UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Period Ended January 31, 2001
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition period from __________________to_______________
Commission file number 0- 3928
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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.)
425 John Ward Road
Lexington, N.C. 29295
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(Address of principal executive offices) (Zip Code)
(336) 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
Indicate the number of shares outstanding of each of insurer's classes of common
stock, as of the latest practicable date.
CLASS Number of Shares Date
----- ---------------- ----
Common Stock 3,823,220 January 31, 2001
Traditional Small Business Disclosure Format:
YES [X] No [ ]
Page 1 of 14
INDEX
Wellington Hall, Limited and Subsidiaries
PART 1. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Consolidated balance sheet - January 31, 2000 3
And April 31, 2000
Consolidated statements of income - Six months and three 4
months ended January 31, 2001 and 2000
Consolidated statements of cash flows- Three months ended 5
January 31, 2001 and 2000
Notes to consolidated financial statements - January 31, 2001 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
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Quarter Ended Year Ended
January 31, April 30,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash $ 14,385 $ 4,541
Accounts Receivables:
Trade $ 633,887 $ 667,231
Allowance for Bad Debt (63,843) (63,843)
Inventories 3,400,195 3,313,222
Note Receivable-Officer -0- -0-
Prepaid Expenses 145,590 88,638
Deferred Income Taxes 22 ,145 22,145
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Total Current Assets $ 4,152,359 $ 4,009,788
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Deferred Income Taxes 104,366 104,366
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Property, Plant and Equipment:
Cost 1,961,127 1,965,679
Less Accumulated Depreciation (1,337,448) (1,294,680)
623,679 670,999
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Other Assets: 26 299
Total Assets $ 4,880,430 $ 4,807,911
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LIABILITIES
Current Liabilities:
Current Maturities of L/T Debt $ 972,982 $ 953,918
Notes Payable, Banks 511,496 458,219
Accounts Payable
Trade 242,589 483,707
Sundry 115,760 49,830
Customer Deposits 39,612 68,457
Other Current Liabilities 183,569 122,278
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Total Current Liabilities $ 2,066,008 $ 2,136,409
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Noncurrent Liabilities:
Deferred Compensation Accrual 330,000 $ 312,000
Long-Term Debt, Less Current Maturities 1,559,357 1,420,463
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Total Liabilities $ 3,955,364 $ 3,868,872
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STOCKHOLDERS' EQUITY
Common Stock; Authorized 6,000,000
Shares; No Par; Stated Value $4; Shares
Issued and Outstanding - 1,689,887 $ 3,811,531 $ 3,811,531
Preferred Stock; Authorized 5,000,000
Shares: $5 par; No Shares Issued
or outstanding -0- -0-
Retained Earnings (954,177) (965,961)
Cumulative Translation Adjustments (1,932,289) (1,906,531)
------------ ------------
Total Stockholders' Equity $ 925,065 939,039
------------ ------------
Total Liabilities & Equity $ 4,880,430 $ 4,807,911
============ ============
Notes to consolidated financial statement are an internal part hereof.
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
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Three Months Ended Nine Months Ended
January 31, January 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Revenue:
Sale of Furniture $ 1,074,283 $ 1,420,533 $ 3,342,273 $ 4,174,252
Other Income $ 3,131 $ 48,819 $ 6,635 $ 52,326
------------ ------------ ------------ ------------
Total $ 1,077,414 $ 1,469,352 $ 3,348,909 $ 4,226,577
------------ ------------ ------------ ------------
Cost of Furniture Sold $ 776,467 $ 1,113,201 $ 2,360,530 $ 3,027,105
Gross Profit $ 300,947 $ 356,151 $ 988,378 $ 1,199,472
Other operating, selling, general
and administrative expenses $ 237,048 $ 285,765 $ 709,248 $ 977,318
Income (Loss) From Operations $ 63,899 $ 70,385 $ 279,130 $ 202,154
Other Deductions:
Interest Expense--S/T $ 21,096 $ 29,999 $ 71,459 $ 114,259
Interest Expense--L/T $ 69,536 $ 56,479 $ 194,287 $ 159,931
------------ ------------ ------------ ------------
Total $ 90,632 $ 86,478 $ 265,746 $ 274,191
------------ ------------ ------------ ------------
Income Before Taxes And
Extraordinary Items ($ 26,733) ($ 16,092) $ 13,384 ($ 72,036)
Income Taxes ($ 3,470) ($ 10,626) $ 0 $ 8,306
------------ ------------ ------------ ------------
Net Income ($ 23,263) ($ 5,466) $ 13,384 ($ 80,342)
============ ============ ============ ============
Earnings (Loss) Per Share of Common Stock:
Primary and Assuming Fully Diluted
Income Before Extraordinary Items ($ 0.001) ($ 0.00) $ 0.00 ($ 0.02)
Extraordinary Item $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net Income (Loss) ($ 0.01) ($ 0.00) $ 0.00 ($ 0.02)
============ ============ ============ ============
The accompanying notes are an integral part of
the consolidated financial statements
-4-
WELLINGTON HALL, LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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Nine Months Ended
January 31,
2001 2000
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Cash Flow From Operating Activities:
Net Income Loss) For the Period $ 13,384 ($ 72,277)
Noncash Expenses (income) Included ($ 1) 1,837
In Net Income
Depreciation 51,211 73,915
Deferred Income Taxes 0 0
Deferred Compensation 18,000 18,000
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts
Receivables, Net 32,044 (112,338)
(Increase) Decrease in Note Receivable 00 00
(Increase) Decrease in Inventories (117,063) 191,174
(Increase) Decrease in Prepaid Expenses (58,119) (73,289)
(Increase) Decrease in Other Assets 267 (3,412)
(Increase) Decrease in Accounts
Payable, Customer Deposits And
Other Current Liabilities ($ 138,460) ($ 115,220)
Net Cash Provided By (Used For)
Operating Activities ($ 198,736) ($ 91,610)
Cash Flow From Investing Activities:
Purchase of Property and Equipment ($ 11,410) ($ 37,817)
Cash Flow From Financing Activities:
Proceeds From Long-Term Borrowing $ 158,984 $ 273,711
Proceeds From Short-Term Borrowing $ 60,034 ($ 192,070)
Proceeds From Equity Capital 00 57,000
Net Cash Provided By Financing Activities $ 219,017 $ 138,641
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Effect of Exchange Rate on Cash $ 1,665 ($ 10,572)
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Net Increase (Decrease) In Cash $ 10,536 ($ 1,259)
Cash, Beginning of Period $ 3,849 $ 36,417
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Cash, End Of Period $ 14,385 $ 35,159
========== ==========
Cash Paid During The Period For:
Income Taxes $ 0 $ 0
========== ==========
Interest $ 261,522 $ 274,191
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements
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WELLINGTON HALL, LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
January 31, 2001
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of
the Company for the interim period presented.
2. Promotional costs are expensed as they are incurred.
3. The company takes a physical inventory at the end of the second quarter
(October 31) and at year-end (April 30). At the end of each month and at
the end of the first quarter (July 31) and the third quarter (January 31),
inventories are adjusted to purchases, production and shipments.
4. The financial statements of the Company's foreign subsidiary, Muebles
Wellington Hall, S.A., have been translated into U.S. dollars in accordance
with FASB Statement No. 52. All balance sheet accounts have been translated
using the current ("spot") exchange rates at the balance sheet date or
15.18 Lempiras to 1 U.S. Dollar. Income statement amounts have been
translated using the weighted average exchange rate which for the period
was 14.98 Lempira to 1 U.S. Dollar. The gains and losses resulting from the
change in exchange rates during the quarter have been reported separately
as a component of stockholders' equity entitled "Cumulative Translation
Adjustments". Net currency transaction gains or losses which occur during
the quarter are included in net earnings and amounted to approximately $252
and ($7,875) during the quarters ended January 31, 2001 and 2000
respectively.
-6-
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's principal long-term capital resources are shareholders'
equity, the term loan of Wellington Hall with Lexington State Bank and the term
loan of WHCC with the Overseas Private Investment Corporation (OPIC). As of
January 31, 2001, total stockholders' equity was approximately $925,065 and the
outstanding principal amounts of the Lexington State Bank loan and the OPIC loan
were about $1,383,719 and $857,940 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 loan balance of approximately $1,272,000 and one term
loan with a balance of approximately $277,784 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. On January 31, 2001 the Company owed $285,000 on the line of credit.
The effect of the restructured LSB debt reduced the Company's "Current
Liabilities" by approximately $967,280 and depending on the level the Demand
Notes utilized over time, hold the Company's interest and principal to almost
the level of those requirements prior to the restructuring of the debt thus
minimizing the effect on the Company's working capital. The net proceeds of the
original loans were used to refinance indebtedness used to purchase and expand
the Company's Lexington, North Carolina facility.
On March 10, 1997, WHCC and OPIC executed an amended loan agreement that,
among other things, lowered the interest rate to 10% per annum as of November 1,
1996 and waived principal payments from July 31, 1996 until July 31, 1997, at
which time the Company began making quarterly payments of approximately $31,000.
Principal payments were scheduled to increase to approximately $62,000 on July
31, 1998 with a balloon payment of approximately $557,438 due on October 31,
1999. Upon execution of the amended documents, WHCC paid OPIC a rescheduling fee
of 1% of the principal balance. The proceeds from the OPIC loan, together with
funds generated internally by Wellington Hall, were used to acquire and improve
the Honduran Facilities.
The Company, beginning on July 31, 1998 and thereafter was unable to make
quarterly principal payments except for the quarters ending on January 31, 1999
and April 30, 1999 when for each quarter the Company paid approximately $21,000.
The Company has made all required quarterly interest payments. On October 31,
1999 the Company was unable to make the balloon payment which had grown to
approximately $826,479 and, therefore, the Company was in default of the loan
agreement. The Company has made all the quarterly scheduled interest payments.
The acceptance of the interest payments by OPIC did not in any way alter the
default status of the loan.
The Company agreed in December of 1999 to bear the expense of having the
OPIC mortgage on the Company's Honduran facility extended. Under Honduran law
the maximum length of time a mortgage can remain in effect is ten years and
OPIC's original mortgage was due to expire on April 1, 2000. Prior to April 1,
2000 the original OPIC mortgage was 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 additional time must be given for it's current
strategy, presented to OPIC during the meeting, to produce the growth in sales
and a resulting level of profitability adequate to servicing the debt and/or
that the Honduran facility be sold or an investor be found with interest in part
ownership of that facility. The proceeds from such a sale or investment could,
among other things, pay off the OPIC loan balance. Selling the Honduras facility
and then contracting the production of the Company's products is consistent with
the Company's current strategy of curtailing unprofitable domestic production
and becoming a marketing and distribution Company for products available from
foreign manufacturers.
On May 1, 2000 the Company and OPIC entered into a Forbearance Agreement
which among other things forebears OPIC until October 31, 2000 from seeking to
enforce its rights against the collateral under the Loan Agreement due to the
failure by the Company to make payment of principal in full, and interest
thereon by October 31, 1999, as required under the terms of the loan agreement.
In consideration for OPIC's above stated agreement to forbear from seeking to
enforce right against the collateral, WHCC agreed to among other things to:
(i) No later than July 3, 2000, pledge, or cause to be pledged, to
OPIC in a manner and with documentation (including legal
opinions) acceptable to OPIC in form and substance (once
executed, such document shall constitute "Financing Documents")
all of the shares of Muebles Wellington Hall S.A. (Muebles); and
-7-
(ii) Make quarterly interest payments in the manner and at the
default rate specified in the Loan Agreement on the full, unpaid
balance of the loan, effective as of October 31, 1999; and
(iii) Exercise its best efforts to sell Muebles at a net value
sufficient to repay OPIC's debt in full, and to cover OPIC's
cost of collection, and commencing May 1, 2000, provide a
written report to OPIC on a monthly basis regarding the
Company's efforts to sell Muebles. The terms of any proposed
sale are subject to OPIC's prior approval, and all of the
proceeds of any sale shall be payable to OPIC, in a manner OPIC
may specify, up to the amount owing to OPIC under the Financial
Document; and
(iv) As may be requested by OPIC, WHCC shall cooperate fully to
provide OPIC with a written appraisal, or work with such broker
as OPIC may identify to expeditiously sell Muebles, subject to
the provisions of the last sentence of subparagraph (iii) above.
On May 31, 2000 the Forbearance agreement was amended whereby item (ii)
above was revised to read: Make quarterly interest payments in the manner
specified in the Loan Agreement on the full, unpaid balance of the loan,
effective as of October 31, 1999; and in lieu of making penalty interest
payments on each quarterly payment date specified in the Loan Agreement, the
Company shall pay a total penalty charge of $25,138.7 on October 31, 2000, which
represents the penalty interest that will accrue during the Forbearance Period,
computed on the basis of 360-day years of twelve 30-day months.
This amendment to the forbearance agreement allows the difference in the
10% interest rate on the OPIC loan balance in effect prior to October 31, 1999
and the default interest rate of 13% included in the Loan Agreement would be
added to the outstanding principal balance quarterly. The principal balance has
been increased accordingly at the end of each fiscal quarter and on October 31,
2000 the outstanding balance was $851,538.
On October 31, 2000 the Company was unable repay the OPIC loan. On October
27, 2000 the Company requested that the Forbearance Agreement be extend while
the Company continues to arrange a means of retiring the debt. Over time and
particularly since May of 2000 a number of possibilities have been investigated
or pursued. i.e.
(i) The sale of the Honduran facility. The Company has advertised
the facility and operation on the internet and discussed the
sale with the likely possible buyers in Honduras. No serious
purchaser has committed beyond discussions of such a
transaction. The Company is negotiating a sale agreement with a
five percent contingency commission fee with three individuals
in Honduras (the group) consisting of the Company's Honduran
corporate counsel, an individual associated with the Honduran
financial market, and a local real-estate broker. The Company is
likely to execute an agreement in March of 2001.
(ii) The sale of domestic assets. The Company was approached by a
potential buyer interested in possibly purchasing the Company's
name, product line, and inventories. These discussion ended when
the potential buyer changed their business plan to another
marketing direction. No activities are presently under
consideration.
(iii) Refinancing the debt. The Company has requested from a Central
American bank a loan of $1,000,000 the proceed of which would be
used to pay off the OPIC loan and to partially replace debt
presently outstanding with with Honduran banks. The bank is
presently executing its due diligence to determine if the loan
will be granted. No schedule has been establish for the
completion of the due diligence. The loan request included a two
year grace period on the repayment of the principal and will
bear an interest rate between 14-17%.
(iv) Raise equity capital. On December 6, 2000 the Company met in New
York city with a representative of the Rain Forest Alliance, an
environmental agency, and their representative of that agency's
Smart Wood certification program. The purpose of the meeting was
to investigate the possibility of soliciting equity capital from
certain firms interested in investing in projects that
positively affect the certification and expansion of sustainable
managed forest programs or projects. A sustainable managed
forest or projects is defined as a designated segment of forest
where trees are inventoried to determine how much harvesting can
be executed annually without exceeding the natural replaced thus
sustaining the forest indefinitely. A project must also have a
market for the wood to be harvested such that the forest take on
a value that precludes the value of cutting trees for the
clearance of the land for ranching or agriculture. The
certification program is after an on site inspection and review
that evaluates, among other things, the inventory, harvesting
practices, and marketing of the wood. It is the marketing
element that could make the Company a good candidate for these
funds or investments. The Company would expect any investment to
be made in Muebles Wellington Hall (MWH), the Honduran
subsidiary, or in Wellington Hall Caribbean Corp. which owns MWH
and markets its production. Because of time restrains since the
December 6 meeting no further action has been taken in this
pursuit and no prediction can be made as to when, if. or how
much equity might be realized by the Company and this approach.
(v) Repayment of the loan from profits. The Company experienced
significant and material losses during three previous fiscal
years. The Company's strategy to returning the Company to
profitability has progressed and, at least during the first
three quarters of the current fiscal year, seems to have
eliminated the losses but has not restored profits to a level to
accommodate the repayment of its outstanding debt including the
OPIC loan balance. That strategy has essentially been to cease
domestic production which accounted for most of the losses and
to restructure the Company whereby it markets and distributes
products manufactured in the Company's Honduras facility or that
is procured from other "off shore" sources (OSS).
-8-
Products from OSS include new products and products manufactured
domestically by the Company in the past. It has taken considerable time to find
adequate sources and to make the transition but production has essentially been
stopped at the Company's Lexington, N.C. facility whereby activities now, for
the most part, include receiving, warehousing, packaging, and shipping.
Management believe the completion of the transition is close to being resolved,
that its products have acceptable profit margins in their prices, but that
considerable time, additional financing, and possibly other arrangement will yet
be required to restore the level of sales to an adequate level whereby the
margins will result in a level of profitability to properly service the
Company's debts. More specifically,
(a) Forgoing the execution of one or more the above described efforts,
OPIC may be required to extend its forbearance agreement.. The Company
has no knowledge as to OPIC's position. The Company continues to pay
quarterly interest on the OPIC loan and communicates from time to time
on activities discussed above aim at repaying the principal on the
loan.
(b) Lexington State Bank (LSB) or another sources will be required to
extend more credit to finance the cost of additional sales aids ,
receivables, and minimal inventory growth. The Company has no
knowledge as to LSB's or any other source's position on extending
additional credit.
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 a three
hundred thousand dollar lines of credit with Lexington State Bank (See above)
and the outstanding balance at January 31, 2001 was $285,000. MWH has lines of
credit with two Honduran banks and as of January 31, 2001, an aggregate of about
$226,496 had been borrowed under these lines. Borrowings bear interest at a rate
that ranges between 22% and 27% payable quarterly and principal is payable on
demand. The lines are secured by a second lien on the fixed assets of MWH and
current assets.
The Company's negative cash flow from operating activities were reported to
be about ($198,736) for the period ended January 31, 2001 and ($91,610) for the
period ended January 31, 2000. The primary contributing factor to the negative
cash flow for the current fiscal three quarters was a decrease in Account
Payable-Trade of approximately $241,118 or from about $483,707 at April 30, 2000
to about $242,589 at January 31, 2001. This drop in payable was the results of
an agreement with one of the Company's vendors to converting a significant and
long standing balance of about $194,350 to a term loan. This agreement, executed
on August 31, 2000, bears an interest rate of 12% per annum and is to be repaid
on or before March 31, 2003. The Company makes interest and principal payment
monthly of approximately $7,500. Prior to the execution of this note, the
Company generally made monthly payments in varying amounts. Without this
conversion of short term debt to long term debt, the cash flow from operations
activities would have been negative by an amount estimated to be about ($4,386).
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 January 31, 2001, accounts receivable-trade had decreased by
approximately $33,344, from about $667,231 at April 30, 200 to about $633,887 at
January 31, 2001, since the beginning of the fiscal year, mostly as a result of
lower sales during the current fiscal year as compared to the previous year. The
receivables represented a turnover rate of about fifty-four days, an increase of
about six days when compared to the turnover rate reported at April 30, 2000.
The company's normal terms of sale for the payment of invoices is Net 30 days
for domestically produced goods (DPG) and 3% 10; Net 30 for foreign produced
goods (FPG). In the case of export sales, an Irrevocable Letter-Of-Credit is
required
Consolidated inventories increased by about $86,660 during the fiscal three
quarters ended January 31, 2001 primarily as a result of an increase in the
inventories of Honduran produced goods. Management believes the decline in the
national economy similarly effected the Company's sale during the third fiscal
quarter ended January 31, 2001. Actions have been taken to curtail production at
the Honduran facility to minimize further inventory growth.
Property and equipment is reported on the consolidated balance sheets to
have decreased by about ($4,552) during the three fiscal quarters. The value of
the Company's foreign fixed assets are revalued to reflect the fluctuation in
the value of the foreign currency. The devaluation of the Honduran currency
relative to the prior fiscal year end was about 3.2%. 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.
-9-
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. The Company's total outlay for capital improvements for the
three quarters ended January 31, 2001 was approximately $11,410 used primarily
to upgrade the Honduran facility.
Current Maturities on Long Term Debt increased slightly and mostly reflects
the capitalization of interest expense as per the terms of the Forbearance
Agreement dated May 11, 2000. (See the discussion of the OPIC loan above).
Long-term debt less current maturities increased as a result of converting a
certain trade payable balance owed a Company vendor to a term loan (see
discussion above).
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 15.18 lempira to the dollar at January 31, 2001. 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 $1.48 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 January 31,
2001 the Company borrowed $110,000 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
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sources which the Company will market exclusively. Under this agreement R.
Douglas Ricks, the FCL president would became a shareholder by investing $27,000
for 100,000 shares of the Company's common stack, would be nominated as a
Director, and would assist management in developing additional products to
further exploit these new sources. As part of the agreement and to enhance
Company sales and possibly finance the growth of these sales, FCL received
certain incentives in the form of warrants. At the High Point International
Furniture Market held in April 1999 the Company displayed these products and
initial shipment resulting orders are reflected in the Company's sales during
the fiscal year ended April 30, 2000. On May 4, 1999 Company and FCL executed a
contractual agreement and on June 22, 1999 the Company received $27,000 for the
Company's common stock (see the Proxy Statement). The warrants issued as part of
the FCL agreement are priced a can be exercised by the following:
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100,000 shares at $0.30 per share exercisable until October 31, 1999
100,000 shares at $0.40 per share exercisable until July 31, 2000
100,000 shares at $0.40 per share exercisable until December 31, 2000
100,000 shares at $0.45 per share exercisable until December 31, 2001
100,000 shares at $0.45 per share exercisable until December 31, 2001
100,000 shares at $0.53 per share exercisable until December 31, 2001
Under the terms of the agreement the company can purchase the products involved
directly from the foreign source in container loads, purchases partial container
loads or from Furniture Classics Limited's inventory. FLC in any event is
responsible for providing letters of credit or satisfying other credit terms
with the foreign vendors. FCL receives a 10% brokers fee on all products
delivered to the Company. For orders placed as partial containers or from FCL
inventories, FCL received addition fee to cover handling, delivery, and
warehousing expense as applicable. Both parties have the right to terminate the
agreement with ninety day notice but must honor all outstanding orders at the
time of termination.
At the annual meeting of shareholders held in September of 1999, Mr. Ricks
was elected a director and on October 31, 1999 Mr. Rick's exercised a warrant
and invested $30,000 for 100,000 shares of the Company's common stock. The funds
received from Mr. Ricks was used to purchase inventory. Mr. Ricks did not
exercise the warrant which could have been exercised on July 31, 2000 or on
December 31, 2000. On September 16, 2000 Mr. Ricks resigned from the Board of
Directors of Wellington Hall Limited.
On April 19, 1999, Hoyt M. Hackney, the Company President, with the
majority of the Board of Directors approval , agreed to alter the "Deferred
Compensation Agreement" between Mr. Hackney and the Company. The agreement
allows that upon retirement, at age 62 or older, or upon his death he or his
estate would received $50,000 per year for a period of ten years (see Proxy
Statement). The Company has accrued the expensed of this obligation over the
last twelve years and is scheduled to continue that expense until the sum of
$300,000 has been accrued. At July 31, 2000 the Company's Balance Sheet stated a
$308,000 long term liability as a result of this accrual.
The revisions (the revision) to the "Deferred Compensation Agreement", not
yet finalized, are expected to reduce the compensation to $20,000 per year but
not before May 1, 2005. In exchange, Mr. Hackney would receiving restricted
stock, 1,000,000 shares of common stock at $.30, which can not be sold until
after retirement or death and then only in increments of 1/10 of the shares per
year for a period of 10 years. This action could capitalize the $300,000
liability and thus remove the long term liability from the Company's balance
sheet when the transaction is executed.
The primary purpose of the revisions to the "Deferred Compensation
Agreement" was as an incentive to the Company's lenders to restructure the
outstanding Company loans whereby the potential outlay of $50,000 per year is
removed, reduced and/or delayed to enhance the Company's ability to repay its
debt over all or part of the period the restructured loan long agreement would
specify. After the action of the board of directors on April 19, 1999 the
financial institutions to whom the Company is indebted have shown little
interest in the revision being complete though, in fact, it was suggested by one
of the Company's lenders. Therefore the proposed revision to the Deferred
Compensation Agreement will have no effect on the disposition of the Company's
debt by the financial institutions involved and the proposal has been eliminated
from consideration and will not be executed.
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.
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RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED JANUARY 31, 2001 COMPARED TO THE THREE MONTHS
AND NINE MONTHS ENDED JANUARY 31, 2000
Consolidated revenues for the first three fiscal quarters ended January 31,
2001 and 2000 were about $3,342,273 and $4,174,252 respectively representing a
decrease of approximately $831,979 or about 19.9%. Sales of domestically
produced goods (DPG) for the first three quarters of fiscal year 2001 were about
$937,103, down approximately $974,578 or 51.0% from the $1,911,681 reported last
year at January 31, 2000. The prices for DPG were last increased August 15, 1998
by an estimated 5 to 6%. Sales of the Company's Honduran produced goods (HPG),
net of intercompany sales, for the first three quarters were approximately
$1,953,430 in 2001 versus $1,911,352 in 2000 representing an increase of about
$42,078 or 2.2% versus the previous year's sales. The prices for HPG were last
increased April 15, 2000 by an estimated 6%. Because of the level of the backlog
of orders for those products on April 15, 2000, the increased prices probably
had little to no affect on the sales reported for the quarter ended July 31,
2000. Sales of the Foreign produced goods (FPG), marketed as Wellington Hall
Imports (WHI), for the first three quarters of the fiscal year ended January 31,
2001 were approximately $402,451 versus $409,422 the previous year representing
a slight decrease of about $6,971 or 1.7 %. Sales of all categories of the
Company's products through the Company's retail outlet for the first three
quarters were approximately $144,008 in 2001 versus sales of about $168,158 the
previous fiscal year.
The sales of FPG reported are the result of an agreement between the
Company and Furniture Classics Limited (FCL) whereby FCL supplies the Company a
line of mirrors, chinese antiques, and other products from their foreign sources
which the Company is marketing exclusively (see discussion above ). The products
the Company is marketing as a result of that agreement were introduced at the
High Point International Furniture Market held in April 1999. In addition to the
products from FCL, the Company has also established relationships with other
foreign manufacturers that are producing products for the Company to market and
distribute exclusively. The Company begin marketing such items in February of
1998 and has continually expanded both the resource base and the product line
accordingly. The Company does not have a contractual relationship with the
foreign manufacturers of these products.
The fact that these sales have not grown during the current fiscal year is
largely attributed to the Company's elimination of one source which it has
replaced with another source but who's shipments have not yet significantly
contributed to the Company's sales. The fact that the Company has no sales aids
(catalogs) published or issued to its dealer has also negatively effected the
sales in this product category. Both of these contributing factors to the lower
level of FPG's sales were to be addressed in the third fiscal quarter ending
January 31, 2001, but now such actions have been delayed indefinitely because of
inadequate available funds.
Consolidated revenues for the third fiscal quarters ended January 31, 2001
and 2000 were about $1,074,414 and $1,469,352 respectively representing a
decrease of approximately $391,938 or about 26.6%. Sales during each of the
first three quarter of the current fiscal year were essentially the same.
The Company's firm backlog of orders on January 31, 2001 was about
$1,228,199, down about 34.5% from the backlog of about $1,876,566 on April 30,
2000 and down about 28.9% from the approximate backlog of $1,726,488 reported at
January 31, 2000. The January 31, 2001 backlog included about $668,192 of
products manufactured domestically in the past, and for the most part is now
committed to off shore sources, as opposed to about $763,498 included in the
April 30, 2000 backlog and about $776,931 included in the January 31, 2000
backlog. The backlog included for WHCC or Honduran-produced products, less
intercompany orders, was about $232,233 on January 31, 2001 versus about
$780,936 on April 30, 2000 and $625,275 on January 31, 2000. The backlog
included for foreign produced goods, marketed as Wellington Hall Imports and
other than the Company's Honduran produced goods, was about $327,774 at January
31, 2001 versus about $332,132 on April 30,2000 and $374,242 on January 31,
2000.
The backlog changes and variations in the various categories of the
Company's products somewhat reflects the management's strategy to returning the
the Company to profitability and renewed sales growth. Basically, that strategy
is to de emphasize domestic produced goods where profits have been elusive over
the past, to replace that
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sales volume with new products and product categories supplied by foreign, less
expensive producers, and to emphasize the sales of the Honduran produced goods
where the Company's believes it has profitable margins.
During the fiscal nine months period ended January 31, 2001, cost of sales
decreased approximately $666,576 to about $2,360,530 when compared to the
$3,027,105 reported last year. As a percent of sales, the cost was 70.6% versus
72.5% for the fiscal first three quarters ended January 31, 2001 and 2000
respectively. During the fiscal quarter ended January 31, 2001, cost of sales
decreased approximately $336,234 to about $776,467 when compared to the
$1,113,201 reported for the period last year. As a percent of sales, the cost
was 72.3% versus 78.4% for the fiscal third quarter ended January 31, 2001 and
2000 respectively. The decline in the cost of sales is mostly a reflection of
the decline in revenues and the change in product mix making up sales whereby
imported goods with higher margins increased as a percent of the total.
During the fiscal nine months period ended January 31, 2001, Selling,
General, and Administrative expenses decreased about $288,070 or 28.9%, dropping
from $997,318 in the nine months period last year to $709,248 at January 31,
2001. During the third fiscal quarter ended January 31, 2001, Selling, General,
and Administrative expenses decreased about $48,717 or 17%, dropping from
$285,765 in the three months period last year to $237,048 at January 31, 2001.
These declines are mostly related to the lower sales of domestically produced
good and the reduced production activity to support these sales. Further
declines in the cost of good sold and Selling, General and and Administrative
expenses will be minimal. Selling, General, and Administrative expenses were
about $239,037 in the first fiscal quarter ended July 31, 2000, about $239, 352
for the second quarter ended October 31, 2000 both virtually the same as
reported for the third fiscal quarter.
Interest expenses during the fiscal nine months period were about $274,191
and $265,746 as reported for January 31, 2001 and 2000 respectively. The
decrease reflects mostly a decrease in the debt with Honduran banks of about
$39,696 against which the Company was paying an interest rate of approximately
27%. Any addition reductions in the Company's debt will likely depend on the
Company's ability to increase its profits. During the three months ended January
31, 2001 and versus 2000, interest expenses increased by about $4,154 or 5%
because of the conversion of trade payable to long term debt discussed above.
For the three fiscal quarters ended January 31, 2001, operating income
(earning before interest and taxes) was about $279,130, compared to $202,154 for
2000. The net income for the first three quarters of fiscal year 2001 was about
$13,384 versus a loss of about ($80,342) at January 31, 2000. For the fiscal
quarter ended January 31, 2001, operating income (earning before interest and
taxes) was about $63,899, compared to $70,385 for 2000. The net loss for the
third quarter of fiscal year 2001 was about ($23,263) versus a loss of about
($5,466) at October 31, 2000.
The net profits reported in the nine months period ended January 31, 2001
are mostly the result of lower levels of assembly production, reductions in
employment, and reduced overheads at the Company's Lexington, N.C. facility.
That facility has essentially been reorganized to receiving, packaging,
warehousing and shipping products received from the Company' Honduras facility
and from other foreign resources. The domestic facility will continue minimal
assembly production of certain products deemed profitable, applying a furniture
finish to portions of the products imported, and possibly contract finishing of
products imported by other Company's.
To reduce the Company's substantial expense for annual certified audits,
transfer agent fees, legal fees, management time, and other related expenses,
the Board of Directors will soon consider approving actions directed at changing
the Company's status from a Securities and Exchange Commission reporting, listed
company to a non reporting, non listed company. Such action is likely to involve
a reverse split of 1:200 of the Company's outstanding common stock and the
purchase of resulting fractional shares whereby the number of Company
shareholders will be reduced to less than five hundred. If such action is
approved, the Company would likely purchase four tenth of one percent (.04%) of
the outstanding stock and eliminate approximately two hundred and fifty
shareholders. Such action would have virtually no effect on the ownership of the
shareholders after the split.
Forward Looking Statements
Certain statements in 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
10QSB should be read as being applicable to all related foreward-looking
statements where ever they may appear in this form 10QSB. The Company's actual
results could differ materially from those discussed herein.
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PART II
Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Filed:
Exhibit No. Description
3.1 Amended and Restated Charter of Wellington Hall
Limited. Incorporated by reference
3.2 Bylaws of Wellington Hall, Limited, as amended.
Incorporated by reference
(b) Reports on From 8-K filed during the quarter ended January 31, 2001:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLINGTON HALL, LIMITED
(Registrant)
Date: March 15, 2001 By: /s/ Hoyt M. Hackney
--------------------
Hoyt M. Hackney, Jr.,
President and
Chief Executive Officer
Chief Financial Officer
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