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 January 31, 1998
----------------
( ) 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
- --------------------------------------------------------------------------------
(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.)
Route 1, U.S. Highway 29
Lexington, N.C. 29293
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(910) 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 January 31, 1998
Traditional Small Business Disclosure Format:
YES [X] No [ ]
Page 1 of 12 Pages
<PAGE>
INDEX
Wellington Hall, Limited and Subsidiaries
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - January 31, 1998 3
Condensed consolidated statements of income - Nine 4
months ended January 31, 1998 and 1997
Condensed consolidated statements of cash flows- 5
Nine months ended January 31, 1998 and 1997
Notes to condensed consolidated financial 6
statements - January 31, 1998
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
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
-----------
Quarter Ended Year Ended
January 31, April 30,
1988 1996
------ ------
ASSETS
Current assets:
Cash:
Cash on hand $ 400 $ 400
Cash in demand deposits 20,067 53,715
Accounts receivable:
Trade 747,117 986,954
Less, allowance for doubtful accounts (63,843) (63,843)
Note receivable - officer 14,561 28,393
Inventories 4,388,322 4,363,027
Prepaid expenses 130,450 170,434
Deferred income taxes 19,712 19,713
----------- -----------
5,256,786 5,558,793
----------- -----------
Property and equipment:
Cost 2,179,382 2,150,193
Less, accumulated depreciation (1,351,984) (1,281,690)
----------- -----------
827,398 868,503
----------- -----------
Other assets:
Deferred income taxes 102,132 98,532
Other 34,137 34,735
----------- -----------
136,269 133,267
----------- -----------
$ 6,220,453 $ 6,560,563
----------- -----------
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 289,350 $ 196,443
Notes payable - other 1,945,873 1,935,972
Accounts payable - trade 388,493 372,139
Customer deposits 68,546 45,757
Other current liabilities 422,194 298,014
----------- -----------
3,114,456 2,848,325
Noncurrent liabilities:
Long-term debt, less current maturities 984,390 1,205,294
Deferred compensation accrual 258,000 240,000
----------- -----------
4,356,846 4,293,619
----------- -----------
STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
no par; shares issued and outstanding 2,289,887 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 (1,864,887) (1,856,648)
Retained earnings 373,863 769,061
----------- -----------
1,863,507 2,266,944
----------- -----------
$ 6,220,353 $ 6,560,563
=========== ===========
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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Sale of furniture $ 1,327,101 $ 1,533,266 $ 4,367,903 $ 4,366,674
Other income 14,055 7,984 15,675 24,305
----------- ----------- ----------- -----------
1,341,156 1,541,250 4,383,578 4,390,979
Cost and expenses:
Cost of furniture sold 1,032,302 1,086,343 3,352,912 3,003,415
----------- ----------- ----------- -----------
Gross Profit 308,854 454,907 1,030,666 1,387,564
Other operating, selling, general
and administrative expenses 311,197 413,398 1,083,455 1,115,959
----------- ----------- ----------- -----------
Income (Loss) from Operations (2,343) 41,509 (52,789) 271,605
Other Deductions:
Interest expense-S/T 78,017 66,884 237,854 183,044
Interest expense-L/T 34,396 38,623 104,544 115,683
----------- ----------- ----------- -----------
112,413 105,507 342,398 298,727
Income (loss) before
taxes and extraordinary items (114,756) (63,998) (395,187) (27,122)
Income taxes (251) (190) 2,925 206
Net income (loss) for
the years $ (114,505) (63,808) $ 398,112 $ (27,328)
=========== =========== =========== ===========
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the year $ .05 $ .03 $ (.17) $ (.01)
=========== =========== =========== ===========
</TABLE>
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)
-----------
Nine Months Ended
January 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) for the period $(398,184) $ (27,328)
Noncash Expenses (Income) Included
in Net Income
Depreciation 72,055 76,701
Deferred income taxes (3,600) 0
Deferred compensation 18,000 18,000
Changes in assets and liabilities:
Accounts receivable 239,056 (193,166)
Note receivable, officer 13,832 -0-
Inventories (33,747) (286,002)
Prepaid expenses 39,808 (13,078)
Other assets 309 (3,790)
Accounts payable, customer deposits,
and other current liabilities 164,275 (36,676)
--------- ---------
Net cash provided by (used for)
operating activities 111,803 (465,338)
Cash flows from investing activities:
Purchase of property and equipment (44,925) (75,458)
--------- ---------
Cash flows from financing activities:
Proceeds from Long-Term borrowing (127,820) (58,422)
Proceeds from Short-term borrowings 13,564 279,996
Proceeds from Equity Capital 0 285,695
--------- ---------
Net cash provided by (used for)
financing activities (114,256) 507,269
--------- ---------
Effect of exchange rate changes on cash 13,816 29,679
--------- ---------
Net increase (decrease) in cash (33,562) (3,848)
Cash, beginning of period 54,029 53,934
--------- ---------
Cash, end of period $ 20,467 $ 50,086
========= =========
Cash paid during the years for:
Income taxes $ -0- $ -0-
========= =========
Interest $ 342,398 $ 298,727
========= =========
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)
January 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
13.13 Lempiras to 1 U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 13.09 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 $938
and $7,800 during the nine month period ended January 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 (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 January 31, 1998, total
stockholders' equity was $1,863,507 and the outstanding principal amounts of the
LSB loan and the OPIC loan were $350,649 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.
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
January 31, 1998, the Company had $1,126,600 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 January 31, 1998 was $95,600.
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
January 31, 1998 was $234,000. The line of credit was reviewed on January 16,
1998 and renewed until July 16, 1998.
The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.
On January 31, 1998, the company had an aggregate balance of $97,000
available from LSB for future borrowing.
MWH has lines of credit with two Honduran banks in an aggregate amount of
about $590,000. As of January 31, 1998, an aggregate of $493,101 had been
borrowed under these lines, leaving approximately $96,000 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 $111,803 and ($465,333) in the first fiscal nine
months of 1998 and 1997, respectively. The funds provided during
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<PAGE>
the period was primarily as a result of decreases in accounts receivable. 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 January 31, 1998, accounts receivable had decreased by approximately
$239,050 since the beginning of the fiscal year, mostly as a result of lower
sales and an improved turn on the outstanding receivables. The receivables
represented a turnover rate of about fifty-one days, a decrease of about four
days when compared to the turnover rate reported at April 30, 1997. The
company's normal terms of sale for payment of invoices is Net 30 days for DPG
and 3% 10; Net 30 for FPG. In the case of export sales an Irrevocable
Letter-Of-Credit is required.
Accounts payable increased by approximately $18,000 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 increased by about $25,000 by the end of the
fiscal quarter ended January 31, 1998 primarily a result of an increased level
of inventories at the Honduras facility to support efforts to increase
production in response to the higher backlog of orders for the foreign produced
products. Domestic Inventories have declined approximately $110,000.
Property and equipment is reported to have increased by about $20,000
during the three fiscal quarters, however, expenditures were approximately
$45,000 with the difference attributable to the devaluation of the Honduran
currency relative to the prior fiscal year end of approximately 1%. 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 during the nine month period ended January 31, 1998 was
approximately $45,000 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, and to install electrical equipment
required by the power company to reduce and control consumption.
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 13.13 lempira to the dollar at January 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 $1.86 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.
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 furnishings has
swung away from the more formal designs and executions that the Company has
marketed.
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, 1997,
and the first three quarters of 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 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.
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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 herein above, (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, and (v) reducing
inventories to finance continued operations.
On February 21, 1997, the Company filed a registration statement with the
Securities and Exchange Commission for the offer and sale of 1,689,887 shares of
its common stock. The shares will be offered first to the holders of record of
its outstanding common stock as of a date at or about the time that the
registration statement becomes effective, who will have the right for thirty
days to purchase one additional share for each share then held at a price of
$.50 per share. Each Wellington Hall shareholder as of that date may also
subscribe within that thirty day period for additional shares, and any available
shares will be sold to shareholders who have subscribed therefore 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 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 AND NINE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THE THREE MONTHS
AND NINE MONTHS ENDED JANUARY 31, 1997
Consolidated revenues for the third quarter and first three quarters of
fiscal 1998 were down $206,000 or 13% and the three quarters the results were
even when compared with results reported last year. The decline for the quarter
reflects a drop in sales of domestically produced goods (DPG) that was somewhat
offset by the increase in the sales of the company's foreign produced goods
(FPG). The year to date decline for DPG sales has been totally offset by
increase sales of FPG experienced in the three quarters. The increase in FPG was
the result of an 80% increase in OEM sales, (products sold to other
manufacturers), and a 20% increase in products sold to the retail trade. These
results were effected by changes in the Company's prices on those product
distributed through retailers. Those prices were increased between four and five
percent in October 1997.
Sales of domestically produced goods for the quarter were about $805,000,
down $247,000 or 27% from the $1,099,000 reported last year while sales for the
nine month period were $2,839,000 down 9% from the $3,124,000 recorded last
year. Sales of foreign produced goods, net of inter company sales, for the
quarter were approximately $635,000 up $67,000 from the previous year's third
quarter and were $1,961,000 for the thirty-nine weeks an increase of $310,000
over the prior year. The consolidated sales included $481,000 and $370,000, for
the quarter and three-quarter year, respectively, of highly discounted sales of
inventories deemed to be slow moving, of unacceptable quality or discontinued
product. Without these highly discounted sales, revenues would have been
significantly less.
The sales of domestic products during the quarter and three-quarter year
were at a level even with or below the level of sales reported over the last two
years and 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 has experienced a continuing downward trend since that time.
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 nation 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
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<PAGE>
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 manufactures and wood consumers their products and
production requirements; OEM sales. These sales during the quarter ended January
31, 1998 were about $117,000 and up about $43,000 as compared to last year. For
the three month period sales were approximately $455,000 an increase of about
$248,000 or 120% and accounted for 82% of all the growth in foreign produced
goods and 11% of total consolidated sales up from 5.0% last year.
The company will introduce a number of new designs to its domestic product
line at the International Furniture Market held in High Point, N.C. in April.
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. Efforts to pre-market these introductions will not begin until late
March or until prices are established and no orders have been received for these
introductions.
The Company's firm backlog of orders on February 28, 1998 is reported as
about $2,520,000 up 24% and 62% respectively when compared with the backlog of
$2,047,000 on April 30, 1997 and the $1,558,000 reported at January 31, 1997.
The current backlog included $1,498,000 of domestically produced goods as
opposed to $1,289,500 included in the April 30, 1997 backlog and $1,105,000
included in the January 31, 1997 backlog. The backlog included $1,022,000 of
FPG, less inter company orders, versus $758,000 on April 30, 1997 and $453,000
on January 31, 1998. Both the backlogs for DPG and FPG were significantly
increased by a large order received from a new dealer late in January for
export. If this new distribution becomes an ongoing process, as expected, annual
sales to this singular account could exceed 10% of the company's projected
fiscal 1998 revenues.
The increase in the backlog of DPG also included a significant amount of
highly discounted orders received for products in inventory which have or will
be discontinued. These sales will negatively effect profits during the upcoming
quarter. The increase in the backlog of FPG was also reflected and increase in
the rate and the amount of orders received for products sold to the retail
trade.
The company has an additional backlog of approximately $445,000 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 plans to officially introduce the line at the International
Furniture market held in High Point, NC scheduled for April 23, 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
the orders reflected in the above mentioned backlog. These sales are stated
separately from the regular backlog of orders until certain uncertainties are
resolved. The uncertainties consist mainly, and among other things, of being
assured of the proper execution and delivery of the market samples.
Cost of sales decreased approximately $64,000 to about $1,032,000 for the
third quarter ended October 31, 1997 and were 77% of sales. These cost for the
three-quarter year increased approximately $403,000 or 21% as compared with last
year, reflecting primarily the reduced level of domestic production especially
during the third quarter ended July 31, 1997 and the sales of highly discounted
goods through out the three quarters.
Selling, general and administrative expenses decreased about $102,000 or
25% for the third fiscal quarter and about $32,000 during the first three
quarters of the year mostly as a result of less commissions paid on lower sales
and reduction in administration and marketing costs. The reported level of sales
& administrative expenses are expected to continue through the next quarter with
the exception of increased commissions, if sales increase.
Interest expenses of $112,413 for the fiscal quarter represent an increase
of about $7,000 over that paid during the previous year third quarter. For the
nine month period interest expenses were $342,098, up about $44,000 over the
same period the prior year, as a result of added borrowing during the previous
fiscal year. The additional borrowing in fiscal 1997 covered operating losses
and increased wood purchases at the Honduras facility to raise production in
response to higher backlog. Long-term debt declined during the nine month period
by about $128,000 and short term borrowing increased by approximately $14,000
since the beginning of the current fiscal year.
For the the fiscal quarter ended October 31, 1997, operating income
(earnings before interest and taxes) was a loss of $2,343, .1 cents per share,
compared to a gain of $41,509, 2.0 cents per share for quarter ended January 31,
1997. For the nine month period ended January 31 1998 the operating income was a
loss of ($50,446), ($.02) per share versus the previous years gain of $271,605
or $.12 per share. The net loss for the third quarter was $114,000, (5.0) cents
per share, while for the nine month period there is a net loss of ($398,000) or
($.17) per share, compared to a net loss of $27,320 or $.01 per share for the
prior year's three quarters.
The net loss reported in the third quarter and first three quarters of
fiscal 1998 are a result generally of slow sales and the company's limited
operating capital. Because of the slow sales and to avoid increasing
inventories, it was
-10-
<PAGE>
necessary, during part of the first three quarters, 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 discounted prices to generate cash to cover the
operating loss and to finance continued operations.
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.
-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
10.25 Note Modification Areement dated January 16, 1998
between the Company and Lexington State Bank
10.26 First Amendment to Lease dated March 1, 1998
between the Company and Phillips Interests 3, Inc.
(b) Reports on From 8-K filed during the quarter ended
January 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: March 17, 1998
By: /s/ Hoyt M. Hackney, Jr.
-----------------------------------
Hoyt M. Hackney, Jr., President and
Chief Executive Officer
Chief Financial Officer
-12-
NOTE MODIFICATION AGREEMENT
This Note Modification Agreement is made the 6th day of February, 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 16, 1997 Original Amount of Note: $250,000.00
--------------------- --------------
Interest Rate LSB Prime variable + 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 4/15/97; Assignment of Life
---------------------------------------------------------------
Insurance Policy; Security Agreement provisions of LSB Loan
---------------------------------------------------------------
Agreement dated 7/24/90 covering accounts and notes receivable,
---------------------------------------------------------------
inventory, machinery, equipment, furniture, fixtures.
---------------------------------------------------------------
Principal Balance: $ 246,000.00 Interest Paid To: January 16, 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:
Extend maturity date to July 16, 1998 with monthly interest due on the
---------------------------------------------------------------------------
outstanding principal balance, beginning February 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 bee executed by the parties hereto and
delivered on the day and year first above written.
LEXINGTON STATE BANK WELLINGTON HALL, LIMITED
BY: /s/ E. Warren MacKinstry BY: /s/ Hoyt M. Hackney, Jr. (SEAL)
------------------------- -----------------------------------------
E. Warren MacKinstry Hoyt M. Hackney, Jr., President/Treasurer
Its: Vice President BY: /s/ William W. Woodruff (SEAL)
------------------------- -----------------------------------------
William W. Woodruff, Secretary
(CORPORATE)
Account/Note Number: Attest: /s/ William W. Woodruff (SEAL)
Old 0123200548-03-115735 -------------------------------------
------------------------- William W. Woodruff, Secretary
Ne Same
-------------------------
STATE OF NORTH CAROLINA
FIRST AMENDMENT TO LEASE
COUNTY OF GUILFORD
THIS FIRST AMENDMENT TO LEASE made and entered into as of this first day of
March, 1998, by and between PHILLIPS INTERESTS 3, INC. (formerly known as North
Hamilton Corporation) ("Landlord"), a North Carolina corporation with offices in
High Point, North Carolina; and Wellington Hall, Limited ("Tenant"), A North
Carolina corporation with offices in Lexington, North Carolina.
RECITALS
A. Landlord and Tenant have previously entered into a Lease Agreement dated
November 1, 1993, (the "Lease"), pursuant to which Landlord leased to Tenant
certain space in the furniture showroom located at 330 North Hamilton Street in
High Point, North Carolina, on the terms and conditions set forth in the Lease.
B. Landlord and Tenant have agreed to modify certain provisions of the
Lease, on the terms and conditions set forth below. In order to effectuate the
agreement of the parties, Landlord and Tenant are entering into this First
Amendment to Lease.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree for themselves, their successors and
assigns, as follows:
1. Any capitalized term used in this First amendment that is not defined in
this First Amendment shall have the meaning given that term in the Lease.
2. Effective as of March 1, 1998, the Lease shall be amended as follows:
(a) Paragraph A on page one of the lease is hereby deleted, and the
following provision is substituted in its place:
A. Demised Premises: That certain showroom unit containing
approximately 4,200 square feet of rentable area, which is shown as the
"Wellington Hall" space on that preliminary floor plan of the second (2nd) floor
of the Showroom, entitled the "Hamilton and Richardson Building." prepared by
William Randall Harris, Architect, and dated March 14, 1998.
(b) Paragraph C on page one of the Lease is hereby deleted, and the
following provision is substituted in its place:
<PAGE>
C. Lease Term: A period of approximately one year, beginning on March
1, 1998 and ending at midnight on February 29, 1999. See paragraph 2.
(c) Paragraph D on page one of the Lease is hereby deleted, and the
following provision is substituted in its place:
D. Base Rent. Eleven and 50/100 Dollars ($11.50) per square foot of
rentable area in the Demised premises per annum, from the commencement date of
the Lease term through the expiration of the Lease Term. Based upon the square
footage of the Demised Premises set forth in Paragraph A of the fundamental
Lease Provisions, the monthly Base Rent during the entire Lease Term is Four
Thousand Twenty Five dollars and 00/100 Dollars ($4,025.00).
(d) Paragraph E on page one of the Lease is hereby deleted, and the
following provision is substituted in its place:
E. Common Facilities Maintenance Charge: Tenant's pro rata share, up
to a maximum of One Thousand Four Hundred Twenty Eight and 00/100 Dollars
($1,428.00) in the initial calendar year of the Lease Term (pro-rated on a daily
basis), which maximum amount shall be increased by six percent (6%) in each
subsequent calendar year. See paragraph 10.
3. Except as expressly amended in this First Amendment to Lease, the Lease
shall continue in full force and effect in accordance with its terms, and is
hereby ratified by Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment
to Lease under seal as of the day and year first above written.
LANDLORD:
PHILLIPS INTERESTS 3, INC.
[CORPORATE SEAL]
By: /s/ Earl N. Phillips, Jr.
-------------------------------
Earl N. Phillips, Jr., President
Attest:
/s/ Lakita Carden
- --------------------------
Secretary
TENANT:
Wellington Hall Limited
[CORPORATE SEAL]
By: /s/ Hoyt Hackney
-------------------------------
Hoyt Hackney, President
Attest:
/s/ William W. Woodruff
- ---------------------------
Secretary
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF GUILFORD
This 6th day of March, 1998, Earl N. Phillips, Jr., personally came before
me who, being by me duly sworn, says that he is the President of PHILLIPS
INTERESTS 3, INC., a North Carolina corporation, and that the seal affixed to
the foregoing instrument in writing is the coprorate seal of the company, and
that the said writing was signed and sealed by him, in behalf of said
corporation, by its authority duly given. And the said President acknowledged
the said writing to be the act and deed of said corporation.
Anthony B. Tertuio
------------------
Notary Public
My Commission Expires:
May 17, 2000
----------------------
[NOTARIAL SEAL]
STATE OF NORTH CAROLINA
-------------------
COUNTY OF DAVIDSON
------------------
This 27th day of February, 1998, Hoyt M. Hackney, Jr. personally came
before me who, being by me duly sworn, says that he is the President of
Wellington Hall Limited, a Lexington, North Carolina corporation, and that the
seal affixed to the foregoing instrument in writing is the corporate seal of the
company, and that the said writing was signed and sealed by him, in behalf of
said coproration, by its authority duly given. And the said President
acknowledged the said writing to be the act and deed of said corporation.
Doris N. Breseski
------------------
Notary Public
My Commission Expires:
8-17-98
----------------------
[NOTARIAL SEAL]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME AND STATEMENT OF CASH FLOW
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH NOTES TO FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 20,467
<SECURITIES> 0
<RECEIVABLES> 747,117
<ALLOWANCES> 63,843
<INVENTORY> 4,388,322
<CURRENT-ASSETS> 5,256,786
<PP&E> 2,179,382
<DEPRECIATION> 1,351,984
<TOTAL-ASSETS> 6,220,453
<CURRENT-LIABILITIES> 3,114,456
<BONDS> 0
0
0
<COMMON> 1,489,644
<OTHER-SE> 373,863
<TOTAL-LIABILITY-AND-EQUITY> 6,220,353
<SALES> 4,367,903
<TOTAL-REVENUES> 4,383,578
<CGS> 3,352,912
<TOTAL-COSTS> 4,436,367
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 63,843
<INTEREST-EXPENSE> 342,398
<INCOME-PRETAX> (395,187)
<INCOME-TAX> 2,925
<INCOME-CONTINUING> (398,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (398,112)
<EPS-PRIMARY> .17
<EPS-DILUTED> 0
</TABLE>
