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FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
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For the quarterly period ended October 31, 1996
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For the Transition period from to
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COMMISSION FILE NUMBER 0 3928
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Wellington Hall, Limited
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(Exact name of Registrant as specified in its charter)
North Carolina 56 0815012
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Route 1, U.S. Highway 29 and 70, Lexington, N.C. 27292
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(Address of principal executive offices)
(704) 249-4931
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(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
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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
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Common Stock 1,689,887 October 31, 1996
Traditional Small Business Disclosure Format:
YES X No
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Page 1 of 13 Pages
EXHIBIT INDEX (NONE -- No Exhibits Filed)
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheet - October 31, 1996 3
Consolidated Statements of Operations,
Three Months and Six Months Ended October 31,
1996 and 1995 5
Consolidated Statements of Changes in
Cash Flows - Six Months Ended October 31,
1996 and 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
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Wellington Hall Limited And Subsidiaries
Consolidated Balance Sheets
Quarter Ended Year Ended
October 31, April 30,
1996 1996
ASSETS
Current Assets:
Cash $ 30,475 $ 55,756
Accounts Receivables
Trade 881,442 756,872
Allowance For Bad Debt (43,800) (43,800)
Inventories 4,710,467 4,571,015
Note Receivable-Officer 27,908 27,908
Prepaid Expenses 159,121 134,076
Deferred Income Taxes 0 0
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Total Current Assets $ 5,765,887 $ 5,501,826
Deferred Income Taxes $ 108,864 $ 108,864
Property, Plant, and Equipment
Cost $ 2,124,318 $ 2,173,110
Less Accumulated Depreciation ($ 1,242,293) ($ 1,218,540)
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$ 882,025 $ 954,570
Other Assets $ 27,184 $ 27,626
Total Assets $ 6,794,595 $ 6,601,31
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Wellington Hall Limited And Subsidiaries
Consolidated Balance Sheet
Quarter Ended Year Ended
October 31, April 30,
1996 1996
LIABILITIES
Currrent Liabilities:
Current Maturities of L/T Debt $ 440,442 $ 347,755
Notes Payable, Banks $ 1,447,809 $ 1,415,698
Accounts Payable
Trade $ 454,768 $ 480,355
Sundry $ 63,858 $ 74,207
Customer Deposits $ 109,973 $ 74,139
Other Current Liabilites $ 239,381 $ 201,951
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Total Current Liabilities $ 2,756,231 $ 2,594,105
Noncurrent Liabilities:
Deferred Compensation Accrual $ 228,000 $ 216,000
Long-Term Debt, Less Current Maturities $ 1,269,335 $ 1,128,907
Total Liabilities $ 3,967,871 $ 3,939,012
STOCKHOLDERS' EQUITY
Common Stock; Authorized 6,000,000 $ 6,759,549 $ 6,759,549
Shares; No Par; Stated Value $4; Shares
Issued and Outstanding-1,689,887
Amount Less Than Stated Value Paid ($ 3,705,018) ($ 3,705,018)
For Common Stock ( Common Stock
Discount)
Paid In Capital $ 0 $ 0
Preferred Stock; Authorized 5,000,000
Shares; $5 Par; No Shares Issued
Or Outstanding
Retained Earnings $ 1,314,178 $ 1,277,715
Cumulative Translation Adjustments ($ 1,827,679 ($ 1,669,945)
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Total Stockholders' Equity $ 2,826,724 $ 2,662,301
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Total Liabilities & Equity $ 6,794,595 $ 6,601,313
Notes to consolidated financial statement are an internal part hereof.
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Wellington Hall Limited And Subsidiaries
Statement Of Operations
Three Months Ended Six Months Ended
October 31, October 31,
1996 1995 1996 1995
Revenues:
Sale Of Furniture $1,586,709 $1,614,388 $2,833,407 $3,087,862
Other Income $ 14,182 ($ 1,571) $ 16,321 $ 4,268
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Total $1,600,891 $1,612,817 $2,849,728 $3,092,130
Cost Of Furniture Sold $1,066,480 $ 1,095,47 $1,917,072 $2,077,217
Gross Profit $ 534,411 $ 517,341 $ 932,656 $1,014,912
Other Operating, Selling,General $ 382,962 $ 405,648 $ 702,561 $ 757,598
And Administrative Expenses
Income (Loss) From Operations $ 151,449 $ 111,694 $ 230,096 $ 257,315
Other Deductions:
Interest Expense-S/T $ 62,932 $ 56,733 $ 116,160 $ 110,930
Interest Expense-L/T $ 38,902 $ 40,253 $ 77,060 $ 80,926
---------- ---------- ---------- ----------
Total $ 101,834 $ 96,986 $ 193,220 $ 191,856
Income Before Taxes And $ 49,597 $ 14,707 $ 36,859 $ 65,459
Extraordinary Items
Income Taxes ($1,881) $ 1,346 $ 396 $ 7,342
Net Income $ 51,478 $ 13,361 $ 36,463 $ 58,117
Earnings (Loss) Per Share Of
Common Stock
Primary And Assuming Fully
Diluted
Income Before Extraordinary Item $ 0.03 $ 0.01 $ 0.02 $ 0.03
Extraordinary Item $ 0.00 $ 0.00 $ 0.00 $ 0.00
---------- ---------- ---------- ----------
Net Income (Loss) $ 0.03 $ 0.01 $ 0.02 $ 0.03
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Wellington Hall Limited And Subsidiaries
Statements of Cash Flow
Six Months Ended
October 31,
1996 1995
Cash Flow From Operating Activities
Net Income (Loss) For The Period $ 36,425 $ 58,565
Noncash Expenses (Income) Included
In Net Income
Depreciation $ 48,531 $ 63,374
Deferred Income Taxes $ 0 0
Deferred Copensation $ 12,000 12,000
Changes in Assets and Liabilities:
(Increase) Decrease In Accounts
Receivables, Net ($ 132,396) 31,175
(Increase) Decrease In Note Receivable $ 0 0
(Increase) Decrease In Inventories ($ 284,396) ($ 332,838)
(Increase) Decrease In Prepaid Expenses ($ 27,904) 36,248
(Increase) Decrease In Other Assets ($ 3,014) $ 2,960
Increase (Decrease) In Accounts
Payables, Customer Deposits And
Other Current Liabilities $ 44,843 101,112
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Net Cash Provided By (Used For) ($ 305,910) $ 27,404)
Operating Activities
Cash Flow From Investing Activities:
Purchase of Propert And Equipment ($ 28,748) $ 7,097)
Cash Flow From Financing Activities:
Proceeds From Long-Term Borrowing $ 237,148 ($ 82,171)
Proceeds From Short-Term Borrowing $ 58,016 97,229
Proceeds From Equity Capital $ 0 0
Net Cash Provided By Financing Activities $ 295,164 15,058
Effect Of Exchange Rate On Cash $ 20,093 9,908
Net Increase (Decrease) In Cash ($ 23,811) ($ 9,535)
Cash, Beginning Of Period $ 54,287 30,908
Cash, End Of Period $ 30,475 21,375
Cash Paid During The Period For:
Income Taxes $ 0 7,342
Interest $ 193,220 $ 191,856
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ITEM I. CONTINUED
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The results of operation for the three-month period ended October 31, 1996
and October 31, 1995, are not necessarily indicative of the results to be
expected for the full year.
3. Promotional expenses are charged in as incurred.
4. 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.
5. 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 12.59 Lempiras to 1 U.S. Dollar. Income statement amounts
have been translated using the weighted average exchange rate which for
the period was 12.22 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.
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Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Accounts receivables increased by approximately $125,000 since the
beginning of the fiscal year but increased almost $180,000 during the second
quarter ended October 31,1996 mostly as a result of an increase in sales during
that quarter versus the first fiscal quarter ended July 31, 1996 of about
$350,000 or twenty-eight percent (28%). The receivables represented a turnover
rate of about fifty-one days and represents an increase of about five day when
compared to the turn over rate reported at April 30, 1996.
Inventories increased by about $140,000 during the first six months of
the current fiscal year as a result of increased production at the Company's
Honduras facility with shipments there increasing significantly since early
July. The production out of that facility during the second quarter was
actually double that recorded for that period the previous year. Inventory in
transit to the Lexington N.C. facility at quarter's end were about $200,000
versus about $74,000 at year end April 30, 1996. The inventory of raw materials
and supplies in transit to the Honduran facility from Lexington N.C. at October
31, 1996 were about $52,000 versus versus about $5,000 on hand at April 30,
1996. These two categories of inventory mostly accounted for the increase in
the reported level of inventory. The reported inventory level of approximately
$4,710,000 at the second fiscal quarter's end were down about $252,000 from the
$4,962,000 reported at October 31, 1996.
The higher level of production at the Honduras facility was largely
responsible for sales increasing during the second quarter over those recorded
during the first quarter of the current fiscal year. Sales of the foreign
produced products increased 39% and accounted for about 30% of total sales with
the balance being the domestic product which increased 23%. The increased
production at that facility was in response to a renewed and revised marketing
effort put in place early in 1996 which has had some positive effect on the
Company's level of incoming orders and has resulted in a backlog of orders of
approximately $1,997,000 at October 31 versus $1,666,000 at the same time last
year and $1,853,000 at April 30.
Property and Equipment is reported to be down about forty-nine thousand
dollars but when expenditures of approximately twenty-nine thousand dollars
are added then the reduction would be about seventy-eight thousand dollars. The
decline is mostly the result of the devaluation of the Honduran currency
relative to the prior fiscal year end. The currency exchange rate was 11.06 to
$1 on April 30, 1996 and 12.59 to $1 on a October 31, 1996, an almost fourteen
percent reduction in value during the first half of the fiscal year. The
historical value of the Company's Honduran assets are carried on the
subsidiaries books in the local currency, the lempira. Accounting rules dictate
that those lempiras be converted to dollars at
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the "spot" rate in effect on October 31, 1996. The reduction to these assets
appears as part of the translation adjustment. There are no significant capital
expenditures planned for the balance of this fiscal year.
On July 31, 1996 the Company's subsidiary Wellington Hall Caribbean Corp.'s
loan with the Overseas Private Investment Corporation (OPIC) had an outstanding
balance of $990,999 that carried an interest rate of 12% per annum. Prior to
July 31, 1996 the terms of the loan require quarterly principal payments which
amounted to approximately $123,500 per year and were scheduled to double to
about $247,000 per year beginning July 31, 1996. On July 19, 1996 the Company
requested that OPIC change the terms of the loan including a change to the
interest rate to 9% per annum and that addition principal payments be delayed
by two years. At the time of that request, OPIC responded by rescinding the
Company's obligation to make a principal payment scheduled for July 31, 1996 in
the amount of approximately $62,500. In addition, OPIC committed to reviewing
certain requested information and, thereafter, determining what other
concessions were necessary to accommodating the Company's need of time to
growing its sales and to accumulating adequate working capital through profits
to support a level of sales against which adequate profits could be expected to
service and repay the balance of the loan and other obligations.
The information requested by OPIC was extensive and included, among other
things, detailed analysis of inventories and proforma projected financial
results by month for fiscal 1997, quarterly details for fiscal 1998, and annual
results for fiscal 1999. The requested information was completed and submitted
by mid October and the Company was informed that the scheduled principal
payment due on October 31,1996 would be rescinded.
On December 1, 1996 the Overseas Private Investment Corporation (OPIC)
advised the Company that OPIC's management had approved the requested
restructuring of the loan outstanding with Wellington Hall Caribbean
Corporation. The essence of the restructuring suspended principal payments
until July 31, 1997 and then and thereafter those required would be reduced
from approximate $61,936 per quarter that would have become effective on July
31, 1996 to $30,969 per quarter that was in effect through April 30 1996. The
reduced principal payments will remain in effect for four subsequent quarters
and then return to the higher level until the loan is paid. To accommodate this
restructuring a "balloon" payment scheduled for October 30, 1999 will be
increased. The interest rate charged on the loan will be permanently reduced
from twelve percent to ten percent effective October 31,1996. There will be a
1% fee charged by OPIC, about $10,000, to complete the paper work involved to
document these changes to the loan, a process expected to require some weeks to
complete.
As a result of the loan restructure by OPIC, the Current Matures of Long
Term Debt included on the Company's balance sheet was reduced from $347,000
reported at April 30, 1996 to $130,772 at October 31, 1996. At the same time
Long-Term Debt, Less Current Maturities increased from $1,128,907 on April 30,
1996 to $1,293,311 on October 31.
The Company must meet its interim cash requirements through cash flow from
operations and the use of both its domestic and foreign lines-of-credit. At
October 31, 1996 the Company had approximately $256,000 available from
Lexington State Bank (LSB), its domestic bank. The foreign subsidiary had
available approximately $10,000 from its primary foreign bank lender,
BANCHASA, which corresponds with Nations Bank and none from its secondary
foreign bank, Banco De Honduras, a subsidiary of Citibank.
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The Company was informed by Lexington State Bank on October 25, 1996 that
its request for an additional loan of $250,000 effectively increasing its
revolving line of credit had been approved. At the time of preparation of this
document only the execution of the loan document remains to be completed to
make these addition funds available to the Company. These documents are
expected to be finalized before the end of December, 1996. This additional loan
effectively made $506,000 available from LSB on October 31, 1996.
The Company's current liabilities are approximately $158,000 below that
reported at April 30, 1996 or about (6%) six percent mostly as a result of the
decrease in Current Maturities on long term debt, raw material inventories and
production at the Honduran facility. The current liabilities are about $451,000
below that reported at the end of the previous years second quarter.
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1996 COMPARED TO THE THREE
MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1995
Consolidated sales for the quarter were down approximately $27,000 or 1.6%
and $254,500 or 8.2% for the three months and six months period respectively as
a result of the current recession within the furniture segment of the national
economy, a shrinking distribution base and possibly a permanent resistance by
the consumer to purchasing more stylish, higher quality, and higher priced
furniture. Sales for domestically produced product were down about (14%)
fourteen percent for the quarter and (18%) eighteen percent for the half year.
Sales of foreign produced goods increased by about (56%) fifty-six points for
the quarter and (20%) twenty percent for the six months period. The foreign
sales include inter company sales.
Orders for the three months period and six months period were
approximately $1,803,000 and $3,273,000 respectively essentially equal to those
periods last year but the Company was without a salesmen in it's North
Carolina, South Carolina and Virginia territory (the "North Carolina
territory"), its most productive, for almost three months while negotiations
with an individual to fill the slot as an exclusive representative, a sales and
marketing manager, and as an investor were completed..
On September 6, 1996 the Company executed an "Employment And Stock
Purchase Agreement" (the "agreement") with Arthur F. Bingham. The entire text
of this agreement wasrein included as Exhibit No.10.17 under PART II, Item 6 of
the 10QSB filed in September of 1996 for the fiscal quarter ended July 31,
1996. Some of the more significant conditions of this agreement makes Mr.
Bingham, who was nominated and elected to the board of director at the annual
meeting of the shareholders held September 18, 1996, the Company's exclusive
sales representative in the North Carolina territory, the Senior Executive Vice
President of Sales and Marketing, and required an investment of $300,000 for
the Company stock within sixty days of the effective date of the agreement. For
these duties Mr. Bingham will receive the normal sales commissions paid on the
territory sales and a compensation package for his Sales and Marketing
responsibilities including a base salary, disability insurance, and an expense
reimbursement that totals approximately $52,200 per year.
Cost of Sales were down approximately $28,900 or (3%) three percent and
$242,400 or (8%) eight percent for the quarter and six months periods
respectively as compared with last year and reflects the reduced level of
sales.
Selling, General and Administrative Expenses decreased about (3%) three
percent for the quarter and by about $55,000 or (7%) for the half year as a
result primarily of a reduction in the commission paid the Company's sales
representation on reduced sales.
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Interest Expenses for the quarter and half-year were up slightly for both
the three and six month period as a results of increased borrowing against
foreign lines-of-credit to support the production increase at the Honduran
facility.
In January 1996, the Company employed Mr. Arnold Axelberg as a
consultant to fill the capacity of Marketing Manager. During the previous two
years, Mr Axelberg had consulted for a number of furniture companies having
previously been employed by Rich's department stores where he was the Senior
Buyer for furniture for sixteen years. The primary purpose of Mr. Axelberg's
employment was to work with management in the development and execution of a
marketing plan aimed at increasing revenues and reducing inventories.
Management believes Mr. Axelberg's association produced some results. However,
Mr. Bingham who joined the Company September 6, 1996 is now responsible for the
duties originally assigned Mr. Axelberg and, therefore, Mr. Axelberg
association with the Company after December 1, 1996 will be determined by
management on an as needed bases.
In 1989 the Company acquired the Honduran facility 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 take on more debt and restrict it capital
expenditure that were both in its original plans for the acquisition and that
have developed over time since the the acquisition. Because of this debt,
sales, from the time of the acquisition, needed to grow rapidly to a level
against which operating incomes would be adequate to servicing the debts and to
funding capital needs if the Company was to growth. Thought the Company's
operating profits have for the most part been adequate, maintaining an adequate
level of sales since the acquisition has only been possible over limited
periods of time mostly as a result of a sluggish furniture economy which has
existed over much of that time, a period which includes two out and out
recessions. To further complicate the matter, the sluggish furniture economy
has diminished the distribution base especially the base of mid to small
retailers more committed to using smaller manufactuers, such as the Company, as
a resource and the consumer taste in home furnishings seems to have swung away
from the more formal designs and execution the Company marketed to more
informal designs and execution.
The resulting situation is that the Company has too much debt service, given
its sales volume more recently achieved, and had inadequate funds for its plans
to restoring and growing its sales to a level where its operating profits can
accommodate all the needs. Having initiated early in 1996 a marketing effort to
achieving the sales, and having begun to see the results of this effort, the
Company formulated a plan (the "plan") during the first fiscal quarter of 1997
that addressed means of securing the necessary funding and to solving its
debt-equity problem in general. Having, over time, discussed, investigated and
evaluated a number of means of raising equity capital and given more recent
developments, the Company now intends to take the following steps that are
expected to raise capital, reduce debt, and increase working capital. The
principal elements of the plan and the status of those elements are as follows:
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1. The Company requested that its line of credit with Lexington State
Bank, its primary domestic bank, be extended by $250,000 to manage short term
requirements. The request was approved on October 25, 1996.
2. The agreement between the Company and Arthur Bingham discussed above
made $300,000 of equity capital available to the Company by November 6, 1996.
Mr. Bingham paid the Company on October 10, 1996 approximately two hundred and
eighty-five thousand dollars ($285,695) which is reflected on the Company's
balance sheet as Paid In Capital.
3. The Company's request of the Overseas Private Investment Corporation to
restructure its loan has been approved and the details of the favorable
restructuring were covered above. This agreement eliminated any principal
payments for fiscal year 1997 and reduced those scheduled for fiscal 1998 by
one-half. Just as important was the reduction to the interest rate charged on
the loan to 10% from 12%. Before this change was granted, the Company was
scheduled to make principal payment in each of the before mentioned fiscal
years of approximately $247,000.
4. Mr. Ralph Eskelsen, the General Manager of the Company's Honduran
subsidiary, has verbally committed to investing 1,800,000 Honduran lempiras
which will repay the Company's indebtedness with Banco de Honduras which at the
exchange rate in effect at October 31, 1996 would equate to approximately
$143,000. These funds are contingent on the sale of certain real-estate own by
the Mr. Eskelsen which could be completed by as early as February, 1997 but
could be extended until the spring of 1997. The Company will prepare an
"Employment and Stock Purchase Agreement" which could be executed with Mr.
Eskelsen before the end of 1996.
5. The Company plans to prepare for approval by the Securities and Exchange
Commission a stock offering to its current shareholder to buy additional,
registered common stock at a price at or near the market price. Included as a
condition of the proposed stock offering will be the right of the board of
directors to sell any remaining stock not subscribed to by the stockholders to
other qualified investors. At present, no firm time table can be established as
to when this element of the plan can be completed.
The success to date in the execution of this plan has removed some
immediate pressure on working capital, made funds available to restoring sales
to a profitable level and to support marketing requirements, and slowed the
effect of servicing it debt for the near term. The balance of the plan is
essentially aimed at reducing debt and the cost of that debt though the
restructuring of the OPIC loan has already reduced annual interest expense by
about $19,000.
For the six month period ending October 31, 1996, the Operating Profits
were reported at $230,096 which, when annualized, amounts to about ($.27)
twenty-seven cents per share for each of the 1,689.887 shares outstanding.
Interest Expense for the same period was reported at $193,220 which, when
annualized, amounts to almost ($.23) twenty-three cents per share for each of
the shares outstanding which then reduced the profits, against only moderate
sales as compared to historical results, to only ($.04) per share. Management
believes that if the plan is fully executed that the interest and related
expenses could be reduced by as much as (50%) fifty percent or a reduction of
($.11-$.12) eleven to twelve cents per share thus increasing earnings to as
much as ($.15-$.16) fifteen to sixteen cents per share after interest expense.
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PART II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed: 27 - Financial Data Schedule (for SEC use only)
(b) Reports on From 8-K filed during the quarter ended
October 31, 1996: 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
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(Registrant)
Date: December 13,1996 By: /S/ Hoyt M. Hackney, Jr.
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Hoyt M. Hackney, Jr., President and
Chief Executive Officer
Chief Financial Officer
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