EXHIBIT
13
2000
ANNUAL REPORT
WELLINGTON HALL, LIMITED
Lexington, North Carolina
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TO THE SHAREHOLDERS OF WELLINGTON HALL LIMITED
During the fiscal year 2000, the domestic production and operations at the
Lexington N.C. facility were curtained significantly and by the end of the year,
the operations had essentially been converted to receiving, packaging, and
shipping products from the Company's Honduran facility and from other foreign
manufactures. This action was part of a plan to reduce the sales of domestically
produced products with low profit margins and then possibly replace those sales
with increased sales of the Company's Honduran products and products from other
foreign manufacturers that have higher profit margins. As a result, total sales
for the fiscal year declined by about $325,526 to about $5,395,680. However, the
sales of domestic products included in the total dropped about $1,196,630. This
decline was partially off set by an increase in the sales of Honduran products
by about $259,979, an increase in the sales of products from other foreign
sources by about $566,488, and an increase in the sales from the Company's
retail outlet of about $44,637. All the sales are net of inter company sales.
These changes or "switch in sales" resulted in a net loss for the year of
$93,917 versus a net loss the previous year loss of $573,387. Operating profits
for the fiscal year were $286,566 versus and operating loss the previous year of
$133,644.
During fiscal year 2001, the Company plans are to continue to pursue means
of increasing the sales of Company's Honduran products and products from other
foreign resources. In addition, the Company also expects to purchase most of the
furniture previously manufactured domestically at the Lexington facility from
off shore sources. By so doing, the objective will be restore some of the lost
sales of this portion of the Company's product line and with sales that will
have a profitable margin.
The most significant challenge for fiscal year 2001 will managing and/or
over coming the Company's financial situation. First, the Company must retire
the debt with Overseas Private investment Corporation, about $838,876 on April
30, 2000, on or before October 31, 2000. Secondly, the Company must be able to
finance a steady flow of incoming products to maintain sales at a profitable
level equal at least to the Company's debt service demands. The Company's
financial circumstances and possible remidies are further discussed below in the
"Management Discussion and Analysis" section which follows in this report.
Sincerely,
Hoyt Hackney, Jr.
President
Upon written request directed to the Secretary of the Company at P.O. Box 1354,
Lexington, North Carolina 27293-1354, Shareholders will be furnished a copy of
the Company's Annual Report on form 10-KSB without charge
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MARKET PRICES, DIVIDENDS AND RELATED SHAREHOLDER MATTERS
Until October 1995, the Common Stock of the Company traded in the NASDAQ
over-the-counter market system. Since that time, the Company's Common Stock has
traded on the NASD's over-the-counter bulletin board. In absence of a market
maker to furnish quotations, the Company has listed the only sale prices
available to the Company which are trade prices that appeared on the Internet
during fiscal year 2000.
Quarter Ending High Low Quarter Ending High Low
-------------- ---- --- -------------- ---- ---
July 1998 5/32 5/32 July 1999 0.20 0.07
October 1998 0.15 0.15 October 1999 0.20 0.07
January 1999 1/8 1/8 January 2000 0.20 0.07
April 1999 0.07 0.07 April 2000 0.20 0.07
These market quotations represent trade prices, as they appeared on the
Internet.
As of July 28, 2000, there were approximately 562 holders of record of the
Company's Common Stock.
The Company has not paid any dividends since its inception. Pursuant to the
terms of its line-of-credit and long-term loan agreements with Lexington State
Bank, the Company may not pay any dividends, purchase, redeem or otherwise
retire any of its capital stock or otherwise make any other distribution of its
assets resulting in the reduction of its capital without the prior written
consent of Lexington State Bank. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."
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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
April 30, 2000, total stockholders' equity was approximately $950,977 and the
outstanding principal amounts of the Lexington State Bank loan and the OPIC loan
were about $1,455,505 and $838,876 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 did make the quarterly scheduled interest payments on
October 31, 1999, January 31, 2000 and on April 30, 2000. 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
(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
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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 and on
April 30, 2000 the principal balance was increased accordingly and on April 30,
2000 the outstanding balance was $838,876.34.
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 April 30, was $240,000.
MWH has lines of credit with two Honduran banks and as of April 30, 2000,
an aggregate of about $218,219 had been borrowed under these lines. Borrowings
bear interest at a rate that ranges between 27% and 30% 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 ($118,144) and $78,004 in fiscal 2000 and 1999,
respectively. The primary contributing factor to the negative cash flow was a
decrease in Other Current Liabilities of approximately $256,661. 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 April 30, 2000, accounts receivable had increased by approximately
$78.212 since the beginning of the fiscal year, mostly as a result of higher
sales late in the fourth quarter. The receivables represented a turnover rate of
about forty-eight days, a increase of about eight days when compared to the
turnover rate reported at April 30, 1999. 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 decreased by about $373,418 during the fiscal year
primarily a result of a decrease of about $580,000 to the inventory of
domestically produced goods which reduction was off-set by an increase of about
$198,000 in foreign produced goods at the Company's Honduran facility, an
increase of 143,000 of inventory of goods purchase from other from resources and
an adjustment to the reserve for slow moving inventory of about $134,283. The
total inventory is expected to continue to decline to both generate operating
capital and to improve the turn on the inventory value. Sales and backlogs are
further discussed herein below.
Property and equipment is reported to have increased by about $15,307
reflecting the devaluation of the Honduran currency during the fiscal year.
Actual capital expenditures for the fiscal years were approximately $39,809
mostly to upgrade and 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 decline in that value during the fiscal year 2000 was
approximately $24, 502 and the devaluation of the Honduran currency relative to
the prior fiscal year end was about 4.7%. 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 declined slightly and mostly reflects
the balloon payment required by the terms of the OPIC loan agreement on October
31, 2000. (See the discussion of the OPIC loan above). Long-term debt less
current maturities increased because of a new long term loan with Lexington
State Bank as a result of the Company's loans being restructured on June 16,
1999 (see the discussion of LSB above) a new loan from Ernst B. Kemm of $55,000,
and the addition penalty interest from the OPIC Forbearance Agreement discussed
above.
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Current liabilities decreased by approximately $254,437 mostly as a result
of a decrease of about $103,379 in trade payable, about a $23,371 decrease in
customer deposits, and various Other Current Liability's of $136,392. These
reductions are not expected to continue in fiscal year 2001.
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 14.71 lempira to the dollar at April 30, 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 $1.94 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 April 30, 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
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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:
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.
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 April. 30, 2000 the Company's Balance Sheet stated
a $312,000 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
Fiscal Year ended April 30, 2000 compared to Fiscal Year ended April 30, 1999
Consolidated revenues for the fourth quarter of fiscal year ended April 30,
2000 were approximately $1,177,621 down about $281,992 when compared to the
revenues of approximately $1,459,318 reported for the fourth quarter of fiscal
1999. For the fiscal year 2000, consolidated revenues were $5,404.176 and down
about $318,914. Sales included of domestically produced furniture for the fourth
quarter were approximately $389,791 down about $543,90 from the fourth quarter
the previous year and these sales for the year were approximately $2,301,471
down about $1,196,630 when compared to the previous fiscal year. Sales included
for the fourth quarter of products produced in the Honduran facility, net of
inter company sales, were approximately $626,523 an increase of about $106,296
versus the approximately $520,227 reported last year. For the year, these sales
were approximately $2,253,573 an increase of about $193,538 when compared with
the approximately $2,060,035 reported the previous year.259,979.
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The consolidated sales also include for the fourth quarter and fiscal year
new products from new off shore resources marketed under Wellington Hall Imports
(WHI) which were first introduced in April 1999. For the fourth quarter,
revenues form these products were approximately $157,147 and for the fiscal year
were $566,818. There were no sales of this category of products included in
fiscal year 1999. There were essentially five sources utilized in fiscal 2000,
four of which are by Furniture Classics. In fiscal 2001, the Company expects to
add additional off shore vendors and new products. Sales as a result of new
products from two new sources whose products were introduced in April 2000 are
expected to be impacted beginning in the second fiscal quarter ending on October
31, 2000.
The consolidated revenues included sales from the Company's retail outlet
located in the Lexington facility and operated as Palmetto Furniture Galleries
for the fourth quarter of about $90,801 about equal to the approximately $98,250
for the previous years fourth quarter and for the fiscal year sales were about
$259,469 versus about $215, 024 for fiscal year 1999 an increase of about
$49,000..
The decline in the sales of domestic products products is a continuation of
a trend that the Company has experience over the last four years. The Company
experienced a significant drop in the rate of incoming orders for these products
in fiscal 1997 and has experienced a continuing downward trend since that time.
Management believe that several fundamental factors probably contribute to the
cause of this trend including 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 the high cost of domestic
production which can not compete with imports which are possibly undercut the
value of domestically produced goods.
To possibly counter act this decline the Company has developed and adopted
a marketing plan that includes strategic measures such as (i) augmenting the
Company's traditional product line with new categories of home furnishing
products such as mirrors and Chinese antiques, (ii) augmenting the Company's
traditional product line with lower priced products produced by foreign
manufactures (other than and in addition to the Company's Honduran produced
goods), (iii) updating and upgrading catalogs and other sales aids in all
distribution channels, (iv) operating a full time retail outlet, and (v)
beginning in fiscal year 2001, to develop off shore suppliers for the Company's
products produced in the past at the Company's Lexington facility
(domestically-produced products).
In pursuit of this strategy the Company developed and introduced in April
of 1999 approximately thirty designs that were to be produced exclusively for
the Company by a foreign manufacture. The Company then entered into an agreement
with Furniture Classics Limited to supply the Company a line of mirrors, chinese
antiques, and other products from their foreign sources which the Company market
exclusively. At the High Point International Furniture Market held in April 1999
the Company initially displayed these products and sales are reflected above as
the revenues included from WHI. At the Market held in October of 1999 and April
2000, the Company expanded on it display of products from Furniture Classics
Limited. In addition and at the April 2000 Market, the Company displayed
products to be supplied by two new suppliers in an effort to increase sales of
the imported goods. The orders received as a result of the expanded displays and
expected to be reflected in fiscal 2001 sales for Wellington Hall Imports.
These sales of Honduran produced products are marketed under the name of
the Company's subsidiary, Wellington Hall Caribbean Corp. (WHCC products)
reportedly increased (see discussion of sales above) when compared with the the
fiscal previous year. These sales include both the finished products sold
primarily through retailer (retailer sales) and to other manufacturers (OEM
sales). For the fiscal year the retailer sales actually increased by about
$225,411 or 10.4% while OEM sales declined by about $31,873 down from about
$124,669 the previous year. The increase in retailer sales can mostly be
attributed to the production and distribution of new catalogs on most of these
products during the first quarter of fiscal year 2000.
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. This situation, most
significantly, resulted in the Honduran facility operating under capacity and
unprofitably over the more recent past. To counteract this loss of inter Company
sales and to increase revenues and operations at the Honduran facility, effort
has been directed through WHCC at selling other manufactures and wood consumers
their products and production requirements; OEM sales. These sales, as stated
above declined from about $124,669 in fiscal 1999 to only about $ 92,700 even
though a number of manufacturer and a significant amount of product was quoted
and in many cases sampled. Management contribute this lack of success to
possibly two factors. First, and like the Company, most of the manufactures
pursued produce domestically higher priced products and the items quoted did not
sale. Secondly, the competition for OEM sales is more competitive and the
products are probably more readily available than in years past from sources
significantly less expensive than Honduras. Even though the Company enjoys a
significant advantage in production cost at its Honduran facility relative to
domestic cost, such countries, for example, as Indonesia or China seem to have
even greater advantages.
As another means of increasing WHCC sales, other than the efforts discussed
above, the Company converted some products from it domestically produced product
line to the WHCC line. An English bedroom and a quantity of occasional furniture
items, which in the past were included in the domestic product line have been
switch to Honduran production and the sales of these products were included in
the fiscal year 2000 revenues. Management believes these items are being sold at
lower price but at higher margins
-28-
<PAGE>
This switch in product accelerated the decline in the level of the
Company's domestic production activities which contributed most heavily to the
losses reported the last three years. By the end of fiscal year 2000, the
domestic facility has essentially become a facility to receive, deluxe, package,
warehouse and distributed products both from the Honduran facility and from
other foreign sources discussed above. Considerable effort is being made to
bring the domestic operating costs and overheads down to a level such that the
remaining domestic production, WHCC sales, and Wellington Hall Export sales will
absorb these cost and return the Company to profitability.
To reduce inventories and to generate operating funds, the Company has sold
inventories deemed to be slow moving, of unacceptable quality or discontinued
product at highly discounted prices. In fiscal year 1999, the Company ended its
association with a furniture clearance center where by this inventory was sold
at highly discounted prices which negatively effected operation cost. In the
first quarter of fiscal year 2000, the Company stopped the using of "Tent" sales
held at the Lexington facility to raise operating capital by selling inventory
at highly discounted prices. To expand sales and revenues, the Company opened a
"Factory Outlet" where by products are sold to the public generally at wholesale
prices or at discounted prices within the available margins. The outlet is
operated as Palmetto Furniture Gallery (PFG), housed in the Lexington facility,
operating expense charged to the Company, and manned by Company personnel. The
consolidated revenues include the sales generated by PFG (see above). In fiscal
year 1999, these inventory sales accounted for approximately $182,578 to the
consolidated loss versus a small profit contribution in fiscal year 2000 of
$5,291. The outlet will continue to operate during the upcoming fiscal year.
The Company's firm backlog of orders on April 30, 2000 was approximately
$1,876,566 down from its backlog of $2,342,513 on April 30, 1999. The April 30,
2000 backlog included $763,498 of domestically-manufactured products, as opposed
to $1,191,649 included in the 1999 backlog. The backlog for WHCC and
Honduran-produced products, less inter company orders, was $780,936 on April 30,
2000 versus $552,148 on April 30, 1999. The April 30, 2000 backlog included
$332,132 of imported products, from sources other than Honduras, as opposed to
$552,794 included in the 1999 backlog.
Cost of sales decreased approximately $277,482 to about $979,131 for the
fourth quarter and decreased about $660,903 to about $3,916,596 for the fiscal
year ended April 30, 2000. For the quarter the Cost of Sales were about 80.2% of
sales down from about 86.96% the previous year. For the fiscal year the Cost of
Sales as a percent of sales were about 72.6% down from about 80% for fiscal year
1999. The primary reasons for the decline in Cost of Sales were:
(i) The decline in the cost of highly discounted inventory during fiscal
2000 versus those sold the previous year as discussed above.
(ii) Lower cost of good sold for Honduran produced goods
(iii) The addition sales of products from off shore sources other than
Honduras which have lower cost as a percent of sales relative to the declining
sales of domestically produced goods which have a higher cost.
Reported revenues and cost of goods sold as a percentage of sales have been
affected by changes in the Company's prices on those products distributed
through retailers. The prices for domestically produced product were increased,
effective August 15, 1999, by about 5 to 6% to improve margins on that portion
of the company's product lines. Prices for Honduran produced products were
increased about 6% affective on April 15, 1999 and on April 15, 2000.
Selling, general and administrative expenses declined in the fourth
quarterly by about $80,204 to about $203,694 and about 17.3 % percent of
revenues and were down about $96,613 during the year to about $1,200,914 and
represent about 22.2% of revenues. The decline in these cost for the fiscal year
reflect lower sales commission on lower sales, voluntary salary reductions for
management. These reduction will continue at least for the upcoming first
quarter of fiscal 2000 ending July 31, 2000. The fourth quarter decline also
included certain over accrued expense which will not be reflected in future
results.
Interest expenses of approximately $98,513 for the fiscal fourth quarter
represent a increase of about $12,000 versus that paid during the previous year
fourth quarter. For the fiscal year 1999, interest expenses were about $372,704
versus about $403,159 in fiscal year 1999, down about $30,455 over the prior
year as a result mostly of a slight decline in short term foreign debt with high
interest rates (See discussion above).
For the the fiscal quarter ended April 30, 2000, operating income (earnings
before interest and taxes) was a about $84,513 compared to a loss of
approximately ($81,194) for quarter ended April 30, 1999. For the fiscal year
ended April 30, 2000, the operating income was $286,666 versus the previous
year's loss of about ($151,936). The net loss for the fourth quarter was about
($11,441), (0.0) cents per share versus a loss of about ($127,397) or ($.02)
cents per share for the previous years fourth quarter, while for the fiscal year
there is a net loss of ($93,917) or ($.02) per share, compared to a net loss of
($573,387) or ($.25) per share for the prior year, fiscal 1999.
The net loss reported in the fourth quarter and fiscal year ended April 30,
2000 are a result generally of slow sales, the company's limited operating
capital and relatively high level of indebtedness. Because of the slow sales and
and to avoid increasing inventories, it was necessary, during most of the year,
to reduce production volumes, primarily assembled production, in the Company's
domestic facility and foreign operations to levels below that required to manage
labor and overhead cost. In addition, the Company sold off inventories at
essentially break-even prices to generate cash to cover the operating loss and
to finance continued operations.
-29-
<PAGE>
The Company's auditing firm expressed that in their opinion there is
substantial doubt about the Company and its subsidiaries to continue as a going
concern. (See the Independent Auditors Report and note 20 in the consolidated
financial statements). For the Company to continue to operate, sales and profits
must increase to a level whereby indebtedness can be repaid as scheduled and the
oustanding OPIC loan principal balance is repaid on or before October 31, 2000.
To increase sales, the company will need more operating funds. To generate
operating funds the Company will need to raise capital or sell part of its
assets. To repay OPIC by October 31, 2000 the company will need to raise capital
or refinance the outstanding principal..
The Company does not believe it can expect to raise capital through some
common channel because of its recent history of sales and profits even though
results improved materially in fiscal year 2000. Therefore, the most likely
avenue is to sell certain assets. The sell of the Company's Honduran facility,
or arrange an outside investment in that facility, has been discussed from time
to time and over the last twelve months with a number of potentially interested
entities but no material commitment has been received by the Company. The
Company believes that the value of that facility exceeds all the Company's
indebtedness and possibly all it's liabilities. The Company prefers a buyer
which would continue to sale the Company it's products for marketing and
distribution to its established customers.
The Lexington operations, domestic operations, could be sold and, though
discussion have occurred from time to time over the last twelve months with
potential buyers, there has been no material commitment received by the Company.
The Company believes that the value of that facility and operations exceeds all
the Company's indebtedness and possibly all it's liabilities. If the Company
sales the domestic operations it would represent a change of ownership and the
Company would continue to operate the Honduran facility. The Company believe
that a potential buyer would continue to purchase there products from the
Honduras facility.
The Company has considered proposing the sale of its public corporate shell
by taking the Company private. Thought this action would not raise significant
capital, considerable expense would be eliminated. The Company has not received
a material commitment on a sale of the corporate shell.
The OPIC (see discussion above) loan and Forbearance Agreement terminate on
October 31, 2000 and the Company intends to take all possible actions to
repaying the loan on or before that date. In addition to finding a buyer or
investor discussed above, the possibility of refinancing the loan is being
presently being pursued. The Company has not received a material commitment form
a lender on refinancing the loan.
Sales of foreign produced products and Honduran produced products
demonstrated adequate margins for profitability in fiscal year 2000. In fiscal
year 2001 and in addition to the established products, the Company expects to
expend the product line from foreign source and to secure the production of its
products manufactured domestically in the past from foreign sources. Those
products manufactured domestically in the past are expected to be purchased at a
price which will in many situations allow the reduction of wholesales prices and
an improvement in the margins on their sale. If the Company can finance these
purchases in quantities to maintain a reasonable level of sales it could return
to profitability in fiscal year 2001 ending April 30, 2001.
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
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.
-30-
<PAGE>
TURLINGTON AND COMPANY, L.L.P.
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Wellington Hall, Limited and Subsidiaries
Lexington, North Carolina
We have audited the accompanying consolidated balance sheets of Wellington Hall,
Limited and Subsidiaries as of April 30, 2000 and 1999, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of Wellington Hall, Limited and Subsidiaries' management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of
Muebles Wellington Hall, S. A., a wholly-owned subsidiary, which statements
reflect total assets of $1,308,735 and $1,325,651, respectively, as of April 30,
2000 and 1999, and total revenues of $2,041,637 and $2,071,637, respectively,
for the years ended April 30, 2000 and 1999. These statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Muebles Wellington Hall, S. A., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wellington Hall, Limited and
Subsidiaries as of April 30, 2000 and 1999 and the results of their operations,
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern. Management's plans in
regard to that matter also are described in Note 20. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
July 7, 2000
-31-
<PAGE>
KPMG PEAT MARWICK ASESORES, S. de R.L.
Auditoria, Consultoria e Impuestos
Apartado 3398, Tequcigalpa Apartado 257, San Pedro Sula
Honduras, C.A. Honduras, C.A.
Telefono: 232-2806, 232-5907 Telefono: 553-3545, 553-0146
Telefax: 232-5925 Telefax: 552-2223
E-Mail: [email protected] E-Mail: [email protected]
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
MUEBLES WELLINGTON HALL, S.A. DE C.V.:
We have audited the accompanying balance sheets of Muebles Wellington Hall, S.A.
de C.V., San Pedro Sula, Honduras, as of April 30, 2000 and 1999 and the related
statements of earnings (loss), retained earnings and cash flows for the years
then ended. Such financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits
We conducted our audits in accordance with generally accepted auditing standards
in Honduras. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, in a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Muebles Wellington Hall, S.A.,
de C.V., as of April 30, 2000 and 1999 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles in Honduras.
/s/ KPMG
July 7, 2000
-32-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30
2000 1999
------------ ------------
ASSETS
Current assets:
<S> <C> <C>
Cash $ 4,541 $ 49,938
------------ ------------
Accounts receivable:
Trade 692,423 617,191
Less, allowance for doubtful accounts (63,843) (63,843)
Inventories 3,310,191 3,587,043
Prepaid expenses 66,795 47,224
Deferred income taxes 22,145 19,476
------------ ------------
4,032,252 4,257,029
------------ ------------
Property and equipment:
Cost 1,992,189 1,976,882
Less accumulated depreciation 1,298,671 1,244,920
------------ ------------
693,518 731,962
------------ ------------
Other assets:
Deferred income taxes 104,366 101,329
Other 299 8,352
------------ ------------
104,665 109,681
------------ ------------
$ 4,830,435 $ 5,098,672
============ ============
LIABILITIES
Current liabilities:
Current maturities on long-term debt $ 953,918 $ 969,438
Notes payable - other 458,219 433,994
Accounts payable - trade 494,293 597,672
Customer deposits 68,457 91,828
Other current liabilities 172,108 308,500
------------ ------------
2,146,995 2,401,432
------------ ------------
Noncurrent liabilities:
Long-term debt, less current maturities
(including $80,000 due to officer) 1,420,463 1,386,658
Deferred compensation accrual 312,000 288,000
------------ ------------
1,732,463 1,674,658
------------ ------------
3,879,458 4,076,090
============ ============
STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares; no par;
shares issued and outstanding for 2000 and 1999 -
3,823,220 and 3,623,220, respectively 3,811,531 3,754,531
Preferred stock; authorized 5,000,000 shares; $5 par;
no shares issued and outstanding for 2000 and 1999 -0- -0-
Accumulated other comprehensive income (loss) (1,949,086) (1,914,398)
Retained earnings (deficit) (911,468) (817,551)
------------ ------------
950,977 1,022,582
------------ ------------
$ 4,830,435 $ 5,098,672
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
-33-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STOCKHOLDERS' EQUITY
Years Ended April 30
2000 1999
----------- -----------
Common stock:
Authorized 6,000,000 shares; no par:
Balances, beginning of years $ 3,754,531 $ 3,354,531
Shares issued during the years 57,000 400,000
----------- -----------
Balances, end of years 3,811,531 3,754,531
----------- -----------
Preferred stock:
Authorized 5,000,000 shares; $5 par; issued and
outstanding beginning and end of years -0- -0-
----------- -----------
Accumulated other comprehensive income (loss):
Balances, beginning of years (1,914,398) (1,870,875)
Changes during the years (34,688) (43,523)
----------- -----------
Balances, end of years (1,949,086) (1,914,398)
----------- -----------
Retained earnings (deficit):
Balances, beginning of years (817,551) (244,164)
Net loss for the years (93,917) (573,387)
----------- -----------
Balances, end of years (911,468) (817,551)
----------- -----------
$ 950,977 $ 1,022,582
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-34-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended April 30
2000 1999
----------- -----------
Revenue:
Sale of furniture $ 5,395,680 $ 5,721,206
Other income 8,496 1,884
----------- -----------
5,404,176 5,723,090
----------- -----------
Costs and expenses:
Cost of goods sold 3,916,596 4,577,499
Selling, general, and administrative expenses 1,200,914 1,297,527
Interest expense 372,703 403,159
----------- -----------
5,490,213 6,278,185
----------- -----------
Loss before income tax expense (benefit) (86,037) (555,095)
Income tax expense (benefit) 7,880 18,292
Net loss for the years $ (93,917) $ (573,387)
=========== ===========
Earnings (loss) per share of common stock:
Basic and diluted:
Net loss for the years $ (.02) $ (.25)
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-35-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended April 30
2000 1999
----------- -----------
Net loss for the years $ (93,917) $ (573,387)
Other comprehensive income (loss) -
net of changes during years:
Foreign currency translation adjustments (34,688) (43,523)
----------- -----------
Comprehensive loss for the years $ (128,605) $ (616,910)
=========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
-36-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended April 30
2000 1999
Cash flows from operating activities:
Net loss for the years $ (93,917) $(573,387)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation 65,222 82,697
Amortization 0 22,070
Adjustment for allowance for fringe benefits 0 (46,039)
Deferred compensation 24,000 24,000
Allowance for slow-moving inventory (134,283) 75,613
Deferred income taxes (5,705) 5,046
Changes in assets and liabilities:
Accounts receivable (78,212) 102,508
Note receivable - officer 0 12,605
Inventories 373,418 296,317
Prepaid expenses (19,827) 31,829
Other assets 782 3,339
Accounts payable, customer deposits,
and other current liabilities 256,661 41,406
--------- ---------
Net cash provided by operating activities 118,144 78,004
--------- ---------
Cash flows from investing activities:
Purchase of equipment 0 (11,845)
--------- ---------
Cash flows from financing activities:
Long-term borrowings 389,387 --
Payments on long-term debt (83,271) (125,192)
Payments on short-term debt (256,412) (316,179)
Proceeds from issuance of stock 57,000 400,000
--------- ---------
Overseas Private Investment Corporation
note deferred interest 12,397 --
Net cash provided by (used for) financing activities 119,101 (41,371)
--------- ---------
Effect of exchange rate changes on cash (6,545) (7,364)
Net increase (decrease) in cash (45,397) 17,424
Cash, beginning of years 49,938 32,514
--------- ---------
Cash, end of years $ 4,541 $ 49,938
--------- ---------
Cash paid during the years for:
Income taxes $ 25,974 $ -0-
--------- ---------
Interest $ 357,645 $ 417,553
--------- ---------
The accompanying notes are an integral part of the
consolidated financial statements
-37-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of
and for the Years Ended April 30, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements were prepared on the basis of generally
accepted accounting principles. The more significant of these principles are
described as follows:
Inventories are stated at the lower of cost or market with cost computed by use
of the first-in, first-out method. Provision has been made for obsolete and
slow-moving inventory.
Property and equipment is carried at cost less accumulated depreciation. New
assets and expenditures which substantially increase the useful lives of the
existing assets are capitalized. Maintenance and repairs are expensed as
incurred. Depreciation is computed by use of the straight-line method over the
estimated useful lives of the assets.
Earnings (loss) per share is computed by dividing net income (loss) by the
weighted average shares outstanding and diluted share equivalents outstanding.
Revenue from sales is recognized when materials are shipped to the customers.
The consolidated financial statements include the accounts of Wellington Hall,
Limited and its wholly-owned subsidiaries, Wellington Hall Caribbean Corp.,
Muebles Wellington Hall, S. A., and Palmetto Furniture Galleries, Inc.
(hereinafter referred to collectively as the Company). All intercompany accounts
and transactions have been eliminated in consolidation. Muebles Wellington Hall,
S. A. was formed during the year ended April 30, 1990, and Palmetto Furniture
Galleries, Inc. was formed during the year ended April 30, 1998. Both of these
subsidiaries were accounted for as purchases.
The financial statements of foreign subsidiaries have been translated into U. S.
dollars in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52. All balance sheet accounts have been translated using the current
exchange rates at the balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. Adjustments resulting
from the changes in exchange rates during the years are included in accumulated
other comprehensive income, a separate component of stockholders' equity.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
2. NATURE OF OPERATIONS AND CONCENTRATION OF CREDIT RISK:
Wellington Hall, Limited and its subsidiary, Muebles Wellington Hall, S. A., are
manufacturers of wall systems, dining room, bedroom, and accent and occasional
furniture, with plant facilities located in Lexington, North Carolina and San
Pedro Sula, Honduras. The accent and occasional furniture accounts for
approximately 50% of the Company's total sales. The remaining 50% of total sales
is split about evenly over the other three product lines. Wellington Hall
Caribbean Corp. is a sales organization located in Lexington, North Carolina
responsible for selling Muebles Wellington Hall, S. A.'s products to both the
general public and Wellington Hall, Limited. Palmetto Furniture Galleries, Inc.
is also a sales organization located in Lexington, North Carolina responsible
for selling second quality furniture of both manufacturing affiliates. The
Company grants credit to customers who are located primarily in the U. S.
The Company's policy is to maintain its cash balances in reputable financial
institutions insured by the Federal Deposit Insurance Corporation which provides
$100,000 of insurance coverage on each customer's cash balances. At times during
the years, the Company's cash balances may have exceeded $100,000. Management
believes that this policy will not cause any adverse effect to the Company.
-38-
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTE RECEIVABLE - OFFICER:
On January 30, 1992, Hoyt Hackney, President and Chief Executive Officer,
exercised options and awards for 180,000 shares of common stock at the option
price of $.80 per share resulting in a net increase in common stock of $144,000.
This increase was accomplished by cash of $40,000 being paid over to the Company
along with the issuance of a demand note to the Company by Hoyt Hackney of
$104,000. The note receivable - officer was collateralized by the assignment of
the interest the officer has in the Company's deferred compensation accrual
account and bears interest at the federal rate as issued from time to time. This
note was paid in full during the year ended April 30, 1999.
4. INVENTORIES:
Inventories consisted of the following:
2000 1999
----------- -----------
Finished goods $ 1,657,096 $ 2,098,895
Work-in-process 1,110,293 1,180,069
Raw materials 550,519 450,079
----------- -----------
3,317,908 3,729,043
(7,717) (142,000)
----------- -----------
$ 3,310,191 $ 3,587,043
=========== ===========
5. PROPERTY AND EQUIPMENT:
The major classes are as follows:
2000 1999
---------- ----------
Land and buildings $1,111,590 $1,114,568
Machinery and equipment 733,675 716,292
Furniture, fixtures, and other equipment 146,924 146,022
---------- ----------
$1,992,189 $1,976,882
========== ==========
Depreciation expense for the years ended April 30, 2000 and 1999 amounted to
$65,222 and $82,697 respectively.
6. NOTES PAYABLE - OTHER:
Notes payable - other consisted of the following
2000 1999
---- ----
Banco La Capitalizadora Hondurena, S. A
Interest rates from 27% to 30%, secured by
second mortgage on fixed assets and a lien on
inventories of Muebles Wellington Hall, S. A $141,061 $321,737
Banco de Honduras, S. A
Interest rates from 27% to 30%, secured by
inventories and a third mortgage on
certain machinery and equipment of
Muebles Wellington Hall, S. A 77,158 112,2571
-39-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Lexington State Bank - Line of Credit Interest
rate prime plus .75% (9.75% at April 30, 2000),
secured by substantially all of the Company's
assets, payable in full June 16, 2000 240,000 --
$ 458.210 $ 433,994
========= =========
On June 16, 1999, Wellington Hall, Limited refinanced certain of its short-term
notes payable to long-term. In accordance with SFAS No. 6, these short-term
loans have been classified as long-term on the Company's Consolidated Balance
Sheets and are more fully described in Note 7 below.
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
2000 1999
---- ----
E. Kemm
Interest payable monthly at 1% above prime $ 25,000 $ 25,000
Interest payable monthly at 1 1/2% above prime
due in full May 31, 2001 55,000
Overseas Private Investment Corporation
Interest rate 10.00%, payable in quarterly
installments of $30,969 plus interest through
April 30, 1998. Beginning July 31, 1998,
quarterly installments increase to $61,937
plus interest with a balloon payment due
October 1999 838,876 826,479
Lexington State Bank
Interest rate prime plus .75% (9.75% at
April 30, 2000) payable in monthly
installments of $19,000 including interest 1,455,505 1,204,617
Lexington State Bank
Interest rate prime plus .75% _______ 300,000
2,374,381 2,356,096
Less, current maturities 953,918 969,438
$1,420,463 $1,386,658
========== ==========
The weighted average interest rate paid E. Kemm amounted to 10.0% for the years
ended April 30, 2000 and 1999
E. Kemm is a stockholder and an officer of the Company.
The Overseas Private Investment Corporation loan is secured by a first lien on
all real estate and all current and future fixed assets of Muebles Wellington
Hall, S. A. and a security interest in the Sales Agreement between Muebles
Wellington Hall, S. A. and Wellington Hall Caribbean Corp.
On May 1, 2000, the Company entered into an agreement with OPIC whereby OPIC
agrees to forbear 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 and interest in full on October 31, 1999 as required by the loan
agreement. In consideration of this forbearance, the Company shall
-40-
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
a) Pledge to OPIC all the shares of Muebles Wellington Hall, S.A. by July
31, 2000.
b) Make quarterly interest payments at the default rate as specified in the
loan agreement.
c) Exercise its best efforts to sell Muebles Wellington Hall, S.A.. at a
price sufficient to repay the OPIC debt, and agrees to cooperate with OPIC or a
broker OPIC may identify to assist in the sale.
At April 30, 2000, the Company had accrued interest at the default rate (an
additional 3%) from October 31, 1999 to April 30, 2000 and added this amount to
the loan principal.
The Lexington State Bank loans are secured by a first lien on all assets of
Wellington Hall, Limited.
The projected payments of long-term debt in each of the years subsequent to
April 30, 2000 are:
Year Ending April 30 Amount
2001 $ 953,918
2002 1,420,463
8. STOCK OPTION PLAN:
On February 10, 1997, the Board of Directors approved the Wellington Hall,
Limited 1997 Stock Option and Restricted Stock Plan (the Plan). The Plan has a
term of ten years, expiring on February 9, 2007. Under the Plan, the Company may
grant options or restricted stock awards to key employees, officers, or
directors for up to an aggregate of 1,200,000 shares of common stock, with no
individual receiving more than 600,000 shares. The price of the shares issued
under the Plan is to be determined at the time of the grant, not to be below
100% of the fair market value of the common stock at the time of the grant. The
Plan was approved by the stockholders of the Company at the October 1, 1997
annual stockholders' meeting. At April 30, 2000, no options or stock awards had
been granted.
9. CAPITAL STOCK AND CAPITAL STRUCTURE:
The Company, in accordance with its long-term loan agreement and line of credit
with Lexington State Bank, is restricted from paying dividends on its capital
stock without prior written consent of the Bank.
All shares of capital stock represent voting shares.
During the year ended April 30, 1999, the Company issued an additional 1,333,333
shares of common stock at $.30 per share to an existing officer/stockholder.
During the year ended April 30, 2000, the company entered into an agreement with
Furniture Classics, Ltd. whereby, in return for certain exclusive rights to
market and distribute certain of Furniture classics, Ltd.'s products, the
Company has granted common stock warrants to Furniture Classics, Ltd. The
agreement provided for the granting of warrants at specific prices ranging from
$.27 per share to $.53 per share and expiring on specific dates over the next
two fiscal years. Furniture Classics, Ltd exercised its right to purchase
100,000 shares at $.27 per share and 100,000 shares at $.30 per share during the
fiscal year ended April 30, 2000. Additionally, as a part of the agreement, the
Company agreed to and did appoint one representative from Furniture Classics,
Ltd to its Board of Directors.
10. INCOME TAXES:
At April 30, 2000, Wellington Hall, Limited and Subsidiaries had federal net
operating losses of $1,996,724 and state net operating losses of $2,304,497
available to offset future tax liabilities, if any.
Generally, the federal losses may be varied forward for fifteen years and North
Carolina losses may be carried forward for five years. Effective for years
beginning January 1, 1999, North Carolina laws were amended to increase the
number of years a net operating loss may be carried forward to fifteen years.
The change applies to losses incurred in tax years beginning on or after January
1, 1993 and limits a loss that is more than fifteen years old to 15% of taxable
income before the remaining portion may be carried forward. For years beginning
January 1, 2002, the percentage limitation is repealed. Additionally, for losses
incurred in 1998 and after, federal net operating losses may be carried forward
for twenty years.
-41-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the company's deferred tax assets and liabilities are as follows:
2000 1999
---- ----
Deferred tax assets:
Book over tax depreciation $ 5,509 $ 17,411
Book allowance for inventory 2,980 30,051
Book allowance for doubtful accounts 22,145 19,476
Tax over book inventory 25,727 33,281
Deferred compensation 120,494 111,715
State net operating loss carryforward 174,900 129,838
Federal net operating loss carryforward 619,420 543,467
--------- ---------
971,175 885,239
Valuation allowance for deferred tax assets (844,664) (764,434)
--------- ---------
Net deferred tax assets $ 126,511 $ 120,805
========= =========
Due to certain conditions, the valuation allowance was increased by $80,230 and
$276,150 respectively, during the years ended April 30, 2000 and 1999.
Classification on the Company's Consolidated Balance Sheets is as follows:
2000 1999
---- ----
Current asset $ 22,145 $ 19,476
Noncurrent asset
-104,366 101,329
--------- ---------
$ 126,511 $ 120,805
========= =========
There follows a reconciliation of the income taxes per the income tax returns
with the income tax expense (benefit) per the Consolidated Statements of Income:
2000 1999
---- ----
Amounts shown by returns (net) $ 13,585 $ 13,246
Deferred income taxes (5,705) 5,046
$ 7,880 $ 18,292
--------- ---------
Effective income tax rates 9.2% 3.3%
========= =========
No provision has been made for U. S. income taxes on unremitted earnings of the
foreign subsidiary (approximately $261,057 and $146,638, respectively) at April
30, 2000 and 1999, since it is the present intention of management to
indefinitely reinvest these earnings.
The components of income (loss) before income taxes are as follows:
2000 1999
---- ----
Domestic ($212,704) ($558,350)
Foreign
--
126,667 3,255
--------- ---------
($86,037) ($555,095)
========= =========
-42-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Federal, foreign, and state income tax expense (benefit) consisted of the
following:
2000 1999
---- ----
Federal ($ 4,534) $ 3,317
Foreign -0- -0-
State $ 12,414 14,975
--------- ---------
$ 7,880 $ 18,292
--------- ---------
The following schedule reconciles the differences between the U. S. federal
income tax rate and the effective tax rate:
2000 1999
---- ----
Tax computed at the U. S. federal rate 34.0% 34.0%
Deferred income taxes ( 5.2) .6
Nondeductible expenses and benefit of
domestic net operating loss ( 34.0) ( 34.0)
State income taxes, net 14.4 2.7
--------- ---------
9.2% 3.3%
11. LEASES:
The Company leases showroom space under a five-year operating lease expiring in
April 2004.
The Company also leases office equipment under noncancelable leases expiring in
2000 through 2004.
Net minimum lease payments on the foregoing leases are as follows:
Years Ending April 30 Amount
--------------------- ------
2001 $ 68,003
2002 66,308
2003 63,128
2004 61,318
$ 258,757
Net lease expenses of the foregoing leases for the years ended April 30, 2000
and 1999 were $108,646 and $98,621, respectively.
12. CONTINGENT LIABILITIES:
In accordance with the Honduran Labor Code, the Company has the obligation to
pay severance compensation to its employees in the event of dismissal under
certain specific circumstances. It is the policy of the Company to pay such
severance payments in accordance with the Law. At April 30, 2000 and 1999, the
estimated contingent liability aggregated approximately $359,897 and $325,352,
respectively.
On June 26, 1998, the Board of Directors of Wellington Hall Caribbean Corp.
voted to pursue the sale of its Honduran subsidiary, Muebles Wellington Hall, S.
A.
13. EARNINGS PER SHARE:
During the year ended April 30, 1998, Wellington Hall, Limited and Subsidiaries
adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires entities to
present basic earnings per share computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
(3,7814,553 shares in 2000 and 2,315,458 shares in 1999).
-43-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Earnings Per Share (Continued)
As discussed in Note 9 to the consolidated financial statements, the Company has
issued common stock warrants allowing the purchase of 500,000 shares at prices
ranging from $ .27 to $ .53 per share. Under SFAS No. 128, these warrants would
be considered diluted share equivalents if the warrants allowed for the purchase
of stock at a price lower than market. The market price of the Company's stock
during the period was well below that stated in the warrants, and the warrants
are, therefore, considered antidilutive and disregarded for the purposes of
computing diluted earnings per share . 14. INCENTIVE PLAN: The Company has an
Incentive Plan covering certain officers and key employees who have the greatest
opportunities to contribute to current earnings and the future success of the
Company's operations. The amount determined under the Incentive Plan is based
upon profits of the Company.
On January 1, 1987, the President of the Company executed a new employment
contract and forfeited his rights under the Incentive Plan as one of the
conditions of the new contract.
15. DEFERRED COMPENSATION AGREEMENT: On May 8, 1987, the Company adopted a
Deferred Compensation Agreement with the President of the Company which will
provide for the payment of $50,000 per year for 10 years in monthly installments
when the President reaches age 62 and retires. The Agreement provides that if he
dies before he has received the total payments or if he dies before retirement,
then his beneficiary shall receive the benefit balance thereof in monthly
installments. In future years, the deferred compensation will be accrued over
the remaining term of service by the President on a present value basis. The
accruals for the years ended April 30, 2000 and 1999 were $24,000 each year.
At the April 19, 1999 meeting of the Board of Directors, the Board approved an
amendment to this Deferred Compensation Agreement. This amendment changes the
annual payment under the Agreement to $20,000 per year not to begin prior to May
1, 2000. In exchange for the $30,000 decrease in the annual payment, the
President is to receive 1,000,000 shares of the Company's stock. This amendment
is to take effect at such time as it is executed by the officers of the Company
and its President. At the date of the audit, the Agreement amendment had not yet
been executed.
16. PROFIT SHARING PLAN:
During the year ended April 30, 1987, the Company adopted a combined Profit
Sharing and Salary Reduction Plan. The Company contributes 50% of the employee
contributions with a 2% maximum Company contribution on each employee's salary.
The Plan also has a feature whereby the Directors can set aside certain profits
as determined annually by the Directors. The Profit Sharing and Salary Reduction
Plans are tax exempt under applicable sections of the Internal Revenue Code. The
contributions by the Company for the years ended April 30, 2000 and 1999 were
$3,342 and $7,572, respectively.
17. QUARTERLY FINANCIAL DATA - UNAUDITED:
The following is a summary of the quarterly results of operations for the years
ended April 30, 2000 and 1999:
<TABLE>
<CAPTION>
Earnings (Loss) Per Share of Common Stock
Quarter Net Sales Gross Profit (Loss) Net Income (Loss) (Basic and Diluted)
Ended 2000 1999 2000 1999 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
July 31 $1,489,569 $1,556,520 $ 412,459 $ 400,925 ($ 11,280) ($ 62,717) ($ 0.02)
October 31 1,264,150 1,351,361 427,356 308,897 ( 64,130) ( 183,809) ( 0.02) (0.08)
January 31 1,420,533 1,376,578 307,332 246,553 ( 6,563) ( 204,464) ( 0.05)
April 30 1,221,428 1,436,747 331,937 187,332 ( 11,944) ( 122,397) ( 0.06)
$5,395,680 $ 5,721,206 $1,479,084 $1,143,707 ($ 93,917) ($ 573,387) ( 0.02) ($0.25)
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires
that the Company disclose estimated fair values for its financial instruments.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
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<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. Quarterly Financial Data - Unaudited: (continued)
Cash:
The carrying amount approximates fair value.
Notes payable - other:
Due to the fact that these are short-term notes payable within one year, the
carrying amount approximates fair value.
Long-term debt:
The fair value of long-term debt is estimated based on the current rates the
Company could obtain on debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments are as follows:
2000 1999
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Cash $ 4,541 $ 4,541 $ 49,938 $ 49,938
Notes payable - other 458,219 458,219 433,994 433,994
Long-term debt 2,374,381 2,374 381 2,356 096 2,356
096
19. RELATED PARTY TRANSACTIONS:
During the year ended April 30, 2000, the Company purchased inventory totaling
$195,941 from Furniture classics, Ltd., a stockholder whose president also
serves on the Company's Board of Directors.
20. GOING CONCERN CONSIDERATIONS: As reflected in the accompanying consolidated
financial statements, the Company incurred a $93,917 loss in the year ended
April 30, 2000 and a $573,387 loss in the year ended April 30, 1999. The
Company's gross profit percentage increased from 20% in the year ended April 30,
1999 to 27% in the year ended April 30, 2000. While this increase is
encouraging, the Company's lines of credit and short-term borrowings were at
near maximum levels at April 30, 2000 and 1999, and cash balances were very low.
A final balloon payment of the remaining principal on the Company's loan with
(OPIC) is due in October 1999 and was not paid.
Management is continuing to develop new product lines with a concentration in
higher volume items which should result in lower costs. Management also plans to
continue to cut costs at its domestic manufacturing facility and increase
production at its foreign manufacturing facility where costs are less. According
to its agreement with OPIC, the Company will exercise its best effort to sell
Muebles Wellington Hall, S.A.
21. STATUTORY RESERVE:
According to the Commercial Code of the Republic of Honduras, the statutory
reserve must be constituted annually appropriating at least 5% of the periods
earnings until it reaches 20% of capital stock. The statutory reserve, which is
included in retained earnings, amounted to $23,558 at April 30, 2000 and 1999.
22. SEGMENT INFORMATION:
The Company's reportable segments are strategic business units that offer
different services or are geographically integrated. They are managed in
different ways because each requires different marketing strategies or is in a
different geographical area.
WHOLESALE - Wellington Hall, Limited and Wellington Hall Caribbean Corp. engage
in the wholesale marketing and sales of fine furniture. Wellington Hall, Limited
manufactures much of the furniture that it sells, and Wellington Hall Caribbean
Corp. purchases the furniture that it sells from its wholly-owned subsidiary.
RETAIL - Palmetto Furniture Galleries, Inc. engages in the retail sales of any
second quality furniture manufactured by its affiliates.
-45-
<PAGE>
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. Segment Information: (continued)
Foreign - Muebles Wellington Hall, S. A., a company wholly-owned by Wellington
Hall Caribbean Corp., is engaged in the manufacturing of fine furniture and
components at its facilities in San Pedro Sula, Honduras. Recently, all of its
sales have been to its sole owner.
Wholesale Retail Foreign
Eliminations Consolidated
Sales revenues 2000 $5,136,771 $258,909 $5,395,680
1999 5,506,934 214,272 5,721,206
Affiliated revenues 2000 303,265 $2,035,681 ($2,338,946)
1999 1,271,812 2,071,637 (3,343,449)
Depreciation and 2000 29,067 36,155 65,222
amortization 1999 49,071 55,696 104,767
Interest income 2000 528 528
1999 32,082 (31,554) 528
Interest expense 2000 260,617 112,086 372,703
and other 1999 251,562 183,151 (31,554)
403,159
Income tax expense 2000 7,880 7,880
1999 18,292 18,292
Net income 2000 (218,386) 5,291 126,667
(7,489) (93,917)
1999 (328,182) (182,578) 5,767
(68,394) (573,387)
Total assets 2000 7,867,563 414,233 1,308,376
(4,759,737) 4,830,435
1999 7,272,490 261,725 1,325,651
(3,761,194) 5,098,672
Capital expenditures 2000 39,809 39,809
1999 11,849 11,845
Other Geographic Information - Sales to unaffiliated customers:
2000 1999
United States $ 5,266,440 $ 5,321,467
Japan 129,240 393,053
Republic of Korea 6,686
$ 5,395,680 $ 5,721,206
=========== ===========
-46-
<PAGE>
OFFICERS AND DIRECTORS
OFFICERS
Hoyt M. Hackney, Jr. Ralph L. Eskelson, Jr.
President and Treasurer General Manager
Muebles Wellington Hall, S.A.
Ernst B. Kemm William W. Woodruff
Executive Vice President Secretary
DIRECTORS
Donald W. Leonard William W. Woodruff
Chairman of the Board President of Woodruff Shoe Store
Hoyt M. Hackney, Jr. Ernst B. Kemm
President and Treasurer Executive Vice President
Arthur F, Bingham
Senior Executive Vice President
TRANSFER AGENT
Continental Stock Transfer and Trust Company
-47-
