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FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
For the fiscal year ended April 30, 1997
or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from______________________________
Commission File Number 0 3928
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WELLINGTON HALL, LIMITED
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(Name of small business issuer in its charter)
NORTH CAROLINA 56-0815012
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
Route 1, U.S. Highway 29 and 70, Lexington, N.C. 27292
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 910-249-4931
Securities registered under section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (NO PAR VALUE)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
item 405 of regulation 5-b contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment. (X)
State issuer's revenues for its most recent fiscal year: $ 5,816,269
State the aggregate market value of the voting stock held by
non-affiliates, computed by reference to the price as which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act): Approximately $253,088 as of July 28, 1997.
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable dated: 2,289,887 shares of Common
Stock (No Par) as of July 28, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Company's Annual Report to Shareholders for the fiscal
year ended April 30, 1997, are incorporated by reference into Part II.
2. Portions of the Company's Proxy Statement for the 1997 Annual Meeting
of Shareholders are incorporated by reference into Part III.
Transitional Small Business Disclosure Form (Check One)
Yes ( ) No (X)
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PART I
Item 1. Description of Business
GENERAL
The Company manufactures high quality wooden home furniture. The
manufacturing operation involves the machining, sanding, assembling and
finishing of components and other raw materials. The Company's products are
distributed nationally through full-service retail stores and unaffiliated trade
showrooms that service the professional designer.
The Company owns a lumber processing mill and furniture manufacturing
facility located in San Pedro Sula, Honduras, Central America (the "Honduran
Facilities"). Wellington Hall Caribbean Corporation ("WHCC"), a wholly-owned
subsidiary of the Company, serves as a sales and distribution company for the
Honduran Facilities. WHCC is a North Carolina corporation organized in December,
1988 and is located in Lexington, North Carolina. Muebles Wellington Hall, S.A.
("MWH"), the Honduran subsidiary of WHCC, located in San Pedro Sula, manages and
operates the Honduran Facilities.
The Company adopted specific strategies designed to improve its results
of operations and financial condition. These strategies involve a more
aggressive program of product development, improving marketing and strengthening
management, as well as increasing capital and reducing indebtedness.
The Company has developed and adopted a comprehensive marketing plan
that includes strategic measures such as (i) augmenting the Company's
traditional product lines with more casual designs of furniture that management
believes reflect trends in consumer tastes, (ii) exploring new opportunities for
its Honduran Facilities and other offshore resources with designs employing
materials such as leather, marble, metal, wicker, bamboo and rattan, and (iii)
updating and upgrading catalogs and other sales aids in all distribution
channels. See "Business--Markets."
In addition to the foregoing, the Company has recruited an experienced
senior executive to lead its sales and marketing function. In September 1996,
the Company employed Arthur F. Bingham for the newly created position of Senior
Executive Vice President of Sales and Marketing. Mr. Bingham directs and
oversees all aspects of the Company's sales and marketing activities with the
goal of assuring continuing growth in profitable sales. Mr. Bingham's employment
arrangement provides for several incentives for him to assist the Company in
increasing sales revenues.
Management believes that the highly leveraged position of the Company
has impeded its ability to pursue strategies designed to improve its results of
operations. In response, the Company has pursued a number of strategies to
improve its financial condition by raising equity capital, reducing indebtedness
and increasing working capital. Certain elements of management's plan were
implemented or developed in fiscal year 1997.
In connection with the employment of Arthur F. Bingham as Senior
Executive Vice President of Sales and Marketing, Mr. Bingham made a loan to the
Company of $285,694. On February 12, 1997, Mr. Bingham purchased 600,000 shares
of Common Stock at a price of $.50 per share, which purchase price was paid by
cancellation of the foregoing loan and for an additional investment of $14,306.
The Company has used the funds provided by Mr. Bingham to reduce its
indebtedness and provide working capital. The Company also has granted stock
options to Mr Bingham and to Mr. Ralph Eskelsen, manager of the Honduran
Facilities, that will provide incentives to these key employees and may result
in additional contributions to capital. Mr. Eskelsen has indicated that he is
likely to purchase between $135,000 and $150,000 of Common Stock during calendar
year 1997 through exercise of his options.
The Company successfully negotiated with its lenders to amend its loan
agreements therewith to provide more favorable terms. On January 16, 1997, the
Company obtained an additional $250,000 line of credit from Lexington State
Bank. In addition, on March 10, 1997, the Company entered into an agreement with
the Overseas Private Investment Corporation ("OPIC") to restructure its loan to
reduce principal payments until July 1997 (with the deferred payments to be made
in a larger balloon payment at the end of the term of the loan in 1999) and to
lower the interest rate. The effect of the restructured loan is a reduction to
the Company's cash requirements for scheduled principal payments for fiscal 1997
and 1998 of $247,748 and $123,874, respectively, which will contribute
significantly to improving the Company's working capital and cash flow for these
years. The restructured OPIC loan also reduced scheduled interest expense by
$9,910 in fiscal 1997 and will reduce scheduled interest expense by about
$18,900 in fiscal 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On February 21,1997, the Company filed a registration statement with
the Securities and Exchange Commission for the offer and sale of 1,689,887
shares of its common stock. The shares will be offered first to the holders of
record of its outstanding common stock as of a date at or about the time that
the registration statement becomes effective, who will have the right for thirty
days to purchase one additional share for each share then held at a price of
$.50 per share. Each Wellington Hall shareholder as of that date may also
subscribe within
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that thirty day period for additional shares, and any available shares will be
sold to shareholders who have subscribed therefor on a pro rata basis. Any
shares still remaining after the expiration of the offering to Wellington Hall
shareholders may be sold to persons who are not directors, officers or
shareholders of Wellington Hall.
The aforementioned stock offering has been delayed and the registration
statement filed with respect thereto is not expected to become effective until
after the filing of the Company's 10 QSB for quarter ending July 31, 1997.
The Offerings, if fully subscribed, would increase the Company's equity
capital by about $800,000 and reduce indebtedness by a corresponding amount.
Interest expense would have been reduced by $79,744 and $83,201 in fiscal 1995
and 1996, respectively, and by approximately $80,000 in fiscal year 1997, on a
pro forma basis, if the Offerings were fully subscribed and consummated at the
beginning of the period. In addition to achieving a reduction in interest
expenses, management believes that the increase in equity and reduction of debt
service requirements in 1997 and 1998 that the foregoing strategies are designed
to achieve would make working capital and other funds available to pursue its
marketing and sales strategies more aggressively with the goal of increasing
funds generated by operations to fund future growth and debt service
requirements.
The Company's business was founded in 1964, and the Company is
incorporated in North Carolina. The Company's principal office is located at
Route 1, U.S. Highway 29 and 70 North, Lexington, North Carolina 27292,
telephone (910) 249-4931.
PRODUCTS
The Company's products include occasional living room tables, dining
room, and bedroom furniture, modular wall systems, entertainment cabinets (for
storage of televisions, stereo equipment and video cassette recorders,etc.),
console tables, mirrors, coffee tables, commodes and other occasional and accent
pieces. The product line generally represents an eclectic collection of
reproductions or renderings of 18th century English and French styles. Most of
the Company's 18th century English and French reproductions and other designs
are offered exclusively by the Company.
The Company imports certain of its designs for finishing when the
domestic production costs for such designs are prohibitive. The Company's
imported line is assembled in the Honduran Facilities and finished in the
Company's Lexington, North Carolina facility and includes solid mahogany dining
chair frames, occasional items and poster beds. Sales of imported designs have
increased over time as a result of the Company's acquisition of the Honduran
Facilities. As described hereinbelow, WHCC, the Company's North American
subsidiary, distributes the products manufactured at the Honduran Facilities,
and during fiscal 1997, such products accounted for approximately 29% of the
Company's consolidated sales (net of intercompany sales), while products
produced domestically by the Company accounted for about 71% of its consolidated
sales. Unfinished furniture imported from the Honduran Facilities accounted for
about 15% of the Company's domestically-produced sales, and the number of
imports for finishing from elsewhere was negligible. In addition, WHCC furnished
the Company's domestic operations with approximately 81% of certain forms of
wood utilized in domestic production. The balance of the raw materials utilized
by the Company's domestic operations, including plywood, brass decorating
hardware, finishing material and packing material, are purchased from domestic
sources.
WHCC markets to the U.S. furniture industry (including the Company)
three categories of unfinished products manufactured by the Honduran Facilities,
including: (i) raw materials in the form of wooden dimension stock (rough
parts); (ii) unfinished assembled items for furniture such as occasional tables
and dining chair frames; and (iii) components (turnings and carvings) utilized
in domestic production (OEM sales). The majority of sales utilize solid
mahogany, but the Company also uses laurel, primarily in the production of its
French designs, pine and San Juan Areno.
WHCC also markets directly to the retail trade a bedroom, dining room
and occasional table group fully produced and finished in the Honduran
Facilities. By assembling and finishing the group in Honduras, significantly
greater advantage of plentiful, less costly labor and lower overhead can be
realized, resulting in a lower retail purchase price for the Honduran - produced
group. This lower price, along with the utilization of solid "Honduran
Mahogany," recognized by the world trade as one of the premier hardwoods, allows
the Company to compete within its market niche. All of the wood utilized by the
Company's Honduran Facilities is harvested from segments of forests under
sustainable management programs.
MARKETS
The Company utilizes several different avenues of distribution. The
Company distributes its finished products to the designer trade, retail stores,
trade showrooms, buyers' clubs and consumer catalogues. The
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following discussion describes the views of the Company regarding each avenue of
distribution for its finished products.
Designer Trade
The Company believes that the designer trade has become one of the more
viable outlets for its primary product niche, traditional, high-end furniture.
From the Company's perspective, the advantage of this outlet is that virtually
all sales are "special order," negating the need for promotional discounts, and
the disadvantages are the relatively low sales volume per account versus the
cost of sales aids necessary to service the account, the requirement that it
grant credit to accounts with limited assets and with a limited credit
histories, and the inadequate means the designer normally has available to
receive delivery and service his customer. Since decorators do not generally
stock or display a significant amount of products, they are largely dependent on
the availability and quality of the Company's sales materials, and as such, it
is important for the Company to create and/or improve and maintain its sales
aids, including but not limited to photography and catalogs for both the
Company's and WHCC's products.
As part of the Company's strategy to increase its sales, the Company is
giving a high priority to maintaining quality sales materials. At present, a new
product catalog has been approved for printing. This catalog is expected to be
issued by September 1997 and includes a portion of the Company's product line,
including the new product introductions from the April 1997 furniture market.
Other more recent activities include the preparation of new finish samples for
the Company's wall unit dealers, a new catalog on the Woodward Collection ( See
"Management's Discussion & Analysis of Financial Condition and Results of
Operations" ), finish samples for the balance of the line , and finish display
boards for major dealers.
Retail Stores
Retail stores are a desirable outlet for the Company's products because
the potential volume of sales is relatively high and certain retail stores do
stock and display the Company's products. The Company does not, however, have
contractual relationships with such retail stores. The Company and a particular
retail store may have an informal understanding at the time that the Company
sells its products to such a store, which understanding may relate to such
things as amount of the Company's products to be displayed on the store's floor
space, pricing and dating for payment purposes. The Company's use of this outlet
has declined over several years for various reasons, including but not limited
to the fact that many dealers within the industry have gone out of business due
perhaps to the soft furniture economy. In addition, the Company has been unable
to compete effectively with the invoice dating policy (e.g. "buy now, pay
nothing until later") employed by larger manufacturers because such a policy
increases receivables and drains available cash. The Company believes that its
inability to compete with such a policy has induced many dealers not to consider
the Company's products when assigning available floor space and when assigning
resources for warehouse stock. Accordingly and in the absence of a display or
stock, a growing percentage of the Company's orders received from retail stores
are for items which the dealer can only sale by utilizing the Company's
catalogs, a circumstance that further necessitates the creation and/or
improvement and maintenance of the Company's sales aids. See--"Designer Trade."
The Company had some initial success in expanding its retail
distribution or display with existing dealers though a program of "Target
Accounts" instituted in early 1996. The program involved the Company asking
certain moderate to large retailers that normally display products compatible
with the Company's price and design niche to purchase and maintain a display of
approximately 70 of the Company's products, including bedroom, dining room and
occasional items. In exchange for doing so, the dealer received (i) a discount
on the original order for its floor samples, normally about 10%, (ii) two sales
periods annually, most often during February and August, in which the dealer
received a 10% discount on all its orders from the Company, (iii) Company
sponsored sales incentive contests for the dealer's floor sales personnel, as
described below, (iv) participation in a stock reserve program to ensure quicker
delivery from the Company, (v) better in-store training and service from the
Company's sales representative, (vi) exclusive distribution from the Company in
the dealer's trading area and (vi) sales leads received on the Company's home
page on the Internet.
By late fall of 1996 the program of "Target Accounts" stalled, perhaps
due to its substantial administrative requirements, and thereafter did not
produce additional or expanded distribution for the Company. The modest gains
that the Company realized from this program were limited to the Southeast region
of the United States. Additional marketing cost associated with this program
were expensed as they occurred and were not material. Though many elements of
the program remain part of the Company's overall marketing plan and the Company
continues its relationship with the dealers that participated in the program,
the Company has ceased sponsoring sales incentive contests for the dealers'
floor sales personnel.
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Early in 1996 the Company added its own Home Page to the Internet
(furniture.com) and has experienced a much higher level of hits (site visits)
and resulting inquiries than was anticipated. These inquiries are forwarded to
the Company's appropriate area sales representative and to a local dealer when
possible. Priority for referral is given to the dealers participating in the
Company's "Target Account" program.
Trade Showrooms
The Company maintains a showroom in High Point, North Carolina to
display its product line during the semiannual International Furniture Market
held in that city in the fall and spring of each year and is affiliated with
trade showrooms, that are accessible only to the professional designer and not
generally open to the public, in all the major markets and design centers around
the country. Trade showrooms generally target the affluent customer, which tends
to be the Company's ultimate customer, and as such, they are an important outlet
for the Company. However, the Company believes that this outlet has diminished
in importance somewhat over the last decade because of "Gallery Programs"
sponsored by the larger manufacturers and retailers under which retail stores
act in large part as competing showrooms, offering substantial discounts to
induce designers to purchase from them. It is the opinion of the Company,
however, trade showrooms are still viable when markups of wholesale prices can
be held to 250%.
In April 1996, the Company received commitments from two major,
national showroom chains to display its products. The Company does not have
contractual agreements with such national chains, but, as is common in the
industry, had informal agreements with the chains at the time that the Company
sold its products to them with respect to such things as the kind and amount of
products to be stocked, the reordering procedure and the dating policy to be
pursued. One of the commitments involved only the Company's modular wall units,
while the others involved the balance of the domestic product (regular line)
lines. Most of the floor samples purchased did not reach the showroom floors
until the early fall of 1996. The sales realized from these commitments during
the fiscal year ended April 30, 1997 were primarily for floor displays and the
subsequent orders received from these showroom have not yet become significant.
Buyers Clubs
The Company became a vendor for the United Consumers Club ("UCC")
approximately three years ago. The UCC's members are required to pay an annual
fee, and the UCC distributes to them through its ninety catalog outlets (Clubs)
and its quarterly mailers. Any UCC member who wishes to purchase an item from
the catalog so informs UCC, and UCC places the order with the Company or another
vendor. In order to succeed in this particular means of distribution, it is
imperative that the Company create and/or improve and maintain high-quality
photography in its mailers, as well as a large supply of catalogs at the various
clubs. See--"Designer Trade." Though the Company and the UCC do not have a
contractual relationship, the Company does have an informal agreement with UCC
that the Company will not change its prices reflected in the UCC catalog or
mailer for the life of such catalog or mailer.
Similarly, consumer catalogs are a means of distribution that has not
been available to or utilized by the Company in the past. At the October 1996
Furniture Market held in High Point N.C., the Company received a commitment from
a major catalog company to include the Company's products in its catalogs.
Though the Company does not have a contractual relationship with the
aforementioned catalog company, certain of the Company's products were included
in an April 1997 edition of its catalog, and the Company expects certain of its
products to be similarly included in future editions. The catalog in which the
Company's products appeared included different types of furniture, wooden and
otherwise, in addition to that sold by the Company, as well as those products
that the catalog company markets in addition to furniture, like clothing or
electronics.
OEM Sales
Following the acquisition and expansion of the Honduran Facilities in
1990, the Company aggressively sought to sell to other manufacturers ("OEM
sales") dimension stock, wood components (carvings and turnings), and unfinished
assemblies with significant success. However, in 1993 and early 1994, the
Company's sales of its proprietary products grew to such a level that it
appeared that it would be more profitable to use the majority, if not all, of
the capacity of the Honduran Facilities for the production of the Company's
products to the exclusion of its OEM business. During such time, the Company
expected to direct available resources to reducing indebtedness as opposed to
continuing to expand its OEM business. However, very late in 1994 the market for
the Company's products became soft and, without the OEM sales, it became
necessary about mid-1995 and through much of calendar 1996 to curtail production
to avoid additional increases in inventory. For all of fiscal year 1997, the
Company's directed its efforts with some success toward establishing a
distribution for its proprietary line and, at the same time, toward rebuilding a
dealer base for OEM sales. During fiscal year 1997, OEM sales increased by
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83% and accounted for 5% of the Company's consolidated sales. In the future, the
Company will maintain a presence in this area of distribution to assure its
presence in a more diversified market.
RESEARCH AND DEVELOPMENT
While neither the Company nor WHCC has a full-time employee or facility
devoted exclusively to research and development, the Company's President, in
consultation with design firms, devotes substantial time to the design and
development of new products. Though, because of the nature of the Company's
designs, many of its products may remain marketable for a significant period of
time, the competition in and the fashion orientation of the home furnishings
market require that the Company's product line be continually updated by the
introduction of new products. The development of such new products involves
producing samples of the new items for display and for the production of sales
aids with respect to such new products. The samples are constructed utilizing
production labor and facilities and from raw materials that are purchased in
very small quantities. The Company does not account the associated cost of these
samples separately, instead absorbing the expenses as production costs. The
labor costs, lost production volume and overhead absorption, and the premium
prices charged on the small quantities of raw materials that such samples
require can, in the aggregate, have a significant impact on operation results.
The Company's does not otherwise spend a material amount on research and
development.
SALES
The Company's sales function is led by Arthur F. Bingham, its Senior
Executive Vice President of Sales and Marketing. The Company employs 15
independent, commissioned sales representatives who sell to retail stores and
service trade showrooms in the United States and Canada. The Company generally
sells its products on a net 30-day basis. The Company has advertised nationally,
to a limited extent, to improve its name recognition.
WHCC employs one independent, commissioned sales representative for
products sold to U.S. furniture manufacturers other than the Company, the
Company's OEM business, and that commissioned sales representative covers the
two eastern states in which the majority of the U.S. furniture industry is
located. In addition to this sales representative, the Company's president
devotes a substantial amount of time to marketing certain categories of the
Company's products to customers not specifically covered by the sales
representative. WHCC utilizes the Company's 15 independent representatives for
products finished in the Honduran Facilities and marketed directly to the retail
trade.
BACKLOG
The Company's firm backlog of orders on April 30, 1997 was $2,047,369,
a 10 1/2% increase from its backlog of $1,853,400 on April 30, 1996. The April
30, 1997 backlog included $1,289,542 of domestically-manufactured products, as
opposed to $1,340,510 included in the 1996 backlog, which decrease reflects the
slow down in the home furnishing segment of the general economy. The backlog for
WHCC and Honduran-produced products, less intercompany orders, was $757,827 on
April 30, 1997 versus $512,990 on April 30, 1996. The increase mostly reflects
more recent success in securing orders from other manufacturers for their
products (OEM sales).
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company's principal raw material is wood, and the Company utilizes
several different species including mahogany, laurel, pine, san juan areno,
walnut, poplar, cherry, oak, maple and cedar. Wood is purchased in the form of
dimension stock (rough parts), components (turnings and carvings) and plywood.
The Company uses all of these forms of wood in the manufacturing of its
products. For example, in the production of a table, turnings and carvings may
be used for table legs and specialty designs, plywood may be used for the
tabletop and dimension stock (large pieces of wood that the Company is able to
process into the required dimensions) may be used for other parts of the table.
Plywood is generally available in adequate supply from domestic resources.
Dimension stock and components are generally supplied to the Company by its
Honduran Facilities. These same raw materials are available from domestic
sources but generally at higher prices and lower quality. Accordingly, the loss
of the Honduran Facilities as the Company's primary source of wood and as its
sole supplier of the Company's proprietary line of assembled items of furniture
would have a significant adverse effect on the Company's operations, financial
condition, competitiveness and future prospects.
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Though the agency of the Honduran government responsible for forest
resources is not able to provide an accurate inventory of the supply of mahogany
or other species of wood available in Honduras and large quantities of mahogany
have previously been harvested from Honduras over the years, the Company
believes based upon all available information that an adequate supply of'
mahogany is available and will be available for many years to come. The
Company's belief is based on the fact that the Honduran government has always
made available to the Company as much mahogany as it has requested and has never
indicated that such supply may be in future jeopardy. In addition to mahogany,
the Company currently utilizes the other species of wood referenced above and
continually researches whether other species of wood are available for
manufacturing in commercial quantities in order to expand its resource base.
The Honduran government has established programs such that all timber
harvested is in areas of forest under sustainable management. The program
requires that a physical inventory be taken by representatives of the government
to determine the number of suitable trees of a given variety in a particular
portion of the forest. From the inventory data, the Honduran government
calculates how quickly that particular variety of tree in that particular area
will regenerate and, then, how much can be harvested annually such the supply of
such variety can be sustained. Wood cannot be harvested or transported without a
permit that the Honduran government issues with a termination date that
specifies the species to be harvested, the amount of wood to be harvested, and
the particular portion of forest is to be harvested and the delivery point for
the harvested wood.
With respect to the Company, sustainable management works as follows:
the Honduran government solicits the Honduran wood-working industry (users), of
which the Company is a part, to determine the need for various types of wood.
The Honduran government then issues permits to various entities (suppliers) to
harvest their assigned areas of forest until the aggregate amount of permitted
harvesting satisfies the users' requested needs. Once the permits are issued
specifying the Company as the exclusive recipient; price, delivery and payment
terms can be negotiated with the supplier. Once the permits are issued,
harvesting can not commence until a stumpage tax is paid by the supplier. Most
often the supplier does not have the resources to pay the tax and the Company
effectively prepays the tax.
SEASONALITY
As is typical in the furniture industry, the Company's greatest volume
of incoming orders is received in the spring and fall of each year. This is due
primarily to the International Furniture Market held each April and October in
High Point, North Carolina. Careful scheduling of production minimizes the
effects of such seasonality on the Company's production and shipments. Orders
are generally shipped within 30 to 90 days of receipt.
COMPETITION
The furniture industry is highly competitive, and no single company
dominates the industry. The Company, while unranked in any known comparative
study of the industry, competes with many nationally-recognized manufacturers of
quality furniture. Many furniture manufacturers have substantially larger
production capabilities, and distribution networks, as well as greater financial
resources than has the Company. The Company's principal method of competing is
by product design (including items or categories of items not available from
other manufacturers), product quality (including high-grade hardwoods and other
materials used in construction and quality-constructed cabinetry and finish) and
price. Most of the Company's designs are offered by the Company exclusively. The
Company believes its pricing structure, product design and product quality to be
competitive with those of its competitors.
The furniture industry is a segmented industry in which design, quality
and price place each manufacturer into a competitive market niche. The Company
competes in the medium-to-high price market, which normally requires a larger
number of items comprising the product line, smaller production lot sizes and
higher inventory requirements to maintain a competitive delivery cycle. The
Company estimates that there approximately 12 to 15 furniture manufacturers
directly competing with the Company in the medium-to-high price market for case
goods. The Company's limited financial resources restrict its ability to compete
effectively in its market niche.
ENVIRONMENTAL CONTROL FACILITIES
The Company's domestic operations must meet extensive federal, state
and local regulatory standards in the areas of safety, health and environmental
pollution controls. Historically, these standards have not had any material
adverse effect on the Company's sales or operations. The furniture industry
currently anticipates
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increased federal and state environmental regulation, particularly with respect
to emissions from paint and finishing operations and wood dust levels in
manufacturing operations. The industry and its suppliers are attempting to
develop water-based finishing materials to replace commonly-used organic-based
finishes which are a major source of regulated emissions. The Company cannot at
this time estimate the impact of these new standards on the Company's operations
or the cost of compliance thereof (including future capital expenditure
requirements).
EMPLOYEES
As of April 30, 1997, the Company had approximately 355 employees,
including approximately 300 people currently employed at the Honduran
Facilities. Approximately 300 of the Company's employees are full-time
employees.
DESCRIPTION OF PROPERTY
The Company owns and operates one plant that houses its United States
production facilities and general offices and is located on 17 acres of land in
Lexington, North Carolina. The 82,500 square foot facility is of brick, steel,
concrete and concrete block construction and is well-maintained and in adequate
condition. The Company's manufacturing facilities generally operate on a 40-hour
week. Substantially all of the Company's physical properties located in
Lexington, North Carolina, including inventory, machinery and equipment, are
pledged as collateral under the Company's loan agreements with Lexington State
Bank of North Carolina, the Company's primary bank lender.
The Company's Honduran Facilities consist of seven and one-half acres
of land located in San Pedro Sula, Honduras, a 21,120 square-foot, equipped
dimension mill, a 7,840 square-foot wood resaw operation, two dry kilns, boilers
and related processing equipment, two buildings for dry lumber storage and a
6,408 square-foot building for "green" lumber storage. In July 1990, the Company
completed construction of a 45,000 square-foot addition to the manufacturing
facility and a 2,600 square-foot office building.
The Company believes its properties are generally suitable and adequate
to meet its intended uses and, in the opinion of management, they are adequately
covered by insurance.
The Honduran Facilities, including both real and personal property such
as plant and equipment but not including inventory or receivables, are pledged
to secure a loan from the OPIC. The loan proceeds were used to finance
completion of capital improvements to the Honduran Facilities. In addition,
Banchas, the Company's Honduran bank lender, holds a second mortgage on the
assets of the Honduran Facilities.
The lumber dimension mill, as well as the furniture manufacturing
operations of the Honduran Facilities, operate on a 44-hour work week (a
standard work week in Honduras). The Company believes that the mill and
furniture manufacturing facilities are in adequate condition and suitable for
its intended uses.
The Company leases a 8,800 square-foot showroom located in High Point,
North Carolina. Approximately 4,400 square feet of space is utilized to display
the Company's products, particularly new product introductions, during the
semi-annual International Furniture Markets. The balance of the space is
subleased to another manufacturer. The Company believes the showroom is in good
condition and suitable for its intended use.
Item 3. Legal Proceedings
There is no pending material litigation involving the Company or any of
its subsidiaries. To the best of management's knowledge, no legal proceedings or
proceedings by any governmental authorities are contemplated.
Item 4. Submission of Matters to Vote of Security Holders.
None
-9-
<PAGE> 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information required by Item 5 of Form 10-KSB appears under the
caption "Market Prices, Dividends and Related Shareholder Matters" in the
Company's Annual Report to Shareholders for fiscal year ended April 30, 1997,
reference to which is hereby made and the information there is incorporated
herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information required by Item 6 of Form 10-KSB appears under the
heading "Management's Discussion and Analysis" in the Company's Annual Report to
Shareholders for fiscal year ended April 30, 1997, reference to which is hereby
made and the information there is incorporated herein by reference.
Item 7. Financial Statements
The information required by Item 7 of From 10-KSB appears in the
Company's Annual Report to Shareholders for the year ended April 30, 1997, at
page 31 through 44, reference to which is hereby made and the information
therein incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by Item 9 of Form 10-KSB appears in the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders under the
caption "Election of Directors", reference to which is hereby made and the
information there is incorporated herein by reference.
Item 10. Executive Compensation
The information required by Item 10 of Form 10-KSB appears in the
Company's Proxy Statement for the 1997 Annual Meeting of Shareholders under the
caption "Executive Compensation", reference to which is hereby made and the
information there is incorporated herein by reference.
Item 11. Security Ownership of certain Beneficial Owners and Management
The information required by Item 11 of Form 10-KSB appears in the Company's
Proxy Statement for the 1997 Annual Meeting of Shareholders under the caption
"Voting Securities and Principal Shareholders" and "Election of Directors",
reference to which is hereby made and the information there is incorporated
herein by reference.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 of Form 10-KSB appears in the Company's
Proxy Statement for the 1997 Annual Meeting of Shareholders under the caption
"Certain Transactions", reference to which is hereby made and the information
there is incorporated herein by reference. Item 13. Exhibits, Lists and Reports
on Form 8-K
(a) The following Financial Statements, Financial Statement
Schedules and Exhibits are filed as part of this report:
(1) Financial Statements:
-10-
<PAGE> 11
The following consolidated financial statements of the Company,
included in the Annual Report to Shareholders for the year ended April 30, 1997,
are incorporated herein by reference to the pages indicated:
Consolidated Balance Sheets - April 30, 1997, and 1996 (page 31)
Consolidated Stockholders' Equity - Years Ended April 30, 1997 and 1996
(page 32)
Consolidated Statements of Income - Years Ended April 30, 1997 and 1996
(page 33)
Consolidated Statements of Cash Flows - Years Ended April 30, 1997 and
1996 (page 34 )
Notes to Consolidated Financial Statements (Pages 35)
Independent Auditors' Report (page 29)
(Financial Statements to Be Filed by Amendment Pursuant to Rule 126-25)
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable or the required
information is given in the financial statements including the notes thereto,
and therefore, have been omitted.
(3) EXHIBITS FILED
(a) A list of exhibits is included in the accompanying index to
exhibits
(b) Reports on Form 8-K: No reports on Form 8-K were filed during
the fourth quarter of the fiscal year ended April 30, 1997.
-11-
<PAGE> 12
[TURLINGTON AND COMPANY, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Wellington Hall, Limited and Subsidiaries
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of Wellington Hall,
Limited and Subsidiaries as of April 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the financial statements of Muebles Wellington Hall, S.A., a wholly-owned
subsidiary, which statements reflect total assets of $1,591,286 and $1,693,959,
respectively, as of April 30, 1997 and 1996, and total revenues of $1,995,456
and $1,273,301, respectively, for the years ended April 30, 1997 and 1996. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Muebles
Wellington Hall, S.A., is based solely on the report of the ther auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wellington Hall, Limited and
Subsidiaries as of April 30, 1997 and 1996, and the results of their operations,
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern at April 30, 1997.
Management's plans in regard to that matter also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Turlington and Company, L.L.P.
July 22, 1997, Except for Note 20,
As to Which the Date is August 13, 1997
<PAGE> 13
[MORALES PALEO WILLIAM Y ASOCIADOS LETTERHEAD]
Report of Independent Auditors
To Shareholders of
Muebles Wellington Hall, S.A. de C.V.
We have audited the accompanying balance sheets of Muebles Wellington Hall, S.A.
de C.V. a wholly owned subsidiary of Wellington Hall Caribbean Corporation (an
indirect subsidiary of Wellington Hall, Limited) as of April 30, 1997 and 1996,
and the related statements of operations, stockholders' equity and cash flows
expressed in Honduras Lempiras for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Honduras and the United States. 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 Muebles Wellington Hall, S.A. de
C.V. as of April 30, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles in the United States.
/s/ Morales Palao William y Asociados
MORALES PALAO WILLIAM
Y ASOCIADOS
Ernst & Young International
San Pedro Sula, Honduras, C.A.
July 15, 1997
<PAGE> 14
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
WELLINGTON HALL, LIMITED
Date: August 12, 1997 By: /s/ Hoyt M. Hackney, Jr.
-----------------------------------------
Hoyt M. Hackney, Jr.
President, (Principal Executive
Officer, Principal Accounting
Officer)
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Name and Signature Position Date
- ------------------ -------- ----
<S> <C> <C>
/s/ Hoyt M. Hackney, Jr. President (Chief August 12, 1997
- ------------------------------ Executive Officer
Hoyt M. Hackney, Jr. and Chief Financial
Officer), Treasurer
/s/ Ernst B. Kemm Executive Vice August 12, 1997
- ------------------------------ President and Director
Ernst B. Kemm
Chairman of the Board
- ------------------------------
Donald W.Leonard
Secretary and Director
- ------------------------------
William W. Woodruff
/s/ Arthur F. Bingham Senior Executive Vice August 12, 1997
- ------------------------------ President and Director
Arthur F. Bingham
</TABLE>
-14-
<PAGE> 15
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-KSB
OF
WELLINGTON HALL, LIMITED
FOR
YEAR ENDED APRIL 30, 1997
Exhibit No. Description
3.1 Amended and Restated Charter of Wellington Hall Limited.*
3.2 Bylaws of Wellington Hall, Limited, as amended.*
10.1 Wellington Hall Executive Stock Plan.**
10.2 Employment Agreement and Executive Deferred Compensation
Agreement between the Company and Hoyt M. Hackney Jr.,
effective January 1, 1987 and May 8, 1987, respectively.*
10.3 Note - Security Agreement, dated April 23, 1986, between the
Company and Lexington State Bank is incorporated herein by
reference to Exhibit 4.2 to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1987.
10.4 Loan Agreement, dated April 15, 1987, between the Company and
Lexington State Bank is incorporated herein by reference to
Exhibit 4.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1987.
10.5 Note - Security and Note Modification Agreements, dated April
26, 1988, between the Company and Lexington State Bank is
incorporated herein by reference to Exhibit 4.3 to the
Company's Annual Report on Form 10-K for fiscal year ended
April 30, 1988.
10.6 Loan Agreement between Wellington Hall Caribbean Corporation
and the Overseas Private Investment Corporation, dated
December 22, 1989, as amended on September 1, 1990. ***
10.7 Subordination Agreement, dated September 1, 1994, between
Wellington Hall, Limited, Wellington Hall Caribbean
Corporation, Muebles Wellington Hall, S.A. and the Overseas
Private Investment Corporation.***
10.9 Amendment to Loan Agreement, dated February 1, 1991m, between
the company and Lexington State Bank is incorporated herein by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the fiscal year ended April 30, 1991.
10.10 Loan Agreement, dated August 20, 1991, between Muebles
Wellington Hall, S.A. and Banco de Honduras, S.A. is
incorporated herein by reference to Exhibit A to the Company's
Form 10-Q for the quarter ended July 31, 1991.
10.11 Amendment to Loan Agreement, dated April 10, 1992 between the
Company and Lexington State Bank.****
10.12 Promissory note, dated January 23, 1992 between the Company
and Hoyt M. Hackney, Jr.****
-15-
<PAGE> 16
10.13 Amendment to Executive Deferred Compensation Agreement, dated
January 23, 1992, between the Company and Hoyt M. Hackney
Jr.****
10.14 Loan Agreement, dated June 28, 1993, between the Company and
Lexington State Bank.*****
10.15 Lease Agreement dated November 1, 1993 by and between North
Hamilton Corporation and the Company, is incorporated herein
by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 1994.
10.16 Amendment to the Loan Agreement, dated September 1, 1994
between Wellington Hall Caribbean Corporation and the Overseas
Private Investment Corporation.******
10.17 Employment and Stock Purchase Agreement dated September 1,
1996 between the Company and Arthur F. Bingham, filed as
Exhibit (a) to the Company's Quarterly Report on Form 10-QSB
for the quarterly period ended July 31, 1996.
10.18 Amended Loan Agreement dated March 10, 1997 with the Overseas
Private Investment Corporation, filed as Exhibit (a) to the
Company's Quarterly Report on Form 10-QSB for the quarterly
period ended January 31, 1997.
10.19 Promissory Note dated January 16, 1997 between the Company and
Lexington State Bank filed as exhibit 10 (q) to the
Registration Statement filed February 20, 1997.
10.20 Employment Agreement dated December 1, 1997 between the
Company and Ralph L. Eskelsen filed as exhibit 10 (t) to the
Registration Statement filed February 20, 1997.
10.21 Addenda to Employment and Stock Purchase Agreement dated
September 1, 1996 between the Company and Arthur F. Bingham
dated February 10, 1997 filed as exhibit 10 (u) to the
Registration Statement filed February 20, 1997.
10.22 1997 Stock Option and Restricted Stock Plan filed as exhibit
10(v) to the Registration Statement filed February 20, 1997.
10.23 Nonqualified Stock Option Agreement dated as of February 10,
1997 between the Company and Arthur F. Bingham filed as
exhibit 10 (w) to the Registration Statement filed February
20, 1997.
10.24 Incentive Stock Option Agreement dated as of February 10, 1997
between the Company and Arthur F. Bingham filed as exhibit 10
(x) to the Registration Statement filed February 20, 1997.
10.25 Incentive Stock Option Agreement dated as of February 10, 1997
between the Company and Ralph L. Eskelsen filed as exhibit
10(y) to the Registration Statement filed February 20, 1997.
11 Earnings Per Share Computation.
13 Annual Report to Shareholders of Wellington Hall, Limited for
the year ended April 30, 1996, portions of which are
incorporated by reference into this report.
-16-
<PAGE> 17
22 Subsidiaries of the Company
27 Financial Data Schedule (For SEC Use Only)
* Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1987.
** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1986.
*** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1990.
**** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-K for the
fiscal year ended April 30, 1992.
***** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-KSB for the
year ended April 30, 1993.
****** Incorporated herein by reference to the identically-numbered
exhibits to the Company's Annual Report on Form 10-KSB for the
year ended April 30, 1995
-17-
<PAGE> 1
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
EXHIBIT 11 - EARNINGS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
Years Ended April 30
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary
Average shares outstanding 1,839,887 1,689,887 1,689,887
Net effect of dilutive stock
options and stock purchase
awards, based on the treasury
stock method using average
market price
---------- ---------- ----------
Total Shares 1,839,889 1,689,887 1,689,887
========== ========== ==========
Net Income (loss) 507,212 73,574 222,655
========== ========== ==========
Per share amount $ (.28) $ .04 $ .13
========== ========== ==========
Fully diluted:
Average shares outstanding 1,839,887 1,689,887 1,689,887
Net effect of dilutive stock
options and stock purchase
awards, based on the treasure
stock method using the year-
end market price if higher
than average market price
---------- ---------- ----------
Total Shares 1,839.887 1,689,887 16,689,887
========== ========== ==========
Net Income (loss) (507,212) 73,574 222,655
========== ========== ==========
Per share amount $ (.28) $ .04 $ .13
</TABLE>
-18-
<PAGE> 1
EXHIBIT
13
1997
ANNUAL REPORT
WELLINGTON HALL, LIMITED
Lexington, North Carolina
-19-
<PAGE> 2
TO THE SHAREHOLDERS OF WELLINGTON HALL, LIMITED
Fiscal year 1997 began with what seemed an opportunity for an improved
year after we established certain new marketing programs that demonstrated some
success and produced some significant new distribution at the April 1996
furniture market held just prior to beginning the year. These successes
continued into the fall and did reflect positively in the operating results for
the first half of the year when the company reported a modest profit of about
$36,000 at the second quarter's end on October 31 1996. Also during this period,
the company strengthened its management and marketing efforts with the addition
of a Vice-President to direct all marketing functions such that we could be more
focused in the pursuit of restoring both foreign and domestic sales to
profitable levels. However, the second half of the year, particularly the early
part of the fourth quarter, saw orders again go into decline when the furniture
economy seemed to have taken a further down turn and many of the programs
started in 1996 stalled or failed to produce the anticipated results.
Because of the slow rate of incoming orders, in combination with the
high levels of inventory available to service those orders, Lexington or
domestic production operations had to be severely curtailed particularly during
the fourth quarter that resulted in inefficiencies, unabsorbed labor and
overhead cost, and significant losses for the year. To further complicate
matters, foreign operations were also interrupted in the fourth quarter because
of maintenance requirement to the wood drying processes that effectively
depleted the necessary level of in process inventories to sustain operations.
For the fiscal year then, the losses amounted to about $507,000 versus a profit
the previous year of about $73,000.
Again this year, the April High Point market was encouraging and for
that month, including sales for both foreign and domestic products, the company
recorded almost $900,000 in new orders. Practically all of these orders were for
the Company's regular line products directed at the residential trade and
normally sold at retail. Also included in these results were sales from a
product line, new to the Company as of April, of country French and English
designs of occasional and dinning items which the Company has designated as its
Woodward Collection. The Company obtained this line when it acquired the assets
of the Woodward Company which consisted of a limited amount of inventory. The
primarily motivation for the Company's action in this regard was the existence
of a developed product line which is deemed to be very compatible with the more
casual taste of today's consumer, its compatibility with the Company's marketing
niche and it's compatibility with domestic production capabilities.
To restore volume for foreign operations, significant efforts are
continuing to be expended to improve the sales of its residential products
normally sold through retailers but the most immediate solution and the progress
made to date has been made in OEM sales, that is, product sold to other U.S.
furniture manufacturers. This category of sales increased in fiscal 1997 and are
expect to continue upward during fiscal 1998. However, to be as profitable as
needed, the continued expansion of the customer base for OEM sales will likely
be necessary since the entire industry has been effected by the slow down in the
furniture segment of the economy and it is uncertain that growth will be
adequate from the existing customer base.
To raise the level of production and sales volume necessary to
restoring profitability to domestic operations will be a real challenge with
losses now having been recorded for each of the last three fiscal years. The
best opportunity here will likely be the success realized from the new Woodward
Collection discussed above. The response to date has been moderately encouraging
but to establish an immanent turn around, a major account that can produce
significant volume will have to commit to the line. Such an account has shown
interest and is currently evaluating the product for their retail outlets but
nothing currently know gives reason to predict that an accommodating order or
commitment is forthcoming.
The Company finances, primarily because of the operating loss reported
and the level of debt service, required a great deal of attention during fiscal
1997. First the company re-negotiated the interest and payment terms with the
Overseas Private Investment Corporation on its outstanding loan, negotiate a
private placement of the Company's stock thus adding $300,000 in equity,
negotiated and expanded the Company's Line of Credit with Lexington State Bank,
and prepared and filed a Registration Statement with the Securities and Exchange
Commission such that additional equity could have been raised to primarily
reduce the company indebtedness. All of these situations are further discussed
later in this report.
-20-
<PAGE> 3
The company's financial position remains tight and requires the careful
orchestration of available resources to remain viable. Most of the losses for
fiscal 1997 were, however, covered by reductions in inventory and non-cash
expenses at least to the degree that the impact on operating funds was somewhat
diminished.
As we start another year revenues for the first quarter of fiscal 1998
are expected to increase significantly because of OEM sales. Profits will likely
be recorded for foreign operations but will be more than offset by continued
losses from domestic operations since curtailed production levels in the
Lexington plant will continue until at least the second quarter when the
Woodward Collection is scheduled to be produced which could favorably influence
volume during that period. How the second quarter and beyond will fair will most
likely depend on sustaining OEM sales, for foreign operations, and on continued
and growing acceptance of the Woodward collection for domestic operations.
Sincerely,
Hoyt Hackney, Jr.
President
Upon written request directed to the Secretary of the Company at P.O. Box 1354,
Lexington, North Carolina 27293-1354, Shareholders will be furnished a copy of
the Company's Annual Report on form 10-KSB without charge.
-21-
<PAGE> 4
MARKET PRICES, DIVIDENDS AND
RELATED SHAREHOLDER MATTERS
Until October 1995, the Common Stock of the Company traded in the
NASDAQ over-the-counter market system. Since that time, the Company's Common
Stock has traded on the NASD's over-the-counter bulletin board. According to the
information furnished by Anderson & Strudwick, a market maker in the Company's
Common Stock, the high and low bid quotations for each quarterly period within
the last two fiscal years and the current fiscal year to date is as follows:
<TABLE>
<CAPTION>
Quarter Ending High Low Quarter Ending High Low
---- --- -------------- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C>
July 1995 1.00 1.00 July 1996 0.344 0.25
October 1995 0.75 0.75 October 1996 0.50 0.281
January 1996 0.75 0.25 January 1997 0.375 0.187
April 1996 0.50 0.25 April 1997 0.313 0.313
</TABLE>
These market quotations represent inter-dealer prices, without retail
mark-up, mark-down or commission, and do not necessarily represent actual
transactions.
As of July 27, 1997, there were approximately 572 holders of record of
the Company's Common Stock.
The Company has not paid any dividends since its inception. Pursuant to
the terms of its line-of-credit and long-term loan agreements with Lexington
State Bank, the Company may not pay any dividends, purchase, redeem or otherwise
retire any of its capital stock or otherwise make any other distribution of its
assets resulting in the reduction of its capital without the prior written
consent of Lexington State Bank. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
-22-
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's principal long-term capital resources are shareholders'
equity, the term loan of Wellington Hall with Lexington State Bank and the term
loan of WHCC with the Overseas Private Investment Corporation (OPIC). As of
April 30, 1997, total stockholders' equity was $2,266,944 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$385,738 and $990,999, respectively.
The Lexington State Bank loan bears interest at the prime rate plus
1.5% and is payable in monthly installments of $7,000 until maturity on April
10, 2002. It is secured by substantially all of the Company's domestic assets.
The net proceeds of the loan were used to refinance indebtedness used to
purchase and expand the Company's Lexington, North Carolina facility.
In July 1996, the Company began negotiating with OPIC to amend the OPIC
loan agreement then in effect to provide more favorable terms. Principal
payments were scheduled to double from approximately $31,000 per quarter to
approximately $62,000 per quarter beginning on July 31, 1996 with a final
balloon payment of $185,812 due on October 31, 1999. Under the loan agreement,
WHCC was also obligated to make quarterly interest payments at the rate of 12%
per annum. On March 10, 1997, WHCC and OPIC executed an amended loan agreement
that, among other things, lowered the interest rate to 10% per annum as of
November 1, 1996 and waived principal payments from July 31, 1996 until July 31,
1997, at which time the Company began making quarterly payments of approximately
$31,000. Principal payments increase to approximately $62,000 on July 31, 1998
with a balloon payment of approximately $557,438 due on October 31, 1999. Upon
execution of the amended documents, WHCC paid OPIC a rescheduling fee of 1% of
the principal balance. The proceeds from the OPIC loan, together with funds
generated internally by Wellington Hall, were used to acquire and improve the
Honduran Facilities.
The OPIC loan prohibits the payment of dividends and other
distributions by Wellington Hall and requires that it maintain a stated amount
of tangible net worth as well as certain financial ratios, including current
assets to current liabilities and total indebtedness to tangible net worth. In
addition, WHCC is required to maintain a stated amount of current assets in
excess of current liabilities, and WHCC and MWH are required to maintain stated
ratios of current assets to current liabilities and indebtedness to tangible net
worth. Wellington Hall, WHCC an MWH are each in compliance with the requirements
of the OPIC loan.
Under the OPIC loan arrangement, Wellington Hall is obligated to supply
any necessary funds to WHCC to meet WHCC's obligations thereunder, and MWH has
also guaranteed the obligations of WHCC. The OPIC loan is secured by
substantially all of the tangible assets of the Honduran Facilities.
The Company's primary sources of liquidity are bank lines of credit and
cash flow from operations. For its domestic operations, the Company has three
lines of credit with Lexington State Bank. Under its primary line, the Company
may borrow the lesser of (i) $1,200,000 or (ii) the sum of 70% of the Wellington
Hall's accounts receivable less than 60 days old, 50% of its finished good
inventories and 10% of work in process and raw material inventories. As of April
30, 1997, the Company had $1,178,400 in borrowings under this line of credit,
leaving $21,600 available for future borrowings. The Company pays interest
monthly at the rate of prime plus 1% on outstanding borrowings under the
facility. Principal payments are due on demand. The line of credit also contains
restrictive covenants that prohibit Wellington Hall from paying dividends and
making other distributions with respect to its capital stock and require it to
maintain certain financial ratios, including current assets to current credit.
The line of credit is reviewed annually for renewal.
Wellington Hall is also indebted to Lexington State Bank under a demand
loan for $100,000 borrowed in 1993 to finance working capital. The loan bears
interest at the prime rate plus 1% payable monthly, and the outstanding balance
at April 30, 1997 was $85,600.
On January 16, 1997, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount of
$250,000. Outstanding borrowings under this facility will bear interest at the
rate of prime plus 1 1/2%, payable monthly, and the outstanding balance as of
April 30, 1997 was $233,000 leaving $17,000 available for future borrowings..
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
MWH has lines of credit with two Honduran banks in an aggregate amount
of $500,000. As of April 30, 1997, an aggregate of $438,972 had been borrowed
under these lines, leaving approximately $61,028 for future borrowings.
Borrowings bear interest at rates ranging from 30% to 40% payable quarterly and
principal is payable on demand. The lines are secured by a second lien on the
fixed assets of MWH and current assets.
-23-
<PAGE> 6
The Company's other primary source of liquidity is net cash provided by
operating activities which was ($729,951) and $97,517 in fiscal 1997 and 1996,
respectively. The use of funds during 1997 was primarily as a result of the
increases in account receivable, reductions to account payable and operating
losses discussed below.
As of April 30, 1997, accounts receivable had utilized funds and
increased by approximately $230,000 since the beginning of the fiscal year,
mostly as a result of a surge in sales late in the fourth quarter and extended
terms granted certain dealers for payment of their invoices. The receivables
represented a turnover rate of about fifty-five days, an increase of about ten
days when compared to the turnover rate reported at April 30, 1996.
Accounts payable were reduced by approximately $105,000 reflecting
mostly the curtailment of domestic production reducing the requirements for raw
materials. The Company has generally paid its vendors and material suppliers
within their terms.
Consolidated inventories decreased by about $208,000 during the fiscal
year primarily a result of a decrease of about $234,000 to the inventory of
domestically produced goods in response to reduced levels of incoming orders,
excessive inventories relative to sales, and to generate operating funds. In
addition the Company established a reserve of about $115,000 for slow moving
inventory against the MWH inventory. The Company utilized about $138,000 to
increase domestic inventories of foreign produced products of which
approximately $75,000 was in transit and was in response to an increased backlog
of orders for foreign produced goods. Sales and backlogs are further discussed
herein below.
Property and equipment is reported to be down about $23,000 for the
fiscal years, however, when expenditures of approximately $74,000 are added, the
decrease is actually about $97,000. The decline is mostly the result of the
devaluation of the Honduran currency relative to the prior fiscal year end of
approximately 17.7%. The historical value of the Company's Honduran assets are
carried on the subsidiaries' books in the local currency, the lempira. Lempiras
are converted to dollars at the spot rate in effect at period end when the
Company's financial statements are consolidated, and the reduction to the
reported value of these assets appears as part of the translation adjustment.
There are no significant capital expenditures planned for fiscal year
1998 and expenditures are expected to be limited to maintenance needs which
develop from time to time. The Company's total outlay for capital improvements
for the fiscal year ended April 30, 1997 was approximately $74,000 used
primarily to convert the Company's boilers at its domestic operations from
burning fuel oil to natural gas, to retube its boiler and to repair a dry wood
storage shed at the Honduran Facilities.
The Company is subject to the risk that foreign currency fluctuation
may have an adverse impact on its operations, For example, if the Honduran
currency were to stabilize in the future or to increase in value against the
dollar, the Honduran subsidiary's cost might increase causing profit margins to
erode. The Company, however, does not engage in any hedging of the exchange rate
fluctuations. Since the acquisition of the Honduran subsidiary in 1989, the
lempira has continually devalued against the U.S. dollar, from 2.0 lempira to
the dollar in 1989 to 13.02 lempira to the dollar at April 30, 1997. Although
the devaluation of the lempira has resulted in reductions in the historical book
value of the assets and liabilities and a corresponding reduction to
shareholders' equity in the form of a $1.86 million cumulative translation
adjustment, the Company also benefits from lower product cost from the
subsidiary as the lempira devalues. In view of the long-term trend of the
devaluation, management believes that hedging of the exchange rate fluctuation
is unnecessary and could reduce or eliminate the benefits of lower product costs
resulting from any continued devaluation.
As of September 1, 1996, the Company executed an Employment and Stock
Purchase Agreement with Arthur F. Bingham (the "Agreement"). On October 10, 1996
Mr. Bingham loaned the Company $285,694 at terms included in an addendum to the
Agreement. On February 12, 1997 and, during the Company's last fiscal quarter,
Mr. Bingham purchased 600,000 shares of common stock at a price of $.50 per
share, which purchase price was paid by cancellation of the foregoing loan and
for an additional investment of $14,306. Mr. Bingham has also been granted
options to purchase 600,000 additional shares at option prices ranging from $.50
to $1.30 per share, 450,000 of which are subject to certain performance
conditions.
In 1989, the Company acquired the Honduran Facilities and anticipated
raising $1,500,000 through the sale of the Company's stock by the board of
directors. The private placement ended early in 1990 having produced about
one-half the funds anticipated. The result of not raising all the funds has been
that the Company has had to incur more debt and restrict capital expenditures
that were both in its original plans at the time of the acquisition and that
have developed since the acquisition. Because of this debt, sales needed to grow
rapidly from the time of the acquisition to a level at which operating incomes
would be adequate to service the debt and to fund capital needs if the Company
was to grow. Maintaining an adequate level of sales since the acquisition has
been possible only for limited periods of time, mostly as a result of a sluggish
furniture economy that has existed over much of that time, a period that
includes two recessions. The sluggish furniture economy has also reduced the
industry's
-24-
<PAGE> 7
distribution base, especially the base of mid to small retailers more committed
to using smaller manufacturers, such as the Company, as a resource. Furthermore,
management believes that the consumer taste in home furnishings has swung away
from the more formal designs and executions that the Company has marketed to
more informal designs.
Management believes that the resulting situation is that the Company
has too much debt service, given its sales volume most recently achieved, and
has inadequate funds for its plans to restoring and growing its sales to a level
where its operating profits can accommodate its needs. The Company's cash
position was tight during all of fiscal years 1996 and 1997, having experienced
excessive wood deliveries early in the fiscal year 1996 and then a slow
furniture economy and lower sales during the balance of the both fiscal years
while the Company continued to service its high level of indebtedness. The sale
of stock to Mr. Bingham assisted the Company in meeting its working capital and
other cash needs during fiscal 1997.
Management recognized early in fiscal year 1997, that if sales, then in
decline, were to be restored to a level necessary to achieving adequate profits
it would first be necessary to manage the Company's limited finances in a manner
that would maintain sufficient funds to support continued operations until its
marketing efforts produced increased sales volume. In addition management
believed it essential that the Company's financial condition be strengthened by
providing funds both to finance a recovery and to addressing the debt-equity
problem in general. A strategy was formulated that addressed securing the
necessary funding and improving the debt-equity problem. The plan consists
primarily of (i) the private placement of stock to Mr. Bingham, (ii) the
Company's debt restructuring, both as discussed hereinabove, (iii) the offering
of stock to the shareholders of Company and to the public, as discussed
hereinbelow, (iv) the grant of options to certain key employees, discussed in
the Notes to the Consolidated Financial Statements, and (v) reducing inventories
to finance continued operations, as discussed hereinbelow .
On February 21,1997, the Company filed a registration statement with
the Securities and Exchange Commission for the offer and sale of 1,689,887
shares of its common stock. The shares will be offered first to the holders of
record of its outstanding common stock as of a date at or about the time that
the registration statement becomes effective, who will have the right for thirty
days to purchase one additional share for each share then held at a price of
$.50 per share. Each Wellington Hall shareholder as of that date may also
subscribe within that thirty day period for additional shares, and any available
shares will be sold to shareholders who have subscribed therefor on a pro rata
basis. Any shares still remaining after the expiration of the offering to
Wellington Hall shareholders may be sold to persons who are not directors,
officers or shareholders of Wellington Hall.
The aforementioned stock offering has been delayed and the registration
statement filed with respect thereto is not expected to become effective until
after the filing of the Company's 10 QSB for quarter ending July 31, 1997.
The foregoing plan removed some of the pressure on the Company's
working capital, made funds available to support marketing requirements and
slowed the negative effect of servicing the debt for the near term. The balance
of the plan would be aimed at reducing debt and the corresponding costs thereof.
RESULTS OF OPERATIONS
Fiscal Year ended April 30, 1997 compared to Fiscal Year ended April 30, 1996
Consolidated revenues for fiscal year ended April 30, 1997 were down
approximately $176,000 or 2.9% as compared to those reported the previous year.
This decline was due entirely to a decrease in sales volume, as prices remained
constant for much of the period or were slightly increased. Such decrease in
sales volume was largely the result of the current recession within the
furniture segment of the national economy, a shrinking distribution base and
possibly a permanent resistance by the consumer to purchasing the higher quality
and higher priced furniture of the type that historically been the Company's
principal product line. The Company has adopted various business strategies
designed to counteract the loss of revenues that these trends may cause in the
future. It is uncertain whether these trends will continue and, if the Company's
strategies do not successfully counteract these trends, they could have a
material adverse effect on the Company's results of operations and financial
condition.
Sales for domestically produced products were down about 10.9% percent
for the fiscal year and sales of foreign produced goods increased by about
23.4%.
The Company believes that the renewed and revised marketing effort that
it put in place in early 1996 had some positive effect on the Company's level of
incoming orders through the second fiscal quarter ended October
-25-
<PAGE> 8
31, 1996, but the rate of incoming orders since that time has generally
declined. However, the amount of orders received for the month of April, mostly
as a result of orders received at the April International Furniture Market held
in High Point N.C., amounted to about $880,000, an amount which may be able to
support future sales Though these results were encouraging, the furniture
segment of the national economy continues to be poor and with the exception of
April, the Company continues to be affected particularly on the sales of its
established products to the retail trade.
To increase revenues and operations at the Honduran Facilities,
considerable effort has been directed through out fiscal 1997 at selling other
manufactures and wood consumers their products and production requirements; OEM
sales. These sales increased by 83% in fiscal year 1997, accounted for all the
growth in foreign produced goods, and for 5% of total consolidated sales.
Means of reversing the downward trend regarding sales of domestically
produced products and returning those operations back to profitability have been
elusive, and several avenues pursued over time have shown initial promise only
to stall and have little lasting material effect. However, on or about April 7,
1997, the Company enter into an agreement in principle to acquire the assets of
The Woodward Company which had developed and was attempting to market a
thirty-eight piece collection of country French and English designs, which
collection management believes to be compatible with the Company's marketing
niche and ideally suited for production in its domestic facility. The Woodward
Company was not established in the furniture trade, had no name identity and had
no production facilities, all of which is believed to have contributed to its
limited success in selling the collection.
The Company believes that the designs and execution of the foregoing
collection are more suited to today's more casual consumer taste that has
negatively affected the sales of the Company's regular line of more formal
designs. To date, the Company has established a backlog of orders for this
product of about $200,000 and expects to begin shipments during its second
fiscal quarter of 1998, ending on October 31, 1997. Though orders to date might
be judged to represent only moderate success, management attributes this to the
disadvantageous timing of its involvement which occurred immediately before the
April International Furniture Market and did not allow time for a premarket
effort or notification to the trade of its presence. The lack of exposure at
that market has meant that sales can only be solicited by the Company's
independent sales representatives from photography and catalogs which only
became available in late May. Many of the orders received for this product have
been from outlets not presently supporting the Company's products, and,
therefore, the addition of this line is contributing to the expansion of the
Company's distribution base.
On June 10, 1997 the Company and The Woodward Company formally agreed
to the aforementioned acquisition. On such date, the Company acquired about
$20,000 of inventory for which The Woodward Company will receive compensation
thirty days after the Company has shipped and invoiced the products. Otherwise,
the Company's only cash outlay has been about $6,000 for printed sales aids. The
former president of The Woodward Company, responsible for the designs and
development of these products, will receive a 5% royalty on the sales of the
items making up the collection at the time of the Company's acquisition.
The Company's firm backlog of orders on April 30, 1997 was $2,047,369,
a 10 1/2% increase from its backlog of $1,853,400 on April 30, 1996. The April
30, 1997 backlog included $1,289,542 of domestically - manufactured products, as
opposed to $1,340,510 included in the 1996 backlog, which decrease reflects the
slow down in the home furnishing segment of the general United States economy.
The backlog for WHCC and Honduran-produced products, less intercompany orders,
was $757,827 on April 30, 1997 versus $512,990 on April 30, 1996. The increase
primarily reflects more recent success in securing orders from other
manufacturers for their products (OEM sales).
Cost of sales increased approximately $317,000 or 8% for the fiscal
year as compared with last year, reflecting primarily the reduced level of
production. Cost of sales are further discussed below.
Selling, general and administrative expenses increased about $77,500 or
5.6% for the fiscal year mostly as a result of the addition of Arthur Bingham as
Senior Executive Vice President of Sales and Marketing. The Company expects to
continue to support an expanded marketing effort.
Interest expenses of $404,147 for the fiscal year represent an increase
of about $15,000 over that paid during the previous year as a result of added
borrowing. Long-term debt declined by about $75,000 but short term borrowing
increased by approximately $520,000. Of that sum, $294,000 were for domestic use
to finance about $65,000 in account receivable, about a $193,000 reduction in
current liabilities, mostly trade payable, and $35,000 to finance prepaid
expense which was mostly legal expense associated with the preparation of a
stock offering document. Domestic losses were approximately $342,000 which were
largely offset by reduction to domestic inventories of $234,000 and non cash
expenses of $88,000. The balance of the additional borrowing was for foreign
operations and was used to finance increased wood (mahogany) inventory, about
$120,000, intransit inventories, and other inventories as a result of growing
sales of the Company's foreign produced products especially it's OEM sales.
-26-
<PAGE> 9
For the the fiscal year ended April 30,1997, operating income (earnings
before interest and taxes) was ($112,446), (6.1) cents per share, compared to
$458,338, 27.1 cents per share for fiscal 1996. The net loss was ($507,212) or
($.28) per share, compared to a net profit of $73,574 or $.04 per share for
fiscal year 1996.
The loss is a result generally of slow sales, excessive inventories
exaggerated by the slow sales, and the Company's limited operating capital.
Because of the slow sales and to avoid increasing inventories, it was necessary,
during the latter portion of the year in particular, to reduce production
volumes, primarily assembled production, in the Company's domestic operation to
levels below that required to manage labor and overhead cost. In addition, the
Company sold off inventories at discounts prices to generate cash to cover the
operating loss and to finance continued operations.
To establish an outlet for the Company to "sell-off" distressed,
overstocked, slow selling, discontinued and other merchandise to reduce its
inventories and to generate cash, space was essentially rented in February of
1996 in The Furniture Clearance Center (FCC) located in Hickory N.C. The FCC is
a warehouse operation shared by a number of furniture manufacturers and open to
the public. Each manufacturer has an assigned area in which consigned goods are
displayed and sold. The Company does not have a contractual agreement and can
discontinue the relationship by giving reasonable notice and removing its
products. The Company's expenses with respect to this relationship are
determined basically by a commission on sales and the resulting sum is withheld
from the sales revenues. During the fiscal year ended April 30, 1997, the
Company sold, before discounts and costs, about $178,000 of domestic goods and
$117,000 of it's foreign products. The discounts generally were about 20% and
the cost were $55,000 and $36,000 respectively.
For the fiscal year, net domestic revenues were reduced by about
$152,000, up about $37,000 over the previous year, as a result of promotional
and other discounts to its regular wholesale prices, about one third of the
total occurred in the fourth quarter. Domestic operations lost about $342,000
during the fiscal year which was $226,000 greater the the prior year. The
increase in discounted prices accounted for 16% of the increased loss while the
balance is attributable to a $41,000 increase in FCC cost (18%),a $68,000
increase in marketing expense (30%), an estimated $43,000 added production cost
as a result of inventory reductions (19%), and an estimated $105,000 to lower
sales volume (46%).
Adding to the loss was a poor performance, particularly during the
fourth quarter, by the Company's foreign subsidiary. This was caused by reduced
production volume and sales out of that facility when the supply of dry wood
became inadequate to sustain a profitable volume. The decrease in the supply of
dry wood was the result of closing down the dry kilns for approximately three
weeks to perform unanticipated maintenance to the boilers used to generate the
necessary steam to operate the kilns. Efforts directed at overcoming the kiln
down time and the reduction to dry wood in the in process inventories was then
hindered when a late start on market samples for the April International Market
required a total commitment of production facilities and personnel to completing
the new product samples for introduction at that market.
The lost production time mostly affected those products with the
greatest value added to the raw material cost and with the highest margins.
Essentially unaffected were certain products with little value added to the raw
material cost and with sales prices that do not attempt to offset a significant
amount of labor and overhead. The overall results were a sales increase for the
fourth quarter, but made up of a product mix that could not adequately absorb
manufacturing costs and, therefore, a net income loss.
Additionally, management established at year end a reserve of
approximately $115,000 on its MWH books for slow moving inventory, about 10% of
the total. This action was primarily taken because the inventories included
quantities of products produced for domestic operations, WHL, that became
excessive when the sales on those items declined or failed to develop as
projected, and included items from two groups from the lines marketed to
retailer through WHCC which management chose to discontinue late in the year.
Management left those items in that inventory to avoid bearing the additional
production and transportation cost until such time that it has the products
sold. Because of the low value placed on these inventories relative to its
ultimate sales price, management believes these "slow moving" products can be
sold at prices above their cost. However, by taking the reserve, management can
chose to more expeditiously dispose of these inventories with assurance that
future operating results will not be negatively impacted.
For the fiscal year net revenues for the Company's foreign produced
products were reduced by about $91,000, up about $42,000 over the previous year,
as a result of promotional and other discounts to its regular wholesale prices,
about one half of the total occurred in the fourth quarter. Foreign operations
loss, not including the inventory reserve discussed above, of about $74,000
during the fiscal year were $241,000 greater the the prior year. The increase in
discounted prices accounted for 17% of the increased loss while the balance can
be attributable to an increase in FCC cost of $34,000 (14%), an estimated
$156,000 added production cost mostly as result of production down time (66%),
and an estimated increase of $9,000 in other miscellaneous expenses (.4%).
-27-
<PAGE> 10
Management expects a significant increase in consolidated revenues
during the first quarter of fiscal year 1998 primarily as a result of increased
OEM sales. Operating profits are also expected to be realized from foreign
operations, but, when consolidated with results from domestic operation a net
loss is expected. Plans for the period call for continued reduced domestic
production operations that will result in profit losses. These losses are
expected to be offset by reductions to inventories to such a degree that funds
provided by operations may actually improve.
-28-
<PAGE> 11
[TURLINGTON AND COMPANY, L.L.P. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Wellington Hall, Limited and Subsidiaries
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of Wellington Hall,
Limited and Subsidiaries as of April 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the financial statements of Muebles Wellington Hall, S.A., a wholly-owned
subsidiary, which statements reflect total assets of $1,591,286 and $1,693,959,
respectively, as of April 30, 1997 and 1996, and total revenues of $1,995,456
and $1,273,301, respectively, for the years ended April 30, 1997 and 1996. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Muebles
Wellington Hall, S.A., is based solely on the report of the ther auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wellington Hall, Limited and
Subsidiaries as of April 30, 1997 and 1996, and the results of their operations,
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern at April 30, 1997.
Management's plans in regard to that matter also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Turlington and Company, L.L.P.,
July 22, 1997, Except for Note 20,
As to Which the Date is August 13, 1997
<PAGE> 12
[MORALES PALAO WILLIAM Y ASOCIADOS LETTERHEAD]
Report of Independent Auditors
To Shareholders of
Muebles Wellington Hall, S.A. de C.V.
We have audited the accompanying balance sheets of Muebles Wellington Hall, S.A.
de C.V. a wholly owned subsidiary of Wellington Hall Caribbean Corporation (an
indirect subsidiary of Wellington Hall, Limited) as of April 30, 1997 and 1996,
and the related statements of operations, stockholders' equity and cash flows
expressed in Honduras Lempiras for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Honduras and the United States. 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 Muebles Wellington Hall, S.A. de
C.V. as of April 30, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles in the United States.
/s/ Morales Paloa William y Asociados
MORALES PALAO WILLIAM
Y ASOCIADOS
ERNST & YOUNG INTERNATIONAL
San Pedro Sula, Honduras, C.A.
July 15, 1997
-30-
<PAGE> 13
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30
ASSETS 1997 !996
----------- -----------
<S> <C> <C>
Current assets:
Cash:
Cash on hand $ 400 $ 400
Cash in demand deposits 53,715 55,356
Accounts receivable:
Trade 986,954 756,872
Less, allowance for doubtful accounts (63,843) (43,800)
Note receivable - officer 28,393 27,908
Inventories 4,363,027 4,571,015
Prepaid expenses 170,434 134,076
Deferred income taxes 19,713 14,327
----------- -----------
5,558,793 5,516,154
----------- -----------
Property and equipment:
Cost 2,150,193 2,173,110
Less, accumulated depreciation 1,281,690 1,218,540
----------- -----------
868,503 954,570
----------- -----------
Other assets:
Deferred income taxes 98,532 94,537
Other 34,735 36,053
----------- -----------
133,267 130,590
----------- -----------
$ 6,560,563 $ 6,601,314
=========== ===========
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 196,443 $ 347,755
Notes payable - other 1,935,972 1,415,698
Accounts payable - trade 372,139 481,797
Customer deposits 45,757 74,139
Other current liabilities 298,014 276,159
----------- -----------
2,848,325 2,595,548
Noncurrent liabilities:
Long-term debt, less current maturities 1,205,294 1,128,907
Deferred compensation accrual 240,000 216,000
----------- -----------
4,293,619 3,940,455
----------- -----------
STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
no par; shares issued and outstanding
1997 - 2,289,887 and 1996 - 1,689,887 3,354,531 3,054,531
Preferred stock; authorized 5,000,000 shares; $5 par;
no shares issued and outstanding for 1997 and 1996 -0- -0-
Cumulative translation adjustments (1,856,648) (1,669,945)
Retained earnings 769,061 1,276,273
----------- -----------
2,266,944 2,660,859
----------- -----------
$ 6,560,563 $ 6,601,314
=========== ===========
</TABLE>
The accomompanying notes are an integral part
of the consolidated financial statements
-31-
<PAGE> 14
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended April 30
1997 1996
----------- -----------
<S> <C> <C>
Common stock:
Authorized 6,000,000 shares; no par:
Balances, beginning of years $ 3,054,531 $ 3,054,531
Shares issued during the years 300,000
----------- -----------
Balances, end of years 3,354,531 3,054,531
----------- -----------
Preferred stock:
Authorized 5,000,000 shares; $5 par;
issued and outstanding beginning and
end of years -0- -0-
----------- -----------
Cumulative translation adjustments:
Balances, beginning of years (1,669,945) (1,419,125)
Translation of foreign currency statements (186,703) (250,820)
----------- -----------
Balances, end of years (1,856,648) (1,669,945)
----------- -----------
Retained earnings:
Balances, beginning of years 1,276,273 1,202,699
Net income (loss) for the years (507,212) 73,574
----------- -----------
Balances, end of years 769,061 1,276,273
----------- -----------
$ 2,266,944 $ 2,660,859
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-32-
<PAGE> 15
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended April 30
1997 1996
----------- -----------
<S> <C> <C>
Revenue:
Sale of furniture $ 5,812,344 $ 5,989,959
Other income 3,925 2,464
----------- -----------
5,816,269 5,992,423
----------- -----------
Costs and expenses:
Cost of goods sold 4,460,775 4,143,692
Other operating, selling, general,
and administrative expenses 1,467,940 1,390,392
Interest expense 404,147 388,829
----------- -----------
6,332,862 5,922,913
----------- -----------
Income (loss) before income taxes (516,593) 69,510
(benefits)
Income tax benefits (9,381) (4,064)
----------- -----------
Net income (loss) for the years $ (507,212) $ 73,574
=========== ===========
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the years $ (.28) $ .04
=========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
-33-
<PAGE> 16
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended April 30
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) for the years $(507,212) $ 73,574
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 102,473 111,149
Gain on sale of equipment (1,200)
Deferred compensation 24,000 24,000
Allowance for slow-moving inventory 115,176
Deferred income taxes (9,381) (6,667)
Changes in assets and liabilities:
Accounts receivable (220,543) 164,231
Note receivable, officer (485) 13,001
Inventories (83,840) (71,750)
Prepaid expenses (39,444) 37,297
Other assets (4,276) (6,363)
Accounts payable, customer deposits,
and other current liabilities (105,219) (240,955)
--------- ---------
Net cash provided by (used for)
operating activities (729,951) 97,517
--------- ---------
Cash flows from investing activities:
Purchase of equipment (73,922) (26,947)
Proceeds from sale of equipment 1,200
--------- ---------
Net cash used for investing activities (72,722) (26,947)
--------- ---------
Cash flows from financing activities:
Short-term borrowings 664,942 69,533
Payments on long-term debt (182,620) (125,354)
Proceeds from issuance of stock 300,000
Net cash provided by (used for)
financing activities 782,322 (55,821)
--------- ---------
Effect of exchange rate changes on cash 18,710 9,715
--------- ---------
Net increase (decrease) in cash (1,641) 24,464
Cash, beginning of years 55,756 31,292
--------- ---------
Cash, end of years $ 54,115 $ 55,756
========= =========
Cash paid during the years for:
Income taxes $-0- $ 10,499
========= =========
Interest $ 402,975 $ 415,494
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
-34-
<PAGE> 17
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED APRIL 30, 1997 AND 1996
1. Summary of Significant Accounting Policies:
These consolidated financial statements were prepared on the basis of
generally accepted accounting principles. The more significant of these
principles are described as follows:
Inventories are stated at the lower of cost or market with cost
computed by use of the first-in, first-out method. Provision has been
made for obsolete and slow moving inventory.
Property and equipment is carried at cost less accumulated
depreciation. New assets and expenditures which substantially increase
the useful lives of the existing assets are capitalized. Maintenance
and repairs are expensed as incurred. Depreciation is computed by use
of the straight-line method over the estimated useful lives of the
assets.
The weighted average number of shares of common stock outstanding and
"common stock equivalents" are totaled in determining both primary and
fully diluted earnings per share.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Wellington Hall Caribbean
Corp. and Muebles Wellington Hall, S.A. All intercompany accounts and
transactions have been eliminated in consolidation. The Muebles
Wellington Hall, S.A. subsidiary was formed during the year ended April
30, 1990 and accounted for as a purchase.
The financial statements of foreign subsidiaries have been translated
into U. S. dollars in accordance with Statement of Financial Accounting
Standards No. 52. All balance sheet accounts have been translated using
the current exchange rates at the balance sheet date. Income statement
amounts have been translated using the average exchange rate for the
year. The gains and losses resulting from the change in exchange rates
during the year have been reported separately as a component of
stockholders' equity entitled "Cumulative Translation Adjustments". Net
currency transaction gains which occurred during the year are included
in net earnings and amounted to approximately $9,970 and $11,969,
respectively, during the years ended April 30, 1997 and 1996.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
-35-
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Nature of Operations and Concentration of Credit Risk:
Wellington Hall, Limited and Subsidiary, Muebles Wellington Hall, S.A.,
are manufacturers of wall systems, dining room, bedroom, and accent and
occasional furniture, with plant facilities located in Lexington, North
Carolina and San Pedro Sula, Honduras. The accent and occasional
furniture accounts for approximately 40% of the Company's total sales.
The remaining 60% of total sales is split about evenly over the other
three product lines. Wellington Hall Caribbean Corp., the other
subsidiary, is a sales organization located in Lexington, North
Carolina that is responsible for selling Muebles Wellington Hall,
S.A.'s products to both the general public and Wellington Hall,
Limited. The Company grants credit to customers who are located
primarily in the United States.
The Company's policy is to maintain its cash balances in reputable
financial institutions insured by the Federal Deposit Insurance
Corporation which provide $100,000 of insurance coverage on each
customer's cash balances. At times during the years, the Company's cash
balances exceeded $100,000. Management believes that this policy will
not cause any adverse effect to the Company.
3. Note Receivable - Officer:
On January 30, 1992, Hoyt Hackney, President and Chief Executive
Officer, exercised options and awards for 180,000 shares of common
stock at the option price of $.80 per share resulting in a net increase
in common stock of $144,000. This increase was accomplished by cash of
$40,000 being paid over to the Company along with the issuance of a
demand note to the Company by Hoyt Hackney of $104,000. The note
receivable - officer is collateralized by the assignment of the
interest the officer has in the Company's deferred compensation accrual
account and bears interest at the federal rate as issued from time to
time.
The note balance at April 30, 1997 and 1996 was $28,393 and $27,908,
respectively.
4. Inventories:
Inventories consisted of the following:
<TABLE>
1997 1996
---------- ----------
<S> <C> <C>
Finished goods $1,912,759 $1,642,115
Work-in-process 1,702,500 2,057,076
Raw materials 862,944 871,824
---------- ----------
4,478,203 4,571,015
Less, allowance for slow-
moving inventory (115,176)
---------- ----------
$4,363,027 $4,571,015
========== ==========
</TABLE>
-36-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Property and Equipment:
The major classes are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings $1,107,151 $1,121,207
Machinery and equipment 869,883 887,479
Furniture, fixtures and other equipment 173,159 164,424
---------- ----------
$2,150,193 $2,173,110
========== ==========
</TABLE>
Depreciation expense for the years ended April 30, 1997 and 1996
amounted to $102,473 and $111,149, respectively.
6. Short-term Loans:
The Company has a demand loan payable to Lexington State Bank for
$85,600 and $90,000, respectively, at April 30, 1997 and 1996.
The Company has a line of credit agreement for short-term debt with
Lexington State Bank. The bank agreed to extend to the Company in the
form of a line of credit the lesser of $1,200,000 or 70% of the
Company's accounts receivable less than 60 days old, 50% of the
finished goods inventory, and 10% of the work-in-process and raw
materials inventories which sum amounted to $1,055,579 at April 30,
1997 and $973,964 at April 30, 1996. The Company executed a $1,200,000
demand promissory note against which the bank shall advance funds at
the Company's request. Interest is at the rate of 1% above prime. This
agreement is reviewed annually for renewal. At April 30, 1997 and 1996,
$1,178,400 and $1,113,000, respectively, was advanced under this
agreement. This loan is secured by all present and future personal
property assets of the Company.
During the year ended April 30, 1997, the Company obtained an
additional line of credit agreement for short-term debt with Lexington
State Bank for up to $250,000, bearing interest at the rate of 1.5%
above prime. The loan is secured by substantially all of the assets of
Wellington Hall, Limited. At April 30, 1997, $233,000 was advanced
under this agreement.
The Company had line of credit agreements with two Honduran banks
bearing interest rates ranging from 30% to 40% with outstanding
balances of $438,972 and $212,698, respectively, at April 30, 1997 and
1996. The banks have a second mortgage on fixed assets and a lien on
inventories as security for these loans. The Company's unused credit
lines with Honduran banks was $155,334 and $134,261, respectively, as
of April 30, 1997 and 1996.
7. Long-term Debt:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
E. Kemm:
Interest payable monthly at 1%
above prime $ 25,000 $ 25,000
</TABLE>
-37-
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Long-term Debt (Continued):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Overseas Private Investment Corporation:
Interest rate 10.00% and 12.00%,
respectively, payable in quarterly
installments of $30,969 plus interest
through April 30, 1998. Beginning
July 31, 1998, quarterly installments
increase to $61,937 plus interest $ 990,999 $1,021,968
Lexington State Bank:
Interest rate 10.0% and 9.75%,
respectively, payable in monthly
installments of $7,000 with
interest at 1.5% above prime 385,738 429,694
---------- ----------
1,401,737 1,476,662
Less, current maturities 196,443 347,755
---------- ----------
$1,205,294 $1,128,907
========== ==========
</TABLE>
The weighted average interest rate paid E. Kemm amounted to 9.56% and
9.61%, respectively, for the years ended April 30, 1997 and 1996.
E. Kemm is a stockholder and an officer of the Company.
The Overseas Private Investment Corporation loan is secured by a first
lien on all real estate and all current and future fixed assets of
Muebles Wellington Hall, S.A. and a security interest in the Sales
Agreement between Muebles Wellington Hall, S.A. and Wellington Hall
Caribbean Corp.
The Lexington State Bank loan is secured by a first lien on all assets
of Wellington Hall, Limited.
The projected payments of long-term debt in each of the five years
subsequent to April 30, 1997 are:
<TABLE>
<CAPTION>
Year Ending April 30 Amount
-------------------- ------
<S> <C>
1998 $196,443
1999 300,296
2000 677,426
2001 64,129
2002 163,443
</TABLE>
During the year ended April 30, 1997, the Overseas Private Investment
Corporation suspended quarterly principal payments from the period July
31, 1996 through April 30, 1997. The interest rate was reduced from
12.00% to 10.00%, effective November 1, 1996.
-38-
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Stock Option Plan:
On February 10, 1997, the Board of Directors approved the Wellington
Hall, Limited 1997 Stock Option and Restricted Stock Plan (the Plan).
The Plan has a term of ten years, expiring on February 9, 2007. Under
the Plan, the Company may grant options or restricted stock awards to
key employees, officers, or directors for up to an aggregate of
1,200,000 shares of common stock, with no individual receiving more
than 600,000 shares. The price of the shares issued under the Plan are
to be determined at the time of the grant, not to be below 100% of the
fair market value of the common stock at the time of the grant. At
report date, the Plan had yet to be approved by the stockholders of the
Company, but is slated to be voted on at the September 1997 annual
stockholders' meeting.
9. Capital Stock:
The Company, in accordance with its long-term loan agreement and line
of credit with Lexington State Bank, is restricted from paying
dividends on its capital stock without prior written consent of the
bank.
During the year ended April 30, 1997, the Company issued an additional
600,000 shares of common stock at $.50 per share to an existing
officer/stockholder. In addition, the officer was given a stock option
plan as described in Note 8.
Also in 1997, the Company filed a registration statement with the
Securities and Exchange Commission for the offer and sale of 1,689,887
shares of its common stock at $.50 per share. The registration
statement had not yet become effective as of the report date.
10. Income Taxes:
At April 30, 1997, the Company had federal operating loss carryforwards
of $491,121 that expire in 2010 through 2012, and state net operating
loss carryforwards of $782,870 that expire in 1998 through 2002.
For financial reporting purposes, a valuation allowance of $244,961 has
been recognized to offset the deferred tax assets related to the
carryovers and certain other deferred tax assets.
At April 30, 1996, the Company had federal operating loss carryforwards
of $62,373 that expire in 2010 and 2011, and state net operating loss
carryforwards of $975,358 that expire in 1997, 1998, 2000, and 2001.
For financial reporting purposes, a valuation allowance of $116,734 has
been recognized to offset the deferred tax assets related to the
carryovers and certain other deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets
and liabilities are as follows:
-39-
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Income Taxes (Continued):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Book over tax depreciation $ 4,668 $ 10,059
Book allowance for doubtful
accounts 19,713 14,327
Tax over book inventory 38,810 42,402
Deferred compensation 93,864 84,478
State net operating loss
carryforward 41,772 49,938
Federal net operating loss
carryforward 164,379 24,394
--------- ---------
363,206 225,598
Valuation allowance for deferred
tax assets (244,961) (116,734)
--------- ---------
Deferred tax assets $ 118,245 $ 108,864
========= =========
</TABLE>
Classification of the Company's Consolidated Balance Sheets is as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Current $ 19,713 $ 14,327
Noncurrent 98,532 94,537
-------- --------
$118,245 $108,864
======== ========
</TABLE>
There follows reconciliations of the income taxes per the income tax
returns with the income tax deductions per the Consolidated Statements
of Income:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Amounts shown by returns (net) $ 2,603
Deferred income taxes $ (9,381) (6,667)
-------- --------
$ (9,381) $ (4,064)
======== ========
Effective income tax rates (1.8)% (5.8)%
======== ========
</TABLE>
No provision has been made for U. S. income taxes on unremitted
earnings of the foreign subsidiary (approximately $1,143,000 and
$1,094,000, respectively, at April 30, 1997 and 1996) since it is the
present intention of management to indefinitely reinvest these
earnings.
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Domestic $(445,698) $ 47,499
Foreign (70,895) 22,011
--------- ---------
$(516,593) $ 69,510
========= =========
</TABLE>
-40-
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Income Taxes (Continued):
Federal, foreign, and state income taxes (benefits) consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Federal $ (7,036) $ (5,809)
Foreign 36
State (2,345) 1,709
-------- --------
$ (9,381) $ (4,064)
======== ========
</TABLE>
The following schedule reconciles the differences between the U. S.
federal income tax rate and the effective tax rate:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Tax computed at the U. S. federal rate 34.0 % 34.0 %
Increases (decreases) resulting from:
State income tax, net of federal benefit 2.4
Foreign income taxed at
different rates (10.7)
Deferred income taxes (1.8) (9.6)
Nondeductible expenses and benefit
of domestic net operating loss (34.0) (17.4)
Other (4.5)
----- -----
(1.8)% (5.8)%
===== =====
</TABLE>
11. Financial Information Relating to Foreign and Domestic Operations and
Export Sales:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales to unaffiliated customers:
United States $ 5,802,687 $ 5,985,826
Republic of Honduras 9,657 4,133
----------- -----------
Total sales $ 5,812,344 $ 5,989,959
=========== ===========
Sales (export sales) or transfers between
geographic areas:
Sales from Republic of Honduras subsidiary
to United States parent company, at market
value (export sales) $ 1,985,799 $ 1,269,168
=========== ===========
Transfers from United States parent
company to Republic of Honduras subsidiary
of materials and supplies, at cost $ 237,235 $ 211,206
=========== ===========
Operating profit:
United States $ (178,275) $ 333,693
Republic of Honduras 65,829 124,646
----------- -----------
Income (loss) before interest
and income taxes $ (112,446) $ 458,339
=========== ===========
</TABLE>
-41-
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Financial Information Relating to Foreign and Domestic Operations and Export
Sales (Continued):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Identifiable assets:
United States $5,112,362 $4,907,355
Republic of Honduras 1,448,201 1,693,959
---------- ----------
Total assets $6,560,563 $6,601,314
========== ==========
</TABLE>
12. Leases:
The Company leases showroom space under a five and one-half year
operating lease expiring in April 1999. The Company subleases a portion
of this showroom space to another company.
The Company also leases office equipment under noncancelable leases
expiring in 1998 through 2001.
Net minimum lease payments on the foregoing leases amount to $104,702
for 1998, $35,913 for 1999, $1,695 for 2000, and $1,695 for 2001. Net
lease expenses of the foregoing leases for the years are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Lease expense $109,210 $103,170
Sublease income 46,776 16,692
-------- --------
Net lease expense $ 62,434 $ 86,478
</TABLE> ======== ========
13. Contingent Liability:
In accordance with the Honduran Labor Code, the Company has the
obligation to pay severance compensation to its employees in the event
of dismissal under certain specific circumstances. It is the policy of
the Company to pay such severance payments in accordance with the Law.
At April 30, 1997 and 1996, the estimated contingent liability
aggregated approximately $155,564 and $133,488, respectively.
14. Earnings Per Share:
Earnings per share of common stock are based on the average number of
shares of common stock outstanding during each period.
For the years ended April 30, 1997 and 1996, the equivalents were
dilutive and the primary earnings per share were computed based on the
average number of common shares and common share equivalents
outstanding. When dilutive, stock options are included as share
equivalents using the treasury stock method. The number of shares used
in computing primary earnings per share were 1,839,887 and 1,689,887,
respectively, for the years ended April 30, 1997 and 1996. The number
of shares used in computing fully diluted earnings per share were
1,839,887 and 1,689,887, respectively, for the years ended April 30,
1997 and 1996.
-42-
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. Incentive Plan:
The Company has an Incentive Plan covering certain officers and key
employees who have the greatest opportunities to contribute to current
earnings and the future success of the Company's operations. The amount
determined under the Incentive Plan is based upon profits of the
Company.
On January 1, 1987, the President of the Company executed a new
employment contract and forfeited his rights under the Incentive Plan
as one of the conditions of the new contract.
16. Deferred Compensation Agreement:
On May 8, 1987, the Company adopted a Deferred Compensation Agreement
with the President of the Company which will provide for the payment of
$50,000 per year for 10 years in monthly installments when the
President reaches age 62 and retires. The Agreement provides that if he
dies before he has received the total payments or if he dies before
retirement, then his beneficiary shall receive the benefit balance
thereof in monthly installments. In future years, the deferred
compensation will be accrued over the remaining term of service by the
President on a present value basis. The accruals for the years ended
April 30, 1997 and 1996 were $24,000.
17. Profit Sharing Plan:
During the year ended April 30, 1987, the Company adopted a combined
Profit Sharing and Salary Reduction Plan. The Company contributes 50%
of the employee contributions with a 2% maximum Company contribution on
each employee's salary. The Plan also has a feature whereby the
Directors can set aside certain profits as determined annually by the
Directors. The Profit Sharing and Salary Reduction Plans are tax exempt
under applicable sections of the Internal Revenue Code. The
contributions by the Company for the years ended April 30, 1997 and
1996 were $7,259 and $8,143, respectively.
18. Quarterly Financial Data - Unaudited:
The following is a summary of the quarterly results of operations for
the years ended April 30, 1997 and 1996:
<TABLE>
<CAPTION>
Fiscal 1997 Quarters
-------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,246,698 $ 1,586,709 $ 1,533,266 $ 1,445,671
Cost of goods sold 850,591 1,066,480 1,086,343 1,457,361
Net income (loss) (15,016) 51,478 (63,809) (479,865)
Net income (loss) per
common share (primary
and fully diluted) (.01) .03 (.04) (.26)
</TABLE>
-43-
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. Quarterly Financial Data - Unaudited (Continued):
<TABLE>
<CAPTION>
Fiscal 1996 Quarters
------------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,473,474 $ 1,614,388 $ 1,496,387 $ 1,405,710
Cost of goods sold 981,741 1,095,476 1,111,108 955,367
Net income (loss) 44,756 13,361 (31,015) 46,472
Net income (loss) per
common share (primary
and fully diluted) .02 .01 (.02) .03
</TABLE>
19. Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments", requires that the Company
disclose estimated fair values for its financial instruments. The
following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash:
The carrying amount approximates fair value.
Note receivable - officer:
The carrying amount approximates fair value.
Notes payable - other:
Due to the fact that these are short-term notes payable within
one year, the carrying amount approximates fair value.
Long-term debt:
The fair value of long-term debt is estimated based on the
current rates the Company could obtain on debt of the same
remaining maturities.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash $ 54,115 $ 54,115 $ 55,756 $ 55,756
Note receivable -
officer 28,393 28,393 27,908 27,908
Notes payable -
other 1,935,972 1,935,972 1,415,698 1,415,698
Long-term debt 1,401,737 1,401,737 1,476,662 1,520,652
</TABLE>
-44-
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. Going Concern Considerations:
As reflected in the accompanying consolidated financial statements, the
Company incurred a $507,212 net loss for the year ended April 30, 1997.
The Company also incurred a negative cash flow from operating
activities of $729,951. The Company's gross profit percentage decreased
from 31% for the year ended April 30, 1996 to 23% for the year ended
April 30, 1997. Accounts receivable turnover and inventory turnover
declined during the year ended April 30, 1997. The Company's lines of
credit and short-term borrowings were at near maximum levels at April
30, 1997. Principal payments on the Overseas Private Investment
Corporation loan had been suspended for much of the year ended April
30, 1997 and are scheduled to resume July 31, 1997.
Management is currently developing new product lines with a
concentration of higher volume items which should result in lower unit
cost. In addition, increased foreign business is expected as well as an
increased cash flow from the usage of existing inventories. Management
also projects a significant cash inflow from the proposed public
offering discussed in Note 9. On July 31, 1997, the required principal
payment on the Overseas Private Investment Corporation loan was made.
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
21. Statutory Reserve:
According to the Commercial Code of the Republic of Honduras, the
statutory reserve must be constituted annually appropriating at least
5% of the period's earnings until it reaches 20% of capital stock. The
statutory reserve, which is included in retained earnings, amounted to
$23,948 and $28,187, respectively, at April 30, 1997 and 1996.
-45-
<PAGE> 28
OFFICERS AND DIRECTORS
OFFICERS
Hoyt M. Hackney, Jr. Ralph L. Eskelson, Jr.
President and Treasurer General Manager
Muebles Wellington Hall, S.A.
Ernst B. Kemm William W. Woodruff
Executive Vice President Secretary
DIRECTORS
Donald W. Leonard William W. Woodruff
Chairman of the Board President of Woodruff
Shoe Store
Hoyt M. Hackney, Jr. Ernst B. Kemm
President and Treasurer Executive Vice President
Arthur F. Bingham
Senior Executive Vice President
TRANSFER AGENT
Wachovia Bank and Trust Company
-46-
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF WELLINGTON HALL, LIMITED
Name of Subsidiary Jurisdiction of Incorporation
1. Wellington Hall Caribbean Corporation North Carolina
2. Muebles Wellington Hall, S.A. Honduras, Central America
Both of the above-listed subsidiaries do business under their full corporate
names.
-47-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 54,115
<SECURITIES> 0
<RECEIVABLES> 986,954
<ALLOWANCES> 63,843
<INVENTORY> 4,363,027
<CURRENT-ASSETS> 5,558,793
<PP&E> 2,150,193
<DEPRECIATION> 1,281,690
<TOTAL-ASSETS> 6,560,563
<CURRENT-LIABILITIES> 2,848,325
<BONDS> 0
0
0
<COMMON> 2,289,887
<OTHER-SE> 769,061
<TOTAL-LIABILITY-AND-EQUITY> 6,560,563
<SALES> 5,812,344
<TOTAL-REVENUES> 5,816,269
<CGS> 4,460,775
<TOTAL-COSTS> 5,935,880
<OTHER-EXPENSES> 404,147
<LOSS-PROVISION> 63,843
<INTEREST-EXPENSE> 404,147
<INCOME-PRETAX> (516,593)
<INCOME-TAX> (9,381)
<INCOME-CONTINUING> (507,212)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (507,212)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
