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, 1999
----------------
( ) 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 January 31, 1999
Traditional Small Business Disclosure Format: YES [X] 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 - January 31, 1999 3
Condensed consolidated statements of income - Nine months ended 4
January 31, 1999 and 1998
Condensed consolidated of cash flows - Nine months ended 5
January 31, 1999 and 1998
Notes to condensed consolidated financial statements - 6
January 31, 1999
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(unaudited)
-----------
<TABLE>
<CAPTION>
Quarter Ended Year Ended
January April 30,
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash:
Cash $ 20,715 $ 32,514
Accounts receivable:
Trade 848,062 722,077
Allowance for Bad Debt (63,843) (63,843)
Note receivable - officer $ 0 12,605
Inventories 3,649,495 4,010,961
Prepaid expenses 34,583 79,567
Total Current Assets 4,489,011 4,793,882
----------- -----------
Property and equipment:
Cost 2,179,931 2,195,476
Less, accumulated depreciation (1,429,627) (1,366,915)
----------- -----------
750,304 828,561
----------- -----------
Other assets:
Deferred income taxes 125,851 125,851
Other 27,831 27,505
----------- -----------
153,682 158,910
----------- -----------
$ 5,392,998 $ 5,775,799
----------- -----------
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 924,347 $ 356,262
Notes payable - Banks 1,961,943 1,998,360
Accounts payable - trade 597,447 562,763
Sundry 17,097 13,064
Customer deposits 101,572 64,177
Other current 494,933 372,553
----------- -----------
4,097,339 3,367,180
Noncurrent liabilities:
Long-term debt, less current maturities 249,895 905,026
Deferred compensation accrual 282,000 264,000
----------- -----------
4,629,234 4,536,206
----------- -----------
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 (1,904,605) (1,870,875)
Retained earnings (686,163) (244,063)
----------- -----------
Total Stockholders Equity 763,764 1,239,593
----------- -----------
Total Liability & Equity $ 5,392,998 $ 5,775,799
=========== ===========
</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 INCOME
---------------------------------
(unaudited)
-----------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
January 31, January 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenue:
<S> <C> <C> <C> <C>
Sale of furniture $ 1,376,578 $ 1,327,101 $ 4,284,459 $ 4,367,904
Other income (4,989) 14,055 1,611 15,675
----------- ----------- ----------- -----------
$ 1,371,589 $ 1,341,156 $ 4,286,070 $ 4,383,578
----------- ----------- ----------- -----------
Cost and expenses:
Cost of goods sold 1,130,025 1,032,302 3,328,084 3,352,912
----------- ----------- ----------- -----------
Gross Profit 241,564 308,854 957,985 1,030,666
Other operating, selling, general
and administrative expenses 346,176 311,197 1,060,460 1,083,455
Interest expense - L/T 25,209 34,596 95,870 104,544
Interest expense - S/T 69,602 78,017 220,521 237,854
----------- ----------- ----------- -----------
Total 440,987 423,810 1,376,851 1,425,853
----------- ----------- ----------- -----------
Income before Taxes and
Extraordinary Items ($ 199,423) ($ 114,756) ($ 418,866) ($ 395,186)
Income tax $ 5,041 ($ 251) 13,518 2,925
----------- ----------- ----------- -----------
Net income (loss) for
the years ($ 204,464) ($ 114,505) ($ 432,384) ($ 398,111)
=========== =========== =========== ===========
</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,
1999 1998
--------- ---------
Cash flows from operating activities:
Net income (loss) for the years $(432,385) $(398,184)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation 73,261 72,055
Gain on sale of equipment
Deferred compensation 18,000 18,000
Deferred income taxes -0- (3,600)
Changes in assets and liabilities:
Accounts receivable (129,469) 239,056
Note receivable, officer 12,605 13,832
Inventories 317,872 (33,747)
Prepaid expenses 43,401 39,808
Other assets (1,610) 309
Accounts payable, customer deposits,
and other current liabilities 211,770 164,275
--------- ---------
Net cash provided by (used for)
operating activities 113,445 111,803
--------- ---------
Cash flows from investing activities:
Purchase of equipment (9,580) (44,925)
--------- ---------
Net cash used for investing activities (9,580) (44,925)
--------- ---------
Cash flows from financing activities:
Short-term borrowings (14,177) 13,564
Payments on long-term debt (85,546) (127,820)
Proceeds from issuance of stock 0 0
--------- ---------
Net cash provided by (used for)
financing activities (99,723) (114,256)
--------- ---------
Effect of exchange rate changes on cash (3,116) 13,761
--------- ---------
Net increase (decrease) in cash 1,026 (33,516)
Cash, beginning of years 19,689 54,029
--------- ---------
Cash, end of periods $ 20,715 $ 20,467
========= =========
Cash paid during the years for
Income taxes $ -0- $ -0-
========= =========
Interest $ 316,391 $ 342,398
========= =========
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)
January 31, 1999
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
13.87 Lempiras to 1 U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 13.55 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
($575) and $12,589 during the nine month period ended January 31, 1999 and
1998 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
January 31, 1999, total stockholders' equity was $763,764 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$302,440 and $846,801 respectively.
The Lexington State Bank loan bears interest at the prime rate plus 1.5%
and is payable in monthly installments of approximately $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 March 15, 1999, 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. On January 31, 1999 WHCC
paid the interest that was due and made a principal payment of approximately
$20,000. The entire outstanding OPIC loan balance of $846,801 scheduled for
payment on or before October 31, 1999 is reflected 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
January 31, 1999, the Company had $1,155,000 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, 1999 was $100,000.
On January 16, 1997, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount of
$250,000. Outstanding borrowings under this facility will bear interest at the
rate of prime plus 1 1/2%, payable monthly, and the outstanding balance as of
January 31, 1999 was $250,000. The line of credit was reviewed on February 28,
1998 and renewed until March 16, 1999. Subsequent discussions with LSB indicated
that the note will be extended until July 16, 1999. In aggregate $45,000 was
available from LSB for future borrowings at January 31, 1999.
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 $500,000. As of January 31, 1999, an aggregate of about $457,000
had been borrowed under these lines, leaving approximately $43,000 for future
borrowings. Borrowings bear interest at a rate that ranges between 29% to 32%
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 were about $113,445 and $111,803 at the end of the
fiscal third quarters of 1999 and 1998, respectively The positive cash
contribution reported in the fiscal three quarters was primarily as a result of
operating losses, approximately $419,000, being essentially off set by non cash
expenses of about $91,000, inventory reductions of approximately $361,000, and
an increase in current liabilities of about $164,000. 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 January 31, 1999, accounts receivable had increased by approximately
$126,000 since the beginning of the fiscal year. The entire increase developed
during the third quarter because of increased sales of FPG's to retail accounts
with terms of 3%,10 :net, 30. The receivables represented a turnover rate of
about fifty-five days, about equal to the turnover rate reported at April 30,
1998.
Consolidated inventories decreased by about $361,000 during the fiscal
three quarters ended January 31, 1999 as a result of about equal decreases to
the inventory of domestically produced goods and foreign produced products.
Current liabilities, less current maturities, increased by approximately
$165,000 reflecting a temporary increase in trade payable, customer deposits,
and other liabilities. The Company has generally paid its vendors and material
suppliers within their terms.
Property and equipment is reported to have decreased by about $15,000
during the first three quarters 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 January 31, 1999 was approximately
$9,6000 used primarily for miscellaneous maintenance requirements.
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 13.87 lempira to the dollar at January 31, 1999. 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 $1.9 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 the three
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<PAGE>
previous fiscal years and thus far through fiscal year 1999. The primary reason
has been diminished demand for the company's products and the continued service
of a 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.
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 $4,025 versus approximately $9,050 prior to the execution of the
amendment. The lease expires on April 31, 1999.
RESULTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1999
COMPARED TO THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 1998
Consolidated revenues for the third quarter were up about $30,000 or 2% and
decreased approximately $98,000 or 2% for the first three quarters of the fiscal
year when compared with the result reported last year. The increase for the
quarter and the decline for the nine month period were, primarily, a result of
variances in the sales from the Company's outlet of close-out, seconds, and
discontinued goods (close-out sales). These sales during the quarter were about
$78,000 versus about $13,000 last year which for the nine months period were
about $116,000 and $203,000 for 1999 and 1998 respectively. Regular sales, net
of close out sales, of domestically produced goods (DPG) for the quarter were
about $839,000, up $133,000 or 19.89% from the $706,000 reported last year while
sales for the nine month period were approximately $2,704,000, down $34,000 or
1.3% from the $2,739,000 recorded last year. Sales of foreign produced goods,
net of inter company sales and close out sales, for the quarter were
approximately $$459,000 up about $130,000, 39.5%, from the previous year's third
quarter and were $1,618,000 for the thirty-nine weeks, an increase of about
$39,000 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 and
possibly another eight days in the third quarter
During the previous two fiscal years, and a portion of this year, the
Company had associated with a clearance center to dispose of close outs, goods
characterized as seconds, over runs and discontinued goods. These sales were
highly discounted and the Company paid its portion of related cost to operate
the center. During fiscal 1998, the Company also had "tent" sales at its
Lexington, N.C. facility to raise cash and to dispose of undesirable inventory.
Both of these means of sales were based on highly discounted prices and
contributed to the Company losses. Beginning in August of 1998, the Company set
up and opened to the public an "Outlet" at its Lexington facility which is opens
during the work week and has discontinued its association with the clearance
center. Any "tent" sales held in the future will be in conjunction with the
outlet and at price whereby the Company will, at least, break even after
expensing all related cost. During the fiscal quarter ended January 31, 1999,
there were no sales included from the clearance center nor from a highly
discounted tent sale. During the nine month period about $55,000 is included
versus about $176,000 last year. Sales from the outlet are reported above.
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 at the time of the price
increase, the effect of the increase could not significantly contributed to the
margins until the third quarter ending January 31, 1999. Prices charged for
FPG's will be increased about 6% affective on or about April 1, 1999.
Also materially important is the product mix of the FPG sales reported for
the fiscal year through January 31, 1999. The sales of FPG's during the fiscal
third quarter of 1999 include OEM sales (sales to other manufacturers) of about
$21,000, or 3% of the total, versus about $117,000, or abut 17% of the total,
for the third quarter of fiscal 1998. During the three quarters of fiscal year
1999, total sales of FPG's include OEM sales (sales to other manufacturers) of
about $86,000, or 4% of the total, versus about $455,000, or abut 21.7% of the
total, for the first three quarters of
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<PAGE>
fiscal 1998. The decline in OEM sales has been essentially offset during the
nine months period by sale of the regular line products sold through retailers
which amounted to about $1,422,000, or 68.8% of the total, versus approximately
$942,000, 48% 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 January 1999, 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 January
31, 1999 were about $21,000, down about $96,000 as compared to last years second
quarter. The Company has recently quoted a number of potential OEM customer
products not made in the past and will have samples supplied in some cases that
are scheduled to be shown by the customers at the April 1999 furniture market.
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 were, in part, included in the results of the fiscal third
quarter ending January 31, 1999. Items not shipped in the third quarter are
scheduled to ship during the fourth quarter ending on April 30, 1999.
The Company's firm backlog of orders on January 31, 1999 was about
$1,863,000, down about 21.7% and 27.6% respectively when compared with the
backlog of about $2,382,000 on April 30, 1998 and the approximate backlog of
$2,520,000 reported at February 28, 1998. The current backlog included about
$1,306,000 of domestically - manufactured products, as opposed to about
$1,327,000 included in the April 30, 1998 backlog and about $1,498,000 included
in the February 28, 1998 backlog. The backlog for WHCC and Honduran-produced
products, less inter company orders, was approximately $557,000 on January 31,
1999 versus about $1,055,000 on April 30, 1998 and about $1022,000 on February
28, 1998. The decrease primarily reflects improved shipment especially for FPG
whereby improved delivery will hopefully product continued growth in these
sales.
The company had at January 31, 1999 an additional backlog of approximately
$368,000 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 originally 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 then the plan was to introduce the products at the market scheduled
for October of 1998. Because of a switch in vendors, all the samples did not
arrive for the October Market and the introduction of these products was further
delayed. However, all the samples will be available for the April 1999 furniture
market. 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 stated above. The Company has released
production orders to its source, which could become available to begin shipping
during the fourth fiscal quarter ending April 30, 1999.
Cost of sales increased approximately $98,000 to about $1,130,000 for the
third fiscal quarter ended January 31, 1999 and were about 82% of sales. These
cost for the three quarter year were 77.6% of sales and decreased approximately
$24,000 or .7% 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 $35,000 or
11.2 % for the third fiscal quarter but decreased about $20,000 during the first
three quarters of the fiscal year relative to the previous years results. The
-10-
<PAGE>
increases recorded in the quarter were sales aids and commission expenses 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 $94,000 for the fiscal quarter represent an
decrease of about $18,000 when compared with that paid during the previous year
second quarter. About one-half of the decrease represents a one time adjustment
after the expense was over accrued during the first half of fiscal 1999. For the
nine month period, interest expenses were approximately $316,000 down about
$26,000 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 fiscal quarter ended January 31, 1999, operating income (earnings
before interest and taxes) was a loss of about ($104,000), (4.5) cents per
share, compared to ($2,000), (.0) cents per share for quarter ended January 31,
1998. For the nine month period ended January 31, 1999 the operating income was
a loss of about ($102,000), ($.045) per share versus the previous years loss of
about ($52,000) or ($.023) per share. Net income for the third quarter was a
loss of about ($204,000) or (.089) cents versus the previous years loss of about
($114,500) or ($.05) per share. For the nine month period there is a net loss of
about ($432,000) or ($.189) per share, compared to a net loss of about
($398,606) or ($.174) per share for the prior year's three quarters.
The net loss reported for the first three quarters of the fiscal year and
third fiscal quarter ended January 31, 1999 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 break even prices to generate cash
to cover the operating loss and to finance continued operations but the level of
these sales during the period ended January 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 and third 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
continue at the level achieved in the first three quarters as production at the
Honduras facility has been restored and no additional interruptions, with the
exception of the preparation of market samples, 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. Sales from the Company's
new import program are not expected to be material in the fourth quarter.
-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 referenced
3.2 Bylaws of Wellington Hall, Limited, as amended.
Incorporated by referenced
(b) Reports on From 8-K filed during the quarter ended
January 31, 1999: 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 15, 1999 By:
--------------------------------
Hoyt M. Hackney, Jr., President and
Chief Executive Officer
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 20,715
<SECURITIES> 0
<RECEIVABLES> 848,062
<ALLOWANCES> 63,843
<INVENTORY> 3,649,495
<CURRENT-ASSETS> 4,489,011
<PP&E> 2,179,931
<DEPRECIATION> 1,429,627
<TOTAL-ASSETS> 5,392,998
<CURRENT-LIABILITIES> 4,097,339
<BONDS> 0
0
0
<COMMON> 3,354,531
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,392,998
<SALES> 4,284,459
<TOTAL-REVENUES> 4,286,070
<CGS> 3,328,084
<TOTAL-COSTS> 4,388,544
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316,391
<INCOME-PRETAX> (418,866)
<INCOME-TAX> 13,518
<INCOME-CONTINUING> (432,384)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (432,384)
<EPS-PRIMARY> 0
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