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 October 31, 1998
----------------
( ) 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
------
Wellington Hall, Limited
- --------------------------------------------------------------------------------
(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 Road
Lexington, N.C. 29295
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(336) 249-4931
----------------------------------------------------
(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 October 31, 1998
Traditional Small Business Disclosure Format:
YES [X] No [ ]
No __
Page 1 of 11 Pages
<PAGE>
INDEX
Wellington Hall, Limited and Subsidiaries
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - October 31, 1998 3
Condensed consolidated statements of income - Six months ended 4
October 31, 1998 and 1997
Condensed consolidated statements of cash flows- Six
months ended October 31, 1998 and 1997 5
Notes to condensed consolidated financial
statements - October 31, 1998 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
-2-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
-----------
Quarter Ended Year Ended
October 31, April 30,
1998 1998
----------- -----------
ASSETS
Current assets:
Cash:
Cash on hand $ 400 $ 400
Cash in demand deposits 12,391 32,114
Accounts receivable:
Trade 686,762 726,612
Less, allowance for doubtful accounts (63,843) (66,947)
Note receivable - officer $ 0 12,605
Inventories 3,922,322 4,010,961
Prepaid expenses 43,177 79,568
Deferred income taxes $ 0 $ 0
----------- -----------
4,600,808 4,793,882
----------- -----------
Property and equipment:
Cost 2,187,240 2,187,922
Less, accumulated depreciation (1,409,782) (1,366,915)
----------- -----------
777,458 821,007
----------- -----------
Other assets:
Deferred income taxes 125,851 125,851
Other 27,364 35,059
----------- -----------
153,215 158,910
----------- -----------
$ 5,531,482 $ 5,777,230
----------- -----------
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 944,668 $ 356,264
Notes payable - other 2,019,606 1,998,360
Accounts payable - trade 515,050 567,100
Customer deposits 76,505 64,177
Other current liabilities 461,914 382,811
----------- -----------
4,029,648 3,115,228
Noncurrent liabilities:
Long-term debt, less current maturities 261,672 905,026
Deferred compensation accrual 276,000 264,000
----------- -----------
4,536,206 4,537,732
----------- -----------
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 3,354,531
Preferred stock; authorized 5,000,000 shares;
$5 par; no shares issued and outstanding
for 1997 and 1996 0 0
Cumulative translation adjustments (1,892,960) (1,870,875)
Retained earnings (497,411) (244,164)
----------- -----------
964,161 1,239,492
----------- -----------
$ 5,531,482 $ 5,777,230
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
-3-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
1998 1997 1998 1997
----------- ---------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Sale of furniture $ 1,351,361 $1,467,983 $ 2,907,881 $ 3,040,802
Other income 1,868 253 6,600 1,620
----------- ---------- ----------- -----------
$ 1,353,229 $1,468,236 $ 2,914,481 $ 3,042,422
----------- ---------- ----------- -----------
Cost and expenses:
Cost of goods sold 1,042,464 1,004,333 2,198,059 2,320,610
Other operating, selling, general
and administrative expenses 389,774 341,169 732,890 772,258
Interest expense 110,427 113,775 221,580 229,985
----------- ---------- ----------- -----------
15,42,665 1,459,277 3,152,529 3,322,852
----------- ---------- ----------- -----------
Income (loss) before
income taxes (benefits) ($ 189,436) 8,959 (238,048) (280,430)
Income tax benefits (5,627) 3,176 8,478 3,176
----------- ---------- ----------- -----------
Net income (loss) for
the years $ (183,809) $ 5,783 $ (246,526) $ (283,606)
=========== ========== =========== ===========
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the years $ (.08) $ -0- $ (.11) $ (.12)
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements
-4-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
-----------
Six Months Ended
October 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) for the years $(246,510) $(283,606)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 49,291 48,263
Gain on sale of equipment
Deferred compensation 12,000 12,000
Deferred income taxes -0- -0-
Changes in assets and liabilities:
Accounts receivable 32,963 206,504
Note receivable, officer 12,605 13,832
Inventories 59,337 (120,306)
Prepaid expenses 35,764 (17,149)
Other assets (638) 310
Accounts payable, customer deposits,
and other current liabilities 52,515 214,530
--------- ---------
Net cash provided by (used for)
operating activities (7,327) 74,378
--------- ---------
Cash flows from investing activities:
Purchase of equipment (7,260) (15,620)
--------- ---------
Net cash used for investing activities (7,260) (15,620)
--------- ---------
Cash flows from financing activities:
Short-term borrowings 34,961 (6,713)
Payments on long-term debt (54,022) (85,001)
Proceeds from issuance of stock -0- 100
--------- ---------
Net cash provided by (used for)
financing activities (19,061) (91,614)
--------- ---------
Effect of exchange rate changes on cash (1,468) 5,127
--------- ---------
Net increase (decrease) in cash (35,116) (27,729)
Cash, beginning of years 47,507 54,062
--------- ---------
Cash, end of years $ 12,391 $ 26,287
========= =========
Cash paid during the years for:
Income taxes $-0- $-0-
========= =========
Interest $ 221,580 $ 229,985
========= =========
The accompanying notes are an integral part
of the consolidated financial statements
-5-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 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
13.62 Lempiras to 1 U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 13.40 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
($1,037) and $5,127 during the six month period ended October 31, 1998 and
1997 respectively.
-6-
<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
October 31, 1998, total stockholders' equity was $964,161 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$314,217 and $867,123 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 December 14, 1998, WHCC had not been
notified as to the final disposition of that request. WHCC only paid the
interest due on July 31, 1998 and on October 31, 1998. The entire outstanding
OPIC loan balance of $867,123 scheduled for payment on or before October 31,
1999 is reflect on the Company's Consolidated Balance Sheets as a current
liability under "Current Maturities on long-term debt".
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 not in compliance with all 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
October 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 October 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
October 31, 1998 was $250,000. The line of credit was reviewed on August 14,
1998 and renewed until January 16, 1999. In aggregate $81,000 was available from
LSB for future borrowings at October 31, 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
approximately $590,000. As of October 31, 1998, an aggregate of about $550,000
had been borrowed under these lines, leaving approximately $40,000 for future
borrowings. Borrowings bear interest at a rate that ranges between 28% and 24%
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.
-7-
<PAGE>
The Company's other primary source of liquidity is net cash provided by
operating activities which were about ($7,327) and $74,378 at the end of the
fiscal second quarters of 1998 and 1997, respectively The negative cash
contribution reported in the fiscal half year were primarily as a result of
operating losses, approximately $246,000, not being totally off set by non cash
expenses of about $61,000, asset reductions of approximately $140,000, and an
increase in current liabilities of about $46,000. 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 October 31, 1998, accounts receivable had decreased by approximately
$33,000 since the beginning of the fiscal year, mostly as an improved turn over
rate. The receivables represented a turnover rate of about forty-three days, a
decrease of about eight days when compared to the turnover rate reported at
April 30, 1998.
Consolidated inventories decreased by about $59,000 during the fiscal
quarter ended October 31, 1998 primarily a result of a decrease to the inventory
of domestically produced goods. The Company domestic inventories of foreign
produced products and inventories at the Honduran facility remained about the
same at the end of the second quarter as those reported at April 30, 1998.
Current liabilities increased by approximately $45,000 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.
Property and equipment is reported to have decreased by about $8,200 during
the first half of fiscal 1999. 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 1999 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 half year ended October 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 13.68 lempira to the dollar at October 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 $1.89 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.
-8-
<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 and the first half of fiscal year 1999, 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. The lease expires on February 28, 1999.
RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1998 COMPARED TO THE THREE MONTHS
AND SIX MONTHS ENDED OCTOBER 31, 1997
Consolidated revenues for the second quarter were down about $115,000 or
7.8% and decreased approximately $128,000 or 4.2% for the first half of the
fiscal year when compared with the result reported last year. The decline was,
primarily, a result of reduced sales of domestically produced goods (DPG). Sales
of domestically produced goods for the quarter were about $966,000, down $83,000
or 7.9% from the $1,049,000 reported last year while sales for the six month
period were approximately $1,934,000, down $99,000 or 4.9% from the $2,033,000
recorded last year. Sales of foreign produced goods, net of inter company sales,
for the quarter were approximately $480,000 down $88,000 from the previous
year's second quarter and were $1,068,000 for the twenty-six weeks a decrease of
about $30,000 over the prior year.
The sales of foreign produced goods have been negatively affected by
excessive production down time at the Company's Honduran facility as a result of
hurricane Mitch which passed through that country in October. Though the
facility and its contents did not experience any physical damage, the employees
on certain days were sent home to protect themselves and their belonging or
could not come to work because of the damage to the roads and transportation
system. The facility was already experiencing sporadic down time to accommodate
the power company's efforts to replacing and upgrading the electrical cables in
the distribution grid. In total, management estimated that eighteen work days
were lost during the second quarter or, almost, the equivalent of a month.
The consolidated revenues for the second fiscal quarter ended October 31,
1998 included about $66,000 versus about $211,000 reported last year and for the
first half included $104,000 versus $418,000 of highly discounted sales. These
results represents a decrease in the second quarter of about $145,000 or 69% and
and a decline of about $312,000 or 75% during the six months. Since the declines
in highly discounted sales are greater than the decline in total revenues then
effectively non discounted regular sales of both DPG and FPG increased over
those reported last year. Management has used highly discounted sales as a means
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 and
the current fiscal years. These discounted sales have generally been generated
at the Furniture Clearance
-9-
<PAGE>
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 and beyond.
Reported revenues have been affected by changes in the Company's prices on
those products distributed through retailers. Those prices, both DPG's and FPG's
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.
Also materially important is the product mix of the FPG sales reported for
the fiscal year through October 31, 1998. The sales of FPG's during the fiscal
second quarter of 1999 include OEM sales (sales to other manufacturers) of about
$28,700, or 5.9% of the total, versus about $85,000, or abut 14.9% of the total,
for the second quarter of fiscal 1998. During the first half year of fiscal year
1999, total sales of FPG's include OEM sales (sales to other manufacturers) of
about $65,000, or 6% of the total, versus about $338,000, or abut 30.7% of the
total, for the first half of fiscal 1998. The decline in OEM sales has been
essentially offset during the six months period by sale of the regular line
products sold through retailers which amounted to about $979,000, or 91.6% of
the total, versus approximately $630,000, 57% of the total, reported for the
period last year. The OEM in the current year include an acceptable profit
margin while those sales in fiscal 1998, particularly in the first quarter, had
only a minimum margin included. All the sales of the Company's proprietary line
are believed to have a high profit margin included.
The sales of domestic products during the first half of fiscal 1999 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 October 1998, the rate of incoming orders for the DPG seem to have
stabilized and possibly have shown 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 October
31, 1998 were about $28,000, down about $57,000 as compared to last years second
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
and October 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, practically all the items have been committed to
production and could effect the results of the fiscal third quarter ending
January 31, 1999.
The Company's firm backlog of orders on October 31, 1998 was about
$2,071,000, down about 13% and 2% respectively when compared with the backlog of
about $2,382,000 on April 30, 1998 and the approximate backlog of $2,115,000
reported at October 31, 1997. The current backlog included about $1,423,000 of
domestically manufactured products, as opposed to about $1,327,000 included in
the April 30, 1998 backlog and about $1,192,000 included in the October 31, 1997
backlog , which increase reflects orders received at the semi annual furniture
market held in High Point N.C. each April and October. The backlog for WHCC and
Honduran-produced products, less inter company orders, was approximately
$648,000 on October 31, 1998 versus about $1,055,000 on April 30, 1998 and about
$924,000 on October 31, 1997. The decrease primarily reflects a decrease in
orders from other manufacturers for their products (OEM sales) and an increase
in the shipment and service for that portion of the Company foreign produced
line normally sold through retailers.
The company had at October 31, 1998 an additional backlog of approximately
$240,000 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
-10-
<PAGE>
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 work force 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.
Cost of sales increased approximately $38,000 to about $1,042,000 for the
second quarter ended October 31, 1997 and were 77% of sales. These cost for the
half year were 75% of sales and decreased approximately $123,000 or 5% as
compared with last year. This decrease probably reflects the reduced level of
the sales of highly discounted goods and a more favorable product mix comprising
the sales of FPG's.
Selling, general and administrative expenses increased about $49,000 or 11
% for the second fiscal quarter but decreased about $39,000 during the first
half year relative to the previous years results. The increases recorded in the
quarter were sales aids expense and the decrease during the half year reflected
the termination of the Company's relationship with the Furniture Clearance
Center used to sales discontinued goods and/or seconds which the Company is now
doing in an outlet recently opened in the Lexington N.C. facility. The Company
will continue to support it marketing effort with more effective sales aids.
Interest expenses of about $110,000 for the fiscal quarter represent an
decrease of about $3,000 when compared with that paid during the previous year
second quarter. For the six month period, interest expenses were approximately
$221,000 down about $8,000 compared with the same period the prior year. These
declines are mostly a result of lower interest the company is being charged on
most of its outstanding debt.
For the the fiscal quarter ended October 31, 1998, operating income
(earnings before interest and taxes) was a loss of about $79,000, (3.5) cents
per share, compared to $122,000, 5.0 cents per share for quarter ended October
31, 1997. For the six month period ended October 31 1997 the operating income
was a loss of about ($16,000), ($.007) per share versus the previous years loss
of about $50,000 or ($.022) per share. Net income for the second quarter was a
loss of about $5,783, virtually breaking even, while for the six month period
there is a net loss of about ($247,000) or ($.11) per share, compared to a net
loss of about ($283,606) or ($.12) per share for the prior year's two quarters.
The net loss reported for the first half fiscal year and second fiscal
quarter ended October 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 period ended October 31, 1998 had only minimal effects 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 but with minimal losses relative to the
means employed previously.
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 located off shore was mostly responsible for
the improved results. The results from foreign operations diminished during the
second quarter as a results of unavoidable production down time experience in
Honduras mostly as a result of hurricane Mitch.
Sales of foreign produced products for the upcoming quarter are expected to
return to the level achieved in the first quarter as production at the Honduras
facility has been restored and no additional interruptions are presently
anticipated. 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. Management has
scheduled a higher level of domestic production for the third quarter ended
January 31, 1999 and expects production and the sales of new productions to
impact the quarterly sales.
-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
(b) Reports on From 8-K filed during the quarter ended October 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: December 15, 1998 By: /s/ Hoyt M. Hackney, Jr.
-----------------------------------
Hoyt M. Hackney, Jr., President and
Chief Executive Officer
Chief Financial Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 12,391
<SECURITIES> 0
<RECEIVABLES> 686,762
<ALLOWANCES> 63,843
<INVENTORY> 3,922,322
<CURRENT-ASSETS> 4,600,808
<PP&E> 2,187,240
<DEPRECIATION> 1,409,782
<TOTAL-ASSETS> 5,531,482
<CURRENT-LIABILITIES> 4,029,648
<BONDS> 0
0
0
<COMMON> 3,354,531
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,531,482
<SALES> 2,907,881
<TOTAL-REVENUES> 2,914,481
<CGS> 2,198,059
<TOTAL-COSTS> 2,930,949
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 221,580
<INCOME-PRETAX> (238,048)
<INCOME-TAX> 8,478
<INCOME-CONTINUING> (246,526)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (246,526)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.00)
</TABLE>
