UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Period Ended July 31, 2000
( ) 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 Rd
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 3,823,220 July 31, 2000
Traditional Small Business Disclosure Format:
YES [X] No [ ]
Page 1 of 13
<PAGE>
INDEX
Wellington Hall, Limited and Subsidiaries
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet - July 31, 2000 And
April 31, 2000 3
Consolidated statements of income - Three months
ended July 31, 2000 and 1999 4
Consolidated statements of cash flows- Three
months ended July 31, 2000 and 1999 5
Notes to consolidated financial statements - July
31, 2000 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
-2-
<PAGE>
WELLINGTON HALL LIMITED AND SUBSIDIARIES
Consolidated Balance Sheets
Uaudited
Quarter Ending Year Ending
ASSETS July 31, 2000 April 30, 2000
Current Assets:
Cash $ 7,781 $ 4,541
Accounts Receivables
Trade $ 691,554 $ 667,231
Allowance for Bad Debt (63,843) (63,843)
Inventories 3,310,928 3,313,222
Note Receivable-Officer -00- -00-
Prepaid Expenses 89,915 88,638
Deferred Income Taxes -00- -00-
------------ ------------
Total Current Assets $ 4,036,335 $ 4,009,788
Deferred Income Taxes 126,511 126,511
Property, Plant and Equipment
Cost 1,962,297 1,965,679
Less Accumulated Depreciation (1,309,346) (1,294,680)
------------ ------------
652,951 670,999
Other Assets 868 299
------------ ------------
Total Assets $ 4,816,665 $ 4,807,597
------------ ------------
LIABILITIES
Current Liabilities:
Current Maturities of L/T Debt $ 960,225 $ 953,918
Notes Payable, Banks 508,702 458,219
Accounts Payable
Trade 464,459 483,706
Sundry 51,903 49,830
Customer Deposits 48,104 68,457
Other Current Liabilities 125,862 122,279
------------ ------------
Total Current Liabilities $ 2,159,255 $ 2,136,409
Noncurrent Liabilities:
Deferred Compensation Accrual 318,000 $ 312,000
Long-Term Debt, Less Current Maturities 1,393,854 1,420,463
------------ ------------
Total Liabilities $ 3,871,109 $ 3,868,872
STOCKHOLDERS' EQUITY
Common Stock; Authorized 6,000,000 $ 3,811,531 $ 3,811,531
Shares; No Par; Stated Value $4; Shares
Issued and Outstanding - 1,689,887
Preferred Stock; Authorized 5,000,000
Shares: $5 par; No Shares Issued
or outstanding -00- -00-
Retained Earnings (950,566) (966,255)
Cumulative Translation Adjustments (1,915,409) (1,906,551)
Total Stockholders' Equity 945,556 938,725
------------ ------------
Total Liabilities & Equity $ 4,816,665 $ 4,807,597
Notes to consolidated financial statement are an internal part hereof.
-3-
<PAGE>
WELLINGTON HALL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
July 31,
2000 1999
---- ----
Revenues:
Sale of Furniture $1,133,433.98 $1,489,569.04
Other Income 4,879.23 2,524.47
------------- -------------
1,138,313.21 1,492,093.51
------------- -------------
Cost and expenses:
Cost of goods sold 796,394.85 1,077,109.88
Other operating, selling, general
and administrative expenses 239,037.64 328,557.13
Interest Expense 84,688.90 96,890.97
Income (loss) before taxes (benefits) 18,191.82 (10,464.47)
Income tax Benefit 1,197.13 815.59
Net income (loss) for the quarter 16,994.69 (11,280.06)
Earnings (loss) per share of common stock:
Primary and assuming full dilution:
Net income (loss) for the quarter $ 0.00 $ 0.00
The accompanying notes are an integral part of the
consolidated financial statements
-4-
<PAGE>
WELLINGTON HALL LIMITED AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
July 31,
2000 1999
---- ----
Cash Flow From Operating Activities
<S> <C> <C>
Net Income Loss) For the Period $ 16,995 ($ 11,280)
Noncash Expenses (income) Included
In Net Income
Depreciation 17,559 23,594
Deferred Income Taxes 00 00
Deferred Compensation 6,000 6,000
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts
Receivables, Net (24,859) (146,527)
(Increase) Decrease in Note Receivable 00 00
(Increase) Decrease in Inventories (9,247) 120,807
(Increase) Decrease in Prepaid Expenses (1,604) (10,021)
(Increase) Decrease in Other Assets (575) 1,576
(Increase) Decrease in Accounts
Payables, Customer Deposits And
Other Current Liabilities (32,994) (263,667)
------------ ------------
Net Cash Provided By (Used For)
Operating Activities ($ 28,725) ($ 279,518)
Cash Flow From Investing Activities:
Purchase of Property and Equipment ($ 2,289) ($ 7,904)
Cash Flow From Financing Activities:
Proceeds From Long-Term Borrowing (19,937) 282,833
Proceeds From Short-Term Borrowing 52,884 (52,170)
Proceeds From Equity Capital 00 27,000
------------ ------------
Net Cash Provided By Financing Activities 32,946 257,663
Effect of Exchange Rate on Cash 1,554 (2,878)
Net Increase (Decrease) In Cash $ 3,486 ($ 32,637)
Cash, Beginning of Period 4,295 36,584
Cash, End Of Period 7,781 3,947
Cash Paid During The Period For:
Income Taxes $ 00 $ 00
Interest $ 84,233 $ 96,891
</TABLE>
-5-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
July 31, 2000
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
14.87 Lempiras to 1 U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 14.83 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 $343
and $230 during the quarters ended July 31, 2000 and 1999 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 July
31, 2000, total stockholders' equity was approximately $945,556 and the
outstanding principal amounts of the Lexington State Bank loan and the OPIC loan
were about $1,428,896 and $845,164 respectively.
On June 16, 1999, Lexington State Bank (LSB) the company's primary domestic
lender restructured the company's debt whereby three lines of credit with an
aggregate total of $1,550,000 and one term loan with a balance of approximately
$278,000 were replaced by a long term loan of $1,529,784 with the repayment
amortized over a period of ten years and a line of credit of $300,000. On June
16, 1999 the Company owed $20,000 against this line of credit. The three lines
of credit retired carried interest rates ranging between prime plus 1% and 1
1/2%. The long term loan retired had an interest rate of prime plus 1.5%. The
new long term loan and line of credit bear interest rates of prime plus 3/4% and
are secured by substantially all of the Company's domestic assets. Principal
payments on the line of credit are is due on demand. The line of credit and long
term loan also contains restrictive covenants that prohibit Wellington Hall from
paying dividends and making other distributions with respect to its capital
stock. The line of credit is reviewed annually for renewal.
The effect of the restructured LSB debt reduced the Company's "Current
Liabilities" by approximately $967,280 and depending on the level the Demand
Notes utilized over time, hold the Company's interest and principal to almost
the level of those requirements prior to the restructuring of the debt thus
minimizing the effect on the Company's working capital. The net proceeds of the
original loans 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.
The Company, beginning on July 31, 1998 and thereafter was unable to make
quarterly principal payments except for the quarters ending on January 31, 1999
and April 30, 1999 when for each quarter the Company paid approximately $21,000.
The Company has made all required quarterly interest payments. On October 31,
1999 the Company was unable to make the balloon payment which had grown to
approximately $826,479 and, therefore, the Company was in default of the loan
agreement. The Company has made all the quarterly scheduled interest payments.
The acceptance of the interest payments by OPIC did not in any way alter the
default status of the loan.
The Company agreed in December of 1999 to bear the expense of having the
OPIC mortgage on the Company's Honduran facility extended. Under Honduran law
the maximum length of time a mortgage can remain in effect is ten years and
OPIC's original mortgage was due to expire on April 1, 2000. All necessary
actions have now been completed and the original OPIC mortgage has been
effectively extended for another ten years. The expense of this transaction was
minimal.
In February of 2000, the Company's management and OPIC personnel met and
discussed the future Company plans to satisfying the principal balance. The
Company's position was that addition time must be given for it's current
strategy, presented to OPIC during the meeting, to produced the growth in sales
and a resulting level of profitability adequate to servicing the debt and/or
that the Honduran facility be sold or and investor be found with interest in
part ownership of that facility. The proceeds from such a sale or investment
could, among other things, pay off the OPIC loan balance. Selling the Honduras
facility and then contracting the production of the Company's products is
consistent with the Company's current strategy of curtailing unprofitable
domestic production and becoming a marketing and distribution Company for
products available from foreign manufacturers.
On May 1, 2000 the Company and OPIC entered into a Forbearance
Agreement which among other things forebears OPIC until October 31, 2000 from
seeking to enforce its rights against the collateral under the Loan Agreement
due to the failure by the Company to make payment of principal in full, and
interest thereon by October 31, 1999, as required under the terms of the loan
agreement. In consideration for OPIC's above stated agreement to forbear from
seeking to enforce right against the collateral, WHCC agreed to among other
things to:
(i) No later than July 3`, 2000, pledge, or cause to be pledged, to OPIC in
a manner and with documentation (including legal opinions) acceptable to OPIC in
form and substance (once executed, such document shall constitute "Financing
Documents") all of the shares of Muebles Wellington Hall S.A. (Muebles); and
-7-
<PAGE>
(ii) Make quarterly interest payments in the manner and at the default rate
specified in the Loan Agreement on the full, unpaid balance of the loan,
effective as of October 31, 1999; and
(iii) Exercise its best efforts to sell Muebles at a net value sufficient
to repay OPIC's debt in full, and to cover OPIC's cost of collection, and
commencing May 1, 2000, provide a written report to OPIC on a monthly basis
regarding the Company's efforts to sell Muebles. The terms of any proposed sale
are subject to OPIC's prior approval, and all of the proceeds of any sale shall
be payable to OPIC, in a manner OPIC may specify, up to the amount owing to OPIC
under the Financial Document; and
(iv) As may be requested by OPIC, WHCC shall cooperate fully to provide
OPIC with a written appraisal, or work with such broker as OPIC may identify to
expeditiously sell Muebles, subject to the provisions of the last sentence of
subparagraph (iii) above.
On May 31, 2000 the Forbearance agreement was amended whereby item (ii)
above was revised to read: Make quarterly interest payments in the manner
specified in the Loan Agreement on the full, unpaid balance of the loan,
effective as of October 31, 1999; and in lieu of making penalty interest
payments on each quarterly payment date specified in the Loan Agreement, the
Company shall pay a total penalty charge of $25,138.7 on October 31, 2000, which
represents the penalty interest that will accrue during the Forbearance Period,
computed on the basis of 360-day years of twelve 30-day months.
This amendment to the forbearance agreement allows the difference in the
10% interest rate on the OPIC loan balance in effect prior to October 31, 1999
and the default interest rate of 13% included in the Loan Agreement would be
added to the outstanding principal balance quarterly. On January 31, 2000, April
30, 2000 and on July 31, 2000 the principal balance was increased accordingly
and on July 31, 2000 the outstanding balance was $845,164.
The OPIC loan prohibits the payment of dividends and other distributions by
Wellington Hall and requires that it maintain a stated amount of tangible net
worth as well as certain financial ratios, including current assets to current
liabilities and total indebtedness to tangible net worth. In addition, WHCC is
required to maintain a stated amount of current assets in excess of current
liabilities, and WHCC and MWH are required to maintain stated ratios of current
assets to current liabilities and indebtedness to tangible net worth. Wellington
Hall, WHCC an MWH are each in compliance with the requirements of the OPIC loan.
Under the OPIC loan arrangement, Wellington Hall is obligated to supply any
necessary funds to WHCC to meet WHCC's obligations thereunder, and MWH has also
guaranteed the obligations of WHCC. The OPIC loan is secured by substantially
all of the tangible assets of the Honduran Facilities.
The Company's primary sources of liquidity are the bank lines of credit and
cash flow from operations. For its domestic operations, the Company has three
hundred thousand dollar lines of credit with Lexington State Bank (See above)
and the outstanding balance at July 31, was $260,000.
MWH has lines of credit with two Honduran banks and as of July 31, 2000, an
aggregate of about $248,702 had been borrowed under these lines. Borrowings bear
interest at a rate that ranges between 24% and 27% 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 about ($28,725) and ($279,518) at July 31, 2000
and and July 31, 1999, respectively. The primary contributing factor to the
negative cash flow was a decrease in Other Current Liabilities of approximately
$32,994 and an increase in accounts receivables of about $24,859. If the Company
is to meet its liquidity needs in the future, it must generate positive cash
flows and avoid any significant losses in the future.
As of July 31, 2000, accounts receivable had increased by approximately
$24,859 since the beginning of the fiscal year, mostly as a result of higher
sales late in the first quarter. The receivables represented a turnover rate of
about fifty-five days, an increase of about seven days when compared to the
turnover rate reported at April 30, 2000. The company's normal terms of sale for
the payment of invoices is Net 30 days for domestically produced goods (DPG) and
3% 10; Net 30 for foreign produced goods (FPG). In the case of export sales, an
Irrevocable Letter-Of-Credit is required.
Consolidated inventories increased by about $9,247 during the fiscal
quarter primarily as a result of an increase in the inventories of Honduran
produced goods.
Property and equipment is reported to have increased by about $2,289 for
the fiscal quarter mostly to maintain the Honduran facility. The value of the
Company's foreign fixed assets are revalued to reflect the fluctuation in the
value of the foreign currency. The devaluation of the Honduran currency relative
to the prior fiscal year end was about 4.3%. 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 fiscal year 2001 and expenditures are expected to be limited to maintenance
needs which develop from time to time.
Current Maturities on Long Term Debt increased slightly and mostly reflects
the capitalization of interest expense as per the terms of the Forbearance
Agreement dated May 11, 2000. (See the discussion of the OPIC loan above).
Long-term debt less current maturities decreased because of a payment on the
long term loan with Lexington State Bank.
-8-
<PAGE>
Current liabilities decreased by approximately $32,994 mostly as a result
of a decrease customer deposits, of about $19,647.
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 14.87 lempira to the dollar at July 31, 2000. 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 $1.46 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 300,000 additional shares at option prices ranging from $.80
to $1.30 per share, 150,000 of which are subject to certain performance
conditions.
On April 23, 1999, Ernst B. Kemm, upon the Board of Directors approval,
purchase 1,333,333 shares of the Company's common stock for $400,000 or $.30 per
share. The purpose of the funds was to reduce trade payable with certain vendors
and sales representatives, finance new sales aids, finance the purchase of raw
materials for the Company's Honduran facility, and to finance the purchase of
furniture from off shore manufacturers.
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 existed over portions of that time, a period that
includes two recessions. The sluggish furniture economy 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
swung away from the more formal designs and executions that the Company has
marketed to more informal designs. In addition, and over the more recent years,
the medium to higher priced segments of the furniture has basically seen the
industry go off shore and domestic produced products have become non competitive
and/or unprofitable.
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 has been tight during all of previous four years. The sale of stock to
Mr. Bingham assisted the Company in meeting its working capital and other cash
needs during fiscal 1997. During fiscal years 1998 and 1999, the Company
depended on the sale of excessive inventories, much of which was highly
discounted, to support continued operations. The equity fund received as a
result of Mr. Kemm's and Mr. Rick's investments (See discussion of Furniture
Classics below) along with the continue reduction of inventory contributed
materially to operating funds during fiscal year ended April 30, 2000.
On April 30, 2000, Ernst B. Kemm, upon the Board of Directors approval
executed a long term loan with the Company whereby the Company can borrow up to
$110,000 to finance the purchase of inventory from off shore suppliers. Under
the terms of the loan, interest will be paid monthly on the outstanding balance
at a rate of 1 1/2 per above prime as established by Lexington State Bank. Upon
notification by Mr. Kemm, the outstanding balance will be due on the last day of
the thirteenth month following the receipt of notification. The Company has the
right to make payments against the balance from time to time. On July 31, 2000
the Company borrowed $55,000 against this loan.
In March of 1999, the Company and Furniture Classics Limited (FCL) entered
into a verbal agreement whereby FCL would supply the Company a line of mirrors,
chinese antiques, and other products from their foreign sources which the
Company will market exclusively. Under this agreement R. Douglas Ricks, the FCL
president would became a shareholder by investing $27,000 for 100,000 shares of
the Company's common stack, would be nominated as a Director, and would assist
management in developing additional products to further exploit these new
sources. As part of the agreement and to enhance Company sales and possibly
finance the growth of these sales, FCL received certain incentives in the form
of warrants. At the High Point International Furniture Market held in April 1999
the Company displayed these products and initial shipment resulting orders are
reflected in the Company's sales during the fiscal year ended April 30, 2000. On
May 4, 1999 Company and FCL executed a contractual agreement and on June 22,
1999 the Company received $27,000 for the Company's common stock (see the Proxy
Statement). The warrants issued as part of the FCL agreement are priced a can be
exercised by the following:
-9-
<PAGE>
100,000 shares at $0.30 per share exercisable until October 31, 1999
100,000 shares at $0.40 per share exercisable until July 31, 2000
100,000 shares at $0.40 per share exercisable until December 31, 2000
100,000 shares at $0.45 per share exercisable until December 31, 2001
100,000 shares at $0.45 per share exercisable until December 31, 2001
100,000 shares at $0.53 per share exercisable until December 31, 2001
Under the terms of the agreement the company can purchase the products involved
directly from the foreign source in container loads, purchases partial container
loads or from Furniture Classics Limited's inventory. FLC in any event is
responsible for providing letters of credit or satisfying other credit terms
with the foreign vendors. FCL receives a 10% brokers fee on all products
delivered to the Company. For orders placed as partial containers or from FCL
inventories, FCL received addition fee to cover handling, delivery, and
warehousing expense as applicable. Both parties have the right to terminate the
agreement with ninety day notice but must honor all outstanding orders at the
time of termination.
At the annual meeting of shareholders held in September of 1999, Mr. Ricks
was elected a director and on October 31, 1999 Mr. Rick's exercised a warrant
and invested $30,000 for 100,000 shares of the Company's common stock. The funds
received from Mr. Ricks was used to purchase inventory. Mr. Ricks did not
exercise the warrant which could have been exercised on July 31, 2000.
On April 19, 1999, Hoyt M. Hackney, the Company President, with the
majority of the Board of Directors approval , agreed to alter the "Deferred
Compensation Agreement" between Mr. Hackney and the Company. The agreement
allows that upon retirement, at age 62 or older, or upon his death he or his
estate would received $50,000 per year for a period of ten years (see Proxy
Statement). The Company has accrued the expensed of this obligation over the
last twelve years and is scheduled to continue that expense until the sum of
$300,000 has been accrued. At July 31, 2000 the Company's Balance Sheet stated a
$308,000 long term liability as a result of this accrual.
The revisions (the revision) to the "Deferred Compensation Agreement", not
yet finalized, are expected to reduce the compensation to $20,000 per year but
not before May 1, 2005. In exchange, Mr. Hackney would receiving restricted
stock, 1,000,000 shares of common stock at $.30, which can not be sold until
after retirement or death and then only in increments of 1/10 of the shares per
year for a period of 10 years. This action could capitalize the $300,000
liability and thus remove the long term liability from the Company's balance
sheet when the transaction is executed.
The primary purpose of the revisions to the "Deferred Compensation
Agreement" was as an incentive to the Company's lenders to restructure the
outstanding Company loans whereby the potential outlay of $50,000 per year is
removed, reduced and/or delayed to enhance the Company's ability to repay its
debt over all or part of the period the restructured loan long agreement would
specify. After the action of the board of directors on April 19, 1999 the
financial institutions to whom the Company is indebted have shown little
interest in the revision being complete though, in fact, it was suggested by one
of the Company's lenders.
The finalization of this revision to the Deferred Compensation Agreement
has been tabled. As a condition of the revision, the revision can not represent
a taxable event to Mr. Hackney. Professional assistance has produced a scenario
whereby the revision may meet this condition but further profession evaluation
will be required. Because of the expense and demands on management of more
urgent matters, finalizing the revision has been given a lower priority.
The Company leases a 4,400 square-foot showroom located in High Point,
North Carolina which is utilized to display the Company's products, particularly
new product introductions, during the semiannual International Furniture
Markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 2000 COMPARED TO THE THREE
MONTHS ENDED JULY 31, 1999
Consolidated revenues for the first fiscal quarter ended July 31, 2000 and
1999 were about $1,138,313 and $1,492,093 respectively representing a decrease
of approximately $353,280 or about 23.7%. Sales of domestically produced goods
(DPG) for the first quarter of fiscal year 2001 were about $349,431, down
approximately $499,297 or 59.0% from the $845,728 reported last year. The prices
for DPG were last increased August 15, 1998 by an estimated 5 to 6%. Sales of
the Company's Honduran produced goods (HPG), net of intercompany sales, for the
first quarter were approximately $573,356 in 2000 versus $528,309 in 1999
representing a increase of about $45,047 or 8.5% versus the previous year's
sales. The prices for HPG were last increased April 15, 2000 by an estimated 6%.
Because of the level of the backlog of orders for those products on April 15,
2000, the increased prices probably had little to no affect on the sales
reported for the quarter ended July 31, 2000. Sales of the Foreign produced
goods (FPG), marketed as
-10-
<PAGE>
Wellington Hall Imports (WHI), for the first quarter ended July 31,2000 were
approximately $148,143 versus $73,371 the previous year. Sales of all categories
of the Company's products through the Company's retail outlet for the first
quarter were approximately $62,504 in 2000 versus sales of about $42,169 the
previous fiscal year.
The additional sales of FPG during the quarter were the result of an
agreement between the Company and Furniture Classics Limited (FCL) whereby FCL
supplies the Company a line of mirrors, chinese antiques, and other products
from their foreign sources which the Company is marketing exclusively ( see
discussion above ). The products the Company is marketing as a result of that
agreement were introduced at the High Point International Furniture Market held
in April 1999. In addition to the products from FCL, the Company has also
established relationships with other foreign manufacturers that are producing
products for the Company to market and distribute exclusively. The Company begin
marketing such items in February of 1998 and has continually expanded both the
resource base and the product line accordingly. The Company does not have a
contractual relationship with the foreign manufacturers of these products.
The Company's firm backlog of orders on July 31, 2000 was about $1,733,107,
down about 7.6% from the backlog of about $1,876,566 on April 30, 2000 and down
about 17.2% from the $2,093,728 reported at July 31, 1999. The July 31, 2000
backlog included about $740,614 of products manufactured domestically in the
past as opposed to about $763,498 included in the April 30, 2000 backlog and
$964,000 included in the July 31, 1999 backlog. The backlog included for WHCC or
Honduran-produced products, less intercompany orders, was $671,564 on July 31,
2000 versus about $780,936 on April 30, 2000 and $516,255 on July 31, 1999. The
backlog included for foreign produced goods, marketed as Wellington Hall Imports
and other than the Company's Honduran produced goods, was about $320,929 at July
31, 2000 versus about $332,132 on April 30,2000 and $613,649 on July 31, 1999.
The backlog changes and variations in the various categories of the
Company's products somewhat reflects the management's strategy to returning the
the Company to profitability and renewed sales growth. Basically, that strategy
is to de emphasize domestic produced goods where profits have been elusive over
the past, to replace that sales volume with new products and product categories
supplied by foreign, less expensive producers, and to emphasize the sales of the
Honduran produced goods where the Company's believes it has profitable margins.
Beginning in the second quarter ending October 31,2000, the Company will make
the first shipments of products from foreign sources, other than the Company's
Honduras facility, that were that were previously manufactured by the Company
domestically.
Cost of sales decreased approximately $ 280,715 to about $796,395 when
compared to the $1,077,110 reported last year. As a percent of sales, the cost
was 70.3% versus 72.2% for the fiscal first quarter ended July 31, 2000 and 1999
respectively. Selling, general, and administrative expenses decreased about
$89,520 or 27.2%, dropping from $328,557 in the first quarter last year to
$239,037 at July 31, 2000. These declines are mostly related to the lower sales
of domestically produced good and the reduced production activity to support
these sales. Further declines in the cost of good sold and Selling, general and
and administrative expenses will be minimal but margins could continue to
improve as product mix changes and the sale of foreign produced goods increases
a a percent of the total sales.
Interest expenses of about $ 84,689 and $ 96,891 are reported for July 31,
2000 and 1999 respectively. The decrease reflects mostly a decrease in the debt
with Honduran banks of about $132,147 against which the Company was paying an
interest rate of approximately 27%. Any addition reductions in the Company's
debt will likely depend on the Company's ability to increase its profits.
For the fiscal quarter ended July 31, 2000, operating income (earning
before interest and taxes) was about $102,881, .03 cents per share, compared to
$86,427, .02 cents per share for quarter ended July 31, 1999. The net income for
the first quarter of fiscal year 2001 was about $16,994 versus a loss of about
($11,281) at July 31, 1999.
The net profit reported in the first quarter ended July 31, 2000 is mostly
the result of lower levels of assembly production, reductions in employment, and
reduced overheads at the Company's Lexington, N.C. facility. That facility has
essentially been reorganized to receiving, packaging, warehousing and shipping
products received from the Company' Honduras facility and from other foreign
resources. The domestic facility will continue minimal assembly production of
certain products deemed profitable, applying a furniture finish to portions of
the products imported, and possibly contract finishing of products imported by
other Company's.
Forward Looking Statements
Certain statements in Item 1. - Business and Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations contain
forward-looking statements that involve risks and uncertainties, such as
-11-
<PAGE>
statements of the Company's plans, objectives, expectations, and intentions. The
cautionary statements made in this 10KSB should be read as being applicable to
all related foreward-looking statements where ever they may appear in this form
10KSB. The Company's actual results could differ materially from those discussed
herein.
-12-
<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 July 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: September 12, 1999 By: _______________________________
Hoyt M. Hackney, Jr., President and
Chief Executive Officer
Chief Financial Officer
-13-
