UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-24912
WELCOME HOME, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1379322
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
309-D RALEIGH STREET, WILMINGTON, NORTH CAROLINA 28412
(Address of principal executive offices)
(Zip code)
(910) 791-4312
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
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 and 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_____
Number of shares of common stock of registrant outstanding at
November 14, 1996: 7,453,615
<PAGE>
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1996
and December 31, 1995. . . . . . ......... . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Nine Month
Periods Ended September 30, 1996 and 1995. . . . . .......... . . 4
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended September 30, 1996 and 1995. . . . . . . . . . .......... . 5
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 . . . . . . . . . . . . .......... . . 14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . .......... 15
<PAGE>
WELCOME HOME, INC.
Consolidated Balance Sheets at September 30, 1996 and December 31, 1995
(in thousands of dollars)
(Unaudited)
September 30, December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 2 $ 7
Inventories 22,502 16,798
Prepaid assets 670 810
Deferred income taxes 470 470
Other current assets - 8
Total Current Assets 23,644 18,093
Property & equipment, net 11,707 8,826
Deferred income taxes 2,971 1,715
Other assets 793 542
Total Assets $39,115 $29,176
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable - line of credit $18,512 $ 5,213
Accounts payable 13,360 11,703
Accrued expenses 1,346 2,817
Current portion of capital lease
obligation 1,730 514
Total Current Liabilities 34,948 20,247
Capital lease obligation 2,666 1,174
Note payable to Jordan Industries 4,690 4,128
Shareholders' equity (deficit):
Common stock, $.01 par value; 13,000,000 shares
authorized; 8,500,000 shares issued 85 85
Preferred stock, $.01 par value; 1,000,000
shares authorized; none outstanding - -
Additional paid-in capital 8,832 8,832
Cumulative translation adjustment (37) (37)
Accumulated deficit (7,184) (368)
Subtotal 1,696 8,512
Less treasury stock, at cost
(1,046,385 shares) 4,885 4,885
Total Shareholders' Equity (Deficit) (3,189) 3,627
Total Liabilities and Shareholders' Equity
(Deficit) $39,115 $29,176
See Notes to Consolidated Financial Statements
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Operations for the Three and Nine Month
Periods Ended September 30, 1996 and 1995
(in thousands of dollars except per share amounts)
(Unaudited)
Three Months Nine Months
Ended September 30 Ended September 30
1996 1995 1996 1995
(14 weeks) (13 weeks) (40 weeks) (38 weeks)
Net sales $20,655 $23,000 $51,874 $53,134
Cost of sales 11,981 13,309 29,195 30,191
Gross margin 8,674 9,691 22,679 22,943
SG&A expenses
(excluding depreciation) 9,950 9,250 27,895 24,998
Depreciation 501 562 1,455 1,525
Operating loss (1,777) (121) (6,671) (3,580)
Interest expense:
Jordan Industries 88 90 279 563
Other 465 343 1,102 506
Other expense - 32 19 6
Pretax loss (2,330) (586) (8,071) (4,655)
Benefit from income taxes - (204) (1,256) (1,830)
Net loss $(2,330) $ (382) $(6,815) $(2,825)
Net loss per share $ (0.31) $ (0.05) $ (0.91) $ (0.36)
Weighted average
shares outstanding
(in thousands) 7,454 7,469 7,454 7,813
See Notes to Consolidated Financial Statements
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended
September 30, 1996 and 1995
(in thousands of dollars)
(Unaudited)
1996 1995
(40 weeks) (38 weeks)
Cash flows from operating activities:
Net loss $(6,815) $(2,825)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,524 1,551
Deferred income taxes (1,256) (1,693)
Other - 7
Changes in operating assets and liabilities:
Inventories (5,704) (7,267)
Other assets 227 194
Accounts payable 1,657 (1,004)
Accrued liabilities (1,471) (1,108)
Income taxes payable - (465)
Net cash used in operating activities (11,838) (12,610)
Cash flows from investing activities:
Capital expenditures (1,134) (3,947)
Other - (100)
Net cash used in investing activities (1,134) (4,047)
Cash flows from financing activities:
Proceeds from advances from Jordan
Industries, net 562 3,360
Proceeds from line of credit, net 13,299 16,215
Loan fees, line of credit (402) (391)
Purchases of treasury stock - (2,945)
Other (492) (324)
Net cash provided by financing activities 12,967 15,915
Net decrease in cash and cash equivalents (5) (742)
Cash and cash equivalents at beginning of period 7 836
Cash and cash equivalents at end of period $ 2 $ 94
See Notes to Consolidated Financial Statements
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Cash Flows for the Nine Month Periods
Ended
September 30, 1996 and 1995
(in thousands of dollars)
(Unaudited)
(Continued)
1996 1995
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest - Jordan Industries $ - $ 452
Interest - third party 973 487
Income taxes 44 343
Noncash investing and financing activities:
Capital leases $ 3,200 $ 1,255
See Notes to Consolidated Financial Statements
<PAGE>
WELCOME HOME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
These consolidated financial statements have been prepared by Welcome Home,
Inc. (together with its 100% owned subsidiary the "Company" or "Welcome Home")
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report to Shareholders for the year ended December 31, 1995.
The financial information included herein reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of management,
necessary to a fair presentation of the results for interim periods.
The Company's sales volumes have historically varied between quarters based on
factors such as the Christmas shopping season; accordingly, the results of
operations for the three and nine month periods ended September 30, 1996 are
not necessarily indicative of the results to be expected for the full year.
2. PLANNED STORE CLOSINGS
The Company closed 23 unprofitable stores during the nine months ended
September 30, 1996. The Company is currently negotiating with the lessors to
close or obtain rent concessions on an additional 27 stores which it intends
to close during the fourth quarter of 1996 or early 1997. As of September 30,
1996, the furniture, fixtures and equipment in these 27 stores had a total net
book value of approximately $923 thousand. The Company has not yet determined
which of these stores will be closed and what additional costs might be
incurred to close these stores, some of which will require early termination
of the leases. The Company will accrue such costs as they become estimable and
known during the forth quarter of 1996.
The Company is also planning to close 10 additional stores during 1997 when
their respective leases expire.
3. SUBSEQUENT EVENT
On November 12, 1996, the Company entered into an agreement with Jordan
Industries in which the Company issued 4,451 shares of a newly designated
class of Series A Preferred Stock to Jordan Industries as repayment of
$4,450,604 under the Subordinated Credit Agreement. The $4,450,604 consisted
of $4,127,500 of principal and $323,104 of accrued interest. Subsequent to
this transaction, total borrowing availability under the Subordinated Credit
Agreement increased to $10.0 million. Had this event happened in the third
quarter, the Company's balance sheet as of September 30th, 1996 would have
shown a positive Stockholders' Equity of $1.2 million versus a deficit of $3.2
million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a leading specialty retailer of gifts and decorative home
furnishings and accessories in North America, with 199 stores located
primarily in outlet/off-price malls in 40 states as of September 30, 1996.
Welcome Home's new merchandise assortments, which currently range in price up
to $1500, cover a broad line of approximately 3,000 active stock keeping units
and consist of four families of business, including home decorative textiles,
home furnishings and wall decor, gifts, and home decorative accessories, all of
which comprise approximately 85% of the Company's sales volume. The Company's
average sales transaction was approximately $14.81 for the nine months ended
September 30, 1996, as compared to $14.09 for the nine months ended September
30, 1995, a 5.1% increase.
During the fourth quarter of 1995, the Company planned and began implementing
a series of strategic restructuring initiatives designed to improve
profitability and better position the Company for a return to profitability
and future growth. The major elements of these initiatives include:
1)modification to the Company's merchandising strategy and the liquidation of
merchandise which is not consistent with that strategy - new merchandise
assortments are now in place for the start of the fourth quarter; 2)closing
unprofitable stores - 23 unprofitable stores have already been closed in 1996,
with up to 37 more stores to close by November 1997; 3)upgrading the Company's
executive team - the Company's executive management team has been strengthened
across the board; 4)installation of information systems necessary to
successfully implement the above strategies - new systems are now operational.
In addition, the Company also engaged in other strategic initiatives during
1996. For example, a national advertising campaign began October 15th with
plans to hit a minimum of 18 million households in the October through
December time period. Coinciding with this national ad program the Company
set up a toll free number for customers to place mail orders and obtain more
information regarding Welcome Home.
<PAGE>
Results of Operations
The following table sets forth selected income statement data of the Company
as a percentage of net sales and certain operating statistics of the Company:
Three Months Nine Months
Ended September 30 Ended September 30
(14 weeks) (13 weeks) (40 weeks) (38 weeks)
1996 1995 1996 1995
Selected income statement data
as a percentage of net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 58.0 57.9 56.3 56.8
Gross profit. 42.0 42.1 43.7 43.2
Selling, general and administrative
expenses (excluding depreciation) 48.2 40.2 53.8 47.0
Operating loss (8.6) (0.5) (12.9) (6.7)
Interest expense..... 2.7 1.9 2.7 2.0
Benefit from income taxes -- (0.9) (2.4) (3.4)
Net loss (11.3)% (1.7)% (13.1)% (5.3)
Operating Statistics:
Stores open at period end 199 210 199 210
Total square feet of store space at
period end (in thousands) 546 565 546 565
Percentage decrease in
comparable store sales (12.6)% (14.6)% (9.6)% (12.3)%
Sales per square foot at
period end 37.8 40.7 95.1 94.1
Average number of stores open 205 208 212 200
Average number of square footage
during the period (in thousands) 560 555 575 528
Sales per average square foot 36.9 41.5 90.2 100.6
Gross margin per
average square foot 21.4 24.0 50.8 57.2
Three Months Ended September 30, 1996 as compared to Three Months Ended
September 30, 1995
Net Sales. Net sales for the three months ended September 30, 1996 decreased
by approximately $2.3 million or 10.2%, as compared to the three months ended
September 30, 1995. The third quarter ended September 30, 1996 had 14 weeks
versus 13 weeks in the quarter ended September 30, 1995. Without the
additional week, net sales for the quarter ended September 30, 1996 would have
declined $3.7 million, or 16.3%. This decline reflects a 20.2% decrease in
comparable store sales (as adjusted to reflect the change in the number of
weeks). The Company believes the decrease in comparable store sales was
primarily the result of lower levels of traffic in outlet malls (where
approximately 91% of the Company's stores are located).
<PAGE>
Gross Profit. Gross profit for the three months ended September 30, 1996
decreased by $1.0 million, or 10.5%, as compared to the three months ended
September 30, 1995. Gross profit as a percentage of sales decreased nominally
to 42.0% from 42.1. Gross profit dollars for the quarter were down 13.6% on a
comparable store/comparable week basis versus the 20.2% decline in net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 1996
increased $.7 million, or 7.6%, as compared to the three months ended
September 30, 1995 due primarily to the additional week in 1996. Selling,
general and administrative expenses as a percent of net sales increased to
48.2% for the three months ended September 30, 1996 as compared to 40.2% for
the three months ended September 30, 1995. The increase as a percentage of net
sales is due primarily to fixed selling, general and administrative expenses
being covered by lower sales volumes. Store selling, general and
administrative expenses, as adjusted for the change in number of weeks,
increased $.1 million, or 1.3% for the quarter ended September 30, 1996 as
compared with 1995. Corporate general and administrative expenses decreased
5.3% to $1.3 million for the three months ended September 30, 1996 as compared
to $1.4 million in the third quarter of 1995 (as adjusted for the change in
number of weeks). Corporate personnel headcount, including field store
operations management and distribution center, has declined from 84 at the
start of the third quarter to 74 at the end of the third quarter. Total
selling, general and administrative expense per average square foot of selling
space (as adjusted for the change in number of weeks), remained the same at
$16.67 in the third quarter of 1996 and the third quarter of 1995. The
Company incurred $149 thousand of selling, general and administrative expenses
in the third quarter 1996 as a result of the strategic initiatives
implemented.
Interest Expense. Interest expense increased from $0.4 million for the
three months ended September 30, 1995 to $0.6 million for the three months
ended September 30, 1996 primarily as a result of an increase in the average
borrowings outstanding in 1996.
Income Taxes. No income tax benefit has been recorded in the accompanying
Statement of Operations for the three months ended September 30, 1996.
Net Loss. Net loss for the three months ended September 30, 1996 was
approximately $2.3 million, as opposed to a net loss of approximately $0.4
million for the three months ended September 30, 1995. The increase occurred
primarily as a result of comparative store sales being down and partially as a
result of increases in selling, general and administrative expenses and a
reduction in income tax benefits.
<PAGE>
Nine Months Ended September 30, 1996 as compared to Nine Months Ended
September 30, 1995
Net Sales. Net sales for the nine months ended September 30, 1996 decreased
by approximately $1.3 million or 2.4%, as compared to the nine months ended
September 30, 1995. This decrease reflects an additional $2.8 million of sales
in the nine months ended September 30, 1996 due to that period having 40 weeks
as opposed to 38 weeks in the nine months ended September 30, 1995. Without
the additional weeks, net sales for the nine months ended September 30, 1996
would have declined $4.0 million, or 7.6%. This decline reflects a 15.9%
decrease in comparable store sales, as adjusted for the change in number of
weeks. The Company believes the decrease in comparable store sales was
primarily the result of lower levels of traffic in outlet malls (where
approximately 91% of the Company's stores are located).
Gross Profit. Gross profit for the nine months ended September 30, 1996
decreased by $0.3 million, or 1.2%, as compared to the nine months ended
September 30, 1995. Gross profit as a percentage of sales increased to 43.7%
from 43.2% due primarily to clearance and liquidation markdowns in early 1996
having been included in the Company's restructuring charge recorded in the
fourth quarter of 1995. Gross profit dollars for the nine months decreased
11.4% on a comparable store/comparable week basis versus the 15.9% decline in
net sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1996 increased
$2.9 million, or 11.6%, as compared to the nine months ended September 30,
1995 due primarily to the additional weeks in 1996 and 12 net average
additional stores open during the nine months ended September 30, 1996 as
opposed to the nine months ended September 30, 1995. Selling, general and
administrative expenses as a percent of net sales increased to 53.8% for the
nine months ended September 30, 1996 as compared to 47.0% for the nine months
ended September 30, 1995. The increase as percentage of net sales is due
primarily to fixed selling, general and administrative expense being covered
by lower sales volumes. On a same store basis, as adjusted for the change in
number of weeks and adjusted for the average number of stores open, store
selling, general and administrative expenses increased 1.8% for the nine
months ended September 30, 1996 as compared to the same period in 1995.
Corporate general and administrative expenses were approximately $4.0 million
in the first nine months of 1996 versus $4.1 million in 1995, as adjusted for
the change in number of weeks. Corporate personnel headcount, including field
store operations management and distribution center, during the nine months
ended September 30, 1996 was reduced from 104 to 74, a 28.8% decline. Total
selling, general and administrative expense per average square foot of selling
space, as adjusted for the change in weeks, increased 0.3% from $47.47 in the
first nine months of 1995 to $47.34 in the first nine months of 1996. The
Company also incurred $321 thousand in selling, general and administrative
expense in the nine months of 1996 as a result of the strategic initiatives
implemented.
Interest Expense. Interest expense increased from $1.1 million for the nine
months ended September 30, 1995 to $1.4 million for the nine months ended
September 30, 1996 primarily as a result of an increase in the average
borrowings outstanding in 1996.
<PAGE>
Net Loss. Net loss for the nine months ended September 30, 1996 was
approximately $6.8 million, as opposed to a net loss of approximately $2.8
million for the nine months ended September 30, 1995. The increase occurred
primarily as a result of comparative store sales being down and partially as a
result of increases in selling, general and administrative expenses and a
reduction in income tax benefits.
Liquidity and Capital Resources
The Company had $11.3 million of working capital deficit at September 30, 1996
as compared to $2.2 million deficit at December 31, 1995. The increase in
working capital deficit was due primarily to an increase in notes payable,
partially offset by higher inventories. The increase in notes payable at
September 30, 1996 is due partially to the Company's operating losses during
the nine months then ended and partially to the Company's increase in
inventory during the same period. The increase in inventories at September 30,
1996 is primarily due to both the seasonality of the Company's business (pre-
holiday season inventory buildup) and the Company's unusually low reported
level of inventory at December 31, 1995 as a result of the $2.4 million
restructuring charge related to inventory recorded by the Company in the
fourth quarter of 1995.
On May 15,1996, the Company closed the Waiver and Amendment No. 1 to the Loan
and Security Agreement (the "New Bank Credit Facility") with Fleet Capital
Corporation (formerly Shawmut Capital Corporation). The New Bank Credit
Facility provides for borrowings of up to 65% of Eligible Inventory (as
defined), with maximum borrowings of $20 million. As amended, the New Bank
Credit Facility also provides for up to $4 million in additional borrowings
through December 31, 1996 ("Additional Borrowings"). The Company's majority
shareholder, Jordan Industries Inc., agreed to purchase a fifty percent
participation in any Additional Borrowings. Additional Borrowings accrue
interest at the lesser of the lender's prime rate plus one percent or LIBOR
plus three percent; other borrowings accrue interest at the lesser of the
lender's prime rate or LIBOR plus two percent. The New Bank Facility, as
amended, is secured by substantially all of the Company's assets and contains
covenants requiring minimum levels of tangible net worth and cash flow and
restricting capital expenditures, mergers and consolidations and the payment
of dividends. The Company is in default of certain of its financial covenants
under this Facility, and is currently discussing waivers and/or other
accomodations with its lender.
The maturity of the New Bank Facility, as amended, is May 22, 2000, after
which it will automatically renew for one year periods unless terminated by
the lender or the Company. At September 30, 1996, the Company had
approximately $0.9 million in availability under the New Bank Credit Facility.
<PAGE>
Under the Company's Subordinated Credit Agreement with its majority
shareholder, Jordan Industries, Inc. ("Jordan Industries") (the "Subordinated
Credit Agreement") the Company can borrow up to $10.0 million for the purpose
of financing the repurchase of the Company's common stock pursuant to its
stock repurchase program and for any other purpose approved by Jordan
Industries. The Subordinated Credit Agreement bears interest at LIBOR plus
3.0% or prime plus 1.5% and is secured by a second lien on substantially all
of the Company's assets. Unless terminated or otherwise extended by the
parties, the Subordinated Credit Agreement expires on August 15, 2000. On
September 30, 1996, total availability under the Subordinated Credit Agreement
was $5.9 million.
During the quarter ended September 30, 1996, the Company established a $3.2
million capital lease with Jordan Industries in order to finance the Company's
new information systems, which became operational on August 4, 1996.
For the remainder of 1996, the Company plans to restrict new store growth and
the expansion and remodeling of existing stores. The Company estimates it will
require capital expenditures of approximately $0.5 million for the remainder
of 1996. To fund this investment, the Company expects to utilize cash provided
by operations and revolving borrowings under the New Bank Credit Facility, and
the Subordinated Credit Agreement. In addition, the Company has replaced its
existing information systems with a fully integrated retail information system
at an approximate cost of $3.4 million, most of which the Company has financed
via a lease from Jordan Industries as described above. On the basis of these
sources, the Company believes that it can finance its business and operations
and pay its debts as they are due through 1996.
Net Operating Loss Carryforward
At September 30, 1996, the Company had approximately $12.2 million in net
operating loss carryforwards for Federal income tax purposes. The Company will
be able to utilize these NOLs to offset future taxable income without
significant limitations through 2011.
Impact of Inflation
General inflation has had only a minor effect on the operations of the Company
and its internal and external sources for liquidity and capital.
<PAGE>
PART II. OTHER INFORMATION
WELCOME HOME, INC.
ITEM 1. LEGAL PROCEEDINGS: NONE
ITEM 2. CHANGES IN SECURITIES: NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE
ITEM 5. OTHER INFORMATION: NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS: The separate Index to Exhibits accompanying this
filing is incorporated by reference.
(b) REPORTS FILED ON FORM 8-K: NONE
(c) Edgar Financial Data Schedule
<PAGE>
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.
WELCOME HOME, INC.
By: /s/ Mark S. Dudeck
____________________________
Mark S. Dudeck
Chief Financial Officer
(Principal Financial Officer)
DATE: November 14, 1996
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<PERIOD-END> SEP-30-1996
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<PP&E> 11,707
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