carucci Family Partners, (the
"Partnership" ) in which Mr. Walter P. Carucci is a general
partner, for $55,222. As a result of the above transaction, Mr.
Carucci may be considered the beneficial owner of an aggregate of
$387,500 of the Convertible Note, consisting of (i) $200,000 of
the Convertible Note convertible into 127,592 shares of Common
Stock previously owned by Mr. Carucci, and (ii) $187,500 of the
Convertible Note convertible into 119,617 shares of Common Stock
owned by the Partnership, of which the aggregate principal and
accrued interest thereon is convertible at any time into 247,209
shares and 101,112 shares, respectively, of the Company's Common
Stock, constituting 7.5% of the Company's Common Stock. As a
result of the above transactions, as of August 12, 1997, Mr.
Sanford is the beneficial holder of (i) $868,750 of the
Convertible Note of which the principal and accrued interest
thereon is convertible at any time into approximately 554,226
shares and 226,686 shares, respectively, of Common Stock, and
(ii) 1,544,653 shares of the Company's Common Stock, constituting
approximately 49.8 percent of the Company's outstanding Common
Stock. As such, Mr. Sanford may be deemed to control the
Company.
Mr. Sanford is the Company's President, Chief Executive
Officer and a member of the Board of Directors.
Item 6. Selected Financial Data.(1)
For the Year 1997 1996 1995 1994 1993
Net sales $8,379 $5,715 $5,041 $5,495 $7,021
Operating profit (loss) $ (613) $ 14 $(517) $(652)
$ (2,251)
Income (loss) from
continuing operations $ 497 $ (58)$ (602) $(588)
$ (3,492)
Loss from discontinued
operations, net of tax $ - $ - $ - $ (161)
$ (1,837)
Net income (loss) $ 497 $(58) $(602) $(749) $(5,329)
Net income (loss) per common and
equivalent share:
Continuing operations $0.15 $(0.02) $(0.18) $(0.18)
$ (1.05)
Discontinued operations - - -
(0.05) (0.55)
Basic $0.15 $(0.02) $(0.18) $(0.23) $
(1.60)
Diluted $0.13 $(0.02) $(0.18) $(0.23) $ (1.60)
Shares used in computing
Net income (loss) per common and
equivalent share
Basic 3,321 3,321 3,321 3,321 3,321
Diluted (2) 4,809 3,321 3,321 3,321 3,321
Cash dividend per share $ - $ - $ - $ -
$ -
At Year-End
Total assets $4,014 $1,998 $2,095 $2,655 $3,104
Long-term debt $ - $ - $ - $ - $ 9
Note payable to majority
owners $1,500 $1,500 $1,500 $1,500 $1,500
(1) Restated to reflect the operations of Northern Engineering
Corporation as discontinued.
(2) Includes 1,348,338 shares assuming the conversion principal
and accrued interest of certain Notes, and 140,081 shares issued
pursuant to a loan origination fee agreement for the year ended
December 31, 1997.
_______________________________
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
Forward-Looking Statements
The following discussion contains certain forward-looking
statements with respect to anticipated results, which are subject
to a number of risks and uncertainties. From time to time, the
Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects,
technological developments, new products, research and
development activities and similar matters. The Private
Securities Litigation Reform Act of 1995 provides safe harbor for
forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks
and uncertainties that may effect the operations, performance,
development and results of the Company's business include, among
other things, the following: business conditions and growth in
the Company's industry; general economic conditions; the addition
or loss of significant customers; the loss of key personnel;
product development; competition; fluctuations in foreign
currency exchange rates; rising costs of raw materials and the
unavailability of sources of supply; the timing of orders placed
by the Company's customers; failure by the Company's subsidiary,
Houze, to renegotiate its credit facility beyond the current
expiry date of September 30, 1998; and other risk factors listed
from time to time in the Company's quarterly reports.
Trends
The following discussion and analysis of financial condition
pertains primarily to Houze and Numo, which represent the primary
business activities of the Company.
The Company continues to face significant competition,
particularly in its core business, which consists principally of
the decoration of items, which are sold to advertising specialty
distributors. In an effort to gain market share and to compete
with its competitors, many of whom are larger companies with far
greater resources, the Company instituted price reductions for
large orders and has increased its marketing efforts to retail
distributors and holders of licensed products. Additionally, the
Company has made significant improvements to its customer
services area in response to the higher level of service demanded
by its customers.
Liquidity and Capital Resources
The Company's consolidated cash and equivalents, were
$462,000 at December 31, 1997 compared to $170,000 at December
31, 1996. During this period, cash and equivalents increased
primarily due to the collection of the secured promissory Note
underlying certain mortgaged property in the amount of $490,000.
Capital expenditures of the Company, were $69,000, $12,000
and $0 in 1997, 1996 and 1995, respectively. The Company does
not anticipate any material capital expenditures in 1998.
From June 1987 through May 1989, the Company made certain
secured loans to Pennsylvania Engineering Corporation ("PEC")
which may be deemed to have been an affiliate of the Company at
such time, and in connection therewith, at December 31, 1994 the
Company was owed a principal balance of $1,555,000 on its
outstanding loans to PEC and $1,032,000 of accrued interest and
$78,000 of fees. Such outstanding loans to PEC were payable on
demand, bore interest at the prime rate plus 3% and are
collateralized by a mortgage on certain real property owned by
PEC's subsidiary, Lectromelt Corporation. On February 4, 1992,
PEC and its subsidiaries, Birdsboro Corporation and Lectromelt
Corporation, filed petitions for relief under Chapter 7 of the
Federal Bankruptcy Code in the United States Bankruptcy Court for
the Western District of Pennsylvania. A trustee was appointed in
such proceedings on February 7, 1992. In accordance with Chapter
7 of the Code, upon such appointment the trustee assumed
jurisdiction over the assets and all powers with respect to the
business of PEC and such subsidiary. On December 28, 1994 the
Company received $60,000 in satisfaction of the mortgage from the
sale of certain real property owned by PEC's subsidiary,
Lectromelt Corp. Such proceeds were applied to accrued interest
receivable and a comparable amount was charged against the
valuation reserve and recorded as other income in the statement
of operations. On September 11, 1995, the Company and the
Bankruptcy Trustee for PEC entered into a Settlement Agreement
pursuant to which the Company's claims against PEC were
recognized as an allowed, general unsecured claim in the amount
of $1,399,986 and provided for a contingent minimum distribution
to the Company in settlement of such claim in an amount equal to
at least 33 percent of its allowed claim. The Settlement
Agreement permitted the Company to withdraw from the settlement
if the Trustee's proposed distribution plan provided for
distribution to the Company of less than 33 percent of the
recognized claim. On October 16, 1995, the Bankruptcy Court
approved the Trustee's settlement with the Company and on
November 16, 1995 the Trustee made a distribution to the Company
in the amount of $472,541 in full and final settlement of the
Company's claim against PEC. Such proceeds were applied to
accrued interest receivable, and a comparable amount was charged
against the valuation reserve and recorded as other income in the
statement of operations.
On March 11, 1994, Houze entered into an agreement with a
bank for a revolving line of credit facility in an amount not to
exceed $400,000. The line of credit has since been increased to
$500,000 and extended to September 30, 1998. Advances on such
line of credit bear interest at the lending bank's prime rate
plus 3.5%. In addition, the bank is entitled to reimbursement of
fees for auditing Houze's accounts receivable during the term of
the commitment. Advances are collateralized by accounts
receivable, inventory and an assignment of a $50,000 Certificate
of Deposit from Fay Penn Economic Development Council and
$100,000 Certificates of Deposit from the Company, and are
guaranteed by the Company and Mr. Sanford. No assurances can be
given as to the success of obtaining an extension or refinancing
subsequent to September 30, 1998. A failure by Houze to
renegotiate such credit facility beyond September 30, 1998 would
have a material adverse effect on the Company.
The Company compensated Mr. Sanford $12,000 for management
services for the year ended December 31, 1997, all of which has
been deferred. Mr. Sanford's annual compensation for 1998 will
be $12,000.
In accordance with an agreement with the Company's former
lender, DWG made a principal payment on December 31, 1982 on the
Company's behalf and purchased interest notes, which were issued
by the Company to such lender in payment of accrued interest.
Pursuant to a Conversion Rights Agreement entered into between
the Company and DWG, the obligations of the Company arising from
the principal payment by DWG and purchase of interest notes were
convertible into newly-issued shares of the Company's common
stock. In 1983, DWG converted $651,445 principal amount of
interest notes into 651,445 shares of the Company's common stock.
In November and December 1988, the Company repaid all outstanding
interest notes, which aggregated $2,132,000, repaid $4.5 million
of the $6.0 million note evidencing such principal payment and
paid substantially all accrued interest owed to DWG. The
remaining principal balance of a $1.5 million note owed to Triarc
Companies, Inc., successor to DWG, as of December 31, 1993 bears
interest at the prime rate and is convertible into 956,937 shares
of the Company's common stock. Effective January 10, 1994, such
convertible note was purchased by Mr. Bruce Paparella and Mr.
Warren B. Kanders in connection with their acquisition of common
stock from Triarc Companies, Inc., as described elsewhere herein.
On December 22, 1994, Mr. Kanders donated his 25% rights in such
note to a charitable institution. On April 18, 1995, John
Sanford, the Company's Vice President and Chief Financial
Officer, acquired a $362,500 interest in such convertible note
which is convertible into 231,259 shares of the Company's Common
Stock and, as such, Mr. Sanford may be deemed to be the
beneficial owner of 231,259 shares issuable to him upon his
election to convert his interest in the notes. On April 21,
1996, Mr. Bruce Paparella, the Company's President, Chief
Executive Officer and a Director died from cancer. On September
6, 1996, in a private transaction, the Estate of Mr. Paparella
sold to Mr. Sanford 1) a 37.5% interest in such Note in the
principal sum of $562,500, which is convertible into 358,852
shares of the Company's Common Stock, 2) certain accounts
receivable in the amount of $461,250 of the Company, and 3)
1,644,653 shares of the Company's common stock, for an aggregate
purchase price of $330,000. November 22, 1996, Mr. Sanford, in a
private transaction, made gifts to non-affiliated persons of 1)
100,000 shares of the Company's Common Stock, and 2) $56,250 of
the principal amount plus accrued interest of the Convertible
Note, which is convertible into 35,886 shares of the Company's
Common Stock. On February 13, 1997, in a private transaction,
Choate Rosemary Hall Foundation, Inc. sold to Mr. Sanford
pursuant to a Note and Accounts Receivable Purchase Agreement (i)
their interest of $375,000 principal amount of the Convertible
Note, which is convertible into 239,234 shares of the Company's
Common Stock, and (ii) their interest in the Accounts Receivable
for an aggregate purchase price of $200,000. On August 12, 1997,
in private transactions, Mr. Sanford pursuant to separate Note
and Accounts Receivable Purchase Agreements sold his interest in
$375,000 principal amount and accrued interest of the Convertible
Note and $307,500 in the Accounts Receivable for an aggregate
amount of $113,227. Of this amount, $187,000 principal amount
and accrued interest on the Convertible Note and 12.5% interest
in the Accounts Receivable were purchased by Carucci Family
Partners, (the "Partnership" ) in which Mr. Walter P. Carucci is
a general partner, for $55,222. As a result of the above
transaction, Mr. Carucci may be considered the beneficial owner
of an aggregate of $387,500 of the Convertible Note, consisting
of (i) $200,000 of the Convertible Note convertible into 127,592
shares of Common Stock previously owned by Mr. Carucci, and (ii)
$187,500 of the Convertible Note convertible into 119,617 shares
of Common Stock owned by the Partnership, of which the aggregate
principal and accrued interest thereon is convertible at any time
into 247,209 shares and 101,112 shares, respectively, of the
Company's Common Stock, constituting 7.5% of the Company's Common
Stock. As a result of the above transactions, as of August 12,
1997, Mr. Sanford is the beneficial holder of (i) $868,750 of the
Convertible Note of which the principal and accrued interest
thereon is convertible at any time into approximately 554,226
shares and 226,686 shares, respectively, of Common Stock, and
(ii) 1,544,653 shares of the Company's Common Stock, constituting
approximately 49.8 percent of the Company's outstanding Common
Stock.
The Company has incurred losses from operations and as of
December 31, 1997, the Company had a stockholders' deficiency of
$3.5 million and a consolidated working capital deficit of $1.4
million. The collection of a note receivable in the amount of
$490,000, and reversal of an environmental reserve due to
compliance with all obligations pertaining to waste containment
in the amount of $775,000 were included in other income during
the year ended December 31, 1997.
The Company's ability to meet its cash requirements in the
next year is dependent upon substantial improvement in the
results of operations and cash flows, maintaining and renewing
its financing from its bank or others. If these conditions are
not satisfactorily achieved, the Company may be unable to
generate sufficient cash flow to meet its requirements, and
therefore, may be unable to continue operations.
The financial statements have been prepared on a going
concern basis, and accordingly, do not include any adjustments
relating to the recoverability and classification of recorded
asset amounts nor the amounts and classification of liabilities
that might be necessary should the Company be unable to continue
in existence or be required to sell its assets.
Recent Acquisitions
On April 9, 1997, the Company entered into a stock purchase
agreement with G&L Consultants, Inc. to purchase a 90 percent
ownership, represented by 171,000 shares of the outstanding
common stock of LMP, a North Carolina corporation with its
principal office in Shelby, North Carolina. The purchase price
for the common stock consisted of the payment of $1, plus a
personal indemnity by Mr. Sanford to G&L Consultants, Inc. for
the payment of a promissory note from LMP to a bank in the
original principal amount of $70,000. The Company has the option
to purchase at any time, or after 3 years is obliged to purchase
at the request of G&L Consultants, Inc., the remaining 10 percent
outstanding shares for the amount of $10,450, with such price
increasing at an annual rate of 20 percent for each month after
April 9, 1997. The acquisition was accounted for using the
purchase method of accounting, of which the purchase price over
net assets acquired is insignificant.
On April 30, 1997, Numo, a newly formed wholly-owned
subsidiary of the Company, purchased certain assets and assumed
certain liabilities of Numo Manufacturing Company, Inc. and its
wholly-owned subsidiary Diamond Cap Company, Inc. (the "Seller"),
each of which has principal offices in Mesquite, Texas. The
aggregate purchase price for the acquired assets of both
companies and covenants not to compete given by the Seller and
their shareholders, was $1,100,000 consisting of $45,000 paid in
cash and the execution and delivery of promissory notes
("Purchase Notes") in the aggregate principal amount of $855,000
and $200,000 payable pursuant to non-compete agreements,
described as follows. The Purchase Notes and amounts payable
under the non-compete agreements bear interest initially at the
rate of 8% per annum subject to adjustment on each April 1 and
October 1, with the first adjustment to occur on October 1, 1997.
On each adjustment date (October 1 and April 1) the interest rate
shall be increased or decreased (but not below 8% per annum or
above 11% per annum) by an amount equal to 50% of the difference
between the prime rate published by The Wall Street Journal on
the adjustment date in question and the immediately preceding
adjustment date. Principal and interest payable on the Purchase
Notes and under the non-compete agreements will be paid on the
first day of each January, April, July and October, commencing on
July 1, 1997. The entire unpaid principal balance on all such
obligations shall be due and payable April 1, 2004. The Purchase
Notes are secured by a pledge of substantially all of the
acquired assets. In addition, payment of the Purchase Notes is
guaranteed by the Company. Numo also entered into consulting
agreements with the two shareholders of the Seller for a term of
one year pursuant to which Numo paid each of such consultants
$224,000 on May 1, 1997.
In order to finance the cash portion of the purchase price
and the consulting fees paid at the time of the closing, the
Company borrowed $550,000 from Blind John, LLC which is wholly-
owned by members of the family of John Sanford, the Company's
President, of which Mr. Sanford is a less than 1% owner. The
loan bore interest at the annual rate of 10 percent and the
outstanding principal balance was repaid in full, with interest
on July 9, 1997. The Company paid an origination fee to the
lender in the amount of $3,500 and an additional loan origination
fee in the amount of $30,000 is payable on or before May 1, 1998.
At the option of the lender exercisable before May 1, 1998, in
lieu of receiving payment of the $30,000 additional origination
fee, the lender shall have the right to purchase the number of
shares of Common Stock of the Company equal to 3% of the
Company's fully diluted shares of Common Stock at the time of
such election or a cash fee of $10,000 and 2% of the Company's
fully diluted shares of Common Stock at the time of such election
or a cash fee of $20,000 and 1% of the Company's fully diluted
shares of Common Stock at the time of such election, provided the
Company has sufficient shares of Common Stock which are then
authorized and unissued available for purchase by the lender. On
April 16, 1998, the Company and Blind John, LLC agreed to extend
the option to May 1, 1999.
Numo continues the pre-existing business activities of Numo
Manufacturing Company, Inc. and Diamond Cap Company, Inc. at the
same premises in Mesquite, Texas for which it entered into a
lease agreement with one of the selling entities for a term of 7
years at an annual base rent of $76,000. Numo's primary
business activity is custom manufacturing, sewing and decorating
of a variety of cloth and vinyl bags and related accessories and
visor style caps. Similarly to Houze Glass Corporation, Numo's
sales are made through sales representatives and are generally
for advertising specialties, premiums, souvenirs and the retail
trade.
The acquisition was accounted for using the purchase method
of accounting and, accordingly, the consolidated financial
statements include Numo's operations from the date of
acquisition. The amounts paid in connection with consulting
agreements of $450,000 are being amortized over the terms of such
agreements, which is 12 months. The amounts paid for covenants
not to compete of $224,000 are being amortized over the terms of
those agreements, which is 3 years. The Company allocated the
remaining excess of purchase price over net assets acquired,
which is approximately $95,000 to goodwill, which is being
amortized over 20 years. Acquisition costs incurred in
connection with this purchase transaction which consisted
principally of professional and borrowing fees, were not
material.
Environmental Matters
As described elsewhere herein, the Company became aware that
certain of the products of Houze might have concentrations of
lead and cadmium at levels, which might constitute hazardous
waste. While after testing, it was ascertained that products
currently being produced are within acceptable levels, certain
products, generally those produced prior to 1980, had
unacceptable levels of lead and cadmium. These products had been
disposed of in a disposal site located on Houze's property. The
Pennsylvania Department of Environmental Protection (PDEP) and
the Company agreed to a consent order on September 22, 1994,
which outlined a plan for Houze to remove and encapsulate all of
the hazardous waste and thereby comply with residual waste pile
closure requirements. The estimated cost of the Company's
original plan of remediation was increased during 1993 by
$700,000 from $200,000, based on advice from its consultant,
which was provided for in the 1993 consolidated financial
statements. The Company incurred actual remediation expenses in
the aggregate amount of $215,000, of which $45,000, $25,000 and
$41,000 were charged to the reserve in 1997, 1996 and 1995,
respectively. On February 12, 1998, a final closure inspection
was conducted by the PDEP. On February 23, 1998, the PDEP
determined that the Company had satisfactorily complied with the
requirements of the consent order, and the Company was released
from any further obligation with respect to such consent order.
As of December 31, 1997, the balance of the reserve in the amount
of $775,000 was reversed into other income.
Year 2000 Capabilities
The Company is developing an action plan with respect to
modifying is computer systems to be Year 2000 compliant. The
process involves system reviews, testing, and modification or
replacement of date-sensitive software. This conversion is not
expected to have any effect on customers or a material adverse
effect on the business operations or its consolidated financial
position, results of operations or cash flows. The Company
intends to communicate with suppliers, dealers, financial
institutions and others, which it does business to coordinate
Year 2000 compliance. At this time, the Company is unable to
determine the cost of necessary software or computer hardware
upgrades and replacements in connection with achieving Year 2000
compliance.
Inflation and Changing Prices
Management believes that inflation did not have a
significant effect on the results of operations during the last
three years.
Results of Operations
1997 Compared with 1996
Net sales increased to $8.4 million in 1997 from $5.7
million in 1996. Of this increase, $2.3 million was attributable
to 10 months of operations of Numo, the balance was due to
increased sales of Houze. Gross profit as a ratio to sales
decreased to 22 percent from 24 percent due to lower gross profit
margins on sales of Numo, which was 20 percent in 1997.
Selling general and administrative expenses increased to
$2.4 million in 1997 from $1.4 million in 1996, of which $.84
million was attributable to 10 months of operations of Numo, $.08
million was attributable to the LMP acquisition and $.05 million
was attributable to an overall increase in professional fees.
Other income includes $490,000 related to collection of
notes receivable and reversal of related reserves associated with
certain property sold by Northern in 1993, and the reversal of
$775,000 of environmental reserves of Houze resulting from
favorable compliance and resolution of a consent order and
agreement.
1996 Compared with 1995
Net sales increased to $5.7 million in 1996 from $5.0
million in 1995. The increase in net sales resulted from
increased marketing and sales efforts initiated in 1995, as well
as special orders related to the 1996 Olympics. During 1996,
sales orders related to the 1996 Olympics aggregated $.5 million.
The Company sold 3.1 million units of decorative mugs and
glassware at an average price of approximately $1.82 versus 2.6
million units sold at an average price of $1.91 in 1995. In
addition, the Company sold .15 and .5 million units of
"misprinted mugs at an average price of $.07 and of $.07, for
1996 and 1995, respectively, for which the inventory values were
reduced to zero in prior years when such mugs were produced,
because they were deemed not salable.
While selling, general and administrative expenses have
decreased from $1.4 million in 1995 to $1.3 million in 1996, due
to decreased legal fees and salaries, selling, general and
administrative expenses of Houze increased by $.1 million due to
increased estimated charges for bad debts, and salaries.
Item 8. Financial Statements and Supplementary Data Index.
Report of Independent Public Accountants 19
Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and
1996 20
Consolidated Statements of Operations and
Accumulated Deficit -
Three years ended December 31, 1997 21
Consolidated Statements of Cash Flows - Three years
ended December 31, 1997 22
Notes to Consolidated Financial Statements 23
Financial Statement Schedules: Schedules included are
set forth in Item 14.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilson Brothers USA, Inc.:
We have audited the accompanying consolidated balance sheets of
Wilson Brothers USA, Inc. (an Illinois corporation) and
subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations and accumulated deficit and
cash flows for each of the three years in the period ended
December 31, 1997. These financial statements and the schedule
referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing 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 and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Wilson Brothers USA, Inc and subsidiaries as of December 31,
1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 16 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 16. The consolidated financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed
in Item 14.(A) 2. is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a
whole. The schedule does not include any adjustments that might
result from the outcome of the uncertainty regarding the Company
discussed above.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
April 29, 1998
Item 8. Financial Statements and Supplementary Data.
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of December 31
1997 1996
Assets (In thousands)
Current assets
Cash and equivalents $ 462 $ 170
Receivables, less allowance of $143,000 in 1997
and $160,000 in 1996 1,328 1,059
Inventories 1,053 332
Note receivable, less valuation reserve of $490,000 in 1996
- -
Prepaid consulting agreements 150 -
Other 49 74
Total current assets 3,042 1,635
Goodwill, less accumulated amortization of $4,000 in 1997
92 -
Non-compete agreements, less accumulated amortization of $50,000
in 1997 174 -
Properties, at cost less accumulated depreciation of $2,013,000
in 1997 706 363
and $1,922,000 in 1996
$ 4,014 $1,998
Liabilities and Stockholders' Deficit
Current liabilities:
Short-term borrowings $ 421 $ 140
Current portion of notes payable 85 -
Accounts payable 1,413 705
Accrued salaries and other employee costs 254
259
Environmental reserve - 820
Accrued interest due affiliates 524 415
Accrued interest due others 124 84
Due to affiliates 1,192 1,230
Other current liabilities 395 217
Total current liabilities 4,408 3,870
Notes payable to affiliates 1,256 1,244
Notes payable to others 1,225 256
Other liabilities 616 639
3,097 2,139
Commitments and Contingencies
Stockholders' deficit:
Preferred stock, $1 par value; authorized 5,000,000
shares; none issued - -
Common stock, $1 par value; authorized 10,000,000
shares; issued and outstanding 3,321,039 shares 3,321
3,321
Capital in excess of par value 7,464 7,464
Minimum pension liability - (23)
Accumulated deficit (14,276) (14,773)
Total stockholders' deficit (3,491) (4,011)
$4,014 $1,998
See accompanying notes to consolidated financial statements.
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Three years ended December 31
1997 1996 1995
(In thousands except per share amou
nts)
Net sales $8,379 $5,715 $5,041
Cost of sales 6,564 4,324 4,109
Selling, general and administrative expenses 2,428
1,377 1,449
8,992 5,701 5,558
Operating profit (loss) (613) 14 (517)
Other expense (income):
Interest expense 127 57 38
Interest expense - affiliates 119 102 127
Interest income (32) (78) (39)
Provision for doubtful notes and interest
receivable from affiliate - 40 457
Other - net (1,324) (49) (498)
(1,110) 72 85
Income (loss)
before provision for income taxes 497 (58)
(602)
Provision for income taxes - - -
Net income (loss) 497 (58) (602)
Accumulated deficit - beginning of year (14,773) (14,715)
(14,113)
Accumulated deficit - end of year $ (14,276) $(14,773) $
(14,715)
Net income (loss) per share:
Basic $0.15 $(0.02) $(0.18)
Diluted $0.13 $(0.02) $(0.18)
See accompanying notes to consolidated financial statements.
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three years ended December 31
1997 1996 1995
(In thousands)
Cash flows from operating activities:
Net income (loss) $ 497 $ (58) $(602)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 144 62 84
Liabilities in excess of assets purchased 46 -
-
Gain on sale of assets - (5) -
Provision on uncollectible notes
receivable from former affiliate (490) - 450
(Increase) decrease in receivables, net (18) (274)
130
(Increase) decrease in inventories (460) 104 61
Decrease (increase) in other current assets 30 (41)
(23)
(Decrease) increase in accounts payable 604 84
(73)
Increase (decrease) in accrued salaries and
other employee costs (5) (122) 109
Increase in accrued interest 149 122 126
Increase in other current liabilities 324 11
27
(Decrease) in environmental reserve (820) (25)
(41)
Net cash provided by (used in) operating activities 1
(142) 208
Cash flows from investing activities:
Acquisition of businesses net of cash acquired (997) -
-
Capital expenditures (69) (12) -
Proceeds from sale of assets - 5 -
Net cash provided by (used in) investing activities (1,066)
(7) -
Cash flows from financing activities:
Repayment of long-term debt (98) (4) (4)
Increase (decrease) in short-term borrowings 331 (10
5) (62)
Proceeds from notes payable - other 1,058 - -
Proceeds from notes payable - affiliate 66 -
-
Repayment of note receivable - - 150
Net cash provided by financing activities 1,357 (10
9) 84
Net increase (decrease) in cash and equivalents 292
(258) 292
Cash and equivalents at beginning of period 170 428
136
Cash and equivalents at end of period $ 462$ 170 $428
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 105 $ 36 $ 38
See accompanying notes to consolidated financial statements.
(1) Basis of Presentation
Wilson Brothers (the "Company") is a holding company whose
business is conducted through its wholly-owned subsidiaries,
Numo Manufacturing Acquisition, Inc. ("Numo") and Houze
Glass Company ("Houze"), its 75 percent owned subsidiary
Houze West LLC ("Houze West"), and its 90 percent owned
subsidiary, LM Plastics, Inc. ("LMP"). All subsidiaries
operate in the specialty advertising business and engage in
the decoration of glass, ceramic and plastic items, cloth
and vinyl bags, and visor style caps. Their products are
primarily distributed throughout the United States through
sales representatives.
Principles of Consolidation
All significant intercompany items and transactions have
been eliminated in consolidation.
On April 23, 1993, DWG Acquisition Group L.P. acquired
shares of DWG Corporation ("DWG"), representing 28.6% of
DWG's then outstanding shares of common stock. DWG
subsequently changed its name to Triarc Companies, Inc.
("Triarc"). DWG owned at the time approximately 53.7% of
the Company's outstanding common stock.
On January 10, 1994, pursuant to a Securities Purchase
Agreement dated December 28, 1993 among Bruce Paparella,
Warren B. Kanders and Triarc, Mr. Paparella acquired from
Triarc 1,296,436 shares of the Company's common stock, and
Mr. Kanders acquired from Triarc 648,217 shares of the
Company's common stock, collectively replacing Triarc as 59
percent ownership of the Company's outstanding common stock.
In addition, Triarc assigned to Mr. Paparella (75 percent)
and Mr. Kanders (25 percent) the $l,500,000 outstanding
balance of note payable to parent ("Convertible Note") and
certain accounts receivable ("Accounts Receivable") held by
Triarc in the amount at September 30, 1993 of $l,230,000.
Effective December 30, 1994, Mr. Kanders entered into three
separate stock purchase agreements pursuant to which Mr.
Kanders transferred the aggregate of 648,217 shares of the
Company's Common Stock owned by him to four individuals,
including Mr. Paparella who purchased 348,217 shares for
$5,000. The remainder of these shares were sold by Mr.
Kanders to three individuals who are not related to Mr.
Paparella. Effective December 22, 1994 Mr. Kanders made a
gift of his 25% portion of the Convertible Note which was
convertible into 239,234 shares of Common Stock (repre
senting 6.9% of the Common Stock on a fully diluted basis
assuming the Convertible Note was fully converted into such
shares of Common Stock) and Mr. Kanders' 25% interest in the
Accounts Receivable to a charitable foundation, leaving Mr.
Kanders with no remaining beneficial interest in the
Company's Common Stock. On April 18, 1995, John Sanford,
the Company's Vice President and Chief Financial Officer,
acquired a $362,500 interest in such convertible note which
is convertible into 231,259 shares of the Company's Common
Stock and, as such, Mr. Sanford may be deemed to be the
beneficial owner of 231,259 shares issuable to him upon his
election to convert his interest in the notes. On April 21,
1996, Mr. Bruce Paparella, the Company's President, Chief
Executive Officer and a Director died from cancer. On
September 6, 1996, in a private transaction, the Estate of
Mr. Paparella sold to Mr. Sanford 1) a 37.5% interest in
such Note in the principal sum of $562,500, which is
convertible into 358,852 shares of the Company's Common
Stock, 2) certain accounts receivable in the amount of
$461,250 of the Company, and 3) 1,644,653 shares of the
Company's common stock, for an aggregate purchase price of
$330,000. On November 22, 1996, Mr. Sanford, in a private
transaction, made gifts to non-affiliated persons of 1)
100,000 shares of the Company's Common Stock, and 2) $56,250
of the principal amount plus accrued interest of the
Convertible Note, which is convertible into 35,886 shares of
the Company's Common Stock. On February 13, 1997, in a
private transaction, Choate Rosemary Hall Foundation, Inc.
sold to Mr. Sanford pursuant to a Note and Accounts
Receivable Purchase Agreement (i) their interest of
$375,000 principal amount of the Convertible Note, which is
convertible into 239,234 shares of the Company's Common
Stock, and (ii) their interest in the Accounts Receivable
for an aggregate purchase price of $200,000. On August 12,
1997, in private transactions, Mr. Sanford pursuant to
separate Note and Accounts Receivable Purchase Agreements
sold his interest in $375,000 principal amount and accrued
interest of the Convertible Note and $307,500 in the
Accounts Receivable for an aggregate amount of $113,227. Of
this amount, $187,000 principal amount and accrued interest
on the Convertible Note and 12.5% interest in the Accounts
Receivable were purchased by Carucci Family Partners, (the
"Partnership" ) in which Mr. Walter P. Carucci is a general
partner, for $55,222. As a result of the above transaction,
Mr. Carucci may be considered the beneficial owner of an
aggregate of $387,500 of the Convertible Note, consisting of
(i) $200,000 of the Convertible Note convertible into
127,592 shares of Common Stock previously owned by Mr.
Carucci, and (ii) $187,500 of the Convertible Note
convertible into 119,617 shares of Common Stock owned by the
Partnership, of which the aggregate principal and accrued
interest thereon is convertible at any time into 247,209
shares and 101,112 shares, respectively, of the Company's
Common Stock, constituting 7.5% of the Company's Common
Stock. As a result of the above transactions, as of August
12, 1997, Mr. Sanford is the beneficial holder of (i)
$868,750 of the Convertible Note of which the principal and
accrued interest thereon is convertible at any time into
approximately 554,226 shares and 226,686 shares,
respectively, of Common Stock, and (ii) 1,544,653 shares of
the Company's Common Stock, constituting approximately 49.8
percent of the Company's outstanding Common Stock.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of the 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
financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ
from those estimates.
Properties
Properties are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets ranging
from four to forty years.
Assets, which have been fully depreciated, are retained in
the accounts for as long as they are useful to operations.
Upon disposition, it is the Company's policy to eliminate
from the accounts the carrying value of the asset and the
related accumulated depreciation or amortization and to
credit or charge the resulting profit or loss to operations.
Net Income (loss) per Share
Effective December 31, 1997, the Company adopted Statement
of Financial Accounting Standards "Earnings per Share"
("SFAS") No. 128. Under SFAS 128, the Company is require to
replace the traditional earnings per share ("EPS")
disclosures with dual presentation of "Basic" and "Diluted"
EPS. The implementation of SFAS did not have an impact on
the Company's financial position or results of operations or
on previously reported EPS.
Basic EPS is calculated by dividing income available to
common shareholders by the weighted average number of shares
of common stock outstanding during the period. Income
available to common shareholders used in determining basic
EPS was $622 thousand in 1997, $ (58) thousand in 1996, and
$ (602) thousand in 1995. The weighted average number of
shares of common stock used in determining basic EPS was
3,321 million in 1997, 3,321 million in 1996, and 3,321
million in 1995.
Diluted EPS is calculated by dividing income available to
common shareholders, adjusted to add back dividends or
interest on convertible securities, by the weighted average
number of shares of common stock outstanding plus additional
common shares that could be issued in connection with
potentially dilutive securities. Income available to common
shareholders used in determining diluted EPS was $622
thousand in 1997, $ (58) thousand in 1996, and $ (602)
thousand in 1995. The weighted average number of shares of
common stock used in determining diluted EPS was 4,809
million in 1997, 3,321 million in 1996, and 3,321 million in
1995 and reflects additional shares in connection with
convertible notes (1,348 million in 1997) and loan
origination fee (140 thousand in 1997).
Concentration of Credit Risk
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and
accounts and notes receivable and are carried at fair market
value, which approximates cost. The Company places its cash
with high quality financial institutions.
Cash and Equivalents
The Company classifies as cash and equivalents all highly
liquid investments with maturity of three months or less
when purchased.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130, "Re
porting Com
prehensive Income", which is effective for periods beginning
after December 15, 1997. The Statement requires businesses
to disclose comprehensive income and its components in their
general-purpose financial statements. The implementation of
SFAS 130 is not expected to have a material impact on the
Company's financial position or results of operations.
Supplemental Cash Flow Information
During 1997, the Company acquired assets net of assumed
liabilities in connection with the acquisition of Numo in
exchange for notes payable of $1,055,000. The Company also
acquired $6,000 in equipment through related capital lease
obligations.
(3) Acquisitions
On April 9, 1997, the Company entered into a stock purchase
agreement with G&L Consultants, Inc. to purchase a 90
percent ownership, represented by 171,000 shares of the
outstanding common stock of LMP, a North Carolina
corporation with its principal office in Shelby, North
Carolina. The purchase price for the common stock consisted
of the payment of $1, plus a personal indemnity by Mr.
Sanford to G&L Consultants, Inc. for the payment of a
promissory note from LMP to a bank in the original principal
amount of $70,000. The Company has the option to purchase
at any time, or after 3 years is obliged to purchase at the
request of G&L Consultants, Inc., the remaining 10 percent
outstanding shares for the amount of $10,450, with such
price increasing at an annual rate of 20 percent for each
month after April 9, 1997. The acquisition is accounted for
using the purchase method of accounting, of which the
purchase price over net assets acquired was not
insignificant. The pro forma effect on prior periods'
results of operations is not material. In January 1998, the
Company agreed to purchase the remaining 10 percent of
outstanding shares of LMP for $8,000. The purchase
transaction will be for cash and will be accounted for as an
adjustment to the original purchase price in the March 31,
1998 financial statements.
On April 30, 1997, Numo, a newly formed wholly-owned
subsidiary of the Company, purchased certain assets and
assumed certain liabilities of Numo Manufacturing Company,
Inc. and its wholly-owned subsidiary Diamond Cap Company,
Inc. (the "Seller"), each of which has principal offices in
Mesquite, Texas. The aggregate purchase price for the
acquired assets of both companies and covenants not to
compete given by the Seller and their shareholders, was
$1,100,000 consisting of $45,000 paid in cash and the
execution and delivery of promissory notes ("Purchase
Notes") in the aggregate principal amount of $855,000 and
$200,000 payable pursuant to non-compete agreements,
described as follows. The Purchase Notes and amounts
payable under the non-compete agreements bear interest
initially at the rate of 8% per annum subject to adjustment
on each April 1 and October 1, with the first adjustment to
occur on October 1, 1997. On each adjustment date (October
1 and April 1) the interest rate shall be increased or
decreased (but not below 8% per annum or above 11% per
annum) by an amount equal to 50% of the difference between
the prime rate published by The Wall Street Journal on the
adjustment date in question and the immediately preceding
adjustment date. Principal and interest payable on the
Purchase Notes and under the non-compete agreements will be
paid on the first day of each January, April, July and
October, commencing on July 1, 1997. The entire unpaid
principal balance on all such obligations shall be due and
payable April 1, 2004. The Purchase Notes are secured by a
pledge of substantially all of the acquired assets. In
addition, payment of the Purchase Notes is guaranteed by the
Company. Numo also entered into consulting agreements with
the two shareholders of the Seller for a term of one year
pursuant to which Numo paid each of such consultants
$224,000 on May 1, 1997.
In order to finance the cash portion of the purchase price
and the consulting fees paid at the time of the closing, the
Company borrowed $550,000 from Blind John, LLC which is
wholly-owned by members of the family of John Sanford, the
Company's President, of which Mr. Sanford is a less than 1%
owner. The loan bore interest at the annual rate of 10
percent and the outstanding principal balance was repaid in
full, with interest on July 9, 1997. The Company paid an
origination fee to the lender in the amount of $3,500 and an
additional loan origination fee in the amount of $30,000 is
payable on or before May 1, 1998. At the option of the
lender exercisable before May 1, 1998, in lieu of receiving
payment of the $30,000 additional origination fee, the
lender shall have the right to purchase the number of shares
of Common Stock of the Company equal to 3% of the Company's
fully diluted shares of Common Stock at the time of such
election or a cash fee of $10,000 and 2% of the Company's
fully diluted shares of Common Stock at the time of such
election or a cash fee of $20,000 and 1% of the Company's
fully diluted shares of Common Stock at the time of such
election, provided the Company has sufficient shares of
Common Stock which are then authorized and unissued
available for purchase by the lender. On April 16, 1998,
the Company and Blind John, LLC agreed to extend such option
to May 1, 1999.
Numo continues the pre-existing business activities of Numo
Manufacturing Company, Inc. and Diamond Cap Company, Inc. at
the same premises in Mesquite, Texas for which it entered
into a lease agreement with one of the selling entities for
a term of 7 years at an annual base rent of $76,000.
Numo's primary business activity is custom manufacturing,
sewing and decorating of a variety of cloth and vinyl bags
and related accessories and visor style caps. Similarly to
Houze Glass Corporation, Numo's sales are made through sales
representatives and are generally for advertising
specialties, premiums, souvenirs and the retail trade.
The acquisition was accounted for using the purchase method
of accounting and, accordingly, the consolidated financial
statements include Numo's operations from the date of
acquisition. The amounts paid in connection with consulting
agreements of $450,000 are being amortized over the terms of
such agreements, which is 12 months. The amounts paid for
covenants not to compete of $224,000 are being amortized
over the terms of those agreements, which is 3 years. The
Company allocated the remaining excess of purchase price
over net assets acquired, which is approximately $95,000 to
goodwill, which is being amortized over 20 years.
Acquisition costs incurred in connection with this purchase
transaction which consisted principally of professional and
borrowing fees, were not material. The following table sets
forth the unaudited pro forma combined condensed results of
operations for the year ended December 31, 1996 and for the
year ended December 31, 1997, and assumes that the foregoing
purchase transaction had been consummated as of January 1,
1996 and 1997, respectively. These pro forma results are
not necessarily indicative of the results that would have
been achieved had these acquisitions occurred on the dates
indicated or that may occur in the future.
Year ended Year ended
December 31, 1997December 31, 199
6
(Unaudited) (Unaudited)
Revenues $ 9,682 $9,315
Income (loss) from operations $(861) $(609)
Net income $ 326 $(617)
Net Income (loss) per share:
Basic $ 0.10 $(0.19)
Diluted $0.09 $(0.19)
On November 12, 1997, the Company became the sole owner of a
newly formed Nevada limited-liability company, Houze West,
LLC ("Houze West"). In January 1998, the Company ownership
interest changed to 75 percent, when an unaffiliated
company, Cactus Enterprises, LLC, purchased the remaining 25
percent interest. Houze West will maintain its
manufacturing operations in Henderson, Nevada, where it has
entered into a lease agreement for approximately 15,000
square feet of manufacturing facilities. Houze West will
operate in the same business segment as the Company,
primarily in the decoration of mugs and glassware, and will
be a manufacturing and sales distribution center to the
Company's customers in the western United States.
The Company has agreed to make an initial capital
contribution to Houze West of cash and other assets in the
approximate aggregate amount of $133,000. This capital
contribution will be accounted for using the equity method
of accounting.
(4) Discontinued Operations
On September 28, 1993, the Company's Board of Directors authorized the sale
or liquidation of its wholly owned subsidiary Northern Engineering
Corporation ("Northern"), the Company's crane business
segment. On May 12, 1994, the Company sold all of the outstanding shares
of Northern to a corporation controlled by a former director
of the Company.
In consideration for the sale of the Northern shares, the
Company received $10,000, plus a secured promissory note
(the "Note") in the principal amount of $750,000 repayable
on or before May 1, 1999, which bears interest payable
quarterly at 8 percent per annum. Such note is
collateralized by certain real property of Northern (the
"Mortgaged Property"). The Mortgaged Property was not
appraised in connection with the transaction. If the
Mortgaged Property is sold, all of the principal and
interest is immediately due and payable.
Effective October 28, 1994, the Company agreed to reduce the
percentage from 50 percent to 30 percent of the amount that
the Company shall be entitled to receive if the Mortgaged
Property is sold in excess of $750,000. In exchange, the
purchaser made a partial prepayment of the principal of the
Note in the amount of $150,000, which was paid by November
7, 1994, and made an additional $150,000 partial prepayment
on January 15, 1995. The purchaser had the option to prepay
the remaining principal balance of the Note by June 30,
1995. Such prepayment was not made, and therefore, the
purchaser was to additionally compensate the Company $50,000
by July 15, 1995, of which $10,000 had been paid. As a
result, the Company believed that the principal amount of
the Note and accrued interest thereon was not collectible,
and therefore had made a full valuation reserve in the March
31, 1997 and December 31, 1996 financial statements in the
amount of $490,000 for principal, plus $6,000 for accrued
interest. On July 1, 1997, the principal and accrued
interest on the Note were paid in full in the aggregate
amount of $539,700, including accrued interest of $6,200 and
$43,500 representing 30 percent of the amount that the
Company shall be entitled to receive if the Mortgaged
Property is sold in excess of $750,000. As a result, as of
June 30, 1997, the valuation reserve for principal of
$490,000 and interest of $6,000 were reversed, and included
in other income and interest income, respectively.
(5) Inventories
Inventories, stated at the lower of cost (first-in, first-
out basis) or market, consisting of materials, labor and
overhead, are as follows:
December 31,
1997 1996
Raw materials $968,000 $313,000
Work in process 18,000 -
Finished goods 67,000 19,000
$1,053,000 $ 332,000
(6) Properties
The following is a summary of the major classifications of
properties:
December 31
1997 1996
Classification
Land $18,000 $18,000
Buildings and improvements 667,000 667,000
Machinery and equipment 2,034,000 1,600,000
2,719,000 2,285,000
Less: accumulated depreciation 2,013,000 1,922,000
$706,000 $363,000
(7) Notes Receivable from Affiliates
From June 1987 through May 1989, the Company made certain
secured loans to Pennsylvania Engineering Corp. ("PEC"),
which may be deemed to have been an affiliate of the
Company. In connection therewith, as of December 31, 1994,
the Company was owed a principal balance of $1,555,000 on
its outstanding loans to PEC and $1,032,000 of accrued
interest and $78,000 of fees. PEC filed for bankruptcy. On
December 28, 1994, the Company received $60,000 in
satisfaction of the mortgage from the sale of certain real
property owned by PEC's subsidiary, Lectromelt Corporation.
Such proceeds were applied to accrued interest receivable,
and a comparable amount was charged against the valuation
reserve and recorded as other income in the statement of
operations. On September 11, 1995, the Company and the
Bankruptcy Trustee for PEC entered into a Settlement
Agreement pursuant to which the Company's claims against PEC
were recognized as an allowed, general unsecured claim in
the amount of $1,399,986. On October 16, 1995, the
Bankruptcy Court approved the Trustee's settlement with the
Company and on November 16, 1995 the Trustee made a
distribution to the Company in the amount of $472,541 in
full and final settlement of the Company's claim against
PEC. Such proceeds were applied to accrued interest
receivable, and a comparable amount was charged against the
valuation reserve and recorded as other income in the
statement of operations.
(8) Income Taxes and Other Liabilities
As of December 31, 1997 and 1996 the Company provided a full
valuation allowance for the net deferred tax assets of
$586,000 and $1,024,000. The deferred tax assets primarily
result from net losses and certain differences in the tax
basis and book basis of inventories, receivables and
liabilities.
The reported tax provision and a computed tax benefit based
on the loss before income taxes are reconciled as follows:
Year ended December 31,
1997 1996 1995
Income (loss) before income taxes $ 497 $(58) $ (602)
Statutory rate 35% 35% 35%
Total computed tax expense (benefit) 174 (20) (211)
(Decrease) increase in taxes resulting from:
Reversal of environmental valuation
allowance (271) - -
Effect of net operating losses for which
no tax is available 97 20 211
$ - $ - $ -
(9) Short-term Borrowings
On March 4, 1994, Houze entered into an agreement with a
bank for a revolving line of credit facility in an amount
not to exceed $400,000. Advances on such line of credit
bear interest at the lending bank's prime rate plus 3.5%.
In addition, the bank is entitled to reimbursement of fees
for auditing Houze's accounts receivable during the term of
the commitment. Advances are collateralized by accounts
receivable, inventory and an assignment of a $50,000
Certificate of Deposit from Fay Penn Economic Development
Council and $100,000 Certificates of Deposit from the
Company, and are guaranteed by the Company and Mr. Sanford,
the Company's Chief Executive Officer. On March 11, 1994,
Houze was advanced $160,000 of the revolving line of credit
and used the proceeds to repay the then outstanding
borrowings under the previous accounts receivable financing
arrangement. The revolving line of credit facility maturity
was extended from December 31, 1995 to September 30, 1998
with a limit of $500,000. No assurances can be given as to
the success of obtaining an extension or refinancing
subsequent to September 30, 1998. A failure by Houze to
renegotiate such credit facility would have a material
adverse effect on the Company.
The short-term borrowings of Houze as of and for the years
ended December 31 are as follows:
1997 1996 1995
End of year balance $421,0 $140, $245,0
00 000 00
Maximum amount
outstanding during the $479,0 $419, $380,0
year 00 000 00
Average balance $259, $280,0
outstanding during the $314,0 000 00
year 00
Weighted average 11.5% 11.5% 11.8%
interest rate during
the year
Interest rate at year 11.5% 11.3% 11.5%
end
(10) Notes Payable to Affiliates and Others
Notes payable to majority owners as of December 31, 1997 and
December 31, 1996 in the aggregate amount of $1,500,000 bear
interest at the prime rate and are convertible to 956,937
shares of the Company's common stock. In December 1994,
Warren B. Kanders made a gift of his 25% interest in the
Note to a charitable foundation of 239,234 shares of the
Company's Common Stock issuable upon conversion of its
interest in the Note. On April 18, 1995, John Sanford, the
Company's then Vice President and Chief Financial Officer,
acquired a $362,500 interest in such convertible note. As a
result, Mr. Sanford may be deemed the beneficial owner of
231,259 shares issuable to him upon his election to convert
his interest in the notes. Conversion by the majority
owners would be dilutive of their individual percentage
ownership of the Company's aggregate outstanding common
stock. On April 21, 1996, Mr. Bruce Paparella, the
Company's President, Chief Executive Officer and a Director
died from cancer. On September 6, 1996, in a private
transaction, the Estate of Mr. Paparella sold to Mr. Sanford
a 37.5% interest in such Note in the principal sum of
$562,500, which is convertible into 358,852 shares of the
Company's Common Stock. On November 22, 1996, in a private
transaction, Mr. Sanford made gifts to a non-affiliated
person of $56,250 principal amount and accrued interest of
the Convertible note, which is convertible into 35,886
shares of the Company's Common Stock. On February 13, 1997,
in a private transaction, Choate Rosemary Hall Foundation,
Inc. sold to Mr. Sanford pursuant to a Note and Accounts
Receivable Purchase Agreement (i) their interest of
$375,000 principal amount of the Convertible Note, which is
convertible into 239,234 shares of the Company's Common
Stock, and (ii) their interest in the Accounts Receivable
for an aggregate purchase price of $200,000. On August 12,
1997, in private transactions, Mr. Sanford pursuant to
separate Note and Accounts Receivable Purchase Agreements
sold his interest in $375,000 principal amount and accrued
interest of the Convertible Note and $307,500 in the
Accounts Receivable for an aggregate amount of $113,227. Of
this amount, $187,000 principal amount and accrued interest
on the Convertible Note and 12.5% interest in the Accounts
Receivable were purchased by Carucci Family Partners, (the
"Partnership" ) in which Mr. Walter P. Carucci is a general
partner, for $55,222. As a result of the above transaction,
Mr. Carucci may be considered the beneficial owner of an
aggregate of $387,500 of the Convertible Note, consisting of
(i) $200,000 of the Convertible Note convertible into
127,592 shares of Common Stock previously owned by Mr.
Carucci, and (ii) $187,500 of the Convertible Note
convertible into 119,617 shares of Common Stock owned by the
Partnership, of which the aggregate principal and accrued
interest thereon is convertible at any time into 247,209
shares and 101,112 shares, respectively, of the Company's
Common Stock, constituting 7.5% of the Company's Common
Stock. As a result of the above transactions, as of August
12, 1997, Mr. Sanford is the beneficial holder of (i)
$868,750 of the Convertible Note of which the principal and
accrued interest thereon is convertible at any time into
approximately 554,226 shares and 226,686 shares,
respectively, of Common Stock, and (ii) 1,544,653 shares of
the Company's Common Stock, constituting approximately 49.8
percent of the Company's outstanding Common Stock.
In connection with the acquisition of certain assets and
liabilities of Numo Manufacturing Company, Inc. and Diamond
Cap Company, Inc., Numo entered into promissory notes
("Purchase Notes") in the aggregate principal amount of
$855,000 and $200,000 payable pursuant to non-compete
agreements, described as follows. The Purchase Notes and
amounts payable under the non-compete agreements bear
interest initially at the rate of 8% per annum subject to
adjustment on each April 1 and October 1, with the first
adjustment to occur on October 1, 1997. On each adjustment
date (October 1 and May 1) the interest rate shall be
increased or decreased (but not below 8% per annum or above
11% per annum) by an amount equal to 50% of the difference
between the prime rate published by The Wall Street Journal
on the adjustment date in question and the immediately
preceding adjustment date. Principal and interest payable
on the Purchase Notes and under the non-compete agreements
will be paid on the first day of each January, April, July
and October, commencing on July 1, 1997. The entire unpaid
principal balance on all such obligations shall be due and
payable April 1, 2004. The Purchase Notes are secured by a
pledge of substantially all of the acquired assets. In
addition, payment of the Purchase Notes is guaranteed by the
Company.
In order to finance the cash portion of the purchase price
and the consulting fees paid at the time of the closing, the
Company borrowed $550,000 from Blind John, LLC which is
wholly-owned by members of the family of John Sanford, the
Company's President, of which Mr. Sanford is a less than 1%
owner. The loan bore interest at the annual rate of 10
percent and the outstanding principal balance was repaid in
full, with interest on July 9, 1997 using the proceeds
collected from the Northern Note.
During the year ended December 31, 1997, the Company from
time to time made short-term borrowings from Combahee
Partners, L.P. ("Combahee") a limited-partnership that Mr.
Sanford is the general partner. During the year ended
December 31, 1997, the Company incurred interest on loans to
Combahee in the amount of $1,228. As of December 31, 1997,
the Company owed $66,100 to Combahee payable on demand with
interest calculated at 8 percent per annum.
During the year ended December 31, 1997, the Company made
short-term borrowings from Margaret Peyton, the mother of
Mr. Sanford. As of December 31, 1997, the Company owed
$50,000 to Mrs. Peyton payable on demand with interest
calculated at 10 percent per annum.
LMP has a promissory note payable to a bank in the original
principal amount of $70,000, repayable over 7 years with
interest calculated at 1 percent over the bank's prime
interest rate, the payment of principal of which is
indemnified by Mr. Sanford. The note is due on February 22,
2002.
(11) Long-Term Debt
Long-term debt consists of the following:
December 31
1997 1996
Description (In thousands)
Purchase notes bearing interest at rates ranging
from 8% to 11%, maturing in 2004 $ 1,013$ -
Note payable to bank bearing interest at 9.50%,
maturing in 2002 47 -
Equipment capital lease obligations (see note 14) 6 -
1,066 -
Less-current maturities 85 -
$ 981 $ -
(12) Pension Plan
Houze has a defined benefit plan covering hourly-paid
employees. Contributions are computed using the projected
unit credit method of funding, the objective of which is to
fund each participant's benefits under the plan as they
accrue. Houze's funding policy is to contribute the minimum
amount required by the Employee Retirement Income Security
Act of 1974. During 1997, 1996 and 1995, no contributions
were required to be made under the plan.
The net periodic pension cost for the plan in 1997, 1996 and
1995 was $37,000, $42,000 and $45,000, respectively. The
components of the net periodic pension cost are as follows:
Year ended December 31,
1997 1996 1995
(In thousands)
Current service cost $ 41 $ 41 $ 52
Interest cost on projected benefit obligation 42 43 43
Actual return on assets 70 96 (3)
Unrealized (gain) loss on plan experience (107) (129)
(38)
Amortization of unrecognized net asset at transition (9) (9)
(9)
Net periodic pension cost $ 37 $ 42 $ 45
The following table sets forth the plans' projected funded
status:
December 31,
1997 1996
(In thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $635,000 in 1997 and $647,000 in 1996 $ 625$ 658
Reconciliation of funded status:
Plan assets at fair value $ 699 $635
Projected benefit obligation 635 658
Plan assets in excess (short) of projected benefit
obligation 64 (23)
Unrecognized net (gain) loss from plan experience (95) (17)
Unrecognized prior service cost 34 37
Unrecognized net asset at January 1, 1987,
amortized over 13 to 17 years (63) (72)
Additional minimum liability $(60) $(75)
An assumed discount rate of 7% for 1997 and 1996, and
long-term rate of return on assets of 8% for 1997 and 1996,
were used in developing this data. Plan assets are invested
in a managed portfolio, consisting primarily of corporate
bonds and common stock.
(13) Related Party Transactions
There were no charges from affiliates for the years ended
December 31, 1997, 1996 and 1995.
For information concerning certain other transactions
between the Company and other corporations or entities,
which may be deemed to be, affiliates of the Company, see
other Notes included elsewhere herein.
(14) Capital Leases
The Company has entered into a capital lease for certain
computer equipment. Future minimum lease payments required
by the capital lease and net future minimum lease payments
are as follows:
Year ending December 31:
1998 $ 1,968
1999 1,968
2000 1,804
Total minimum lease payments 5,740
Less amount representing interest (971)
Future minimum lease payments $ 4,769
(15) Operating Leases
The Company leases office and manufacturing facilities in
Mesquite, Texas for which it entered into a lease agreement
for the annual base rent of $76,000. Such lease expires on
April 30, 2004.
Minimum annual rental commitments under noncancelable
operating leases are as follows:
Year ending December 31:
1998 $76,000
1999 76,000
2000 76,000
2001 76,000
2002 76,000
Rent expense for the years ended December 31, 1997, 1996 and
1995 was $50,677, $0 and $0, respectively.
(16) Commitments and Contingencies
The Company has incurred losses from operations and as of
December 31, 1997, the Company had a stockholders'
deficiency of $3.5 million and a consolidated working
capital deficit of $1.4 million.
The Company's ability to meet its cash requirements in the
next year is dependent upon substantial improvement in the
results of operations and cash flows, maintaining and
renewing it's financing from its bank or others. If these
conditions are not satisfactorily achieved, the Company may
be unable to generate sufficient cash flow to meet its
requirements, and therefore, may be unable to continue
operations.
The financial statements have been prepared on a going
concern basis, and accordingly, do not include any
adjustments relating to the recoverability and
classification of recorded asset amounts nor do they include
adjustments to the amounts and classification of liabilities
that might be necessary should the Company be unable to
continue in existence or be required to sell its assets.
The Company has become aware that certain of the products of
Houze may have concentrations of lead and cadmium at levels,
which might constitute hazardous waste. While after
testing, it was ascertained that products currently being
produced are within acceptable levels, certain products,
generally those produced prior to 1980, had unacceptable
levels of lead and cadmium. These products had been
disposed of in a disposal site located on Houze's property.
The Pennsylvania Department of Environmental Protection
(PDEP) and the Company agreed to a consent order on
September 22, 1994, which outlined a plan for Houze to
remove and encapsulate all of the hazardous waste and
thereby comply with residual waste pile closure
requirements. The estimated cost of the Company's original
plan of remediation was increased during 1993 by $700,000
from $200,000, based on advice from its consultant, which
was provided for in the 1993 consolidated financial
statements. The Company incurred actual remediation
expenses in the aggregate amount of $215,000, of which
$45,000, $25,000 and $41,000 were charged to the reserve in
1997, 1996 and 1995, respectively. On February 12, 1998, a
final closure inspection was conducted by the PDEP. On
February 23, 1998, the PDEP determined that the Company had
satisfactorily complied with the requirements of the consent
order, and the Company was released from any further
obligation with respect to such consent order. Accordingly,
as of December 31, 1997, the balance of the reserve in the
amount of $775,000 was reversed into other income.
By agreement dated January 1, 1995, the Company, Houze and
Triarc agreed to settle an outstanding claim by a former
officer of Houze for bonuses owed. The agreement provided
that Houze pay to the former officer the aggregate amount of
$37,500 in several installments by December 31, 1996 of
which $31,350 was paid in 1995, and $6,150 was paid in 1996.
The original amount of such claim previously recorded in the
financial statements of approximately $116,000 plus interest
was reduced accordingly.
In addition to the litigation noted above, the Company is
from time to time involved in other routine litigation
incidental to its business, the outcome of which in the
opinion of management will not have a material adverse
effect on the Company's consolidated financial position or
results of operations.
(17) Subsequent Events
On February 18, 1998, the Company formed a new subsidiary,
Surplus Salvage Supply, LLC ("Surplus Salvage"), a Texas
Limited-Liability Company, which on February 26, 1998,
agreed to purchase certain assets of B.J.'s Warehouse, a
Texas company. The purchase price is $150,000, of which
$125,000 was paid in cash, and the balance payable in the
form of a promissory note in the amount of $25,000, over 24
months with interest calculated at 8 percent per annum.
The Company capitalized Surplus Salvage in the amount of
$76,500, and made a demand loan in the amount of $73,500.
To finance the capitalization and loan to Surplus Salvage,
the Company borrowed $140,000, including $60,000 from
Combahee, and $40,000 from a company of which a member of
the Board of Directors is the principal owner. These loans
are payable on demand.
Effective March 1, 1998, Harris Trust and Savings Bank
("Harris") terminated its appointment as the Company's
transfer agent and registrar due to overdue balances and non-
payment of its invoices for fees. Until such time that the
Company pays Harris for all past due fees plus reimbursement
of reasonable expenses, Harris will not release the
Company's records and stock certificate inventory for
further processing.
(18) Other Matters
In May 1997, the Company learned that its state of
incorporation, Illinois, administratively dissolved the
Company for failure to file the State of Illinois Domestic
Corporation Annual Report for 1995 and 1996. In July 1997,
the Company filed with the Secretary of State of Illinois
for reinstatement retroactive to June 1, 1995, and amended
its name to Wilson Brothers USA, Inc. Effective August 20,
1997, the Company was notified by the State of Illinois that
its certificate of incorporation was reinstated.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The table below sets forth the names, ages and positions of
the Company's directors and executive officers:
Name Age Position
John Sanford 32 President, Chief
Financial Officer,
Treasurer, Secretary
and Director
Brett R. Smith 32 Director
Frank Zanin 31 Director
The Board of Directors currently consists of three
directors. Mr. Arthur Williams, Vice President and Secretary
resigned as a director and officer on April 4, 1995. Mr. Sanford
was appointed to the Board of Directors in April 1995 filling the
vacancy of Mr. Nicholson who resigned on May 12, 1994. Directors
are elected at the annual meeting of shareholders, and hold
office until the next succeeding annual meeting of shareholders
or until their successors are elected and qualified. Mr.
Paparella who was appointed to the Board of Directors on January
10, 1994 to fill vacancies created by the resignation of members
of the Board of Directors who were elected by the former
controlling shareholder of the Company, died on April 21, 1996.
Mr. Brett R. Smith and Mr. Frank Zanin were appointed to the
Board of Directors on April 17, 1997 and April 24, 1997,
respectively, to fill the vacancies created by the death of Mr.
Paprella and resignation of Mr. Williams. Directors who are
employees of the Company do not receive an annual retainer or
meeting attendance fees.
The Company's officers are elected by the Board of Directors
and hold office at the discretion of the Board.
John Sanford has been President since the death of Mr.
Paparella in 1996 and previously served as Vice President,
Treasurer and Chief Financial Officer of the Company since March
7, 1994. He also became Secretary and Director in April 1995.
Since September 1993, Mr. Sanford has been an equity trader for
Carr Securities, Inc., a New York brokerage firm. From August
1991 through September 1993, Mr. Sanford was earning his M.B.A.
degree at the University of North Carolina at Chapel Hill. Mr.
Sanford was the President of Fortress Marine Construction from
August 1990 through August 1991.
Brett R. Smith has been a director since April 17, 1997, and
since 1993 co-founded and has been a principal of Counter Culture
Coffee in Durham, North Carolina. From Fall 1991 to Spring 1993
earned his M.B.A. at the University of North Carolina at Chapel
Hill.
Frank Zanin has been a director since April 24, 1997, and
since Fall 1993 has served as a Financial Analyst for Roper
Health Systems Inc. Previously, he was earning his M.B.A. degree
at The College of William and Mary through 1991.
Item 11. Executive Compensation.
During the year ended December 31, 1997, the Company
compensated John Sanford $12,000 for management services, all of
which has been deferred. Mr. Sanford's annual compensation for
1998 will be $12,000.
The Company's executive officer holds a position with a
non-affiliated company (see Item 10) that pays compensation to
such officer. The officer devotes the time necessary to the
Company and to his non-affiliated employer as is necessary for
the effective discharge of his duties. The Company is unable to
estimate the approximate amount of time spent by the officer
listed in Item 10 on the affairs of the Company and its
subsidiaries. No minimum amount of time is required to be
devoted to such affairs by such officer.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table sets forth information regarding the
beneficial ownership of shares of the Company's Common Stock, as
of March 1, 1998, by each person who beneficially owns more than
five percent of such shares, by each director of the Company, by
each executive officer named in Item 10 and by all directors and
executive officers of the Company as a group. Each person named
in the table has sole voting and investment power with respect to
all shares of Common Stock shown as beneficially owned by him or
it, except as otherwise set forth in the notes to the table.
Name and Address Amount of
of Beneficial Owner Beneficial Percent
Ownership
John Sanford
One Penn Plaza,
Suite 4720 2,325,565(1) 49.8%
New York, NY
10119-0002
All Directors and
Executive 2,325,565 49.8%
Officers (1
person)
(1) Includes 1,544,653 shares as to which Mr. Sanford has sole
voting and dispositive power and 554,226 shares and 226,686
shares, respectively, issuable upon conversion of the principal
and accrued interest thereon of a certain promissory note made by
the Company in the principal amount of $1,500,000 as to which Mr.
Sanford has a 57.9 percent interest.
Item 13. Certain Relationships and Transactions.
In connection with the sale of control of the Company
pursuant to a Securities Purchase Agreement dated December 28,
1993, Triarc Companies, Inc. ("Triarc"), the former controlling
shareholder of the Company, assigned to Bruce Paparella,
President and Chief Executive Officer of the Company and Warren
B. Kanders, a beneficial owner of more than 5% of the Company's
common stock, the $1,500,000 outstanding balance of a note (the
"Note") by the Company and certain accounts receivable (the
"Accounts Receivable") of the Company held by Triarc in the
amount, at September 30, 1993, of $1,230,000.
Effective December 30, 1994, Mr. Kanders entered into three
separate stock purchase agreements, whereby Mr. Kanders
transferred all of his shares of the Company's common stock to
four individuals, including Mr. Paparella who purchased 348,217
shares for $5,000. In addition, on December 22, 1994, Mr.
Kanders made a gift of his portion of the Note and Accounts
Receivable to a charitable foundation, leaving him with no
remaining beneficial interest in the Company's common stock. On
April 18, 1995, John Sanford, the Company's Vice President and
Chief Financial Officer, acquired a $362,500 interest in such
convertible note which is convertible into 231,259 shares of the
Company's Common Stock and, as such, Mr. Sanford may be deemed to
be the beneficial owner of 231,259 shares issuable to him upon
his election to convert his interest in the notes. On April 21,
1996, Mr. Bruce Paparella, the Company's President, Chief
Executive Officer and a Director died from cancer. On September
6, 1996, in a private transaction, the Estate of Mr. Paparella
sold to Mr. Sanford 1) a 37.5% interest in such Note in the
principal sum of $562,500, which is convertible into 358,852
shares of the Company's Common Stock, 2) certain accounts
receivable in the amount of $461,250 of the Company, and 3)
1,644,653 shares of the Company's common stock, for an aggregate
purchase price of $330,000. November 22, 1996, Mr. Sanford, in a
private transaction, made gifts to non-affiliated persons of 1)
100,000 shares of the Company's Common Stock, and 2) $56,250 of
the principal amount plus accrued interest of the Convertible
Note, which is convertible into 35, 886 shares of the Company's
Common Stock. On February 13, 1997, in a private transaction,
Choate Rosemary Hall Foundation, Inc. sold to Mr. Sanford
pursuant to a Note and Accounts Receivable Purchase Agreement (i)
their interest of $375,000 principal amount of the Convertible
Note, which is convertible into 239,234 shares of the Company's
Common Stock, and (ii) their interest in the Accounts Receivable
for an aggregate purchase price of $200,000. On August 12, 1997,
in private transactions, Mr. Sanford pursuant to separate Note
and Accounts Receivable Purchase Agreements sold his interest in
$375,000 principal amount and accrued interest of the Convertible
Note and $307,500 in the Accounts Receivable for an aggregate
amount of $113,227. Of this amount, $187,000 principal amount
and accrued interest on the Convertible Note and 12.5% interest
in the Accounts Receivable were purchased by Carucci Family
Partners, (the "Partnership" ) in which Mr. Walter P. Carucci is
a general partner, for $55,222. As a result of the above
transaction, Mr. Carucci may be considered the beneficial owner
of an aggregate of $387,500 of the Convertible Note, consisting
of (i) $200,000 of the Convertible Note convertible into 127,592
shares of Common Stock previously owned by Mr. Carucci, and (ii)
$187,500 of the Convertible Note convertible into 119,617 shares
of Common Stock owned by the Partnership, of which the aggregate
principal and accrued interest thereon is convertible at any time
into 247,209 shares and 101,112 shares, respectively, of the
Company's Common Stock, constituting 7.5% of the Company's Common
Stock. As a result of the above transactions, as of August 12,
1997, Mr. Sanford is the beneficial holder of (i) $868,750 of the
Convertible Note of which the principal and accrued interest
thereon is convertible at any time into approximately 554,226
shares and 226,686 shares, respectively, of Common Stock, and
(ii) 1,544,653 shares of the Company's Common Stock, constituting
approximately 49.8 percent of the Company's outstanding Common
Stock.
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K.
(A) 1. Financial Statements:
See Index to Financial Statements (Item 8)
2. Financial Statement Schedule:
II. Valuation and Qualifying Accounts -
Three years ended December 31, 1997.
All other schedules are omitted as the
required information is inapplicable or the
information is presented in the financial
statements or the notes thereto.
3. Exhibits:
Copies of the following exhibits are available at a
charge of $.25 per page upon written request to the
Secretary of the Company at 902 South Main Street,
Point Marion, PA 15474.
3.1 Articles of Incorporation (including all
amendments thereto) of Wilson Brothers,
incorporated herein by reference to Wilson
Brothers Form 10-K for the year ended December 31,
1980, Exhibit 3.1.
3.2 By-Laws of Wilson Brothers, incorporated herein by
reference to Wilson Brothers Form 10-K for the
year ended December 31, 1980, Exhibit 3.2.
4.1 Conversion Rights Agreement dated as of April 1,
1982 by and between Wilson Brothers and DWG
Corporation, incorporated herein by reference to
Wilson Brothers Form 10-Q for the quarter ended
June 30, 1982, Exhibit 4.2.
4.2 Amendment to Conversion Rights Agreement dated
April 1, 1982, incorporated herein by reference to
Wilson Brothers Form 10-K for the year ended
December 31, 1984, Exhibit 4.1.
10.1 Loan Agreement dated March 11, 1994 by and between
Houze Glass Corporation and Integra Bank/South,
incorporated by reference to Wilson Brothers Form
10-K for the year ended December 31, 1993, Exhibit
10.1.
10.2 Security Agreement dated March 11, 1994, by and between
Houze Glass Corporation and Integra Bank/South, incorporated by
reference to Wilson Brothers Form 10-K for the year ended
December 31, 1993, Exhibit 10.2.
10.3 Revolving Credit Note dated September 14, 1994 between
Houze Glass Corporation and Integra Bank/South, incorporated by
reference to Wilson Brothers Form 10-K for the year ended
December 31, 1994, Exhibit 10.3.
10.4 First Amendment to Loan Agreement and Note Modification
Agreement dated September 14, 1994 between Houze Glass
Corporation and Integra Bank/South, incorporated by reference to
Wilson Brothers Form 10-K for the year ended December 31, 1994,
Exhibit 10.4.
10.5 Amended and Restated Security Agreement dated December
30, 1994 between Houze Glass Corporation and Integra/Bank
Pittsburgh, incorporated by reference to Wilson Brothers Form 10-
K for the year ended December 31, 1994, Exhibit 10.5.
10.6 Third Amendment to Loan Agreement and Note
Modification Agreement between Houze Glass
Corporation and Integra Bank/South dated July 21,
1995, incorporated by reference to Wilson Brothers
Form 10-K for the year ended December 31, 1995,
Exhibit 10.7.
10.7 Fourth Amendment to Loan Agreement and Note Modification
Agreement between Houze Glass Corporation and Integra Bank/South
dated July 21, 1995, incorporated by reference to Wilson Brothers
Form 10-K for the year ended December 31, 1995, Exhibit 10.8.
10.8 Fifth Amendment to Loan Agreement and Note Modification
Agreement between Houze Glass Corporation and National City Bank
of Pennsylvania dated June 18, 1996, incorporated by reference to
Wilson Brothers Form 10-K for the year ended December 31, 1996,
Exhibit 10.8.
10.9 Sixth Amendment to Loan Agreement and Note Modification
Agreement between Houze Glass Corporation and National City Bank
of Pennsylvania December 20, 1996, incorporated by reference to
Wilson Brothers Form 10-K for the year ended December 31, 1996,
Exhibit 10.8.
10.10 Certificate of Resolution to Amend Articles of
Incorporation as to change of name from Wilson Brothers to Wilson
Brothers USA, Inc. incorporated by reference to Wilson Brothers
Form 10-Q for the quarter ended June 30, 1997, Item 6. Exhibits.
11.1 Computation of Earnings (Loss) per Common and
Equivalent Share - Five Years Ended December 31,
1997.*
__________________
* being filed herewith.
(B) Reports on Form 8-K
The registrant did not file any reports on Form 8-K
during the three months ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILSON BROTHERS USA, Inc.
Dated: July 15, 1998 By: /s/ John Sanford
John Sanford
President
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
indicated and on the dates indicated.
Date Signature Titles
July 15, /s/ John Sanford President, Chief Executive
1998 John Sanford Officer and Director
(Principal Executive Officer)
July 15, /s/ Brett R. Smith Director
1998 Brett R. Smith
July 15, /s/ Frank Zanin Director
1998 Frank Zanin
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
II. Valuation and Qualifying Accounts - Three 42
years ended December 31, 1997
Schedule II
WILSON BROTHERS USA, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Three years ended December 31, 1997
Additions
Balance charged Deduction Balance
at to s at
Description beginnin costs and from end
g expenses reserves of year
of year
Year ended December 31, 1997:
Receivables - allowance
for doubtful $160,000 $132,000 $149,000 $143,000
accounts
Note receivable - $490,000 $ - $490,000 $ --
valuation reserve -
Accrued interest - $6,000 $ $6,000 $ --
valuation reserve -
Year ended December 31, 1996:
Receivables - $130,000 $86,000 $56,000 $160,000
allowance for
doubtful
accounts
Notes receivable -
valuation $450,000 $40,000 $ $490,000
reserve -
Accrued interest - $6,000 $ $ $6,000
valuation reserve - --
Year ended December 31, 1995:
Receivables - allowance $243,000 $96,000 $210,000 $130,000
for
doubtful
accounts
Notes receivable
from affiliate- $2,665,0 $ $2,665,00 $ -
valuation 00 -- 0 -
reserve
Note receivable - $ $450,000 $ $450,000
valuation reserve -- --
Accrued interest - $ $6,000 $ $6,000
valuation reserve -- --
EXHIBIT INDEX
Pa
ge
11.1 Computation of Earnings 44
(Loss) per Common and
Equivalent Share - five
years ended December 31,
1997
Exhibit 11.1
WILSON BROTHERS USA, INC. AND SUBSIDIARIES
Computation of Earnings (Loss) per Common and Equivalent Share
Five Years Ended December 31, 1997
(In thousands, except per share amounts)
1997 1996 1995 1994 1993
Income (loss) from continuing operations $ 497$ (58) $
(602) $(588) $(3,492)
Loss from discontinued operations, net of tax - -
- (161) (1,837)
Add: Interest on convertible
note payable 125 * * *
*
622 (58) (602) (749)(2,352)
- - -
- -
Adjusted net income (loss) $ 622$ (58) $ (602) $
(749) $(2,352)
Average common stock and common
equivalents:
Common stock 3,321 3,321 3,321 3,321 3,321
Conversion of note payable,
including interest thereon 1,348 * * *
*
Issuable pursuant to a loan origination fee 140 * *
* *
4,809 3,321 3,321 3,321 3,321
Net income (loss) per common and
equivalent share:
Continuing operations $0.15 $(0.02) $(0.18)$(0.18)$(
1.05)
Discontinued operations - - - (0.05)
(0.55)
Basic $0.15 $(0.02) $(0.18)$(0.23)$(
1.60)
Diluted $0.13 $(0.02) $(0.18)$(0.23)$(
1.60)
*Antidilutive
