UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECUITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24912
WELCOME HOME, INC.
309 Raleigh Street
Wilmington, N.C. 28412
(910) 791-4312
INCORPORATED IN I.R.S. EMPLOYER
DELAWARE IDENTIFICATION NO.
56-1379322
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to this
Form10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $4,959,598 as of March 25, 1997. Determination of affiliate
status for this purpose is not a determination of affiliate status for any other
purpose. As of March 25, 1997, there were 7,453,615 shares of the registrant's
common stock outstanding.
Documents Incorporated by Reference. None
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
GENERAL
The Company is a specialty retailer of gifts and decorative home furnishings
and accessories in North America, with 186 stores located primarily in outlet
centers in 40 states as of December 31, 1996. Welcome Home's products, which
currently range in price up to $1500, cover a broad line of 6,000 to 10,000
Stock Keeping Units ("SKU's") and consist of eleven basic groups, including
textiles, afghans, framed art, home fragrance, stationery, brass, picture
frames, doilies, chimes and bird feeders, wood and seasonal products. The
Company's average sales transaction was approximately $16.12 for the year ended
December 31, 1996.
In the past several years, the number of Company stores has expanded from 45
at December 31, 1988 to 186 at December 31, 1996, and its net sales have
increased from $13.5 million for fiscal 1989 to $81.9 million for fiscal 1996.
During 1996, emphasis was put on improvements to its information systems and
merchandising strategies. Management does not plan on opening any new stores in
1997 as compared to 9 and 39 new stores opened in 1996 and 1995, respectively.
During the fourth quarter of 1995 and continuing in 1996, the Company
planned and implemented a series of strategic restructuring initiatives designed
to improve profitability and better position the Company. The major elements of
these initiatives included a change in the Company's merchandising strategy and
the liquidation of merchandise which is not consistent with that strategy,
closing unprofitable stores, and strengthening the Company's information systems
as necessary to successfully implement the above strategies. The Company
recorded a $8.1 million restructuring charge in 1996 and a $5.9 million
restructuring charge in 1995 for the cost of these initiatives.
On January 21, 1997, the Company filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code. In connection with this
bankruptcy proceeding management expects to close approximately 60-65
non-profitable stores in addition to the 38 stores that were closed in 1996.
This will result in a core group of approximately 120 stores.
During 1996, the Company installed a fully integrated retail information
system, which includes point of sale capabilities.
Approximately 50% to 60% of the Company's merchandise is sourced overseas.
These imports are purchased with U.S. dollars and therefore the Company does not
engage in any foreign currency hedging activities. Also, of the 186 stores open
at December 31, 1996, none were located in a foreign country. Therefore, any
exposure to foreign currency exchange rate risks are minimal and are immaterial
to the Company's consolidated financial statements.
RESULTS OF OPERATIONS
The following table sets forth certain selected income statement data of the
Company expressed as a percentage of net sales:
1996 1995 1994
---- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 59.5 61.7 56.8
Gross Profit 40.5 38.3 43.2
Selling, General, and Administrative Expenses
(Excluding Depreciation) 47.3 39.3 32.8
Restructuring Charges 9.9 6.3 -
Other non-recurring charges - 1.1 -
Management Fees (1) - - 1.7
Operating Income (loss) (19.3) (10.7) 7.1
Interest Expense 2.3 1.6 1.0
Provision (Benefit)For Income Taxes 2.7 (1.3) 1.9
Net Income (loss) (24.8)% (11.2)% 4.1%
(1) Management fees reflect intercompany management fees paid by the
Company to Jordan Industries under the Consulting Agreement. See
"Item 8. Financial Statements and Supplemental Data - Note 10 to
the Consolidated Financial Statements."
9
<PAGE>
FISCAL 1996 AS COMPARED WITH FISCAL 1995
NET SALES. Net sales for fiscal 1996 decreased by $11.3 million, or 12.1%,
as compared to fiscal 1995. This decrease reflects a decline in store count from
215 stores open at December 31, 1995 to 186 at December 31, 1996. Net sales on a
comparable store basis declined 15.7%. The Company believes that the decrease in
comparable store sales was due to lower traffic levels in outlet centers (where
96% of the Company's stores were located at December 3l, 1996). Management
believes that the above contributed to a 20.2% decline in the Company's number
of sales transactions on a same store basis in fiscal 1996 as compared to fiscal
1995. The decrease in sales transactions was partially offset by the increase in
the average sale per transaction from $14.73 in 1995 to $16.12 in 1996.
GROSS PROFIT. Gross profit for fiscal 1996 decreased $2.5 million, or 7.1%,
as compared to fiscal 1995, largely reflecting the 29 net closed stores in
fiscal 1996. Gross profit as a percentage of sales increased from 38.3% in
fiscal 1995 (before the restructuring charge described below) to 40.5% in fiscal
1996, due primarily to markdowns taken during the fourth quarter of 1995 on
inventory items sold during 1996. The cost of markdowns decreased to $5.3
million in fiscal 1996 from $7.5 million in fiscal 1995, due to the
restructuring charge taken in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for fiscal 1996 increased $2.2 million, or 5.9%, as
compared to fiscal 1995, largely as a result of the Company's store expansion in
1995. In addition, selling, and administrative expense as a percentage of net
sales increased to 47.3% in fiscal 1996 as compared to 39.3% in fiscal 1995.
This increase was due to the decrease in the Company's comparable store sales of
15.7% in fiscal 1996 and home office expenses of $6.1 million in fiscal 1996 as
compared to $5.9 million in fiscal 1995. The increase in home office expenses
was due primarily to increased payroll costs for additional corporate office
personnel necessitated by the Company's growth.
RESTRUCTURING CHARGES. In fiscal 1996, the Company recorded restructuring
charges of $8.1 million, compared to $5.9 million of charges in fiscal 1995. The
charges recorded reflect a restructuring plan adopted by management in 1995 to
close non-profitable stores. These charges were increased due to additional
store closings. See "Item 8. Financial Statements and Supplemental
Data-Note 3 to the CFS."
OTHER NON-RECURRING CHARGES THE Company recorded $1.0 million of other
non-recurring charges in fiscal 1995, while no such charges were recorded in
fiscal 1996. These charges represent the charge against its recorded investment
in store furniture, fixtures and equipment which are considered to be impaired
under Statement of Financial Accounting Standards ("SFAS) No.121. See "Item 8.
Financial Statements and Supplemental Data - Note 2 to the Consolidated
Financial Statements."
INTEREST EXPENSE - JORDAN INDUSTRIES. Interest expense to Jordan Industries
decreased to $0.3 million in fiscal 1996 from $0.7 million in fiscal 1995
primarily as a result of the reduction in interest rates incurred by the Company
on borrowings from Jordan Industries. The rate on borrowings from Jordan was
amended and reduced subsequent to the execution of the Intercompany Credit
Agreement on September 29, 1994 (see Note 6 to the Consolidated Financial
Statements) and the debt/equity swap which occurred on November 12, 1996 (See
Note 4 to the Consolidated Financial Statements).
INTEREST EXPENSE - OTHER. Interest expense - other increased to $1.6 million
in fiscal 1996 from $0.9 million in fiscal 1995 due to interest expense on the
New Bank Credit facility which closed on May 30, 1995 and the addition of new
capital leases during fiscal 1996. See Note 6 to the Consolidated financial
Statements.
NET LOSS. The Company's net loss for fiscal 1996 was $20.3 million, as
compared to $10.4 million in fiscal 1995. The increase in net loss of $9.9
million was partially due to a $2.2 million increase in restructuring charges
recorded in fiscal 1996; an increase in provision for income taxes of $3.4
million; the decrease in the Company's comparable store sales in fiscal 1996 of
15.7%, higher selling, general and administrative expenses and higher interest
expense.
FISCAL 1995 AS COMPARED WITH FISCAL 1994
NET SALES. Net sales for fiscal 1995 increased by $11.5 million, or 14.1%,
as compared to fiscal 1994. This increase reflects 26 net additional stores open
at the end of fiscal 1995 as compared to fiscal 1994 net of an 8.1% decrease in
comparable store sales. The Company believes that the decrease in comparable
store sales was due to the weak overall
10
<PAGE>
retail environment in 1995, lower traffic levels in outlet malls (where 91%
of the Company's stores were located at December 3l, 1995) and a decline in
the Company's afghan sales from approximately $15.5 million in fiscal 1994
to approximately $12.8 million in fiscal 1995. Management believes that all
of the above contributed to a 6.5% decline in the Company's number of sales
transactions on a same store basis in fiscal 1995 as compared to fiscal 1994 as
well as a 1.6% decline in the dollar value of the Company's average sales
transaction on a same store basis in fiscal 1995 as compared to fiscal 1994.
GROSS PROFIT. Gross profit for fiscal 1995 increased $0.4 million, or 1.1%,
as compared to fiscal 1994, largely reflecting the 26 net additional stores
opened in fiscal 1995. Gross profit as a percentage of sales decreased to 38.3%
in fiscal 1995 (before the restructuring charge described below) from 43.2% in
fiscal 1994, due primarily to markdowns taken during the fourth quarter of
1995.The markdowns were taken on inventory that management determined did not
fit with the Company's merchandise strategy. The cost of markdowns increased
from $2.2 million in fiscal 1994 to $7.5 million in fiscal 1995. At December 31,
1995, management recorded a charge against its inventory balance of $2.4
million, representing the reduction in value of such items not sold in fiscal
1995. This charge is included in "restructuring charges" in the Company's 1995
Statement of Operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for fiscal 1995 increased $9.8 million, or 36.5%, as
compared to fiscal 1994, largely as a result of the Company's store expansion in
1995. In addition, selling and administrative expense as a percentage of net
sales increased to 39.3% in fiscal 1995 as compared to 32.8% in fiscal 1994.
This increase was due to an increase in the Company's average occupancy cost per
average open store from $47,000 in fiscal 1994 to $55,000 in fiscal 1995, the
decrease in the Company's comparable store sales of 8.1% in fiscal 1995, and an
increase in home office expenses from $3.7 million in fiscal 1994 to $5.9
million in fiscal 1995. The increase in home office expenses was due primarily
to increased payroll costs for additional corporate office personnel and field
executives necessitated by the Company's growth, increased legal and
professional fees as a result of the Company's initial public offering of its
common stock in September 1994, and executive search and general legal fees.
RESTRUCTURING CHARGES. In fiscal 1995, the Company recorded restructuring
charges of $5.9 million, while no such charges were recorded in fiscal 1994. The
charges recorded reflect a restructuring plan adopted by management in the
fourth quarter of 1995. The major elements of the plan include a change in the
Company's merchandising strategy and the liquidation of merchandise which is not
consistent with that strategy, closing unprofitable stores, and strengthening
the Company's executive management team and information systems as necessary to
successfully implement the above strategies. Accordingly, the Company recorded
the following restructuring charges:
(i) A charge of $2.4 million against its inventory to reflect the reduction
in the value of items owned as of December 31,1995 which management determined
did not fit with the Company's merchandise strategy for 1996 or for which the
quantities owned were in excess of that called for by its strategy and,
accordingly, were liquidated at reduced prices in 1996;
(ii) A charge of $2.8 million against its recorded investment in its
information systems as of December 31, 1995. Management determined that these
systems will not support its merchandising and other strategies and, therefore,
replaced these systems in 1996;
(iii) A charge of $0.5 million to reflect the cost of planned store closings
in 1996, representing primarily its recorded investment in the related store
furniture, fixtures and leasehold improvements; and
(iv) A charge and an accrued liability of $0.2 million related to payments
due to a former executive in accordance with the Company's employment and
severance agreements with that individual.
Of the total restructuring charge of $5.9 million, approximately $0.4
million represented cash expenditures made primarily in 1996 and $5.5 million
represented a reduction in the recorded value of asset.
OTHER NON-RECURRING CHARGES. The Company recorded $1.0 million of other
non-recurring charges in fiscal 1995, while no such charges were recorded in
fiscal 1994. These charges represent the charge against its recorded investment
in store furniture, fixtures and equipment which are considered to be impaired
under Statement of Financial Accounting Standards ("SFAS") No. 121. See "Item 8.
Financial Statements and Supplemental Data - Note 2 to the Consolidated
Financial Statements."
INTEREST EXPENSE - JORDAN INDUSTRIES. Interest expense to Jordan Industries
decreased to $0.7 million in fiscal 1995 from $0.8 million in fiscal 1994
primarily as a result of the reduction in interest rates incurred by the Company
on borrowings from Jordan Industries subsequent to the execution of the
Intercompany Credit Agreement on September 29, 1994 (See "Item 8. Financial
Statements and Supplemental Data - Note 6 to the Consolidated Financial
Statements) and due to the debt/equity swap executed on November 12, 1996 (See
"Note 8. Financial Statements and Supplemental Data-
11
<PAGE>
Note 4 to the Consolidated Financial Statements").
INTEREST EXPENSE - OTHER. Interest expense - other increased to $0.9 million
in fiscal 1995 from $0.1 million in fiscal 1994 due to interest expense on the
New Bank Credit Facility which closed on May 30, 1995 and due to new capital
leases during fiscal 1995. See "Item 8. Financial Statements and Supplemental
Data -
Note 6 to the Consolidated Financial Statements."
NET INCOME (LOSS). The Company's net loss for fiscal 1995 was $10.4 million,
as compared to $3.3 million net income in fiscal 1994. The decrease of $13.7
million was due to $5.9 million in restructuring charges recorded in fiscal
1995; $1.0 million in other non-recurring charges recorded in fiscal 1995, the
decrease in the Company's comparable store sales in fiscal 1995 of 8.1%; the
decrease in the Company's gross margin as a percentage of sales; higher selling,
general and administrative expenses, higher interest expense and a $3.0 million
valuation allowance against the Company's deferred tax assets recorded in fiscal
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $(19.0) million of working capital at December 31, 1996
compared to $(2.2) million at December 31, 1995. The decrease in working capital
was due primarily to higher notes payable $8.1 million, higher payables due to
affiliates, $10.0 million, and an increase in accrued restructuring charges $4.5
million.
The Company's net cash used by operating activities for the year ended
December 31, 1996 was $3.9 million as compared to net cash used by operating
activities of $0.5 million for the fiscal year ended December 31, 1995. The
increase was due to an increased net loss of $9.9 million. The net cash used
in investing activities for the year ended December 31, 1996 decreased $3.5
million as compared to the same period in fiscal 1995 due to lower capital
expenditures of $3.4 million. The net cash provided by financing activities
for the year ended December 31, 1996 increased by $1.4 million as compared
to the same period in fiscal 1995 due to net borrowings of $6.9 million
under the New Bank Credit Facility in 1996. Net property has not changed
significantly at December 31,1996 as compared to December 31,1995 as
additions due primarily to new store expansion were offset by restructuring
and charges See "Item 8. Financial Statements and Supplemental Data - Note 3
to the Consolidated Financial Statements) and by depreciation expense."
The Company expects to satisfy its anticipated demands and commitments for
cash in the next 12 months from borrowings under the interim post-petition
credit facility extended by Fleet Capital Corporation subsequent to the
Company's Chapter 11 filing. The terms of this facility are as follows:
a) Borrowing base of $12.75 million.
b) Commencing on March 30, 1997 until March 31, 1998.
c) Secured by substantially all assets of the Company.
d) Interest calculated at 1 1/2% above prime.
NET OPERATING LOSS CARRYFORWARDS AND DEFERRED TAX ASSETS
At December 31,1996, the Company had approximately $22.3 million of net
operating loss carryforwards for Federal income tax purposes ("NOL's"). See
"Item 8. Financial Statements and Supplemental Data - Note 7 to the Consolidated
Fiscal Statements. Due to the uncertainty of generating future taxable income,
management believes it is appropriate to fully reserve the deferred tax asset.
The Company recorded a charge of $2,185 in 1996, to increase the valuation
allowance.
ADOPTION OF ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued SFAS No.121,
"Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
be Disposed Of". SFAS 121 requires, among other things, that the Company
consider whether indicators of impairment of long-lived assets held for use are
present, that if such indicators are present the Company determine whether the
sum of the estimated undiscounted future cash flows attributable to such assets
are less than the carrying amount, and that the Company recognize an impairment
loss based on the excess of the carrying amount of the assets over their fair
value if the sum of the undiscounted future cash flows are less. The Company
adopted the provisions of SFAS 121 in 1995 and recorded impairment losses of
$1.0 million which are
12
<PAGE>
included in "other non-recurring charges" in the 1995 Statement of
Operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.123
"Accounting for Stock-Based Compensation". SFAS No. 123 requires, among other
things, that companies which issue stock, stock options or other stock based
compensation to employees either (i) recognize the fair value of such awards as
expense over the period in which the employees provide the service (the fair
value method") or (ii) provide disclosure of proforma results of operations and
earnings per share determined using the fair value method but continue to
account for such awards under existing practice. The Company adopted SFAS 123 in
1996 for all awards granted in 1995 and subsequent years. The affect of applying
SFAS 123's fair value method to the Company's stock based compensation results
in a net loss that is not materially different from the amount reported.
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 working capital.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<PAGE>
Page
<S> <C>
Index to Consolidated Financial Statements
Consolidated Balance Sheets at December 31,1996 and 1995................................................14
Consolidated Statements of Operations for the Years Ended December 31,1996,1995 and 1994................15
Consolidated Statements of Cash Flows for the Years Ended December 31,1996,1995 and 1994................16
Consolidated Statements of Stockholders' Equity (Deficiency) for the Years Ended December 31, 1996,
1995 and 1994..................................................................................18
Notes to Consolidated Financial Statements..............................................................19
Report of Independent Auditors..........................................................................28
Financial Statement Schedule
For the three years ended December 31, 1996:
Schedule II Valuation and Qualifying Accounts...................................................38
</TABLE>
13
<PAGE>
WELCOME HOME, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------
(in thousands of dollars
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 612 $ 7
Inventories 16,291 16,798
Prepaid and other assets 626 818
Deferred income taxes - 470
- ----------------------------------------------------------------------------------------------------
Total Current Assets 17,529 18,093
Property & equipment, net 8,563 8,826
Deferred income taxes - 1,715
Other assets 222 542
- ----------------------------------------------------------------------------------------------------
Total Assets $26,314 $29,176
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Notes payable - line of credit $ 12,123 $ 5,213
Note payable to Jordan Industries 1,224 -
Accounts payable 3,817 11,390
Accounts payable to affiliates 11,077 1,087
Accrued expenses 2,880 1,595
Accrued restructuring charges 4,907 448
Current portion of capital lease obligations 473 514
- ----------------------------------------------------------------------------------------------------
Total Current Liabilities 36,501 20,247
Capital lease obligations 454 1,174
Note payable to Jordan Industries 1,595 4,128
Shareholders' equity: (deficiency)
Series A Redeemable Preferred stock,$0.01 par value; 11,100 shares authorized,
1996-4451 shares issued 4,510 -
Preferred stock, $0.01 par value; 1,000,000 shares authorized; none
issued - -
Common stock, $0.01 par value; 13,000,000 shares authorized;
8,500,000 shares issued 85 85
Additional paid-in capital 8,832 8,832
Cumulative translation adjustment (12) (37)
Retained deficit (20,766) (368)
- ----------------------------------------------------------------------------------------------------
Subtotal (7,351) 8,512
Less treasury stock, at cost (1996 and 1995-1,046,385 shares) 4,885 4,885
- ----------------------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficiency) (12,236) 3,627
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity (Deficiency) $26,314 $29,176
====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE>
WELCOME HOME, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
(in thousands of dollars)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $81,855 $93,166 $81,654
Cost of sales 48,734 57,504 46,381
- ------------------------------------------------------------------------------------------------------------
Gross margin 33,121 35,662 35,273
Selling, general and administrative
expenses (excluding depreciation) 38,757 36,586 26,798
Restructuring charges 8,106 5,913 -
Other non-recurring charges - 1,016 -
Depreciation 2,096 2,121 1,325
Management fee - Jordan Industries - - 1,393
- ------------------------------------------------------------------------------------------------------------
Operating income (loss) (15,838) (9,974) 5,757
Interest expense -Jordan Industries 323 655 764
Interest expense - other 1,552 865 83
Other expense 441 145 21
- ------------------------------------------------------------------------------------------------------------
Pretax income (loss) (18,154) (11,639) 4,889
Provision (benefit) for income taxes 2,185 (1,190) 1,561
- ------------------------------------------------------------------------------------------------------------
Net income (loss) $(20,339) $(10,449) $3,328
============================================================================================================
Net income (loss) per share ($2.74) ($1.35) $0.39
============================================================================================================
Weighted average shares outstanding (in thousands) 7,454 7,722 8,479
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
15
<PAGE>
WELCOME HOME, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(in thousands of dollars)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(20,339) $(10,449) $3,328
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 2,096 2,121 1,325
Increase in parent's NOL carryforward - - (158)
Deferred income taxes 2,185 (1,241) 1,559
Restructuring charges 8,106 5,913 -
Other non-recurring charges - 1,016 -
Other 433 121 -
Changes in operating assets and liabilities
Inventories 507 2,484 (6,837)
Prepaid expenses and other assets 208 369 (689)
Accounts payable 956 (1,023) 5,079
Accrued liabilities 837 485 841
Income taxes payable - (294) 62
Payables to Jordan Industries 1,080 - (797)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,931) (498) 3,713
- ----------------------------------------------------------------------------------------------------------
Cash flows used in investing activities:
Capital expenditures (1,638) (5,021) (3,409)
Other - (100) -
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities: (1,638) (5,121) (3,409)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from advances from Jordan Industries 2,000 15,678 10,668
Repayment of advances from Jordan Industries (2,000) (12,318) (8,300)
Proceeds from line of credit 63,559 19,650 -
Repayments - line of credit (56,649) (14,437) -
Proceeds from sale of common stock - - 28,661
Repayment of Intercompany Redemption Notes to Jordan Industries - - (28,661)
Purchase of treasury stock - (2,945) (1,940)
Loan fees - line of credit - (390) -
Other (736) (448) (177)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 6,174 4,790 251
- ------------------------------------------------------------------------------------------------------------
Net increase (decease) in cash and cash equivalents 605 (829) 555
Cash and cash equivalents at beginning of period 7 836 281
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $612 $ 7 $836
============================================================================================================
</TABLE>
16
<PAGE>
Supplemental disclosures of cash flow information: Cash paid during the period
for:
<TABLE>
<S> <C> <C> <C>
Interest - Jordan Industries $ - $ 655 $ 179
============================================================================================================
Interest -third party $1,236 $ 759 $ 83
============================================================================================================
Income taxes $ 58 $ 353 $ 98
============================================================================================================
Noncash investing and financing activities:
Capital leases $ - $1,255 $ 391
============================================================================================================
Issuance of Intercompany Redemption Notes to redeem 2,875,000
shares of common stock previously owned by Jordan Industries $ - $ - 28,661
============================================================================================================
Issuance of Preferred Stock to repay $4,451 of notes payable $4,451 $ - $ -
============================================================================================================
Issuance of Notes Payable to Jordan Industries for equipment $3,200 $ - $ -
============================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
WELCOME HOME, INC.
SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(in thousands of dollars)
<TABLE>
<CAPTION>
Series A
Redeemable Additional Retained
Preferred Preferred Common Paid-In Translation Earnings Treasury
Stock Stock Stock Capital Component (Deficit) Stock Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ - $ - $ 85 $8,990 $(34) $6,753 $ - $15,794
Net income - - - - - 3,328 - 3,328
Translation component - - - - (14) - - (14)
Increase in parent's NOL
carryforward - - - (158) - - - (158)
Purchase of treasury stock - - - - - - (1,940) (1,940)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 3l, 1994 - - 85 8,832 (48) 10,081 (1,940) 17,010
Net loss - - - - - (10,449) - (10,449)
Translation component - - - - 11 - - 11
Purchase of treasury stock - - - - - - (2,945) (2,945)
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 85 8,832 (37) (368) (4,885) 3,627
Net loss - - - - - (20,339) - (20,339)
Translation component - - - - 25 - - 25
Issuance of preferred stock 4,451 - - - - - - 4,451
Accrual of dividends in arrears 59 - - - - (59) - -
- ---------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $4,510 $ - $85 $8,832 $(12) $(20,766) $(4,885) $(12,236)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. SUBSEQUENT EVENT
On January 21, 1997, Welcome Home, Inc. ("the Company") filed a voluntary
petition for relief ("the Filing") under chapter 11 ("Chapter 11") of title 11
of the United States Code ("the Bankruptcy Code") in the United States
Bankruptcy Court for the Southern District of New York ("the Bankruptcy Court").
In Chapter 11, the Company will continue to manage its affairs and operate its
business as a debtor-in-possession while it develops a reorganization plan that
will restructure the Company and allow its emergence from Chapter 11. As a
debtor-in-possession in Chapter 11, the Company may not engage in transactions
outside of the ordinary course of business without approval, after notice and
hearing, of the Bankruptcy Court.
In accordance with the Bankruptcy Code, the Company can seek court approval
for the rejection of executory contracts, including real property leases. In
connection with the Company's Chapter 11 proceedings, a review is being
undertaken of all the Company's obligations under its executory contracts,
including real property leases.
Subsequent to the Filing, the Company reached an agreement with Fleet
Capital Corporation to provide secured debtor-in-possession financing in the
form of a credit facility. The credit facility provides for borrowings dependent
upon the Company's level of inventory with maximum borrowings of $12,750. The
agreement grants a security interest in substantially all of the Company's
assets. Advances under the facility bare interest at the prime rate plus 1.5%.
The agreement will terminate on March 31, 1998.
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result should the Company be unable to continue as a going concern. The
Company's recent losses from operations and the related Chapter 11 filing raise
substantial doubt about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, (i) the ability to obtain and comply with debtor-in-possession financing
agreements, (ii) confirmation of a plan of reorganization under the Bankruptcy
Code, (iii) the ability to achieve profitable operations after such confirmation
and (iv) the ability to generate sufficient cash from operations to meet its
obligations.
A plan of reorganization could materially change the amounts currently
recorded in the financial statements. The financial statements do not give
effect to any adjustment to the carrying value of assets, or amounts and
classifications of liabilities that might be necessary as a consequence of this
matter.
2. ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company, which is a majority-owned subsidiary of Jordan Industries, Inc.
("Jordan Industries") is a retailer of gifts, decorative home furnishings and
accessories. The Company offers a broad product line of 6,000 - 10,000 active
Stock Keeping Units categorized into 11 basic groups of merchandise; including,
textiles, afghans, framed art, home fragrance, stationery, brass, picture
frames, doilies, chimes and bird feeders, wood and seasonal products. As of
December 31, 1996, the Company operates 186 retail locations in 40 states, all
in leased locations. Approximately 96% of the stores are located in outlet
malls; accordingly, the Company's results of operations would be significantly
impacted by any nationwide trends in customer buying patterns, occupancy expense
or other factors affecting these malls.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Home Again Stores Inc. Significant intercompany
accounts and transactions among the Company and Home Again Stores Inc. have been
eliminated in consolidation.
19
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined
on the first-in, first-out ("FIF0") basis using the retail inventory method. All
inventory consists of finished goods.
At December 31,1995, the Company recorded a charge against its inventory of
$2,379, representing the lower of cost or market adjustment related to inventory
items which did not fit the Company's new merchandise strategies or for which
the Company owned quantities in excess of that called for by its strategies and
were, accordingly, liquidated at reduced prices in 1996. The related charge
against earnings is included in "Restructuring charges" in the 1995 Statement of
Operations. (See Note 2).
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight line method over the estimated useful lives of the assets and
includes amortization of assets held under capital leases. The useful lives of
property and equipment for computing book depreciation are five to seven years.
For income tax purposes, accelerated depreciation (Accelerated Cost Recovery
System and Modified Accelerated Cost Recovery System) methods are used.
Amortization of assets capitalized under capital lease obligations is included
in depreciation expense.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.121, " Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121). SFAS
121 requires, among other things, that the Company consider whether indicators
of impairment of long-lived assets held for use are present, that if such
indicators are present the Company determine whether the sum of the estimated
undiscounted future cash flows attributable to such assets is less than their
carrying amount, and, if so, that the Company recognize an impairment loss based
on the excess of the carrying amount of the assets over their fair value.
The Company adopted the provisions of SFAS 121 in 1995. Accordingly, the
Company evaluated the ongoing value of its property and equipment and determined
that leasehold improvements, furniture and fixtures located in unprofitable
stores with a carrying value of $1,016 were impaired and that, given the nature
of such items, their estimated fair value was insignificant. Accordingly, the
Company recorded an impairment loss on such assets in 1995 of $1,016 which is
included in "Other non-recurring charges" in the 1995 Statement of Operations.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary basis differences that have
arisen between financial statement and income tax reporting.
ADVERTISING COSTS
The Company expenses advertising costs as incurred on an annual basis.
Advertising expense amounted to $411, $681 and $1490 in 1996, 1995 and 1994,
respectively.
STORE OPENING COSTS
Salaries, training and travel costs relating to opening new retail locations
are expensed as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
20
<PAGE>
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share computations in the accompanying consolidated
statements of operations are based on the weighted average number of common
shares outstanding for each year presented. Earnings (loss) per share include
the effect of the cumulative dividends of the Series A Preferred Stock. All
share and per share amounts have been retroactively adjusted to reflect the 17
for 1 stock split described in Note 4.
REVENUE RECOGNITION
Revenue is recognized upon sales to customers.
RECLASSIFICATIONS
Certain 1995 amounts have been reclassified to conform with the 1996
presentation. Such reclassifications had no effect on previously reported net
loss or shareholders' equity.
3. RESTRUCTURING CHARGES
In the fourth quarter of 1995, the Company adopted a restructuring plan. The
major elements of the plan included a change in the Company's merchandising
strategy and the liquidation of merchandise which was not consistent with that
strategy, closing unprofitable stores, and strengthening the Company's executive
management team and information systems as necessary to successfully implement
the above strategies.
Accordingly, the Company recorded the following restructuring charges.
(i) The Company recorded a charge of $2,379 against its inventory to reflect
the reduction in the value of items owned as of December 31, 1995 which
management determined did not fit with the Company's strategy and
accordingly, were liquidated at reduced prices in 1996. (ii) The Company
recorded a charge of $2,816 against its recorded investment in its
information systems as of December 31, 1995. Management determined that
these systems will not support its merchandising and other strategies and,
therefore, replaced these systems in 1996. (iii) The Company recorded a
charge of $526 to reflect the cost of planned store closings in 1996,
representing primarily its recorded investment in the related furniture,
fixtures and leasehold improvements. (iv) The Company recorded a charge and
accrued liability of $192 related to payments due to a former executive in
accordance with the Company's employment and severance agreements with that
individual.
The Company continued the implementation of the restructuring plan in 1996.
In accordance with the plan, the Company recorded a restructuring charge of
$8,106 representing additional costs of closing 38 stores in 1996, the cost
of 62 planned store closings in 1997 and severance to two former executives.
The store closing costs, $7,233, consist of the write off of the recorded
investment in furniture, fixtures and leasehold improvements at these
stores, lease termination costs, other related store closing costs. The
severance costs for the two former executives amounted to $873.
4. COMMON AND PREFERRED STOCK TRANSACTIONS
On September 29, 1994, the Company completed an initial public offering of
2,500,000 shares of its common stock. The net proceeds of the offering after
deducting the underwriting discount and offering expenses were approximately
$24,825. The net proceeds were used to repay in full on September 29, 1994 a
note payable issued by the Company as of September 22, 1994, to Jordan
Industries, the Company's parent prior to the completion of the initial public
offering, in exchange for 2,500,000 shares of the Company's common stock
previously held by Jordan Industries (the "lntercompany Redemption Note"). The
Intercompany Redemption Note bore interest at the rate of 10%.
In addition, on October 13, 1994 the Company utilized the net proceeds from
the exercise of the underwriters' over-allotment option of approximately $3,836
to repay in full a note payable issued to Jordan Industries in exchange for
375,000 shares of the Company's common stock previously held by Jordan
Industries (the "Intercompany Over-Allotment Redemption Note") on October
11,1994. The Intercompany Over-Allotment Redemption Note bore interest at the
rate of 10%.
Prior to and subsequent to the initial public offering, Jordan Industries
owned 92.5% and 58.7% of the Company's outstanding common stock, respectively.
21
<PAGE>
On May 4,1994, the Company's Board of Directors and shareholders approved an
Amended and Restated Certificate of Incorporation (the "Certificate") which
provided for, among other things, a 17-for-1 stock split of the outstanding
common shares of the Company and the authorization of 13,000,000 shares of
common stock, par value $.01, of which 8,500,000 shares are issued. All share
and per share amounts in the accompanying financial statements have been
retroactively adjusted to reflect the stock spilt.
The Company incurred interest expense of $48 on the Intercompany Redemption
Note and $2 on the Intercompany Over-Allotment Redemption Note. Otherwise, the
above transactions had no effect on the Company's consolidated shareholders'
equity.
On November 28, 1994, the Company issued a press release announcing its
intention to repurchase shares of its common stock having an aggregate market
value of up to $5,000 in the open market. Through December 31,1996 and 1995, the
Company had repurchased 1,046,385 shares of its common stock at a total cost of
$4,885.
At December 31, 1996, Jordan Industries owned approximately 66.9% of the
Company's outstanding common stock.
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 non-voting Series A Redeemable Preferred Stock to Jordan Industries as
repayment of $4,451 outstanding under the Subordinated Credit Agreement. The
holders of this preferred stock are entitled to cumulative annual dividends of
10% of the liquidation value of the stock. The Company may not declare or pay
any dividend or distribution on any shares of stock that rank junior to the
preferred stock as long as any shares of the preferred stock are outstanding.
The Company is required to redeem the Preferred Stock ten years from the date of
issuance. The Company may, at the discretion of the Board of Directors and the
written consent of the holders of the shares, redeem the shares prior to the
mandatory redemption date. The redemption can occur through the payment of cash
or the issuance of debt or common stock and will be based on the fair market
value of the common stock. This preferred stock ranks senior to all other
capital stock of the Corporation.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1996, and 1995:
December 31,
1996 1995
Leasehold improvements $ 2,227 $ 2,536
Fixtures and equipment 16,174 15,406
------ ------
18,401 17,942
Less: Accumulated depreciation (5,978) (5,035)
Restructuring (3,860) (4,081)
------- -------
Property and equipment, net after restructuring $8,563 $8,826
====== ======
6. NOTES PAYABLE
On September 29,1994, the Company entered into a revolving credit agreement
with Jordan Industries (the "Intercompany Credit Agreement"). The Intercompany
Credit Agreement provided for borrowings of up to $15,000 at an annual interest
rate of prime plus 0.5% or LIBOR plus 2.0% and was not subject to availability
fees on the unused portion thereof.
On May 30,1995, the Company closed a Loan and Security Agreement with Fleet
Capital Corporation (the "New Bank Credit Facility"). The New Bank Credit
Facility provided for borrowings of up to 65% of the Company's Eligible
Inventory (as defined therein), with a maximum borrowing of $20,000 (part of
which the Company may use to issue documentary and standby letters of credit).
Revolving loans bare interest at the lesser of the lender's prime rate or LIBOR
plus 2.0%, and the Company paid a monthly fee equal to 1.5% per annum of the
average amount of all letters of credit outstanding during each month. The New
Bank Credit Facility also provided for an availability fee on unused borrowing
capacity equal to 0.25% per annum of the average daily amount during each month
by which $20,000 exceeded the sum of all revolving loans made to the Company and
all documentary and stand-by letters of credit issued during that period,
payable quarterly in arrears.
On May 15, 1996, the Company closed the Waiver and Amendment No. 1 to the
New Bank Credit Facility. As amended, the New Bank Credit Facility provided for
up to $4 million in additional borrowings through December 31, 1996. The
Company's majority shareholder, Jordan Industries, agreed to purchase a $2
million junior participation in the
22
<PAGE>
new bank credit facility. Additional borrowings bare interest at the
lesser of the lender's prime rate plus one percent or LIBOR plus three percent.
The New Bank Credit Facility was secured by substantially all of the
Company's assets and contained covenants requiring minimum levels of tangible
net worth and cash flow and restricting capital expenditures, mergers and
consolidations and the payment of dividends. The original terms of the New Bank
Credit Facility was amended in connection with the debtor-in-possession
financing (See Note 1).
At December 31,1996, the Company was in violation of certain financial
covenants; however, the lender has waived this violation in connection with the
debtor-in-possession financing.
At Closing, the Company borrowed a total of $12,800 under the New Bank
Credit Facility, including a $75 commitment fee payable to the lender and $55 in
other closing expenses. At December 31, 1996, borrowings outstanding under the
New Bank Credit Facility totaled $12,122 and had a weighted average interest
rate of 8.2%.
Simultaneously with the closing of the New Bank Credit Facility, the Company
amended and restated the Intercompany Credit Agreement (as amended and restated,
the "Subordinated Credit Agreement"). Under the Subordinated Credit Agreement,
the Company can borrow up to $10,000 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 bares 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.
Immediately prior to the closing of the Subordinated Credit Agreement, the
Company repaid to Jordan Industries principal and accrued interest due under the
Intercompany Credit Agreement totaling $12,270. The remaining principal due
under the Intercompany Credit Agreement, $2,500, was rolled over to the
Subordinated Credit Agreement. At December 31,1996, borrowings outstanding under
the Subordinated Credit Agreement totaled $0 and had a weighted average interest
rate of 9.0%.
On August 22, 1996, the Company issued a promissory note to Jordan
Industries for $3,200 to finance the new information systems installed in 1996.
The note bares interest at an annual rate of 10.31% and is being repaid in
monthly installments through March 1999. At December 31, 1996, the balance of
this note was $2,819.
The following summarizes the maturities of the notes payable at December 31,
1996:
1997 $13,347
1998 1,356
1999 239
Simultaneously with the closing of the New Bank Credit Facility, the Company
also entered into a consulting agreement (the "Financial Advisory Agreement")
with TJC Management Corporation ("TJC"), an affiliate of Jordan Industries.
Under the Financial Advisory Agreement, the Company engaged TJC to render
consulting services from time to time in connection with its financial and
business affairs. Under the Financial Advisory Agreement, TJC is entitled to
receive an investment banking and sponsorship fee of up to 2.0% of the aggregate
consideration paid in connection with any sale of substantially all of the
Company's common stock or assets, or any purchase by the Company of
substantially all of the common stock or assets of another business entity. In
addition, TJC is entitled to receive a financial consulting fee of up to 1.0% of
the amount of any financing made available to the Company with the assistance of
TJC. In connection with the New Bank Credit Facility, the Company paid a $200
fee to TJC.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
---- ---- ----
Current:
Federal $ - $ 7 $ 107
State and local - 44 52
Deferred 2,185 (1,241) 1,402
----- ------ -----
Total $ 2,185 $(1,190) $ 1,561
------- -------- -------
23
<PAGE>
The provision (benefit) for income taxes differs from the amount of income
tax expense (benefit) computed by applying the United States federal income tax
rate to income (loss) before income taxes. A reconciliation of the differences
is as follows
1996 1995 1994
---- ---- ----
Computed Statutory Tax Provision (Benefit) $ - $(3,957) $1,662
Increase (Decrease) Resulting From:
Increase in Valuation Allowance 8,886 3,000 -
State and local Taxes (522) (302) 29
Other (7) 69 (130)
------- --------- --------
Provision For Income Taxes $2,185 $(1,190) $1,561
====== ======== ======
Deferred income taxes at December 31, 1996 and 1995 consist of the following:
1996 1995
Current Deferred Tax Assets:
Inventory Markdowns $1,018 $ 881
Other 269 235
------ -------
Total Current Deferred Tax Asset 1,287 1,116
Less Valuation Allowance (1,287) (646)
------- -------
Net Current Deferred Tax Asset $ 0 $ 470
======== =======
Noncurrent Deferred Tax Liabilities:
Excess Tax Over Book Depreciation $ 1,752 $ 656
Other 30 30
------- ------
Total Noncurrent Deferred Tax Liabilities 1,782 686
----- -------
Noncurrent Deferred Tax Assets:
NOL Carryforwards 7,721 2,957
Writedowns of Property and Equipment 2,651 1,541
AMT Credit Carryforward 114 114
Other 1,895 143
----- ------
Total Noncurrent Deferred Tax Assets 12,381 4,755
Less Valuation Allowance (10,599) (2,354)
-------- -------
Net Noncurrent Deferred Tax Assets 0 1,715
=========== =====
For the period from January 1 through September 28, 1994, the Company was
included in the consolidated Federal income tax return of Jordan Industries.
During this period, the Company generated a net operating loss for Federal
income tax purposes which was reflected in Jordan Industries' consolidated
Federal income tax return for 1994. Jordan Industries made no payment to the
Company related to this benefit, which has been reflected as a reduction of
paid-in capital in the Company's consolidated balance sheet as of December 31,
1994.
For the period from September 29 through December 31, 1994, the Company
filed a stand-alone Federal income tax return reflecting the utilization of
approximately $5,207 of net operating loss carryforwards to offset its taxable
income. The Company's 1994 current Federal income tax expense of $107 represents
its estimated alternative minimum tax liability for the period from September 29
through December 31, 1994. For years ending subsequent to December 31, 1994, the
Company is filing a stand-alone Federal income tax return. At December 31, 1996,
the Company a net operating loss of approximately $22 million which begins
expiring in 2010 and is available to offset the Company's future taxable income
on a stand-alone basis.
The Company is required to establish a valuation allowance for any portion
of the deferred tax assets that management believes will not be realized. Based
upon the uncertainty of future earnings, management believes it is appropriate
to fully reserve the deferred tax asset at December 31, 1996. Accordingly, the
Company has recorded a charge of $2,185 in 1996 to remove the existing deferred
tax asset.
8. OPERATING LEASES
The Company leases its administrative facilities under an operating lease
with stipulated annual rentals payable monthly. The Company also leases retail
outlet stores under operating leases which generally have initial terms of five
to ten years with renewal options usually encompassing five to seven additional
years. Retail outlet store leases generally provide for minimum rentals plus
contingent rentals for (a) a percentage of sales in excess of stated amounts and
(b) a
24
<PAGE>
pro rata share of common area operating expenses. Total rental expense
under these operating leases was approximately $8,650, $8,100, and $5,800 for
the years ended December 31, 1996, 1995, and 1994, respectively. Contingent rent
expense was not material in 1996, l995 and 1994.
Future minimum lease payments, excluding contingent rentals, (which have
not been adjusted for leases that may be rejected as a result of the Company's
filing Chapter 11, See Note 1) under noncancelable operating leases with initial
or remaining terms of one year or more as of December 31,1996 are as follows:
1997 $ 7,561
1998 6,939
1999 6,113
2000 4,682
2001 3,659
Thereafter 7,253
9. CAPITAL LEASE OBLIGATIONS
Prior to December 31, 1995, the Company had entered into capital lease
obligations for the purchase of computer hardware and software, registers and
scanners. This equipment was written off as part of the 1995 restructuring
charge. However, the Company still has required payments under the capital
leases which have effective interest rates ranging from 9.1% to 11.6%.
The future minimum lease payments as of December 31, 1996 under the capital
lease obligations consist of the following:
1997 $ 545
1998 379
1999 106
2000 5
---------
Total 1,035
Less Amount Representing Interest (108)
---------
Present Value of Future Minimum Lease Payments $ 927
10. OTHER RELATED PARTY TRANSACTIONS
Prior to September 29,1994, the Company and Jordan Industries were parties
to a management consulting agreement (the "Consulting Agreement") under which
Jordan Industries provided consulting services to the Company in exchange for
management fees payable in accordance with terms stipulated by the Consulting
Agreement. The Company incurred fees under the Consulting Agreement of $1,393
for the year ended December 31, 1994.
Effective September 29,1994, the Company and Jordan Industries entered into
an agreement (the "Termination Agreement") under which the Consulting Agreement
was terminated and management fees ceased to accrue as of that date. Under the
terms of the Termination Agreement, the Company was repaid all accrued and
outstanding fees incurred under the Consulting Agreement on December 30,1994.
The Company purchases inventories from Cape Craftsmen, Inc., affiliated
through common ownership. Such purchases amounted to approximately $12,377,
$10,677, and $8,966 for the years ended December 31, 1996, 1995, and 1994,
respectively.
25
<PAGE>
11. BENEFIT PLANS
The Company participates in Jordan Industries' defined contribution 401(k)
Plan (the "Jordan Plan") effective January 1, 1993 for salaried and hourly
employees of the Company. As of July 1, 1995, the Company established the
Welcome Home, Inc. 401(k) Savings Plan (the "401(k) Plan") the provisions of
which are substantially identical to the Jordan Plan. As of December 31, 1996,
89 employees of the Company participated in the 401(k) Plan. In order to
participate in the 401(k) Plan, employees must be at least 21 and have worked at
least 1,000 hours during the first 12 months of employment. Each employee may
contribute from 1% to 15% of such employee's before-tax wages into the 401(k)
Plan. The Company does not currently match employee contributions to the 401(k)
Plan.
12. STOCK OPTION PLAN
On September 29,1994, the Company's Board of Directors instituted the Welcome
Home, Inc. Stock Option Plan (the "Plan"). Under the Plan, options to purchase
the Company's common stock and stock appreciation rights are granted for the
purpose of attracting and motivating key employees and non-employee directors of
the Company. The Plan provides for the issuance of options to purchase 8,000
shares of the Company's common stock to each newly appointed independent
director of the Company. Options granted under the Plan on September 29, 1994
were priced at the initial public offering price of $11.00 per share. All
options and stock appreciation rights subsequently granted under the Plan are
priced at the closing sale price of a share of the Company's common stock on the
date of grant on the exchange on which it is traded. All awards under the Plan
vest over three or five year period. A total of 300,000 shares of the Company's
common stock have been reserved for issuance under the Plan.
As of December 31, 1996, no stock appreciation rights have been granted under
the Plan. Options to purchase the Company's common stock outstanding under the
Plan are as follows:
Date Expiration Option Number
Granted Date Price Of Shares
9/24/1994 9/29/2004 $11.00 90,000
12/21/1994 12/21/2004 5.50 16,000
2/1/1995 2/1/2005 6.00 40,000
1/2/1996 1/2/2006 2.75 100,000
2/14/1996 2/14/2006 2.63 10,000
4/15/1996 4/15/2006 2.13 10,000
7/31/1996 7/31/2006 1.25 10,000
12/9/1996 12/9/2006 1.13 2,700
No effect is given to the options outstanding as of December 31, 1996 or 1995
in computing earnings per share for the year then ended, as their effect is
antidilutive.
The Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation"
(SFAS 123") at December 31, 1996. In accordance with SFAS 123, the Company has
elected to follow Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" and present pro forma net loss and loss per share.
The Company estimated the fair value of the options granted during 1996 and 1995
using a Black-Scholes option pricing model. The following assumptions were used
for 1996 and 1995: risk-free interest rate of 6.70% and 6.25%, respectively, no
payment dividends, validity factor of .592 and .812, respectively and an
expected life of the option of 10 years. The weighted average fair value of
options granted during 1996 and 1995 was $2.17 and $4.53 respectively. The
effect of applying SFAS 123's fair value method to the Company's stock-based
compensation results in a net loss that is not materially different from the
amount reported.
26
<PAGE>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The table below sets forth selected financial information for each quarter of
the last two years
Year Ended December 31,1996
- -----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------------
Net Sales $ 12,482 $ 18,737 $ 20,655 $ 29,981
Gross Profit 5,924 8,081 8,674 10,442
Operating loss (3,061) (1,833) (1,744) (9,200)
Net loss $ (2,140) $ (2,346) $ (2,330) (13,523)
Net loss per share* $ (0.29) $ (0.31) $ (0.31) $ (1.82)
Year Ended December 31,1995
- -------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter**
- --------------------------------------------------------------------------
Net Sales $12,137 $17,997 $23,000 $40,032
Gross Profit 5,395 7,857 9,691 12,719
Operating loss (2,430) (977) (121) (6,446)
Net loss $(1,571) $ (872) $ (382) $(7,624)
Net loss per share* $ (0.19) $ (0.11) $ (0.05) $ (1.02)
*The sum of the quarterly loss per share does not equal the annual loss per
share due to rounding.
**During the fourth quarter of 1995, the Company recorded $6,929 in
restructuring and other non-recurring charges.
During the fourth quarter of 1996, the Company
recorded $8,106 in additional restructuring charges. (see Note 3).
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Welcome Home, Inc.
We have audited the accompanying consolidated balance sheets of Welcome Home,
Inc. and subsidiary and the related consolidated statements of operations,
shareholders' equity (deficiency), and cash flows for each of the three years in
the period ended December 31, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Welcome
Home, Inc. and subsidiary at December 31, 1996 and 1995, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material aspects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 of the Notes to
the Consolidated Financial Statements, on January 21, 1997, the Company filed a
voluntary petition for relief under Chapter 11 of title 11 of the United States
Code. This matter raises substantial doubt about its ability to continue as a
going concern and recover the carrying amounts of its assets. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
March 25, 1997
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, as of the
14th of April, 1997.
WELCOME HOME, INC.
By: /S/ Mark S. Dudeck
Name: Mark S. Dudeck
Title: Vice President, Treasurer
and Chief Financial Officer
35
<PAGE>
