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, 1998
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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_______________
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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
425 John Ward Rd
Lexington, N.C. 29295
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(Address of principal executive offices) (Zip Code)
(336) 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.
CLASS Number of Shares Date
----- ---------------- ----
Common Stock 2,289,887 July 31, 1998
Traditional Small Business Disclosure Format:
YES [X] No [ ]
Page 1 of 13
<PAGE>
INDEX
Wellington Hall, Limited and Subsidiaries
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet - July 31, 1998 3
Consolidated statements of income - Three months ended 4
July 31, 1998 and 1997
Consolidated statements of cash flows - Three months ended 5
July 31, 1998 and 1997
Notes to consolidated financial statements - July 31, 1998 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
Note Modification Agreement 13
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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(unaudited)
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July 31,
ASSETS 1998
-----------
Current assets:
Cash:
Cash on hand $ 20,669
Accounts receivable:
Trade 817,564
Less, allowance for doubtful accounts (63,843)
Note receivable - officer 7,466
Inventories 3,918,456
Prepaid expenses 63,788
Deferred income taxes 0
-----------
$ 4,764,100
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Property and equipment:
Cost 2,196,909
Less, accumulated depreciation (1,389,264)
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807,645
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Other assets
Deferred income taxes 125,851
Other 27,747
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$ 5,725,342
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LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 325,293
Notes payable - other 1,978,485
Accounts payable - trade 565,371
Sundry 14,544
Customer deposits 65,668
Other current liabilities 443,668
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3,393,029
Noncurrent liabilities:
Long-term debt, less current maturities 893,943
Deferred compensation accrual 270,000
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4,556,972
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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 (1,879,186)
Retained earnings (306,975)
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Total Stockholders' Equity 1,168,370
-----------
Total Liabilities & Equity 5,725,342
The accompanying notes are an integral part of the
consolidated financial statements
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
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Three Months Ended
July 31,
1998 1997
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Revenues:
Sale of furniture $ 1,556,520 $ 1,572,819
Other income 4,732 1,367
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1,561,252 1,574,186
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Costs and expenses:
Cost of goods sold 1,155,595 1,350,512
Other operating, selling, general,
and administrative expenses 343,116 396,855
Interest expense 111,154 116,209
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1,609,865 1,863,575
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Income (loss) before income taxes (48,613) (289,389)
(benefits)
Provision for Income Taxes 14,104 0
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Net income (loss) for the quarter ($ 62,717) ($ 289,389)
----------- -----------
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the quarter ($ .02) ($ .13)
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The accompanying notes are an integral part of the
consolidated financial statements
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
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Three Months Ended
July 31,
1998 1997
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Cash flows from operating activities:
Net income (loss) for the period ($ 63,012) ($289,389)
Noncash Expenses (Income) Included
in Net Income
Depreciations 24,736 26,110
Deferred compensation 6,000 6,000
Deferred income taxes 0 0
Changes in assets and liabilities:
Accounts receivable ($ 96,220) 81,040
Note receivable, 5,139 9,985
Inventories 81,783 210,879
Prepaid expenses 15,623 10,857
Other assets (441) (24)
Accounts payable, customer deposits,
and other current liabilities 79,203 (14,581)
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Net cash provided by (used for)
operating activities $ 52,812 $ 40,876
Cash flows from investing activities:
Purchase of equipment ($ 7,388) (9,115)
Cash Flow From Financing Activities:
Payments on short-term debt (14,604) (12,250)
Payments on long-term debt (41,696) (42,301)
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Net cash provided by (used for) (56,300) (54,552)
financing activities --------- ---------
Effect of exchange rate changes on cash ($ 921) 3,702
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Net Increase (decrease) in cash (11,798) (19,088)
Cash, beginning of quarters 32,467 54,071
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Cash, end of quarter $ 20,669 $ 34,983
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Cash paid during the quarters for:
Income taxes $ 0 $ 0
Interest $ 111,153 $ 116,209
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The accompanying notes are an integral part of the
consolidated financial statements
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
July 31, 1998
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
13.38 Lempiras to U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 13.34 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 $120
and $618 during the quarters ended July 31, 1998 and 1997 respectively.
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<PAGE>
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 with Lexington State Bank and the term
loan of WHCC with the Overseas Private Investment Corporation (OPIC). As of July
31, 1998, total stockholders' equity was $1,168,370 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$327,113 and $898,092, respectively.
The Lexington State Bank loan bears interest at the prime rate plus 1.5%
and is payable in monthly installments of $7,000 until maturity on April 10,
2002. It is secured by substantially all of the Company's domestic assets. The
net proceeds of the loan were used to refinance indebtedness used to purchase
and expand the Company's Lexington, North Carolina facility.
On March 10, 1997, WHCC and OPIC executed an amended loan agreement that,
among other things, lowered the interest rate to 10% per annum as of November 1,
1996 and waived principal payments from July 31, 1996 until July 31, 1997, at
which time the Company began making quarterly payments of approximately $31,000.
Principal payments were scheduled to increase to approximately $62,000 on July
31, 1998 with a balloon payment of approximately $557,438 due on October 31,
1999. Upon execution of the amended documents, WHCC paid OPIC a rescheduling fee
of 1% of the principal balance. The proceeds from the OPIC loan, together with
funds generated internally by Wellington Hall, were used to acquire and improve
the Honduran Facilities.
On July 22, 1998, WHCC requested that OPIC waiver the principal due on July
30, 1998 and on October 31, 1998. As of September 12, 1998, WHCC had not been
notified as to the final disposition of that request but WHCC only paid the
interest due on July 31, 1998. Management believes the request will be approved.
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 July
31, 1998, the Company had $1,109,400 in borrowings under this line of credit.
The Company pays interest monthly at the rate of prime plus 1% on outstanding
borrowings under the facility. Principal payments are due on demand. The line of
credit also contains restrictive covenants that prohibit Wellington Hall from
paying dividends and making other distributions with respect to its capital
stock and require it to maintain certain financial ratios, including current
assets to current credit. The line of credit is reviewed annually for renewal.
Wellington Hall is also indebted to Lexington State Bank under a demand
loan for $100,000 borrowed in 1993 to finance working capital. The loan bears
interest at the prime rate plus 1% payable monthly, and the outstanding balance
at July 31, 1998 was $99,600.
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
July 31, 1998 was $240,000. The line of credit was reviewed on August 14, 1998
and renewed until January 16, 1998. In aggregate $101,000 was available from LSB
for future borrowings at April 30, 1998.
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
MWH has lines of credit with two Honduran banks in an aggregate amount of
$590,000. As of July 31, 1998, an aggregate of $529,000 had been borrowed under
these lines, leaving approximately $61,000 for future borrowings. Borrowings
bear interest at a rate that ranges between 28% and 35% payable quarterly and
principal is payable on demand. The lines are secured by a second lien on the
fixed assets of MWH and current assets.
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<PAGE>
The Company's other primary source of liquidity is net cash provided by
operating activities which was $52,812 and $40,867 in the fiscal first quarter
of 1998 and 1997, respectively The positive cash contribution in fiscal quarter
were primarily as a result of a reduction in consolidated inventories and an
increase in current liabilities. If the Company is to meet its liquidity needs
in the future, it must continue to generate positive cash flows and avoid any
significant losses in the future.
As of July 31, 1998, accounts receivable had increased by approximately
$96,000 since the beginning of the fiscal year, mostly as a result higher sales
late in the quarter. The receivables represented a turnover rate of about
forty-eight days, a decrease of about three days when compared to the turnover
rate reported at April 30, 1998.
Other liabilities increased by approximately $68,000 reflecting a temporary
overdraft at the foreign facility for the purchase of raw materials (wood). The
Company has generally paid its vendors and material suppliers within their
terms.
Consolidated inventories decreased by about $92,000 during the fiscal
quarter ended July 31, 1998 primarily a result of a decrease of about $144,000
to the inventory of domestically produced goods as a results of lower scheduled
assembly production to generate operating funds. The Company domestic
inventories of foreign produced products and inventories at the Honduran
facility increased by about $52,000 at the end of the quarter as compared to
those reported at April 30, 1997 in response to increased production and a
larger backlog of orders for those products.
Property and equipment is reported to have increased by about $7,300 during
the fiscal quarter. 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, 1998 was approximately $7,300
used primarily to upgrading the Company's 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 13.38 lempira to the dollar at July 31, 1998. Although the
devaluation of the lempira has resulted in reductions in the historical book
value of the assets and liabilities and a corresponding reduction to
shareholders' equity in the form of a $1.88 million cumulative translation
adjustment, the Company also benefits from lower product cost from the
subsidiary as the lempira devalues. In view of the long-term trend of the
devaluation, management believes that hedging of the exchange rate fluctuation
is unnecessary and could reduce or eliminate the benefits of lower product costs
resulting from any continued devaluation.
As of September 1, 1996, the Company executed an Employment and Stock
Purchase Agreement with Arthur F. Bingham (the "Agreement"). On October 10, 1996
Mr. Bingham loaned the Company $285,694 at terms included in an addendum to the
Agreement. On February 12, 1997 and, during the Company's last fiscal quarter,
Mr. Bingham purchased 600,000 shares of common stock at a price of $.50 per
share, which purchase price was paid by cancellation of the foregoing loan and
for an additional investment of $14,306. Mr. Bingham has also been granted
options to purchase 450,000 additional shares at option prices ranging from $.80
to $1.30 per share, 300,000 of which are subject to certain performance
conditions.
In 1989, the Company acquired the Honduran Facilities and anticipated
raising $1,500,000 through the sale of the Company's stock by the board of
directors. The private placement ended early in 1990 having produced about
one-half the funds anticipated. The result of not raising all the funds has been
that the Company has had to incur more debt and restrict capital expenditures
that were both in its original plans at the time of the acquisition and that
have developed since the acquisition. Because of this debt, sales needed to grow
rapidly from the time of the acquisition to a level at which operating incomes
would be adequate to service the debt and to fund capital needs if the Company
was to grow. Maintaining an adequate level of sales since the acquisition has
been possible only for limited periods of time, mostly as a result of a sluggish
furniture economy that has existed over much of that time, a period that
includes two recessions. The sluggish furniture economy has also reduced the
industry's distribution base, especially the base of mid to small retailers more
committed to using smaller manufacturers, such as the Company, as a resource.
Furthermore, management believes that the consumer taste in home furnishings has
swung away from the more formal designs and executions that the Company has
marketed to more informal designs.
Management believes that the resulting situation is that the Company has
too much debt service, given its sales volume most recently achieved, and has
inadequate funds for its plans to restoring and growing its sales to a level
where its operating profits can accommodate its needs. The Company's cash
position was tight during all of fiscal years 1996, 1997 and 1998, having
experienced excessive wood deliveries early in the fiscal year 1996 and then a
slow furniture economy and lower sales during the balance of these fiscal years
while the Company continued to service its high level of indebtedness. The sale
of stock to Mr. Bingham assisted the Company in meeting its working capital and
other cash needs during fiscal 1997.
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<PAGE>
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 herein
below, (iv) the grant of options to certain key employees, discussed in the
Notes to the Consolidated Financial Statements, and (v) reducing inventories to
finance continued operations, as discussed hereinbelow.
On February 21, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for the offer and sale of 1,689,887 shares of
its common stock. The shares were to have been offered first to the holders of
record of its outstanding common stock as of a date at or about the time that
the registration statement becomes effective, who would have had the right for
thirty days to purchase one additional share for each share then held at a price
of $.50 per share. Each Wellington Hall shareholder as of that date could also
have subscribed within that thirty day period for additional shares, and any
available shares would have been sold to shareholders who had subscribed
therefor on a pro rata basis. Any shares still remaining after the expiration of
the offering to Wellington Hall shareholders could have been sold to persons who
were not directors, officers or shareholders of Wellington Hall.
The aforementioned stock offering has been canceled because of the
operating losses and all related cost, estimated to have been about $65,000,
have been expensed.
The foregoing plan, during fiscal year 1997 removed some of the pressure on
the Company's working capital, made funds available to support marketing
requirements and slowed the negative effect of servicing the debt. During fiscal
year 1998, the sale of excessive inventories at highly discounted prices
generated funds to support continued operations.
The Company leased a 8,800 square-foot showroom located in High Point,
North Carolina. Approximately 4,400 square feet of space was utilized to display
the Company's products, particularly new product introductions, during the
semiannual International Furniture Markets. The balance of the space was
subleased to another manufacturer. On March 1, 1998 the Company's lease was
amended to include only the 4,400 square feet of space the Company was actually
using. The Company believes the showroom is in good condition and suitable for
its intended use and the amendment to the lease will have no material effect on
the Company's intended use of the space. The Company's monthly obligation for
rent will be be $4,025 versus approximately $9,050 prior to the execution of the
amendment.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1997
Consolidated revenues for the first fiscal quarter ended July 31, 1998 and
1997 were $1,561,252 and $1,574,186 respectively or essentially unchanged. Sales
of domestically produced goods (DPG) for the first quarter of fiscal year 1999
were about $968,081, down $15,455 or 1.6% from the $968,781 reported last year.
Sales of foreign produced goods (FPG), net of intercompany sales, for the first
quarter were approximately $768,211 in 1998 versus $758,262 in 1997 representing
an increase of $9,949 or 1.3% over the previous year's sales. These sales
results were affected by changes in the Company's prices on those products
distributed through retailers. Those prices were increased between four and five
percent in October 1997. The prices for DPG were additionally increased,
effective August 15, 1998, by an additional 5 to 6% to improve margins on that
portion of the company's product lines. Because of the level of the backlog of
orders for those products, the effect of the increase will not fully contribute
to the margins until the third quarter ending January 31, 1999.
The consolidated revenues included about $37,638 and $172,254, of highly
discounted sales during the first quarters of fiscal year 1998 and 1997
respectively. This represents a decrease of $134,626 or 78% and effectively
represents an improvement in regular sales of both DPG and FPG over those
reported last year. Management has used highly discounted sales as a means of
generating sales to both dispose of discontinued inventory, slow moving
inventory and to generate operating capital in the past and particularly over
portions of the last two fiscal years. These discounted sales have generally
been generated at the Furniture Clearance Center or at "Tent" sales held at the
Lexington, N.C. facility in May and October of 1997. In addition, management
estimates that a list of inventory items published to the company's sales
representation early in the fourth quarter of fiscal year 1998 may have
accounted for another $200,000 or more in highly discounted sales in fiscal year
1998. All of the sales from the published list were at 50% of the regular
wholesale price. Without these highly discounted sales, revenues for the year
would have been significantly less. All of these sales contributed significantly
and materially to "cost of goods sold" and to the reported operating losses
reported for fiscal year 1998.
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<PAGE>
Also materially important is the product mix making up the sales of FPG
reported for the first quarters. The fiscal year 1998 results include sales to
other manufacturers (OEM sales) of about $36,330, or 4.7% of the total, versus
$253,462, or abut 33.4% of the total, for the first quarter of fiscal 1997. The
decline in OEM sales were essentially offset by sale of the regular line
products sold through retailers which amounted to about $553,448, or 69.4% of
the total, versus $321,574, 42.2% of the total, reported for the quarters ended
July 31, 1998 and 1997 respectively. The OEM in the current quarter had an
acceptable margin included while those sales in 1997's first quarter had only a
minimum margin included. All the sales of the Company's proprietary line have a
high margin included and the 1998 results also included an additional margin
from the price increase taken during the fiscal year 1998.
The sales of domestic products during the first quarter were about the same
as those reported last year but remains well below the Company's production
capacity and an estimated level of sales necessary for the operation to be
profitable. The company experienced a significant drop in the rate of incoming
orders for these products last in 1994 and experienced a continuing downward
trend through fiscal year 1998. Since late in 1998 and continuing now through
August 1998, the rate of incoming orders for the DPG seem to have stabilized and
possibly are showing some minimum increases. Several fundamental factors
probably contribute to the cause of this trend including the somewhat distress
level of the furniture economy during the period relative to the strong national
economy, a shrinking distribution base, more and more retailers have gone out of
business, changing consumer taste away from more formal designs such as the
Company's products, and imports which have possibly undercut the value of
domestically produced goods.
Means of reversing the downward trend regarding sales of domestically
produced products and returning those operations back to profitability have been
elusive, and several avenues pursued over time have shown initial promise only
to stall and have little lasting material effect. It is uncertain whether these
trends will continue but, if the Company's strategies do not successfully
counteract these trends, they could continue to have a material adverse effect
on the company's results of operations and financial condition.
The decline in domestic sales has also negatively effected the Company's
foreign operations. The domestic operation was consuming a significant portion
of the foreign output as dimension stock, carved and/or turned components and
unfinished assemblies into domestic production. The decline has effectively cost
the foreign operation its best and largest customer. To counteract this loss and
to increase revenues and operations at the Honduran facility, effort has been
directed at selling other manufacturers and wood consumers their products and
production requirements; OEM sales. These sales during the quarter ended July
31, 1998 were about $36,000, down about $253,000 as compared to last years first
quarter.
The company introduced a number of new designs to its domestic product line
at the International Furniture Market held in High Point, N.C. in April of 1998.
These new items have been selected to better utilize the component and assembly
capacity of the Honduran operation and the finishing capacity of the domestic
operation. The resulting sales of those introductions were marginal. However,
all the items have been committed to production though on a somewhat delayed
schedule and November-December delivery such that additional orders can be
solicited at the October 1998 market to assure all the production is sold.
The Company's firm backlog of orders on July 31, 1998 was about
$2,184,000, down about 6.6% from the backlog of about $2,382,000 on April 30,
1998 and up about 6.9% from the $2,025,972 reported at July 31, 1997. The July
31, 1998 backlog included about $1,471,000 of domestically-manufactured
products, as opposed to about $1,327,000 included in the April 30, 1998 backlog
and $1,208,224 included in the July 31, 1997 backlog, which increase from April
reflects a slight increase in the rate of incoming orders late in the quarter.
The backlog for WHCC and Honduran-produced products, less intercompany orders,
was $712,849 on July 31, 1998 versus about $1.055,00 on April 30, 1998 and
$817,745 on July 31, 1996. The decrease primarily reflects increase production
and shipments of those products during the quarter.
The company had at July 31, 1998 an additional backlog of approximately
$640,000 for products it has begun marketing under the name Wellington Hall
Imports. These new company sponsored designs will be manufactured exclusively
for the company by a foreign manufacturer with whom management has established a
relationship. The company has no contractual relationship with the supplier. The
company planned to officially introduce the line at the International Furniture
Market held in High Point, N.C. in April of 1998 but samples did not arrive and
now the plan is to introduce the products at the market scheduled for October of
1998. Pre-marketing began throughout the country in early February, 1998. To
date the response has been very significant, and by mid-March the company had
received most of the orders reflected in the above mentioned backlog. The
backlog has been excluded from the total because of uncertainties about this
manufacturers ability to produce the quality of product the Company requires.
Presently, the Company expects to make a final decision on releasing production
to this source, which would become available to begin shipping during the third
fiscal quarter ending January 31, 1999, on receipt of samples expected in early
October 1998.
In August of 1998, management made the initial contact with a second
foreign manufacturer and developed and present a new set of Company sponsored
designs for this source to potentially manufacture and for the Company to market
and distribute. Management believes this second source to better equipped and to
have a more experienced workforce and is quite capable of producing the quality
products the Company can sale and ship. The cost or price advantage from this
source is expected to be made late in September 1998.
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<PAGE>
Cost of sales decreased approximately $194,917 to about $1,155,595 when
compared to the $1,350,517 reported last year. As a percent of sales, the cost
was 74.2% versus 83.69% for the fiscal first quarter ended July 31, 1998 and
1997 respectively. Selling, general, and administrative expenses decreased about
$53,739 or 13%, dropping from $396,855 in the first quarter last year to
$343,116 at July 31, 1998. These declines are directly related to the before
mentioned product mix whereby the percent of low margin OEM sales included in
the 1997 results decline significantly and were replaced by almost an equal
percentage of sales for high margin products sold through retailers. These costs
will remain at similar levels if the Company's backlog of orders for FPG remains
high enough to support the level of sales achieved during the first quarter. The
decline in highly discounted sales also contributed materially to the reductions
to cost of sales and to the reductions to S, G, and A expenses.
Interest expenses of $111,153 and $116,209 in at July 31, 1998 and 1997
respectively. The decrease reflects a decrease in the interest rate applied to
the Company's borrowings.
For the fiscal quarter ended July 31, 1998, operating income (earning
before interest and taxes) were about $62,541, .027 cents per share, compared to
a loss of ($173,180), (.076) cents per share for quarter ended July 31, 1997.
The net income for the first quarter of fiscal year 1999 was a loss of about
($62,717), (.027) cents per share versus a loss of about ($289,389) or (12.6)
cents per share at July 31, 1997.
The net loss reported in the first quarter ended July 31, 1998 are a result
generally of slow sales for DPG, low levels of assembly production at the
Lexington facility and the company's limited operating capital. Because of the
slow sales and to avoid increasing inventories, it was necessary, during the
first quarter to reduce production volumes, primarily assembled production, in
the Company's domestic operations to levels below that required to manage labor
and overhead cost. The Company continued to sale off inventories at discounted
prices to generate cash to cover the operating loss and to finance continued
operations but the level of these sales during the quarter ended July 31, 1998
that had only minimal effect on profits. The Company has opened an Outlet Store
at its Lexington facility which is expected to replace the Company's involvement
with the Furniture Clearance Center and "tent" sales. Management believes this
Outlet will achieve a sales volume suitable to the Company's need and without
the losses which have been absorbed from the means being discontinued.
The Company's profits from foreign operations increased in the first
quarter with MWH and WHCC contributing materially. MWH had one of its best
shipping quarters which in turn allowed WHCC to ship a much higher level of
profitable sales with less discounted goods. An order received in the fourth
quarter of 1998 from a new dealer off shore was mostly responsible for the
improved results.
Sales of foreign produced products for the upcoming quarter are expected to
improve as production at the Honduras facility rises allowing the higher backlog
of orders for these products to be shipped. There remains some doubt as to the
performance that might be expected from the domestic operations which will be
more dependent on the amount of orders received for those products as the
quarter progresses. However, and in retrospect, management believes a high level
of production could have been scheduled for domestic operation in the first
quarter and does expect improvement in that regards in the quarter ending
October 31, 1998.
-11-
<PAGE>
PART II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed:
Exhibit No. Description
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
10.28 Note Modification Agreement dated July 16, 1998
between the Company and Lexington State Bank
(b) Reports on From 8-K filed during the quarter ended July 31, 1998:
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, 1998 By: /s/ Hoyt M. Hackney, Jr.
-------------------------------
Hoyt M. Hackney, Jr., President and,
Chief Executive Officer,
Chief Financial Officer
-12-
Exhibit Number 10.28
NOTE MODIFICATION AGREEMENT
This Note Modification Agreement is made the 14th day of August, 1998 by and
between the undersigned parties with regard to the obligation described below,
which obligation shall hereinafter be referred to as the "Note":
Date of Note January 26, 1997 Original Amount of Note: $250,000.00
---------------- --------------------
Interest Rate LSB Prime + 1.5%
------------------------------------------------------------------
Payable Outstanding principal plus interest due January 16, 1998 with monthly
------------------------------------------------------------------------
interest payments begin February 16, 1997
------------------------------------------------------------------------
Security $650,000.00 Deed of Trust dated April 15, 1987; Assignment of Life
------------------------------------------------------------------------
Insurance Policy; Security Agreement provisions of LSB Loan Agreement
------------------------------------------------------------------------
dated July 24, 1990 covering accounts and notes receivable, inventory,
------------------------------------------------------------------------
machinery, equipment, furniture & fixtures.
------------------------------------------------------------------------
Principal Balance: $240,000.00 Interest Paid To: August 14, 1998
----------- ---------------
The maker of the Note and Lexington State Bank, the payee thereof, mutually
desire to modify and amend the provisions of the Note in the manner hereinafter
set forth, it being specifically understood that except as herein modified and
amended, the terms and provisions of the Note and any Security Agreement and/or
Deed of Trust granted as security thereto shall remain unchanged and continue in
full force and effect as therein written.
Now therefore, for good and valuable consideration, the receipt of which is
hereby acknowledged, the undersigned agree that the Note is hereby modified and
amended to provide as follows:
Extended modified maturity date from July 16, 1998 to January 16, 1999 with
- --------------------------------------------------------------------------------
monthly interest due on the outstanding principal balance, beginning September
- --------------------------------------------------------------------------------
16, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
It is mutually agreed by and between the parties hereto that nothing herein
contained shall impair the security now held for the Note, nor shall waive,
annual, vary or affect any provision, condition, covenant, or agreement
contained in the Note or any Security Agreement or Deed of Trust securing same.
Furthermore, all rights and remedies as to all parties secondarily liable for
repayment of the indebtedness evidenced by the Note are hereby reserved.
In witness whereof, this instrument has been executed by the parties hereto and
delivered on the day and year first above written.
LEXINGTON STATE BANK WELLINGTON HALL, LIMITED
By: By: (SEAL)
-------------------------------- -------------------------------
E. Warren MacKinstry Hoyt M. Hackney, Jr., President
Its: Vice President By: (SEAL)
------------------------------- -------------------------------
William W. Woodruff, Secretary
Account/Note Number: Attest: (CORPORATE
----------------------- SEAL)
Old 0123200548-03-115735 William W. Woodruff, Secretary
-------------------------------
New SAME
-------------------------------
