UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECUITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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 $1,991,237 as of March 13,
1998. Determination of affiliate status for this purpose is
not a determination of affiliate status for any other
purpose. As of March 13, 1998, there were 7,453,615 shares of
the registrant's common stock outstanding.
Documents Incorporated by Reference: None
<PAGE>
INDEX
Part I
<TABLE>
<S> <C>
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters
to a Vote of Security Holders 6
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 8. Financial Statements and Supplemental Data 12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27
Part III
Item 10. Directors and Executive Officers
of the Registrant 27
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain
Beneficial Owners and Management 29 29
Item 13 Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 31
</TABLE>
2
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Part I
Item 1. Business
General
Welcome Home, Inc. (together with its subsidiary, the
"Company" or "Welcome Home") is a specialty retailer of gifts
and decorative home furnishings and accessories in North
America, with 124 stores located primarily in factory outlet
centers in 36 states. Welcome Home stores offer a broad
product line of 1,500 to 2,500 Stock Keeping Units ("SKUs")
consisting of 11 basic groups, including decorative home
textiles, framed art, furniture, candles, lighting,
fragrance, decorative accessories, decorative garden, music,
special opportunity merchandise and seasonal products.
Welcome Home's products currently range in price up to
$1,500, with an average sales transaction for the year ended
December 31, 1997 of approximately $18.28.
History
The predecessor to the Company was originally organized in
1966 as Cape Craftsmen, Inc. ("Cape Craftsmen"), a
manufacturer, importer and distributor of a variety of
giftware including wood, ceramic, picture frames and brass
items, and operated its business through two divisions: the
wholesale division (the "Wholesale Division") and the retail
division (the "Retail Division"). The business now conducted
by the Company was formerly the Retail Division, which began
operations in the mid 1970's. Cape Craftsmen was acquired in
1983 in a leveraged buyout and was owned primarily by
partners, principals and affiliates of the Jordan Company
(the "Jordan Group"). In November 1985, Cape Craftsmen filed
for bankruptcy protection pursuant to Chapter 11 under the
United States Bankruptcy Code (the "Bankruptcy Code")
primarily due to a serious decline in the Wholesale
Division's sales.
On September 12, 1989, the Bankruptcy Court with
jurisdiction over the Cape Craftsmen bankruptcy approved a
Plan of Reorganization which became effective on September
26, 1989. On that date, Jordan Industries, Inc. ("Jordan
Industries") purchased the secured claims of a bank relating
to Cape Craftsmen amounting to approximately $36.0 million
(including accrued interest) for approximately $8.5 million.
In addition, Jordan Industries purchased the unsecured
creditors' claims of approximately $3.7 million for
approximately $0.6 million. During and immediately after the
bankruptcy proceedings, Jordan Industries also loaned funds
to Cape Craftsmen to meet working capital needs and to fund
tax and administrative claims. On March 22, 1991, Jordan
Industries acquired Cape Craftsmen ("Old Cape Craftsmen"),
then controlled by the Jordan Group, an affiliate of the
Company and Jordan Industries, in exchange for approximately
$17.2 million of notes and accrued interest owed to Jordan
Industries by Old Cape Craftsmen. Old Cape Craftsmen then
became a subsidiary of Jordan Industries. Also on that date,
the existing shareholders of Old Cape Craftsmen exchanged
their shares in Old Cape Craftsmen for shares in a newly-
formed company ("New Cape Craftsmen") which acquired from Old
Cape Craftsmen the assets of the former Wholesale Division of
Old Cape Craftsmen and a note payable to Jordan Industries.
The Retail Division, which comprised the business now
conducted by the Company, remained in Old Cape Craftsmen. Old
Cape Craftsmen was renamed Welcome Home, Inc. on March 22,
1991. Thereafter, the Company continued the business
previously conducted by the Retail Division.
From 1989 to 1995, the Company expanded from 45 to 215
stores and net sales increased from $13.5 million to $93.2
million. During 1996 and 1997, however, the Company curtailed its
expansion into new markets, with only nine new store openings
during the period, and closed 100 stores. As a result, net sales
decreased to $62.6 million for 1997. In order to restructure its
financial obligations and to implement a strategy to reverse
declining operating results, the Company filed a voluntary
petition for relief under Chapter 11 of the Bankruptcy Code
in January 1997. See "Item 3. Legal Proceedings".
Business Strategy
The Company's objective is to return to profitability by
building upon its position as a specialty retailer of home
decor and gifts with a national presence in outlet malls.
Through our direct sourcing capabilities, Welcome Home offers
a unique and often exclusive collection of value priced,
fashion forward accents and gifts for the home. This
attractive merchandise mix, accompanied by friendly customer
service oriented environment, is expected to encourage repeat
business as well as a constant flow of new customers shopping
in the outlet mall as a destination. To accomplish this
objective, the Company's management team has outlined a
business strategy for 1998 and beyond which emphasizes the
following principles:
Margin Building. Management believes the key to making
Welcome Home a profitable, growth-oriented entity is margin
building. During the second half of 1997, the Company was
able to increase its margins while continuing to offer
Welcome Home customers competitive pricing. This was
accomplished in two ways: first, more direct import buying
from better sources, better price negotiation and better
3
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product selection; second, identifying quality close out
opportunities from domestic sources that offered quick turnover
potential at higher margins and lower prices for customers.
Implementation of this strategy will continue through 1998
and is expected to result in further improvement in the
Company's margin and overall profitability.
Appropriate Merchandise Mix. During 1998, the Company
will continue to modify it merchandise assortment as
management identifies new product lines with long-term growth
potential. By improving the mix and management of product
lines within its assortment plan, the Company will seek to
maximize the performance of each store. For example, framed
art, furniture, music, fragrance and decorative accessories
will take on greater importance in most stores, while
decorative home textiles will be reduced. As a result of the
implentation of this strategy during 1997, sales of higher
margin gift merchandise increased during the fourth quarter
of 1997 versus the same period of 1996 and are expected to
continue to improve during 1998.
Aggressive Merchandising and Store Signage. The success
of the Company's value pricing program during the fourth
quarter of 1997 indicates that customers in the outlet
mall venue are looking for value. The Company has begun
positioning itself to appeal to this market segment by
introducing promotional tables and floor stacks of value buys
and calling attention to them with larger in-store signage.
This program will continue through 1998. Welcome Home also
plans to scale back some of the large shelf fixturing in its
stores to make room for promotional tables and floor stacks,
which will be complimented by a coordinated signage and
packaging program.
Customer Service. Management plans to instill a renewed
emphasis throughout the Company on customer service. Welcome
Home's new customer service theme will be entitled "Every
Customer, Every Day". The theme "Every Customer, Every Day"
simply means that every customer will be greeted,
helped, and receive special attention when they enter the
store. The Company's clean environment, fresh scents,
uncluttered cash/wraps, clear comparison pricing, and
improved merchandise assortment are expected to enable the
Company to keep existing customers and attract new ones.
Building the Welcome Home Brand. During the second half of
1997, the Company implemented a number of branding programs
designed exclusively for Welcome Home. Exclusive Welcome Home
merchandise achieves two things: first, it allows the Company
to price product based on its value and uniqueness; second,
it encourages customers to return to Welcome Home stores
either to buy more of that unique Welcome Home product or to
see new Welcome Home's products. Where appropriate, the
Company will create more exclusive Welcome Home product in 1998.
Event Marketing. During 1998, creative events in the
stores are expected to be a key ingredient in driving sales.
While the Company's two major seasonal businesses are Easter
in the Spring and Christmas in the Fall, Welcome Home will
also provide special products to create events around
Valentine's Day, St. Patrick's Day, Mother's Day, Father's
Day, the Fourth of July, Halloween and Thanksgiving.
Management plans to have the Company's major seasonal
programs exclusively designed and packaged for Welcome Home
so that the merchandise will be truly unique in the
marketplace. By creating weekly events in the stores, manage-
ment expects to encourage repeat business and thereby
increase net sales.
Effective Management Information Systems. The Company has
implemented a fully integrated retail computer system
consisting of inventory control, purchase order management,
accounting and general ledger systems. The package selected
and installed is currently in use in hundreds of retail
chains across the United States and Canada. The systems are
designed to provide SKU-level perpetual inventory tracking as
well as SKU-level sales tracking. This "core" package was
augmented by the purchase of a decision support/marketing
system that allows the merchandising and advertising
departments the ability to perform strategic promotional
advertising by gathering customer purchase information
gleaned at the point of sale.
Targeted Store Growth. As of December 31, 1997, the Company
had 124 stores. Four stores were closed in January 1998,
bringing the current store count to 120. In 1998, the
Company plans to expand the store group into some new outlet
mall locations. Management also believes that by moving some
current fixturing and taking a low-cost approach to opening
these new stores, Welcome Home can accomplish two important
goals: first, add sales volume in 1998; and, second, begin the
process of improving the store portfolio to include some of
the best outlet mall locations in the country.
Purchasing and Distribution
The Company maintains its own central buying staff,
comprised of four senior buyers. Management believes that
this centralized purchasing function provides the Company
with better control of its inventory and positions it to
negotiate cost concessions from vendors. These buyers are
responsible for identifying home fashion trends and making
sure that the Company's merchandise assortment is current.
These buyers are also responsible for designing and
developing proprietary merchandise.
4
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The Company purchases its merchandise from over 120
suppliers. In 1997, the Company's largest supplier accounted
for approximately 38% of the Company's merchandise purchases
and the Company's ten largest suppliers accounted for
approximately 65% of such purchases. The Company has no long-
term contracts for the purchase of merchandise. Although the
Company's sales are not dependent on any single supplier,
there can be no assurance that the Company's operating
results would not be adversely affected if any of its ten
largest suppliers were unable to continue to fill the
Company's orders for such supplier's products.
Approximately 60% to 70% of the Company's merchandise is
sourced from distributors purchasing abroad. Although the
Company believes that it has established close relationships
with its principal foreign manufacturing sources, the
Company's future success will depend in some measure upon its
ability to maintain such relationships. The Company believes
that no foreign supplier offers such unique product that it
could not be replaced, after temporary shortages, with
merchandise from other foreign or domestic suppliers. The
Company currently maintains multiple suppliers for each
foreign and domestic product category.
The Company's distribution center, located in Wilmington,
North Carolina, is used to temporarily warehouse merchandise,
where it is broken down into individual store orders and
shipped directly to store locations. Approximately 25% of
the total merchandise mix flows through the Wilmington
distribution center and is currently being shipped to the
stores on a weekly basis. The distribution center is also
used to assemble merchandise that is shipped to new stores
for initial stocking upon their opening. Otherwise, all
domestically sourced inventory is shipped directly to the
stores. This strategy avoids incremental costs associated
with maintaining inventory on a centralized basis.
Management
At all store locations, there is a Store Manager and an
Assistant Store Manager. Depending on the size and sales
volume, the store may have one to four additional Sales
Clerks. The Store Manager is responsible for the overall
management and maintenance of the store including sales and
receipt of merchandise, record-keeping and reporting,
displays, customer service and security. The Assistant Store
Manager is equally trained in all of these areas. The Store
Manager reports to a District Manager. On average, each
District Manager has responsibility for 15 stores. As of
December 31, 1997, the Company had 9 District Managers.
Employees
As of December 31, 1997, the Company had 283 full-time and
494 part-time employees. One hundred forty seven employees
are in managerial positions, with 14 at the central office,
and the remainder in store operations. As of December 31,
1997, the labor force in store operations consisted of 744
people, including 9 District Managers, 124 Store Managers,
117 Assistant Store Managers and 494 hourly, part-time sales
clerks and cashiers. None of the Company's employees are
covered by collective bargaining agreements. The Company
believes that the dedication of its employees is critical to
its retailing success, and that its relations with its
employees are excellent.
Competition
Competition is highly intense among specialty retailers,
traditional department stores and mass merchant discounters
in outlet malls and other high traffic retail locations. The
Company competes for customers principally on the basis of
product assortment, convenience, customer service, price and
the attractiveness of its stores. The Company also competes
against other retailers for suitable locations and qualified
management personnel. Because of the seasonal nature of its
business, competitive factors are most important during the
summer and Christmas selling seasons.
The Company has limited competition with different types of
retail stores where some of the Company's products are
offered. Many of these competitors have substantially greater
financial, marketing, advertising, store distribution and
other resources than the Company. The Company also believes
that the dedication of its employees and emphasis on customer
service provides an important competitive advantage for the
Company.
Seasonality
The Company historically has experienced and expects to
continue to experience significant seasonal fluctuations in
its net sales and net income. The Company generally has
experienced losses and relatively lower sales for the first
half of the calendar year as compared to the summer vacation
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season through the Christmas holiday season. As a result,
the Company's outstanding borrowings under its line of credit
have been significantly higher during the year than at year
end.
Trade Names, Service Marks and Franchise Agreements
The Company generally uses the "Welcome Home" name as a
trade name and as a service mark in connection with retail
services. In Northern California, the Company uses the "Home
Again" name as a trade name and service mark in connection
with retail services. The Company has registered the "Welcome
Home" and "Home Again" logos as service marks with the United
States Patent and Trademark office. Management believes that
the names "Welcome Home" and "Home Again", and growing
customer recognition of these names, are important elements
of the Company's merchandising strategy.
The Company is not a party to any franchise agreements and
does not intend to enter into franchise relationships in the
future.
Item 2. Properties
The Company had 124 stores as of December 31, 1997, all of
which are leased. In most cases, the Company pays a minimum
fixed rent plus a contingent rent based on net sales of the
store in excess of a certain threshold. Certain of the
Company's store leases contain restrictive covenants
regarding, among other things, pricing and product offerings,
none of which the Company believes have or may have a
material adverse effect on the way it conducts its business.
The Company currently expects that its policy of leasing
rather than owning will continue. The Company's leases
generally provide for original lease terms of five or ten
years, with renewal options generally for an additional five
or seven years at moderately increased rents, generally based
upon consumer price indexes.
The Company's corporate headquarters, which is also leased,
is located in Wilmington, North Carolina and occupies 36,500
square feet, of which 26,500 square feet serves as a
distribution center and 10,000 square feet serves as office
space. The central warehouse is used to temporarily store
merchandise for distribution and used to initially stock new
stores upon their opening
The Company's mix of 124 stores at December 31, 1997
consisted of 32 stores of less than 2,400 square feet, 33
stores of 2,400 - 2,800 square feet and 36 stores of 2,800 -
3,300 and 23 stores of 3,300 - 4,600 plus square feet.
Item 3. Legal Proceedings
On January 21, 1997, the Company filed a voluntary petition
for relief under the provisions of Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of New York. The filing is intended to
allow the Company to restructure its financial obligations
through a plan of reorganization. Fleet Capital Corporation
has extended a post-petition credit facility to the Company
to enable it to continue to conduct its business while the
bankruptcy proceeding is pending. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
The Company is not involved in any other legal proceedings
which are expected to have a material effect on the Company's
results of operations or financial condition, nor is it aware
of any threatened litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were voted upon during the fourth quarter of the
year ended December 31, 1997.
6
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Part II
Item 5 . Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock traded on the Nasdaq National
Market System under the symbol "WELC" during 1995 and 1996.
The Company has not paid dividends since its initial public
offering, and does not anticipate paying dividends in the
foreseeable future.
Effective as of the close of business on January 13, 1997,
Nasdaq delisted the Company from its National Market System.
The common stock is now traded on the OTC Bulletin Board
System operated by the National Association of Securities
Dealers, Inc. As of March 13, 1998 there were approximately
60 holders of record of the Company's common stock. The
Company believes that the number of beneficial holders of its
common stock is substantially higher. The following table
sets forth the high, low and closing bid prices of the
Company's common stock for each quarter in the three year
period ended December 31, 1997:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997:
High bid $ .75 $ .19 $ .20 $ .20
Low bid $ .05 $ .04 $ .08 $ .02
Closing bid $ .19 $ .07 $ .16 $ .03
1996:
High bid $ 2.88 $2.25 $1.75 $1.06
Low bid $ 2.75 $2.25 $1.50 $ .63
Closing bid $ 2.88 $2.25 $1.75 $ .63
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 Redeemable
Preferred Stock (the "Series A Preferred Stock") to Jordan
Industries as repayment of $4,451,000 outstanding under the
Subordinated Credit Agreement. The holders of the Series A
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 Series A Preferred Stock as
long as any shares of Series A Preferred Stock are outstanding.
The Company is required to redeem the Series A 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 Series A Preferred Stock, 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 Series A Preferred Stock ranks
senior to all other capital stock of the Company.
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Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31
- ----------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------
(in thousands except per share data)
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales $62,590 $81,855 $93,166 $81,654 $61,633
Gross Profit 23,817 33,121 35,662 35,273 28,207
Selling, general and
administrative expenses
(excluding depreciation) 25,397 38,757 36,586 26,798 20,686
Management fees -
Jordan Industries - - - 1,393 1,782
Restructuring charges - 8,106 5,913 - -
Other non-recurring charges - - 1,016 - -
Bankruptcy fees 1,130 - - - -
Operating income (loss) (4,895) (15,838) (9,974) 5,757 4,799
Interest expense Jordan
Industries 234 323 655 764 369
Interest expense - other 1,162 1,552 865 83 4
Provision (benefit) for
income taxes (1) - 2,185 (1,190) 1,561 1,923
Income (loss) before
extraordinary item
and cumulative effect of
accounting change (6,266) (20,339) (10,449) 3,328 2,441
Net income (loss) (2) $(6,266) $(20,339) $(10,449) $3,328 $5,213
Basic and diluted loss per
common share $ (0.90) $ (2.74) $(1.35) $ 0.39 $ 0.61
Weighted average number of
common shares
outstanding (3) 7,454 7,454 7,722 8,479 8,500
SELECTED OPERATING DATA:
Stores opened during the
period 0 9 39 34 35
Stores closed during the
period 62 38 13 3 4
Number of stores open at
period end 124 186 215 189 158
Total square feet of store
space (in thousands) 350 514 587 488 382
Sales per average square
foot of total store
space (4) $158 $144 $177 $187 $182
Percentage increase
(decrease) in comparable
store sales(5) 2.4% (15.7)% (8.1)% 8.4% 6.5%
OTHER OPERATING DATA:
Capital expenditures $134 $1,638 $5,021 $3,409 $2,896
Depreciation 2,185 2,096 2,121 1,325 940
BALANCE SHEET DATA:
Working capital
(deficiency) $(25,084) $(18,972) $(2,154) $7,781 $5,048
Total assets 18,668 26,314 29,176 33,614 26,917
Total debt 7,556 15,869 11,029 1,660 664
Shareholders' equity
(deficiency) (18,527) (12,236) 3,627 17,010 15,794
(1) Reflects only state income taxes as the Company and
Jordan Industries had Federal net operating loss
carryforwards during these periods. See Note 7 to the
Consolidated Financial Statements.
(2) Net income for the year ended December 31,1993
includes a $2.8 million cumulative effect of a change
in accounting principle pertaining to the adoption of
SFAS 109.
(3) Reflects weighted average outstanding shares
retroactively adjusted to reflect the 17 for 1 stock
split in 1994.
(4) Calculated by dividing the net sales for the period
by the average square feet of total store space. The
amounts have not been adjusted for the seasonal nature
of the Company's sales or for the impact of opening
stores in different periods each year.
(5) Calculated using net sales of stores which have been
open during at least one full calendar year.
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Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company is a specialty retailer of gifts and decorative
home furnishings and accessories in North America, with 124
stores located primarily in factory outlet centers in 36
states as of December 31, 1997. Welcome Home's products,
which currently range in price up to $1,500, cover a broad
product line of 1,500 to 2,500 Stock Keeping Units ("SKUs")
consisting of 11 basic groups, including decorative home
textiles, framed art, furniture, candles, lighting,
fragrance, decorative accessories, decorative garden, music,
special opportunity merchandise and seasonal products. The
Company's average sales transaction was approximately $18.28
for the year ended December 31, 1997 as compared to $16.12
for the year ended December 31, 1996.
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 Bankruptcy Code. In
connection with this bankruptcy proceeding, management closed
62 non-profitable stores in 1997 in addition to the 38 stores
that were closed in 1996. The Company also closed four stores
in January 1998, bringing it to a core group of 120 stores.
Approximately 60% to 70% 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 124 stores
open at December 31, 1997, 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:
1997 1996 1995
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 61.9 59.5 61.7
Gross Profit 38.1 40.5 38.3
Selling, General, and
Administrative Expenses
(Excluding Depreciation) 40.6 47.3 39.3
Restructuring Charges - 9.9 6.3
Other non-recurring charges - - 1.1
Bankruptcy fees 1.8 - -
Operating Loss (7.5) (19.3) (10.7)
Interest Expense 2.2 2.3 1.6
Provision (Benefit)For Income
Taxes - 2.7 (1.3)
Net Loss (10.0)% (24.8)% (11.2)%
Fiscal 1997 as compared with Fiscal 1996
Net Sales. Net sales for fiscal 1997 decreased by $19.3
million, or 23.5%, as compared to fiscal 1996. This decrease
reflects a decline in store count from 186 stores open at
December 31, 1996 to 124 at December 31, 1997. Net sales on a
comparable store basis increased by $1.3 million, or 2.4%.
The increase in comparable store sales is attributed to
modifications of the Company's merchandise assortment
implemented during the latter half of 1997. Despite an 8.2%
decline in the Company's number of sales transactions on a
same store basis in 1997, the Company increased its average
sale to $18.45 in 1997, compared to $16.55 in 1996 on a same
store basis.
Gross Profit. Gross profit for fiscal 1997 decreased $9.3
million, or 28.1%, as compared to fiscal 1996, largely
reflecting the closure of 62 stores in fiscal 1997. Gross
profit as a percentage of sales decreased from 40.5% in
fiscal 1996 to 38.1% in fiscal 1997, due primarily to
markdowns taken during the first seven months of 1997 on
inventory items sold in "Going Out of Business" sales in the
stores that were closed. The cost of markdowns decreased to
$6.2 million in fiscal 1997 from $7.4 million in fiscal 1996.
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Selling, General and Administrative Expense. Selling, general
and administrative expense for fiscal 1997 decreased by $13.4
million, or 34.5%, as compared to fiscal 1996, largely as a
result of the Company's store closings in 1996. In addition,
selling, and administrative expense as a percentage of net
sales decreased to 40.6% in fiscal 1997 as compared to 47.3%
in fiscal 1996. This decrease was due to the increase in the
Company's comparable store sales of 2.4% in fiscal 1997 and
the decrease in home office expenses of $4.5 million in
fiscal 1997 as compared to $6.1 million in fiscal 1996. The
decrease in home office expenses was due primarily to
decreased payroll costs for corporate office personnel
associated with a corporate layoff necessitated by the
Company's closing of 62 stores in 1997 and 38 stores in 1996.
Restructuring Charges. In fiscal 1997, the Company did not
record any restructuring charges compared to $8.1 million of
charges in fiscal 1996. The charges recorded reflect a
restructuring plan adopted by management in 1995 and continued
in 1996 to close non-profitable stores and severance to two
former executives. The Company closed 38 stores in 1996 and 62
stores in 1997 with costs of $7.2 million from the writeoff of
the recorded investment in furniture, fixtures and leasehold
improvements at these stores, lease termination costs and other
related store closing costs. The severance costs for the two
former executives amounted to $0.9 million. See Note 3 of the
Consolidated Financial Statements.
Bankruptcy Fees. The Company recorded $1.1 million of
bankruptcy fees in fiscal 1997, while no such charges were
recorded in fiscal 1996. These charges represent the expenses
associated with the Chapter 11 bankruptcy proceedings.
Interest Expense - Jordan Industries. Interest expense to
Jordan Industries decreased from $0.3 million in fiscal 1996
to $0.2 million in fiscal 1997 primarily as a result of the
reduction in the borrowings by the Company with Jordan
Industries.
Interest Expense - Other. Interest expense - other
decreased from $1.6 million in fiscal 1996 to $1.2 million in
fiscal 1997 due to lower interest expense on its post-
petition credit facility. Borrowings under the facility were
lower due to reduced inventory levels required for a fewer
number of stores. See Note 6 of the Consolidated Financial
Statements.
Net Loss. The Company's net loss for fiscal 1997 was $6.3
million, as compared to $20.3 million in fiscal 1996. The
decrease in net loss of $14.1 million was due to a $8.1
million decrease in restructuring charges recorded in fiscal
1996; the increase in the Company's comparable store sales
in fiscal 1997 of 2.4%, lower selling, general and
administrative expenses and interest expense.
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 decrease in
comparable store sales is attributed primarily 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 $7.4 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
and continued in 1996 to close non-profitable stores. These
charges were increased due to additional store closings. See
Note 3 of the Consolidated Financial Statements.
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 SFAS 121. See Note 2 of the Consolidated
Financial Statements.
10
<PAGE>
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 reduced subsequent to the execution of the
Intercompany Credit Agreement on September 29, 1994 and the
debt/equity swap which occurred on November 12, 1996. See
Notes 4 and 6 of 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 credit facility
which closed on May 30, 1995 and the addition of new capital
leases during fiscal 1996. See Note 6 of 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.
Liquidity and Capital Resources
The Company had a $25.1 million of working capital deficiency at
December 31, 1997 compared to a $19.0 million deficiency at
December 31, 1996. The increase in working capital deficiency
was due primarily to lower inventory levels of $5.4 million
attributable to having 186 stores open at December 31, 1996
compared to 124 stores opened at December 31, 1997.
The Company's net cash provided from operating activities
for the year ended December 31, 1997 was $6.3 million as
compared to net cash used by operating activities of $4.4
million for the fiscal year ended December 31, 1996. The
increase was due to a decreased net loss of $14.1 million.
The net cash used in investing activities for the year ended
December 31, 1997 decreased $1.6 million as compared to the
same period in fiscal 1996 was due to lower capital
expenditures of $1.5 million. The net cash provided by
financing activities for the year ended December 31, 1997
decreased by $13.3 million as compared to the same period in
fiscal 1996 due to repayments of $6.2 million under the
credit facility in 1997 compared to net borrowings of $6.9
million in 1996. Net property was lowered by $2.1 million at
December 31,1997 as compared to December 31,1996 by
depreciation expense.
The Company expects to satisfy its anticipated demands and
commitments for cash in the next 12 months from borrowings
under the post-petition credit facility extended by Fleet
Capital Corporation. 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) Extended on March 13, 1998 until January 31, 1999.
d) Secured by substantially all assets of the Company.
e) Interest calculated at 1 1/2% above prime.
Net Operating Loss Carryforwards and Deferred Tax Assets
At December 31,1997, the Company had approximately $36.1
million of net operating loss carryforwards for Federal
income tax purposes ("NOL's"). See Note 7 of 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 $2.2 million 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 included
in "other non-recurring charges" in the Consolidated
Statement of Operations for the year ended December 31, 1995.
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
11
<PAGE>
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.
The Financial Accounting Standards Board issued Statement
No.128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any
dilutive effects of stock options. Diluted earnings per
share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts
for all periods have been presented, and where appropriate,
restated to conform to Statement 128 requirements. Stock
options are considered anti-dilutive and therefore have not
been included in the computation.
The Financial Accounting Standards Board issued Statements
No 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures About Segments of and Enterprise and Related
Information", which are both effective for years beginning
after December 31, 1997. Statement 130 addresses reporting
amounts of other comprehensive income and Statement 131
addresses reporting segment information. The Company does
not believe that the adoption of these new standards will
have a material impact on its financial statements.
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.
Year 2000
The Company has appointed a Year 2000 management committee
to conduct an assessment of the Company's internal
operations. The assessment, which is currently in progress,
addresses all computer systems, applications and any other
systems that may be vulnerable to Year 2000 issues. The
Company anticipates addressing all systems during 1998.
While the Company does not believe that the costs associated
with addressing Year 2000 issues will be material to the
Company's financial statements, business or operations, the
Company's assessment of the Year 2000 issues is ongoing and
there can be no assurance that the costs of addressing the issues
will not have a material impact on the Company's financial
statements, business or operations.
Item 8. Financial Statements and Supplemental Data
Index to Consolidated Financial Statements Page
</TABLE>
<TABLE>
<S> <C>
Consolidated Balance Sheets at December 31,1997 and 1996 13
Consolidated Statements of Operations for the Years Ended
December 31,1997,1996 and 1995 14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 15
Consolidated Statements of Shareholders' Equity (Deficiency)
for the Years Ended December 31,1997,
1996 and 1995 17
Notes to Consolidated Financial Statements 18
Report of Independent Auditors 26
Financial Statement Schedule
For the three years ended December 31, 1997:
Schedule II Valuation and Qualifying Accounts 35
</TABLE>
12
<PAGE>
WELCOME HOME, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
1997 1996
- --------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C>
- --------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $845 $1,715
Inventories 10,895 16,291
Prepaid and other assets 131 626
- --------------------------------------------------------------------------
Total Current Assets 11,871 18,632
Property & equipment, net 6,488 8,563
Other assets 309 222
- --------------------------------------------------------------------------
Total Assets $18,668 $27,417
==========================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank overdraft $1,179 $1,103
Notes payable - line of credit 5,960 12,123
Note payable to Jordan Industries 1,356 1,224
Accounts payable 338 3,817
Accounts payable to affiliates 4,018 11,077
Accrued expenses 4,164 2,880
Accrued restructuring charges 605 4,907
Current portion of capital lease
obligations 0 473
- -------------------------------------------------------------------------
Total Current Liabilities 17,620 37,604
Capital lease obligations 0 454
Note payable to Jordan Industries 240 1,595
Pre-petition liabilities:
Accounts payable 2,843 0
Accounts payable to affiliates 11,046 0
Accrued expenses 2,133 0
Accrued restructuring charges 3,313 0
- -------------------------------------------------------------------------
Total Pre-petition liabilities 19,335 0
Shareholders' deficit:
Series A redeemable preferred
stock, $0.01 par value;
11,100 shares authorized;
4,451 shares issued 4,955 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 (37) (12)
Retained deficit (27,477) (20,766)
- -------------------------------------------------------------------------
Subtotal (13,642) (7,351)
Less treasury stock, at cost
(1,046,385 shares) 4,885 4,885
- -------------------------------------------------------------------------
Total Shareholders' Deficit (18,527) (12,236)
- -------------------------------------------------------------------------
Total Liabilities and Shareholders'
Deficit $18,668 $27,417
=========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
13
<PAGE>
WELCOME HOME, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended
December 31,
1997 1996 1995
- --------------------------------------------------------------------------
(in thousands of dollars except per share data)
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Net Sales $62,590 $81,855 $93,166
Cost of sales 38,773 48,734 57,504
- --------------------------------------------------------------------------
Gross margin 23,817 33,121 35,662
Selling, general and
administrative expenses
(excluding depreciation) 25,397 38,757 36,586
Restructuring charges - 8,106 5,913
Other non-recurring charges - - 1,016
Bankruptcy fees 1,130 - -
Depreciation 2,185 2,096 2,121
- --------------------------------------------------------------------------
Operating loss (4,895) (15,838) (9,974)
Interest expense - Jordan
Industries 234 323 655
Interest expense - other 1,162 1,552 865
Other (income) expense (25) 441 145
- --------------------------------------------------------------------------
Pretax loss (6,266) (18,154 (11,639)
Provision (benefit) for income
taxes - 2,185 (1,190)
- --------------------------------------------------------------------------
Net loss $(6,266) $(20,339) $(10,449)
==========================================================================
Net loss available to common
shareholders $(6,711) $(20,398) $(10,449)
==========================================================================
Basic and diluted loss per
common share $(0.90) $(2.74) $(1.35)
==========================================================================
Weighted average common shares
outstanding (in thousands) 7,454 7,454 7,722
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
14
<PAGE>
WELCOME HOME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C>
- -------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,266) $(20,339) $(10,449)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation 2,185 2,096 21,121
Deferred income taxes - 2,185 (1,241)
Restructuring charges - 8,106 5,913
Other non-recurring charges - - 1,016
Changes in operating assets and liabilities
Inventories 5,396 507 2,484
Prepaid expenses and other assets 408 208 369
Accounts payable (560) 1,038 (1,023)
Accrued liabilities 2,428 837 485
Income taxes payable - - (294)
Payables to Jordan Industries 2,764 1,007 -
- ---------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 6,257 (4,355) (498)
- ---------------------------------------------------------------------------
Cash flows used in investing activities:
Capital expenditures (134) (1,638) (5,021)
Other 122 - (100)
- ---------------------------------------------------------------------------
Net cash used in investing activities: (12) (1,638) (5,121)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
(12) (1,638) (5,121)
Cash flows from financing activities:
Proceeds from advances from Jordan
Industries - 2,000 15,678
Repayment of advances from Jordan
Industries - (2,000) (12,318)
Proceeds from line of credit 71,858 63,559 19,650
Repayments - line of credit (78,021) (56,649) (14,437)
Purchase of treasury stock - - (2,945)
Loan fees - line of credit - - (390)
Other (952) (736) (448)
- ----------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (7,115) 6,174 4,790
- ----------------------------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents (870) 181 (829)
Cash and cash equivalents at beginning
of period 1,715 1,534 2,363
- ---------------------------------------------------------------------------
Cash and cash equivalents at end of
period $ 845 $ 1,715 $ 1,534
===========================================================================
</TABLE>
15
<PAGE>
WELCOME HOME, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
(in thousands of dollars)
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest - Jordan Industries $ 234 $ - $ 655
=============================================================================
Interest - third party $1,137 $1,236 $ 759
=============================================================================
Income taxes $ - $ 58 $ 353
=============================================================================
Noncash investing and financing activities:
Capital leases $ - $ - $ 1,255
=============================================================================
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
16
<PAGE>
WELCOME HOME, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
For the Years Ended December 31, 1995, 1996 and 1997
(in thousands of dollars)
<TABLE>
<CAPTION>
Series A
Redeemable Additional
Preferred Preferred Common Paid-In
Stock Stock Stock Capital Subtotal
<S> <C> <C> <C> <C> <C>
Balance at December 3l,
1994 $ - $ - $ 85 $ 8,832 $ 8,917
Net loss - - - - -
Translation component - - - - -
Purchase of treasury stock - - - - -
- ----------------------------------------------------------------------------
Balance at December 31,
1995 - - 85 8,832 8,917
Net loss - - - - -
Translation component - - - - -
Issuance of preferred
stock 4,451 - - - 4,451
Accrual of preferred stock
dividends in arrears 59 - - - 59
- ---------------------------------------------------------------------------
Balance at December 31,
1996 4,510 - 85 8,832 13,427
Net loss - - - - -
Translation component - - - - -
Accrual of preferred stock
dividends in arrears 445 - - - 445
- ---------------------------------------------------------------------------
Balance at December 31,
1997 $4,955 $ - $85 $8,832 $13,872
===========================================================================
</TABLE>
WELCOME HOME, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIENCY)
For the Years Ended December 31, 1995, 1996 and 1997
(in thousands of dollars)
(continued)
<TABLE>
<CAPTION>
Retained
Translation Earnings Treasury
Subtotal Component (Deficit) Stock Total
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994 $ 8,917 $ (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 8,917 (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 13,427 (12) (20,766) (4,885) (12,236)
Net loss - - (6,266) - (6,266)
Translation component - (25) - - (25)
Accruals of dividends
in arrears 445 - (445) - -
- ----------------------------------------------------------------------------
Balance at December 31,
1997 $13,872 $ (37) $(27,477) $(4,885) $(18,527)
=============================================================================
</TABLE>
See Notes to Consolidated Financial Statements
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
1. Chapter 11 Bankruptcy Proceedings
On January 21, 1997, Welcome Home, Inc. (the "Company")
filed a voluntary petition for relief 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 has been
undertaken of all the Company's obligations under its
executory contracts, including real property leases.
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
proceedings 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.
Under Chapter 11, actions to enforce certain claims against the
Company are stayed if the claim arose, or are based on events that
occurred, on or before January 21, 1997. Other liabilities may arise
or be subject to compromise as a result of rejection of executory
contracts, including leases, or the Court's determination of the
allowed amount of contingent or other disputed claims. The ultimate
terms of settlement of these claims will be determined in accordance
with a plan of reorganization which requires the approval of impaired
prepetition creditors and stockholders and confirmation by the court.
Liabilities subject to compromise in accompanying consolidated balance
sheets represent the Company's estimate of liabilities as of
December 31, 1997, subject to adjustment in the reorganization process.
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. Jordan
Industries owns approximately 67% of the Company's
outstanding common stock. The Company offers a broad product
line of 1,500 - 2,500 Stock Keeping Units categorized into 11
basic groups of merchandise; including decorative home
textiles, framed art, furniture, candles, lighting,
fragrance, decorative accessories, decorative garden, music,
special opportunity merchandise and seasonal products. As of
December 31, 1997, the Company operated 124 retail locations
in 36 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.
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.
18
<PAGE>
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.
The carrying values of property and equipment are reviewed if
the facts and circumstances indicate potential impairment of
their carrying value. Any impairment in the carrying value
of such intangibles is recorded when identified. In 1995,
the Company determined that certain property and equipment at
unprofitable stores was impaired and recorded a charge of
$1,016. This charge is included at "Other non-recurring
charges" in the Statement of Operations for the year ended
December 31, 1995.
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 $111, $411 and
$681 in 1997, 1996, and 1995, 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.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("SFAS 128"). SFAS 128
replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of stock options. Diluted
earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS128 requirements.
Stock options are considered anti-dilutive and therefore have
not been included in the computation.
Revenue Recognition
Revenue is recognized upon sales to customers.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to
conform with the 1997 presentation. Such reclassifications
had no effect on previously reported net loss or
shareholders' deficit.
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.
19
<PAGE>
(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 and other related store closing
costs. The severance costs for the two former executives
amounted to $873.
As of December 31, 1997, accrued restructuring charges
consist of landlord rejection claims on leases for closed
stores, estimated costs of closing four stores in 1998 and
severance for a former executive. The decrease in the
restructuring accrual during 1997 is related to primarily to
payments made for expenses associated with closing stores
totaling $275 and severance payments made to a former
executive totaling $225.
4. Shareholders' Equity (Deficit)
Series A Redeemable Preferred 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 series of preferred stock are
entitled to cumulative annual dividends of 10% of the
liquidation value of the stock. The Company recorded an
accrual for the preferred stock dividends in arrears of $445
and $59 during the years ended December 31, 1997 and 1996,
respectively. No dividends were paid by the Company during
1997 and 1996. The Company may not declare or pay any
dividend or distribution on any shares of stock that rank
junior to this series of preferred stock as long as any
shares of the series are outstanding. The Company is
required to redeem this series of 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 series of preferred stock ranks senior to all
other capital stock of the Company.
Loss Per Share
The following table sets forth the computation of basic and
diluted earnings per share in accordance with Statement No.
128, Earnings per share:
December 31,
1997 1996 1995
Numerator:
Net loss $ (6,266) $ (20,339) $(10,449)
Cumulative preferred stock
dividends (445) (59) -
------ -------- -------
Numerator for basic and
dilutive earnings per share -
Loss available to common
shareholders $ (6,711) $(20,398) $(10,449)
Denominator:
Denominator for basic and
dilutive earnings per share -
Weighted average shares 7,454 7,454 7,722
------ ------ ------
Basic and diluted loss
per share $ (0.90) $ (2.74) $ (1.35)
======== ======== ========
20
<PAGE>
5. Property And Equipment
Property and equipment consists of the following at December
31, 1997, and 1996:
December 31,
1997 1996
Leasehold improvements $ 1,584 $ 2,227
Fixtures and equipment 12,944 16,174
14,528 18,401
Less: Accumulated depreciation (6,644) (5,978)
Restructuring reserve (1,396) (3,860)
Property and equipment, net $6,488 $8,563
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 London Interbank Offered
Rates ("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 New Bank
Credit Facility. Additional borrowings bear 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.
Simultaneously with the closing of the New Bank Credit
Facility, the Company amended and restated a credit agreement
with its parent company, Jordan Industries, ("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 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.
Subsequent to filing Chapter 11, 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 Subordinated Credit Agreement were $5,960
and $12,123 and had a weighted average interest rate of 9.6% and 8.2%,
respectively. On March 13, 1998, the Company reached an agreement
with Fleet Capital Corporation to extend the credit facility until
January 31, 1999.
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 bears interest at an
annual rate of 10.31% and is being repaid in monthly
installments through March 1999. The balance of this note
was $1,596 at December 31, 1997 and $2,819 at December 31,
1996.
21
<PAGE>
The following summarizes the maturities of the notes payable
at December 31, 1997:
1998 $1,356
1999 240
------
$1,596
======
The Company estimates that the fair value of notes payable
approximates the carrying value based upon its effective
borrowing rate for debt with similar terms and remaining
maturities. Disclosure about fair value of financial
instruments is based upon information available to management
as of December 31, 1997. Although management is not aware of
any factors that would significantly affect the fair value of
these amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since
that date.
7. Income Taxes
The provision (benefit) for income taxes consists of the
following:
1997 1996 1995
---- ---- ----
Current:
Federal $ - $ - $ 7
State and local - - 44
Deferred - 2,185 (1,241)
---- ----- -------
Total $ - $2,185 $(1,190)
===== ====== ========
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:
1997 1996 1995
---- ---- ----
Computed Statutory Tax
Provision (Benefit) $(2,131) $(6,172) $(3,957)
Increase (Decrease) Resulting From:
Increase in Valuation Allowance 2,325 8,886 3,000
State and local Taxes (194) (522) (302)
Other - (7) 69
------ ------ ------
Provision For Income Taxes $ - $2,185 $(1,190)
======== ======= ========
22
<PAGE>
Deferred income taxes at December 31, 1997 and 1996 consist
of the following:
1997 1996
---- ----
Current Deferred Tax Assets:
Inventory Markdowns $ 92 $ 1,018
Other 138 269
------- ------
Total Current Deferred Tax Asset 230 1,287
Less Valuation Allowance (230) (1,287)
-------- -------
Net Current Deferred Tax Asset $ - $ -
======== ========
Noncurrent Deferred Tax Liabilities:
Excess Tax Over Book Depreciation $ 883 $ 1,752
Other 30 30
------ -------
Total Noncurrent Deferred Tax
Liabilities 913 1,782
------ -------
Noncurrent Deferred Tax Assets:
NOL Carryforwards 12,813 7,721
Writedowns of Property and Equipment 517 2,651
AMT Credit Carryforward 114 114
Other 1,450 1,895
------ -----
Total Noncurrent Deferred Tax Assets 14,894 12,381
Less Valuation Allowance (13,981) (10,599)
-------- --------
Net Noncurrent Deferred Tax Assets $ - $ -
========= =========
At December 31, 1997, the Company had a net operating loss
carryforward of approximately $36 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, 1997 and
1996. The Company recorded a charge of $2,185 in 1996 to
reserve 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 pro rata share of common area operating expenses. Total
rental expense under these operating leases was approximately
$5,279, $8,650 and $8,100 for the years ended December 31,
1997, 1996, and 1995, respectively. Contingent rent expense
was not material in 1997, l996 and 1995.
Future minimum lease payments, excluding contingent
rentals, (which have not been adjusted for leases that have
been or 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 31,1997 are as follows:
1998 $ 7,084
1999 6,321
2000 4,839
2001 3,744
2002 2,985
Thereafter 4,257
$29,230
9. Other Related Party Transactions
The Company purchases inventories from Cape Craftsmen,
Inc., an affiliate through common ownership. Such purchases
amounted to approximately $10,541, $12,377 and $10,677, for
the years ended December 31, 1997, 1996, and 1995,
respectively.
23
<PAGE>
10. Benefit Plans
The Company participated in Jordan Industries' defined
contribution 401(k) Plan (the "Jordan Plan") effective
January 1, 1993 for salaried and hourly employees of the
Company until June 30, 1995. 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, 1997, 81
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.
11. 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 a 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, 1997, 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:
Number of Shares Weighted Average
Available for Awards Exercise
Grant Outstanding Price
------------- ----------- --------
December 31, 1994 194,000 106,000 $10.17
Granted (40,000) 40,000 $6.00
Exercised - - -
Terminated - - -
----------------------------------------
December 31, 1995 154,000 146,000 $9.03
Granted (132,700) 132,700 $2.55
Exercised - - -
Terminated 15,000 (15,000) $11.00
-----------------------------------------
December 31, 1996 36,300 263,700 $5.65
Granted - - -
Exercised - - -
Terminated 59,200 (59,200) $7.87
----------------------------------------
December 31, 1997 95,500 204,500 $5.01
========================================
Approximately 40,000 outstanding options were exercisable at
December 31, 1997. Exercise prices for awards outstanding as
of December 31, 1997 ranged from $1.13 to $11.00. The
weighted average remaining contractual life of those awards
is 7.6 years. The weighted average exercise price of
outstanding exercisable awards at December 31, 1997 is
$2.57.
No effect is given to the options outstanding as of December
31, 1997, 1996 or 1995 in computing earnings per share for
the year then ended, as their effect is anti-dilutive.
24
<PAGE>
The Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") in 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. There were no options granted during 1997. The
following assumptions were used for 1996 and 1995:
1996 1995
---- ----
Risk free interest rate 6.70% 6.25%
Dividend yield 0% 0%
Volatility factor .592 .812
Expected life 10 years 10 years
The Company's proforma information for the years ended
December 31, is as follows:
1997 1996 1995
---- ---- ----
Proforma net loss available
to common shareholders $ (6,826) $(20,466) $(10,482)
Proforma basic and diluted
loss per common share $(0.92) $(2.75) $(1.36)
12. Selected Quarterly Financial Data (Unaudited)
The table below sets forth selected financial information for
each quarter of the last two years
Year Ended December 31,1997
- ----------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ----------------------------------------------------------------------
Net Sales $13,324 $13,735 $13,621 $21,910
Gross Profit $ 4,245 $ 4,612 $ 5,734 $ 9,226
Operating profit (loss) $(4,166) $(2,612) $ (292) $ 2,175
Net profit (loss) $(4,821) $(3,303) $(1,011) $ 2,869
Net profit (loss) available
to common shareholders $(4,932) $(3,414) $(1,122) $ 2,757
Basic and diluted income
(loss) per share $ (0.66) $ (0.46) $ (0.15) $ 0.37
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 profit (loss) available
to common shareholders $(2,140) $(2,346) $(2,330) $(13,582)
Basic and diluted loss
per share* $ (0.29) $ (0.31) $ (0.31) $ (1.82)
*The sum of the quarterly loss per share does not equal the
annual loss per share due to rounding.
** During the fourth quarter of 1996, the Company recorded
$8,106 in restructuring charges.
(see Note 3).
25
<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, 1997. 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, 1997 and 1996, and the
consolidated results of its operations and cash flows for
each of the three years in the period ended December 31,
1997, 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 respects 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 the Company's 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 13, 1998
26
<PAGE>
Item 9.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information
regarding the current executive officers and directors of the
Company.
Name Age Position
Thomas H. Quinn 50 Chairman of the Board and Chief Executive
Officer
John J. Hillmann 52 President
R. Thomas Wolfe 58 Vice President, Chief Operating Officer
Mark S. Dudeck 40 Vice President, Treasurer and
Chief Financial Officer
Edward J. Kleiger 62 Director
John W. Jordan II 50 Director
Thomas C. Spielberger 36 Vice President and Secretary
Gordon L. Nelson, Jr. 40 Vice President and Assistant Secretary
Thomas H. Quinn has served as Chairman and Chief Executive
Officer of the Company since March 1991. Mr. Quinn has served
as President, Chief Operating Officer and a director of
Jordan Industries, a privately-held diversified industrial
holding company, since 1988. Mr. Quinn is also a director of
American Safety Razor Company.
John J. Hillmann has served as President of Welcome Home
since May 1997 and has served as President of Cape Craftsmen
since June, 1992.
R. Thomas Wolfe has served as Vice President and Chief
Operating Officer since May 1997. Prior to joining the
Company, Mr. Wolfe was President of the Bombay Company -
Canada from January 1991 through December 1996.
Mark S. Dudeck was appointed Vice President, Treasurer and
Chief Financial Officer of the Company in August 1996. From
July 1994 through June 1996, Mr. Dudeck served as Director of
Financial Planning and Analysis at Camelot Music, Inc. and
from February 1992 through June 1994, he was Director of
Investor Relations for Mercantile Stores, Inc.
Edward J. Kleiger served as President and Chief Operating
Officer of the Company from December 1985 until May 1996 and
has been a director of the Company since April 1994.
John W. Jordan II has served as a director of the Company
since March 1991. Mr. Jordan is the founder and managing
partner of The Jordan Company, a private merchant banking
firm which he founded in 1982. Mr. Jordan is also a director
of Jordan Industries, Carmike Cinemas, Inc., American Safety
Razor Company and Apparel Ventures, Inc., an affiliate of The
Jordan Company.
Thomas C. Spielberger has served as the Company's Vice
President and Secretary since January 1997. Since 1989, Mr.
Spielberger has been employed in various positions by Jordan
Industries, Inc. and has served as the Senior Vice President
of Finance and Accounting since January 1998 and Vice
President, Controller of Jordan Industries since January
1993.
Gordon L. Nelson, Jr. has served as Vice President and
Assistant Secretary since January 1997. He is a Senior Vice
President of Jordan Industries, Inc.. Prior to joining
Welcome Home and Jordan Industries, he was a Director at the
Bank of Boston from January 1992 through December 1996.
All of the Company's executive officers and directors with
the exception of Messrs. Hillmann and Wolfe, were incumbent
in January 1997 when the Company filed a voluntary petition
for reorganization under the provisions of Chapter 11 of the
Bankruptcy Code. Mr. Jordan was director of Jones Plumbing
Systems, Inc. in November 1995 when the company and its
wholly owned subsidiary, Jones Manufacturing Company, Inc.
(the "Jones Companies"), filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code. The
Jones Companies' reorganizations were subsequently converted
to liquidation proceedings under Chapter 7 of the Bankruptcy
Code.
27
<PAGE>
Item 11. Executive Compensation
Executive Compensation
The following table sets forth certain information
regarding compensation paid by the Company for services
rendered during 1997, 1996 and 1995, as applicable, to (i)
its chief executive officer, (ii) its three most highly
compensated employees at December 31, 1997 who were paid in
excess of $100,000 during 1997; and (iii) one individual who
was among its four most highly compensated employees during
1997 but no longer is an executive officer at December 31,
1997 (the "Named Executives").
Summary Compensation Table
Annual Long-Term
Compensation Compensation
- ----------------------------------------------------------------------
Securities
Underlying
Name and Principal Position Salary($) Bonus($) Options (#)
Thomas H. Quinn (1) 1997 0 0 0
Chairman of the Board and 1996 0 0 0
Chief Executive Officer 1995 0 0 0
R. Thomas Wolfe 1997 128,950 0 0
Chief Operating Officer 1996 - - -
1995 - - -
Mark S. Dudeck 1997 115,000 33,333 0
VP, Treasurer and CFO 1996 50,799 - 10,000
1995 - - -
Robert E. Wood 1997 105,000 25,333 0
Chief Information Officer 1996 69,709 - 10,000
1995 - - -
Edward J. Kleiger (2) 1997 205,000 0 0
Former President and Chief 1996 205,000 0 0
Operating Officer 1995 204,000 0 20,000
__________________
(1) Does not reflect compensation paid to Mr. Quinn by
Jordan Industries, the Company's majority shareholder. See
"Item 13. Certain Relationships and Related Transactions."
(2) Mr. Kleiger resigned in May 1996. See "Termination
Agreement"
Compensation of Directors
Directors who are not employees of the Company receive
$8,000 per year for serving as a director of the Company. In
addition, the Company reimburses directors for their travel
and other expenses incurred in connection with attending
meetings of the Board of Directors and its committees. Each
Independent Director of the Company (as defined in the Option
Plan) also is entitled to receive an option to purchase 8,000
shares of the Company's common stock upon his or her
appointment to the Board of Directors, subject to certain
terms and conditions contained in the Option Plan.
Compensation Committee Interlocks and Insider Participation
Messrs. Jordan and Quinn were members of the compensation
committee of the Company's Board of Directors during 1997.
Mr. Quinn serves as the Chief Executive Officer. Mr. Quinn
received no compensation during 1997 from the Company for his
service as an officer of the Company. Messrs. Jordan and
Quinn are directors of Jordan Industries. Mr. Quinn also
serves on its compensation committee. Jordan Industries is
the majority shareholder of, and directly and indirectly
engages in certain transactions with, the Company. See "Item
13. Certain Relationships and Related Transactions."
28
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of
Securities Underexercised
Underlying In-the-Money
Unexercised Options at
Options at Fiscal
Fiscal Year-End Year-End
(#) ($)
-----------------------------------------
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
______________ _____________ _____________
<S> <C> <C> <C>
Mark S. Dudeck 3,333/6,666 0/0
Robert E. Wood 3,333/6,666 0/0
Edward J. Kleiger 20,000/0 0/0
</TABLE>
Termination Agreement
In September 1994, simultaneously with the completion of
its initial public offering, the Company entered into an
employment agreement with Mr. Kleiger. Under the agreement,
Mr. Kleiger agreed to serve as the Company's President and
Chief Operating Officer for a five-year term at an annual
base salary of $190,000. The agreement provides for
successive one-year extensions unless, 180 days prior to the
scheduled expiration date, either the Company or Mr. Kleiger
notifies the other of a decision not to extend the agreement.
In May 1996, Mr. Kleiger resigned as President and Chief
Operating Officer of the Company and, pursuant to the
termination provisions of the agreement, will continue to
receive payments equal to his base salary through September
1999. The agreement also provides that Mr. Kleiger may not
exploit for the benefit of anyone, other than the Company,
any Confidential Information (as defined therein) concerning
the Company and includes a covenant by Mr. Kleiger not to (i)
own or engage in any Competitive Business (as defined
therein) which competes with the Company, (ii) induce or
otherwise influence certain persons associated with the
Competitive Business to employ certain employees of the
Company for a period of two years subsequent to termination
of his employment.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth as of December 31, 1997
certain information with respect to the number of shares of
the Company's common stock beneficially owned by (i) each
current director of the Company; (ii) each Named Executive;
(iii) all current directors and executive officers of the
Company as a group; and (iv) based on information available
to the Company and a review of statements filed with the
Securities and Exchange Commission pursuant to Section 13(d)
and 13(g) of the Securities Act of 1934, as amended (the
"Exchange Act"), each person or entity that beneficially owns
more than 5% of the Company's common stock. The Company
believes that each individual or entity named has sole
investment and voting power with respect to shares indicated
as beneficially owned by them.
Amount
and Nature
of Beneficial Percent of
Name of Beneficial Owner Ownership(1) Class(1)
Current Directors and Named Executives
Edward J. Kleiger (2) 445,000 6.0%
Mark S. Dudeck (3) 3,333 *
Robert E. Wood (3) 3,333 *
Thomas H. Quinn (4) 5,000 *
All directors and executive officers 472,908 6.3
as a group (7 persons)
Principal Shareholder
Jordan Industries, Inc. (4) 4,989,500 66.9%
_______________
(*) Indicates beneficial ownership of less than 1% of the
outstanding shares of the Company's common stock.
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange
Act. Under Rule 13d-3(d), shares not outstanding which are
subject to options exercisable within 60 days are deemed
outstanding for the purpose of calculating the number and
percentage owned by such person, but not deemed outstanding
29
<PAGE>
for the purpose of calculating the percentage owned by any
other person listed. As of December 31, 1997, the Company had
7,453,645 shares of common stock outstanding.
(2) Address is c/o Welcome Home, Inc., 309 Raleigh Street,
Wilmington, North Carolina 28412. Amount presented includes
20,000 shares subject to an immediately exercisable option.
(3) Address is c/o Welcome Home, Inc., 309 Raleigh Street,
Wilmington, North Carolina 28412
(4) Address is Arbor Lake Center, Suite 550, 1751 Lake Cook Road,
Deerfield, Illinois, 60015.
Item 13. Certain Relationships and Related Transactions
Subordinated Credit Agreement with Jordan Industries
On May 30, 1995, the Company entered into an amended and
restated subordinated credit agreement with Jordan Industries
(the "Subordinated Credit Agreement"), the Company's majority
shareholder. Under the Subordinated Credit Agreement, the
Company (i) may borrow, on a revolving basis for a five-year
period, up to $10 million for the purpose of financing
repurchases of its common stock pursuant to a stock
repurchase program and for other purposes approved by Jordan
Industries and (ii) pay interest per annum at approximately
prime plus 1.5% or London Interbank Offered Rates plus 3.0%.
The Subordinated Credit Agreement is secured by a second lien
on substantially all of the Company's assets and contains
customary event of defaults and certain covenants that, among
other things, require the Company to maintain a minimum net
worth and limit the ability of the Company to incur
indebtedness, pay dividends, create liens and engage in
mergers and consolidations. On November 12, 1996, the Company
entered into an agreement with Jordan Industries whereby the
Company issued 4,451 shares of a newly designated class of
preferred stock to Jordan Industries as repayment of $4.5
million of principal and accrued interest then outstanding
under the Subordinated Credit Agreement. Subsequent to this
transaction, the Company increased its capacity under the
Subordinated Credit Agreement to $10 million, the maximum
available under the facility.
Cape Craftsmen Purchases
Cape Craftsmen, Inc., an affiliate of Jordan Industries
("Cape Craftsmen") supplies various inventory items to the
Company. In 1997, the Company purchased approximately $10.5
million of merchandise from Cape Craftsmen, which represented
approximately 38% of the Company's total 1997 merchandise
purchases. Management believes that the pricing of inventory
items purchased from Cape Craftsmen is comparable to that
which the Company would obtain from a non-affiliated
supplier, while the payment terms extended by Cape Craftsmen
are considerably more favorable to the Company than those
likely to be extended by a non-affiliated supplier. The
Company expects to continue this relationship with Cape
Craftsmen so long as its pricing and terms remain
competitive.
Compensation of Certain Executive Officers
Mr. Quinn does not receive compensation directly from the
Company. Rather, Mr. Quinn receives compensation from Jordan
Industries in his capacity as its Chief Operating Officer.
Prior to the Company's initial public offering in September
1994, Jordan Industries was the Company's corporate parent
and is currently the majority shareholder of the Company. Mr.
Quinn's duties to the Company include monthly meetings with
the Company's executives and day-by-day telephonic contact
regarding, among other things, marketing strategy, results of
operations, personnel management and financial matters.
Mr. Hillmann does not receive compensation directly from
the Company. Rather, Mr. Hillmann receives compensation from
Cape Craftsmen in his capacity as its President. Mr. Hillmann's
duties to the Company include day-to-day working with Company's
executives regarding, among other things, marketing strategy,
results of operations, personnel management and financial matters.
30
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) Documents filed as a part of this report:
1. Financial statements. See Index to consolidated Financial
Statements at Item 8 of this report.
2. Financial Statement Schedules. See Index to Consolidated
Financial Statements at Item 8 of this report. All other
schedules are not applicable or the information is presented
in the Consolidated Financial Statements.
3. Exhibits. See "Index to Exhibits" on pages 33 and 34.
(b) Exhibits. See "Index to Exhibits" on pages 33 and 34.
(c) Financial Statement Schedules. See Index to Consolidated
Financial Statements at Item 8 of this report.
31
<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 13th of
March, 1998.
WELCOME HOME, INC.
By: /s/ Mark S. Dudeck
Name: Mark S. Dudeck
Title: Vice President, Treasurer
and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby
constitutes and appoints Thomas H. Quinn and Mark S. Dudeck,
and each of them, the true and lawful attorneys in fact and
agents of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of
the undersigned and to file the same, with all exhibits
thereto, in any and all capabilities, to sign any and all
amendments with the Securities and Exchange Commission, and
hereby grants to such attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as
fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capabilities
as of the 13th day of March, 1997.
<TABLE>
<CAPTION>
Signature Title
<S> <C> <C>
/s/ Thomas H. Quinn Chairman of the Board and Chief
-----------------
Thomas H. Quinn Executive Officer
(Principal Executive Officer)
/s/ Mark S. Dudeck Vice President, Treasurer and
-----------------
Mark S. Dudeck Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Edward J. Kleiger Director
-----------------
Edward J. Kleiger
/s/ John W. Jordan II Director
-----------------
John W. Jordan II
/s/ Thomas C. Spielberger Vice President and Secretary
---------------------
Thomas C. Spielberger
/s/ Gordon Nelson, Jr. Vice President and Assistant
---------------------
Gordon Nelson, Jr. Secretary
</TABLE>
32
<PAGE>
FORM 10-K
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Numbered
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation of
Welcome Home, Inc. (The Registrant) (1)
3.2 Amended and Restated By-laws of the Registrant (1)
3.3 Certificate of Designation of Series A and
Determination of Rights and Preferences of Series A
Preferred Stock of the Company (2)
4.1 Revolving Note payable by the Registrant to Jordan
Industries, Inc. Dated May 30, 1995 (3)
10.1 Loan and Security Agreement between the Registrant and
Shawmut Capital Corporation dated May 30, 1995 (5)
10.2 Amended and Restated Credit Agreement between the
Registrant and Jordan Industries, Inc. dated
May 30, 1995 (6)
10.3 Financial Advisory Agreement between the Registrant
and TJC Management Corporation dated May 30, 1995 (7)
10.4 Trademark Security Agreement between the Registrant and
Shawmut Capital Corporation dated May 30, 1995 (8)
10.5 Agreement ('Trademark) between the Registrant and Jordan
Industries, Inc. Dated May 30, 1995 (9)
10.6 Option Agreement, dated February 1, 1995, between the
Company and Edward Kleiger (10)
10.7 Exchange Agreement dated November 12, 1996 between the
Company and Jordan Industries, Inc. (2)
10.8 Option Agreement, dated July 29, 1996 between the
Company and Mark S. Dudeck (13)
10.9 Employment and Non-Competition Agreement, dated May 1,
1997 between the Company and R. Thomas Wolfe (14)
10.10 Option Agreement, dated May 1, 1997 between the Company
and R. Thomas Wolfe (14)
27.1 Financial Data Schedule (for Securities and Exchange Commission
use only)
99.1 Waiver and Amendment to the Loan and Security
Agreement dated May 15, 1996 between the Company
and Fleet Capital Corporation (12)
</TABLE>
(1) Incorporated by reference to the exhibits filed with
the Registrant's Form 10-Q for the period ended September 30,
1994 (File No.0-24912).
(2) Incorporated by reference to Exhibit 3.1 to the Form 8-K
filed with the SEC on November 18, 1996
(File No.0-24912).
(3) Incorporated by reference to Exhibit 4.1 to the
Form 8-K filed with the SEC on June 30, 1995.
(4) Incorporated by reference to the exhibits filed
with the Registrant's Form 10-Q for the period ended
September 30, 1995. (File No.0-24912).
33
<PAGE>
(5) Incorporated by reference to Exhibit 99.1 to the
Form 8-K filed with the SEC June 30, 1995.
(6) Incorporated by reference to Exhibit 99.2 to the
Form 8-K filed with the SEC on June 30, 1995.
(7) Incorporated by reference to Exhibit 99.3 to the
Form 8-K filed with the SEC on June 30, 1995.
(8) Incorporated by reference to Exhibit 99A to the
Form 8-K filed with the SEC on June 30, 1995.
(9) Incorporated by reference to Exhibit 99.5 to the
Form 8-K filed with the SEC on June 30, 1995.
(10) Incorporated by reference to the exhibits filed
with the Registrant's Form 10-Q for the period ended
September 30, 1995. (File No.0-24912).
(11) Incorporated by reference to the exhibits filed with
the Registrant's Form 10-Q for the period ended June 30,
1996. (File No.0-24912).
(12) Filed herewith.
34
<PAGE>
WELCOME HOME, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands of dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Valuation Allowance for Deferred Tax Assets
Balance, beginning of period $11,886 $3,000 $ -
Additions charged to income
tax expense - 2,185 3,000
Increase related to deferred tax assets 2,325 6,701 -
------- ------- -------
Balance, end of period $14,211 $11,886 $ 3,000
======= ======= =======
Accumulated Depreciation - Property and Equipment
Balance, beginning of period $ 5,978 $ 5,035 $ 3,392
Additions charged to depreciation
reserve 2,185 2,096 2,121
Reductions (1,519) (1,153) (478)
------- ------- -------
Balance, end of period $ 6,644 $ 5,978 $ 5,035
======= ======= =======
Restructuring and Impairment Reserves
Balance, beginning of period $ 3,860 $6,460 $ -
Additions charged to restructuring
expense - 1,833 6,460
Reductions (2,464) (4,433) -
------- ------- -------
Balance, end of period $1,396 $3,860 $6,460
======= ======= =======
</TABLE>
35
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000922817
<NAME> WELCOME HOME, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 845 1,715
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 10,895 16,291
<CURRENT-ASSETS> 11,871 18,632
<PP&E> 13,132 14,541
<DEPRECIATION> 6,644 5,978
<TOTAL-ASSETS> 18,668 27,417
<CURRENT-LIABILITIES> 17,620 37,604
<BONDS> 0 0
0 0
4,955 4,510
<COMMON> 85 85
<OTHER-SE> (23,567) (16,831)
<TOTAL-LIABILITY-AND-EQUITY> 18,668 27,417
<SALES> 62,590 81,855
<TOTAL-REVENUES> 62,590 81,855
<CGS> 38,773 48,734
<TOTAL-COSTS> 28,712 48,959
<OTHER-EXPENSES> (25) 441
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,396 1,875
<INCOME-PRETAX> (6,266) (18,154)
<INCOME-TAX> 0 2,185
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,266) (20,339)
<EPS-PRIMARY> (0.90) (2.74)
<EPS-DILUTED> (0.90) (2.74)
</TABLE>
