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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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)
ILLINOIS 36-1971260
(State o r other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
902 South Main Street
Point Marion, PA 15474
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 725-
5231
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(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 No X
There were 3,321,039 shares of Common Stock ($1.00 par
value) outstanding at October 31, 1998.
Part I. Financial Information, Item 1. Financial Statements
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
Assets (In thousands)
Current assets
Cash and cash equivalents $ 341 $ 462
Receivables, less allowance of $125,000 in 1998
and $143,000 in 1997 1,590 1,328
Inventories 1,272 1,053
Prepaid consulting agreements - 150
Other 195 49
Total current assets 3,398 3,042
Goodwill, less accumulated amortization 117 92
Non-compete agreements, less accumulated amortization 166
174
Properties, at cost less accumulated depreciation 707
706
$ 4,388 $4,014
Liabilities and Stockholders' Deficit
Current liabilities:
Short-term borrowings $ 431 $ 471
Current portion of notes payable 222 85
Accounts payable 1,783 1,413
Accrued salaries and other employee costs 141
254
Accrued interest due affiliates 586 524
Accrued interest due others 101 124
Due to affiliates 1,111 1,142
Other current liabilities 389 395
Total current liabilities 4,764 4,408
Notes payable to affiliates 1,256 1,256
Notes payable to others 1,299 1,225
Other liabilities 616 616
3,171 3,097
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
Minority interest 10 -
Minimum pension liability - -
Accumulated deficit (14,342) (14,276)
Total stockholders' deficit (3,547) (3,491)
$4,388 $4,014
See accompanying notes to consolidated financial statements.
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the Three MonthsFor the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
(In thousands except per share amounts)
Net sales $2,896 $2,299 $8,489 $5,686
Cost of sales 2,533 1,829 6,919 4,532
Selling, general and administrative expenses 486 612 1
,723 1,494
3,019 2,441 8,642 6,026
Income (loss) from operations (123) (142) (153) (340)
Other expense (income):
Interest expense - affiliates 42 38 86
89
Interest expense 26 (4) 125 53
Other, net (126) (24) (298) (552)
(58) 10 (87) (410)
Income (loss) from operations before
provision for income taxes (65) (152) (66)
70
Provision for income taxes - - - -
Net income (loss) (65) (152) (66) 70
Accumulated deficit - beginning (14,277) (14,551) (
14,276) (14,773)
Accumulated deficit - ending $(14,342) $ (14,703) $(1
4,342) $ (14,703)
Income (loss) per share
Basic $(0.02) $(0.05) $(0.02) $
0.02
Diluted $(0.02) $(0.05) $(0.02) $
0.01
See accompanying notes to consolidated financial statements.
Wilson Brothers USA, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
1998 1997
(In thousands except per share
amounts)
Cash flows from operating activities:
Net loss $ (66)$ 70
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 92 77
Decrease (increase) in receivables, net (262) 275
Decrease (increase) in inventories(219) (350)
Decrease (increase) in other current assets 4 (317)
Increase (decrease) in accounts payable 370 258
Increase (decrease) in accrued salaries and
other current liabilities (80) 27
Due from affiliates (31) 74
Net cash used in operating activities (192) 114
Cash flows used in investing activities:
Capital expenditures (84) (30
Acquisition businesses and intangibles (26) (1,089)
Net cash used in investing activities (110) (1,119)
Cash flows from financing activities:
Repayment of long-term debt - (28)
Proceeds from long-term debt 211 1,052
Minority interest capital contribution 10 -
Increase (decrease) in short-term borrowings (40)
228
Net cash provided by financing activities 181
1,252
Net increase (decrease) in cash and equivalents (121)
247
Cash and equivalents at beginning of period 462 170
Cash and equivalents at end of period $ 341 $ 417
See accompanying notes to consolidated financial statement
Summary of Significant Accounting Policies
(1) Basis of Presentation
The accompanying unaudited condensed financial statements
have been prepared by Wilson Brothers USA, Inc. (the
"Company") in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the
periods shown are not necessarily indicative of the results
that may be expected for the year. For further information,
refer to the Consolidated Financial Statements and Notes
thereto included in the Annual Report on Form 10-K for the
year ended December 31, 1997.
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 September 30,
1998, the Company had four wholly-owned subsidiaries, Numo
Manufacturing Acquisition, Inc. ("Numo"), Houze Glass
Corporation ("Houze"), Bargain Building Products, LLC
("BBP") and LM Plastics, Inc. ("LMP") and a 75 percent
ownership interest in Houze West LLC ("Houze West"). The
Company had discontinued substantially all of the operations
of LMP as of December 31, 1997. Numo and Houze 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. BBP operates in the building
products business and engages in wholesaling and retailing
of building supplies.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its majority-owned subsidiaries. All
significant intercompany items and transactions have been
eliminated in consolidation.
Income (loss) per Share
Income per share has been calculated using weighted
average number of outstanding shares of common stock of
4,809,458, which includes 1,348,338 shares assuming the
conversion of the principal and accrued interest on the
Convertible Note referred to in Note 5, and 140,081 shares
issued pursuant to the loan origination fee agreement
referred to in Note 5. Loss per share has been computed
using only the weighted average number of outstanding shares
of common stock (3,321,039 shares in each year), since the
inclusion of common stock equivalents (shares issuable as
referred to in Note 5) would be antidilutive.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued a new
standard SFAS 128, "Earnings per Share." SFAS 128 provides
for revisions to the current method of calculating earnings
per share and for the disclosure of certain information
about the capital structure of the reporting entity. SFAS
128 became effective on December 15, 1997; early adoption
was not permitted. The implementation of the SFAS did not
materially impact the Company's calculation of earnings per
share for prior periods.
In June 1997, the Financial Accounting Standards Board
issued SFAS 130, "Reporting Comprehensive 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, with reclassification of comparative (earlier
period) financial statements. The adoption of SFAS 130 did
not have a material impact on the Company's disclosure.
In June 1997, the Financial Accounting Standards Board
issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for
periods beginning after December 15, 1997. The statement
redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information
about a company's operating segments. The adoption of SFAS
131 did not have a material impact on the Company's
disclosure.
(2) Note Receivable
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 "Northern Note") in the principal amount of $750,000
repayable on or before May 1, 1999, which bore interest
payable quarterly at 8 percent per annum. The Northern Note
was collateralized by certain real property of Northern (the
"Mortgaged Property").
Effective October 28, 1994, the Company agreed to reduce the
percentage from 50 percent to 30 percent of the amount that
the Company was 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
Northern Note in the amount of $150,000 on or about 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 Northern Note by June
30, 1995. Such prepayment was not made, and as a result,
the purchaser was required to compensate the Company an
additional $50,000 by July 15, 1995. As of September 30,
1995, only $10,000 of this amount had been paid. As a
result of the failure to pay, the Company believed that the
principal amount of the Northern 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 Northern
Note were paid in full in the aggregate amount of $539,700.
This amount included accrued interest of $6,200 and $43,500
representing 30 percent of the amount that the Company would
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.
(3) Inventories
Inventories, stated at the lower of cost (first-in, first-
out basis) or market, consisting of materials, labor and
overhead, were as follows:
September 30, December
31,
1998 1997
(In
thousands)
Raw materials $ 1,055 $ 968
Work in process 20 18
Finished goods 93 67
$1,168 $1,053
(4) 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
bore 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 Certificates of Deposit from the Company worth
$100,000 in the aggregate, and are guaranteed by the Company
and Mr. John H. 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. On July 21, 1995, the
revolving line of credit facility maturity was extended from
December 31, 1995 to September 30, 1998 with a limit of
$500,000.
On October 2, 1998, Houze executed a new revolving line of
credit with a new bank, which expires on March 31, 1999 and
has a limit in the amount of $750,000. This line of credit
replaced the former $500,000 line of credit. Interest is
calculated at the bank's prime rate plus 0.75% or 1.25%
depending on the amount of cash collateral. Advances on
such line of credit are collateralized by Houze's accounts
receivable, inventory and equipment, as well as the real
property owned by Houze, secured under an open-end mortgage,
and are guaranteed by Mr. Sanford. No assurances can be
given as to the success of obtaining an extension or
refinancing subsequent to March 31, 1999. A failure by
Houze to renegotiate such credit facility would have a
material adverse effect on the Company.
(5) Notes Payable to Affiliates and Others
John H. Sanford, Walter Carucci, the Carucci Family
Partners, Marshall C. Sanford, Jr. and others hold interest
in an outstanding convertible note of the Company as of for
an aggregate amount of $1,500,000 bears interest at the
prime rate and are convertible to an aggregate of 956,937
shares of the Company's Common Stock (the "Convertible
Note"). These security holders also hold interest in
certain accounts receivable in the Company in the aggregate
amount of $1,230,000. In December 1994, Warren B. Kanders
made a gift of his 25% interest in the Convertible Note,
equal to 239,234 shares of the Company's Common Stock upon
conversion, and his interests in the Accounts Receivable to
the Choate Rosemary Hall Foundation, Inc. (the "Choate
Foundation"). On April 18, 1995, John H. Sanford, the
Company's then Vice President and Chief Financial Officer,
acquired a $362,500 interest, equal to 231,260 shares upon
conversion and a $297,250 interest in the Accounts
Receivable. As a result, Mr. Sanford was deemed the
beneficial owner of 231,260 shares issuable to him upon his
election to convert his interest in the Convertible Note as
of April 18, 1995. 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 the Convertible Note in the principal sum of $562,500,
which is convertible into 358,852 shares of the Company's
Common Stock, and a $461,250 interest in the Accounts
Receivable. 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.
As of the beginning of 1997, Mr. Sanford, the Choate
Foundation, and Mr. Walter Carucci, a private investor,
owned 57.92%, 25.0% and 13.33%, respectively, of the
Convertible Note and the Accounts Receivable in the amount
of $1,230,000. On February 13, 1997, in a private
transaction, Choate Foundation sold to Mr. Sanford pursuant
to a Note and Accounts Receivable Purchase Agreement (i) its
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) its $307,500 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 Agreement 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 convertible at any time
into 247,209 shares of the Company's Common Stock,
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. As a result of the above transactions,
as of September 30, 1998, Mr. Sanford was deemed to be the
beneficial holder of (i) $868,750 of the Convertible Note
convertible at any time into approximately 554,226 shares of
Common Stock, and (ii) 1,544,653 shares of the Company's
Common Stock, constituting approximately 49.6 percent of the
Company's outstanding Common Stock. As of September 30,
1998, conversion by the owners of the Convertible Notes
would have been dilutive of their individual percentage
ownership of the Company's aggregate 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 certain promissory
notes ("Purchase Notes") in the aggregate principal amount
of $855,000 and $200,000 payable pursuant to non-compete
agreements. The Purchase Notes and amounts payable under
the non-compete agreements initially bore interest 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 thereafter, the interest
rate has been and will continue to 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 is to 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 an entity which is wholly-
owned by members of the family
of John Sanford, the Company's President, of which Mr.
Sanford is a less than 3% owner. The loan bore interest at
the annual rate of 10% and the outstanding principal balance
was repaid in full, with interest on July 9, 1997 using the
proceeds collected from the Northern Note.
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.
(6) Commitments and Contingencies
The Company has incurred losses from operations and as of
September 30, 1998, the Company had an accumulated deficit
of $14.3 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, integrating its
acquisitions effectively, 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.
In February 1993 the Company became aware that certain of
the products produced by Houze may have contained
concentrations of lead and cadmium at levels that might
constitute hazardous waste. While after testing it was
ascertained that the products then being produced by Houze
were within acceptable levels, certain products, generally
those produced prior to 1980, had unacceptable levels of
lead and cadmium. The products produced prior to 1980 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 to $900,000
from $200,000, based on advice from its consultant. These
costs were provided for in the Company's 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.
In addition to the proceeding 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.
(7) 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 had the option to purchase
at any time, or after 3 years was 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.
The remaining 10 percent of the outstanding shares was
acquired in March 1998 for $8,000.
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 "Sellers"), 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 Sellers 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. 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 May 1) the interest rate
is to 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 was and will continue to 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 is 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 Sellers for a term of one year
pursuant to which Numo paid each of such consultants
$225,000 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 ("Blind
John") which is wholly-owned by members of the family of
John H. Sanford, the Company's President, of which Mr.
Sanford is a less than 3% owner. The loan bore interest at
the annual rate of 10% and the outstanding principal balance
was repaid in full, with interest on July 9, 1997. The
Company paid an origination fee to Blind John in the amount
of $3,500 and an additional loan origination fee in the
amount of $30,000 was payable on or before May 1, 1998. In
lieu of receiving payment of the $30,000 additional
origination fee, Blind John has the right to exercise an
option to purchase (1) 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, (2) 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 (3) 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
then authorized and unissued available (the "Financing
Option"). The initial expiration date of the Financing
Option was May 1, 1998. On April 16, 1998, the Company and
Blind John agreed to extend the exercise period 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 Sellers 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, pocket
coolies and related accessories. 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 were being amortized over the terms
of such agreements, which is 12 months. The amounts paid
for covenants not to compete of $225,000 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.
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 sold 25%
of its ownership interest to an unaffiliated company, Cactus
Enterprises, LLC. Houze West maintains 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 operates 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.
(8) Subsequent Events
On October 2, 1998, Houze executed a new revolving line of
credit with a new bank, which expires on March 31, 1999 and
has a limit in the amount of $750,000. This line of credit
replaced the former $500,000 line of credit. Interest is
calculated at the bank's prime rate plus 0.75% or 1.25%
depending on the amount of cash collateral. Advances on
such line of credit are collateralized by Houze's accounts
receivable, inventory and equipment, as well as the real
property owned by Houze, secured under an open-end mortgage,
and are guaranteed by Mr. Sanford. No assurances can be
given as to the success of obtaining an extension or
refinancing subsequent to March 31, 1999. A failure by
Houze to renegotiate such credit facility would have a
material adverse effect on the Company.
In addition to the line of credit, LMP and Houze West
operate in the same business segment as the Company,
primarily in the decoration of mugs, glassware, and
plastics. By December 31, 1998 the company transferred all
of the operations of LMP and Houze West to Houze.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-Looking Statements
The following discussion contains certain forward-looking
statements with respect to anticipated results that 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 a 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; business acquisitions
and joint ventures; 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.
Financial Condition and Liquidity
The following discussion and analysis of financial condition
pertains primarily to Houze and Numo, which represent the
principal business of the Company.
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 bore 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 Certificate of Deposit from the
Company worth $100,000 in the aggregate, 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. On July 21, 1995, the revolving line of
credit facility maturity was extended from December 31, 1995 to
September 30, 1998 with a limit of $500,000. On October 2, 1998,
Houze executed a new revolving line of credit with a new bank,
which expires on March 31, 1999 and has a limit in the amount of
$750,000. This line of credit replaced the former $500,000 line
of credit. Interest is calculated at the bank's prime rate plus
0.75% or 1.25% depending on the amount of cash collateral.
Advances on such line of credit are collateralized by Houze's
accounts receivable, inventory and equipment, as well as the real
property owned by Houze, secured under an open-end mortgage, and
are guaranteed by Mr. Sanford. No assurances can be given as to
the success of obtaining an extension or refinancing subsequent
to March 31, 1999. A failure by Houze to renegotiate such credit
facility would have a material adverse effect on 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 ("Blind John") which is
wholly-owned by members of the family of John H. Sanford, the
Company's President, of which Mr. Sanford is a less than 1% owner
(the "Numo Acquisition Financing"). The loan bore interest at
the annual rate of 10% and the outstanding principal balance was
repaid in full, with interest on July 9, 1997. The Company paid
an origination fee to Blind John in the amount of $3,500 and an
additional loan origination fee in the amount of $30,000 was
payable on or before May 1, 1998. In lieu of receiving payment
of the $30,000 additional origination fee, Blind John has the
right to exercise an option to purchase (1) 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, (2)
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 (3) 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 then authorized and
unissued available. The Company advanced the full amount of the
proceeds of
such loan to Numo. In addition, Numo entered into a lease
agreement with one of the selling entities for a manufacturing
facility located at 700 Hickory Tree Road, Mesquite, Texas for a
term of 7 years at an annual base rent of $76,000. The initial
expiration date of the Financing Option was May 1, 1998. On
April 16, 1998, the Company and Blind John agreed to extend the
exercise period to May 1, 1999
On February 18, 1998, the Company formed a new subsidiary,
Surplus Salvage Supply, LLC, a Texas limited-liability company to
sell surplus building supplies. During 1998, Surplus Salvage
Supply, LLC changed its name to Bargain Building Products, LLC
("BBP"). On February 26, 1998, BBP purchased inventory and other
assets of B.J.'s Warehouse, a Texas company. The purchase price
was $150,000, of which $125,000 was paid in cash, and the balance
was 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 1998, the Company capitalized BBP in the amount of
$77,000, and made a demand loan in the amount of $49,000. To
finance the capitalization and loan to BBP the Company borrowed
$140,000, including $60,000 from Combahee Partners, L.P.
("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.
As previously reported in the Company's Annual Report on Form 10-
K, 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, integrating its
acquisitions effectively, maintaining and obtaining new financing
from banks or others. If these conditions are not satisfactorily
achieved, the Company may be unable to generate sufficient cash
flow to meet its requirements, including payments of amounts,
which may be expended for environmental remediation, 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.
Results of Operations
The results of operations for the three and nine months ended
September 30, 1998 and 1997 include the operations of two newly
acquired subsidiaries, Numo and LMP since their respective dates
of acquisition of April 30, 1997 and April 9, 1997, and the
operations of a newly formed subsidiary, Bargain Building
Products, LLC ("BBP") since its formation date of February 18,
1998.
Three Months September 30, 1998 Compared with the Three Months
Ended September 30, 1997
Net sales increased $.5 million in the three months ended
September 30, 1998 as compared to the three months ended
September 30, 1997. The increase was primarily attributable to
increased sales of pocket coolies by Numo during the period.
The increase in cost of sales and selling, general and
administrative expenses for the three months ended September 30,
1998 compared to the three months ended September 30, 1997 is
also attributable to the increased sales of pocket coolies by
Numo.
Nine Months Ended September 30, 1998 Compared with the Nine
Months Ended September 30, 1997
Net sales increased $2.8 million in the nine months ended
September 30, 1998 as compared to the nine months ended September
30, 1997. The increase was primarily attributable to the
inclusion of Numo's sales for the nine months ended September 30,
1998 versus the inclusion of Numo's sales for the five months
ended September 31, 1997. In addition, Numo had increase sales
of pocket coolies during the nine months ended September 30, 1998
over the 5 months ended September 30, 1997.
The increase in cost of sales and selling, general and
administrative expenses for the three months ended September 30,
1998 compared to the nine months ended September 30, 1997 is also
attributable to the increased sales of pocket coolies by Numo, as
well as the inclusion of Numo's operations for the nine months
ended September 30, 1998 versus the five months ended September
30, 1997.
Other income for the nine months ended September 30, 1997
includes the reversal of a $490,000 note valuation reserve
provision resulting from the collection of such principal amount
and interest thereon in July 1997.
Part II. Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities and Use of Proceeds - Not
Applicable
Item 3. Defaults on Senior Securities - Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -
Not Applicable
Item 5. Other Information - Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial data schedule for the Nine Months ended
September 30, 1998 (for SEC purposes only)
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during
the nine months ended September 30, 1998.
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Wilson Brothers USA, Inc.
Date: December 06, 2000By:
/s/ John Sanford
John Sanford
President and
Principal Financial
Office
Exhibit 27.1
Financial Data Schedule for the Nine Months Ended September 30,
1998
(for SEC purposes only)
IN 000's
PERIOD-TYPE QUARTER
FISCAL-YEAR-END DEC-31-1998
PERIOD-START JUL-01-1998
PERIOD-END SEP-30-1998
CASH $ 341
SECURITIES 0
RECEIVABLES 1,715
ALLOWANCES 125
INVENTORY 1,272
CURRENT-ASSETS 3,398
PP&E 2,802
DEPRECIATION 2,095
TOTAL-ASSETS 4,388
CURRENT-LIABILITIES 4,764
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 3,321
OTHER-SE (6,868)
TOTAL-LIABILITIES-AND-EQUITY 4,388
SALES 2,896
TOTAL-REVENUES 2,896
COGS 2,533
TOTAL-COSTS 3,019
OTHER-EXPENSES (58)
LOSS-PROVISION 0
INTEREST-EXPENSE 68
INCOME-PRETAX (65)
INCOME-TAX 0
INCOME-CONTINUING (65)
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET-INCOME (65)
EPS-BASIC (.02)
EPS-DILUTED (.02)
