<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended July 31, 1997
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition period from to
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Commission file number 0-3928
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Wellington Hall, Limited
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(Exact name of Registrant as specified 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
Lexington, N.C. 29293
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(Address of principal executive offices) (Zip Code)
(910) 249-4931
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(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
----- -----
Indicate the number of shares outstanding of each of insurer's classes of common
stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS Number of Shares Date
----- ---------------- ----
<S> <C> <C>
Common Stock 2,289,887 July 31, 1997
</TABLE>
Traditional Small Business Disclosure Format:
YES X No
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Page 1 of 13 Pages
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INDEX
Wellington Hall, Limited and Subsidiaries
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet - July 31, 1997 3
Consolidated statements of income - Three months ended 4
July 31, 1997 and 1996
Consolidated statements of cash flows - Three months ended 5
July 31, 1997 and 1996
Notes to consolidated financial statements - July 31, 1997 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
</TABLE>
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
July 31,
ASSETS 1997
----------
<S> <C>
Current assets:
Cash:
Cash on hand $ 400
Cash in demand deposits 34,583
Accounts receivable:
Trade 905,492
Less, allowance for doubtful accounts (63,843)
Note receivable - officer 18,408
Inventories 4,147,505
Prepaid expenses 159,496
Deferred income taxes 19,713
-----------
5,221,754
-----------
Property and equipment:
Cost 2,156,301
Less, accumulated depreciation (1,306,933)
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849,368
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Other assets
Deferred income taxes 98,532
Other 34,610
-----------
133,142
-----------
$ 6,204,264
===========
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 227,412
Notes payable - other 1,921,836
Accounts payable - trade 300,266
Customer deposits 71,210
Other current liabilities 329,442
-----------
2,850,166
Noncurrent liabilities:
Long-term debt, less current maturities 1,131,882
Deferred compensation accrual 246,000
-----------
4,228,048
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STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
no par; shares issued and outstanding
2,289,887 3,354,531
Preferred stock; authorized 5,000,000 shares; $5 par;
no shares issued and outstanding -0-
Cumulative translation adjustments (1,860,947)
Retained earnings 482,632
-----------
1,976,216
$ 6,204,264
===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
1997 1996
---- ----
<S> <C> <C>
Revenues:
Sale of furniture $ 1,572,819 $ 1,246,697
Other income 1,367 2,140
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1,574,186 1,248,837
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Costs and expenses:
Cost of goods sold 1,350,511 850,591
Other operating, selling, general,
and administrative expenses 396,855 319,599
Interest expense 116,209 91,386
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1,863,575 1,261,576
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Income (loss) before income taxes (289,389) (12,739)
(benefits)
Income tax benefits 0 2,277
----------- -----------
Net income (loss) for the quarter ($ 289,389) ($ 15,016)
----------- -----------
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the quarter ($ .13) ($ .01)
----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
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<PAGE> 5
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) for the years ($242,563) ($ 15,015)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 26,110 28,449
Deferred compensation 6,000 6,000
Deferred income taxes 0 0
Changes in assets and liabilities:
Accounts receivable 81,040 51,777
Note receivable, officer 9,985 0
Inventories 210,879 (179,500)
Prepaid expenses 10,857 14,192)
Other assets (24) (2,505)
Accounts payable, customer deposits,
and other current liabilities (14,581) (9,873)
--------- ---------
Net cash provided by (used for)
operating activities 40,876 (134,859)
Cash flows from investing activities:
Purchase of equipment (9,115) (20,455)
Cash Flow From Financing Activities:
Payments on short-term debt (12,250) 145,575
Payments on long-term debt (42,301) (38,646)
--------- ---------
Net cash provided by (used for) (54,552) 106,929
financing activities --------- ---------
Effect of exchange rate changes on cash 3,702 15,875
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Net Increase (decrease) in cash (19,088) (35,514)
Cash, beginning of quarters 54,071 54,679
--------- ---------
Cash, end of quarter $ 34,983 $ 19,165
--------- ---------
Cash paid during the quarters for:
Income taxes $ 0 $ 0
Interest $ 116,209 $ 91,386
--------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements
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<PAGE> 6
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
July 31, 1997
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
of the Company for the interim period presented.
2. Promotional costs are expensed as they are incurred.
3. The company takes a physical inventory at the end of the second quarter
(October 31) and at year-end (April 30). At the end of each month and
at the end of the first quarter (July 31) and the third quarter
(January 31), inventories are adjusted to purchases, production and
shipments.
4. The financial statements of the Company's foreign subsidiary, Muebles
Wellington Hall, S.A., have been translated into U.S. dollars in
accordance with FASB Statement No. 52. All balance sheet accounts have
been translated using the current ("spot") exchange rates at the
balance sheet date or 13.08 Lempiras to 1 U.S. Dollar. Income statement
amounts have been translated using the weighted average exchange rate
which for the period was 13.07 Lempira to 1 U.S. Dollar. The gains and
losses resulting from the change in exchange rates during the quarter
have been reported separately as a component of stockholders' equity
entitled "Cumulative Translation Adjustments". Net currency transaction
gains or losses which occur during the quarter are included in net
earnings and amounted to approximately $618 and $3,426 during the
quarters ended July 31, 1997 and 1996 respectively.
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Item 2:
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 (WHL) with Lexington State Bank (LSB)
and the term loan of Wellington Hall Caribbean Corp. (WHCC) with the Overseas
Private Investment Corporation (OPIC). As of July 31, 1997, total stockholders'
equity was $1,976,246 and the outstanding principal amounts of the LSB loan and
the OPIC loan were $374,266 and $960,030, 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 and 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 July
31, 1997, the Company had $1,130,000 in borrowings under this line of credit,
leaving $70,000 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 July 31, 1997 was $100,000.
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 bear interest at the
rate of prime plus 1 1/2%, payable monthly, and the outstanding balance as of
July 31, 1997 was $250,000.
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
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<PAGE> 8
MWH has lines of credit with two Honduran banks in an aggregate amount
of about $590,000. As of July 31, 1997, an aggregate of $441,836 had been
borrowed under these lines, leaving approximately $148,000 for future
borrowings. Borrowings bear interest at rates ranging from 28% to 35% payable
quarterly and principal is payable on demand. The lines are secured by a second
lien on the fixed assets of MWH and current assets.
The Company's other primary source of liquidity is net cash provided by
operating activities which was $40,867 and ($134,859) in the fiscal first
quarter of 1998 and 1997, respectively. The funds provided during the quarter
was primarily as a result of decreases in account receivable and inventories.
As of July 31, 1997, accounts receivable had decreased by approximately
$81,000 since the beginning of the fiscal year, mostly as a result lower sales
late in the quarter because of vacation close down at domestic operations and
slow sales activity in general. The receivables represented a turnover rate of
about fifty-three days, a decrease of about two days when compared to the
turnover rate reported at April 30, 1997.
Accounts payable were reduced by approximately $72,000 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 $211,000 during the fiscal
quarter ended July 31, 1997 primarily a result of a decrease of about $220,000
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. The Company domestic inventories of foreign produced products
and inventories at the Honduran facility were unchanged at the end of the
quarter as compared to those reported at April 30, 1997.
Property and equipment is reported to have increased by about $6,000
during the fiscal quarter, however, expenditures were approximately $9,000 with
the difference attributable to the devaluation of the Honduran currency relative
to the prior fiscal year end of approximately 5%. 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 the balance
of 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 quarter ended July 31, 1997 was approximately $9,000
used primarily to upgrading the Company's domestic operations water supply
piping and to completing the retubing of its boiler at the Honduran facilities
used to dry wood.
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 13.08 lempira to the dollar at July 31, 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 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
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<PAGE> 9
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 remains tight as was the case 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 are to be offered first to the holders of
record of its outstanding common stock as of a date at or about the time that
the registration statement 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, if at
all, until some future date.
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.
The Company's liquidity is discussed further in the last paragraph under Results
of Operation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1997 COMPARED TO THE THREE
MONTHS ENDED JULY 31, 1996
Consolidated revenues for the first fiscal quarter ended July 31, 1997
were up approximately $326,000 or 26% as compared to those reported the previous
year. This increase was due entirely to an increase in sales volume, as prices
remained constant for much of the period or were only slightly increased. Such
increase in sales volume was almost entirely the result of the Company's efforts
to increasing it's OEM sales, i.e. products sold to other manufacturer and
produced in the Honduras facility. The sales of the Company's product produced
at the Honduran facility and products produced domestically and normally
distributed through retailers were essentially the same as reported last year.
The sales of domestic products remained well below the estimated level necessary
for the operation to avoid a loss. Such low 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 about $946,942 up
approximately $75,000 or about eight percent (8%) for the fiscal quarter over
last year but well below $1,200,000 per quarter estimated to be required for the
domestic operation to avoid a loss. All of the increase in the domestic sales
was the result of selling discounted inventory which further contributed to
domestic losses. Sales of foreign produced goods net of inter
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<PAGE> 10
company, OEM, and discounted inventory sales remained about even with the
results reported last year.
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 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, begun early in fiscal 1997, continue to be directed at
selling other manufactures and wood consumers their products and production
requirements; OEM sales. These sales increased by about $200,000 or 477% in the
first quarter of fiscal year 1998, and accounted for practically all the growth
in foreign produced goods, and for 16% of total consolidated sales up from 3.5%
last year.
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. At July 31, 1997, the Company had established a backlog of orders for
this product of about $230,000 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 could 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. Management believes that the results realized at
the next market to be held in October will define the magnitude and significance
of the Woodward Collection to restoring domestic operations to profitable level.
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 July 31, 1997 was $2,025,972,
virtually even with the backlog of $2,047,369 on April 30, 1997 and the
$2,033,000 reported at July 31, 1996. The July 31, 1997 backlog included
$1,208,224 of domestically - manufactured products, as opposed to $$1,289,542
included in the April 30, 1997 backlog and $1,471,235 included in the July 31,
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 $817,745 on July 31,
1997 versus $757,827 on April 30, 1996 and $561.950 on July 31, 1996. The
increase primarily reflects more recent success in securing orders from other
manufacturers for their products (OEM sales).
Cost of sales increased approximately $500,000 or 59% for the fiscal
quarter as compared with last year, reflecting primarily the reduced level of
domestic production. Cost of sales are further discussed below.
Selling, general and administrative expenses increased about $72,200 or
24 % for the first fiscal quarter mostly as a result of the addition of Arthur
Bingham as Senior Executive Vice President of Sales and Marketing and marketing
costs in general. The Company expects to continue
to support an expanded marketing effort.
Interest expenses of $116,209 for the fiscal quarter represent an
increase of about $25,000 over that paid during the previous year first quarter
as a result of added borrowing during the previous fiscal year. However,
long-term debt declined during the quarter by about $42,000 and short term
borrowing decreased by approximately $14,000.
For the fiscal quarter ended July 31, 1997, operating income
(earnings before interest and taxes) was ($173,180), (7.6) cents per share,
compared to $78,647, 3.4 cents per share for quarter ended July 31, 1996. The
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<PAGE> 11
net loss was ($289,389) or ($.13) per share, compared to a net loss of ($15,016)
or ($.007) per share for the prior year's first quarter. Domestic operations
losses of approximately $246,000 for the first fiscal quarter ended July 31,
1997 were largely offset by reductions to domestic inventories of $221,000 and
non cash expenses of about $23,500.
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 most of the quarter, 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 quarter ended July 31, 1997, the
Company sold, before discounts and costs, about $70,000 of domestic goods and
$28,000 of it's foreign products. The discounts generally were about 20% and the
cost were $14,000 and $6,300 respectively. In addition, the Company held a one
day factory close out sale and sold, before discounts and cost, about $64,000 of
domestic goods and $47,000 of it's foreign products.
For the fiscal quarter, net domestic revenues were reduced by about
$65,000, up about $40,000 over the previous year's first quarter, as a result of
promotional and other discounts to its regular wholesale prices. Domestic
operations lost about $246,000 during the fiscal quarter which was $231,000
greater the prior year. The increase in discounted prices accounted for
16.3% of the increased loss while the balance is attributable to a estimated
loss on the factory close out sale of $44,000 (17.9 %), a $77,200 increase in
marketing expense (31.4%), and the balance is estimated to be mostly
attributable to lower sales volume (34.4%).
For the fiscal quarter net revenues for the Company's foreign produced
products were reduced by about $5,000, down about $2,000 from the previous
year's first quarter, as a result of promotional and other discounts to its
regular wholesale prices. Foreign operations realized a profit of about $42,000
for the quarter but when the results were combined with WHCC, an approximate
loss $43,000 is reported. That loss of about $43,000 during the fiscal quarter
was $84,000 greater the prior year first quarter. The loss was mostly due to
increased freight cost and product mix.
If the Company is to meet its liquidity needs in the future, it must
continue to generate positive cash flows and must achieve profitable operations
for the second quarter ended October 31, 1997 and for the remainder of the
fiscal year. Management believes there are a number of contingencies if the
improved results are to be realized most notable is the amount of orders
received for the balance of the quarter and at the October International
Furniture market. The rate of incoming orders during the first three weeks of
August were poor but then improved significantly thereafter and through the
early part of September. It is essential that new orders continue to be
received at a profitable rate for the balance of the quarter if additional
losses are to be avoided.
-11-
<PAGE> 12
PART II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed:
3.1 Amended and Restated Charter of Wellington Hall Limited
Incorporated by reference
3.2 Bylaws of Wellington Hall, Limited, as amended
Incorporated by reference
10.26 Amendments to the 1997 Stock Option and Restricted
Stock Plan Dated September 1, 1997
27 Financial Data Schedule (For SEC Use Only)
(b) Reports on From 8-K filed during the quarter ended
July 31, 1997: None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLINGTON HALL, LIMITED
(Registrant)
Date: September 12, 1997
By: /s/ Hoyt M. Hackney, Jr.
-------------------------
Hoyt M. Hackney, Jr.,
President and
Chief Executive Officer
Chief Financial Officer
-12-
<PAGE> 1
EXHIBIT 10.26
WELLINGTON HALL, LIMITED
RESOLUTIONS OF THE BOARD OF DIRECTORS
SEPTEMBER 1, 1997
WHEREAS, on February 10, 1997, the Board of Directors of the Company
approved the Wellington Hall, Limited 1997 Stock Option and Restricted Stock
Plan (the "Plan"), subject to the approval of the shareholders of the Company;
and
WHEREAS, certain provisions of the Plan are not as flexible as
permitted by the Company's bylaws, applicable state law and applicable tax
laws; and
WHEREAS, the Board of Directors desires to amend the Plan to adopt the
most flexible provisions permissible and to clarify certain other provisions;
now, then, it is
RESOLVED, that Article II, Section 1(f) of the Wellington Hall, Limited
1997 Stock Option and Restricted Stock Plan be and hereby is amended to delete
said Article II, Section 1(f) in its entirety and to substitute in lieu
thereof the following:
(f) Duration of Options. Each Option and all rights thereunder
granted pursuant to the terms of this Plan shall expire on the date
specified in the applicable option agreement, but in no event shall
any Option expire later than ten (10) years from the date on which the
Option is granted; provided, however, that any Incentive Stock Option
granted to an employee who owns more than 10% of the combined voting
power of all classes of stock of the Company may not be exercisable
after the date five (5) years from the date the Incentive Stock Option
is granted. In addition, each Option shall be subject to early
termination as provided in this Plan or the applicable option
agreement.
FURTHER RESOLVED, that Article II, Section 1(g)(v) be and hereby is
added to the Wellington Hall, Limited 1997 Stock Option and Restricted Stock
Plan to read as follows:
(v) If a nonemployee director-optionee ceases to serve the
Company in that capacity, the rights of the nonemployee
director-optionee upon such termination shall be governed in the
manner of an optionee's rights upon termination of employment as set
forth above.
FURTHER RESOLVED, that Article III, Section 5 of the Wellington Hall,
Limited 1997 Stock Option and Restricted Stock Plan be and hereby is amended
to add a second paragraph thereto to read as follows:
If a nonemployee director-grantee ceases to serve the Company
in that capacity, the rights of the nonemployee director-grantee upon
termination shall be governed in the manner of a grantee's rights upon
termination of employment as set forth above.
FURTHER RESOLVE, that Article IV, Section 4 of the Wellington Hall,
Limited 1997 Stock Option and Restricted Stock Plan be and hereby is amended to
delete said Article IV, Section 4 in its entirety and to substitute in lieu
thereof the following:
4. Effective Date of Plan. This Plan shall be effective
February 10, 1997, the date of adoption of the Plan by the Board of
Directors of the Company, subject to approval of the Plan by the
shareholders of the Company by the majority of the votes cast at a
duly held shareholders' meeting at which a majority of the Company's
Common Stock is present either in person or by proxy held within 12
months of the date of adoption of the Plan by the Board.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH NOTES TO FINANCIAL STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-21-1997
<CASH> 34,983
<SECURITIES> 0
<RECEIVABLES> 905,492
<ALLOWANCES> 63,843
<INVENTORY> 4,147,505
<CURRENT-ASSETS> 5,221,754
<PP&E> 2,156,301
<DEPRECIATION> 1,306,933
<TOTAL-ASSETS> 6,204,264
<CURRENT-LIABILITIES> 2,850,166
<BONDS> 0
0
0
<COMMON> 2,289,887
<OTHER-SE> 482,632
<TOTAL-LIABILITY-AND-EQUITY> 6,204,595
<SALES> 1,572,819
<TOTAL-REVENUES> 1,574,186
<CGS> 1,350,511
<TOTAL-COSTS> 1,863,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 63,843
<INTEREST-EXPENSE> 116,209
<INCOME-PRETAX> (289,389)
<INCOME-TAX> 0
<INCOME-CONTINUING> (289,389)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (289,389)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
