UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCT0BER 3, 1998
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 ( )
The aggregate market value of the voting stock held by non-affiliates
of the registrant was $1,991,237 as of November 18, 1998.
Determination of affiliate status for this purpose is not a
determination of affiliate status for any other purpose. As of
November 18, 1998, there were 7,453,615 shares of the registrant's
common stock outstanding.
1
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of October 3, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the Three
Months and Nine Months Ended October 3, 1998
and October 4, 1997 4
Consolidated Statements of Cash Flows for the Nine
Months Ended October 3, 1998 and October 4, 1997 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION
Signatures 9
</TABLE>
2
<PAGE>
Part I
Item 1. Financial Statements
WELCOME HOME, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 3, December 31,
1998 1997
---- ----
(Unaudited) (Audited)
(in thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,201 $ 845
Inventories 13,216 10,895
Prepaid and other assets 95 131
------ ------
Total current assets 14,512 11,871
Property & equipment, net 5,058 6,488
Other assets 264 309
------ ------
Total assets $19,834 $18,668
======= =======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank overdraft $ 881 $ 1,179
Notes payable - line of credit 9,259 5,960
Note payable to Jordan Industries 592 1,356
Accounts payable 4,135 338
Accounts payable to affiliates 5,641 4,018
Accrued expenses 2,296 4,164
Accrued restructuring charges 327 605
------ ------
Total current liabilities 23,131 17,620
Note payable to Jordan Industries - 240
Pre-petition liabilities:
Accounts payable 2,842 2,843
Accounts payable to affiliates 11,046 11,046
Accrued expenses 2,053 2,133
Accrued restructuring charges 3,336 3,313
------- ------
Total pre-petition liabilities 19,277 19,335
Shareholders' deficit:
Series A redeemable preferred
stock, $0.01 par value;
11,100 shares authorized; 4,451
shares issued 5,289 4,955
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) (37)
Retained deficit (31,858) (27,477)
-------- --------
Subtotal (17,689) (13,642)
Less treasury stock, at cost
(1,046,385 shares) 4,885 4,885
------- -------
Total shareholders' deficit (22,574) (18,527)
-------- --------
Total liabilities and shareholders'
deficit $19,834 $18,668
======= =======
See Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(in thousands ofdollars) (in thousands of dollars)
<S> <C> <C> <C> <C>
Net sales $12,616 $13,621 $33,434 $40,679
Cost of goods sold 6,962 7,887 18,818 26,088
------ ------ ------ ------
Gross margin 5,654 5,734 14,616 14,591
Selling, general and
administrative expenses
(excluding depreciation) 5,285 5,468 15,293 20,031
Bankruptcy fees 300 363 900 1,134
Depreciation 572 558 1,664 1,609
----- ----- ------ ------
Operating loss (503) (655) (3,241) (8,183)
Interest expense:
Jordan Industries 21 55 89 187
Other 237 286 661 1,073
Other expense (income) - - 11 (122)
----- ----- ----- ------
Pretax loss (761) (996) (4,002) (9,321)
Provision (benefit) for income
taxes 15 15 45 15
----- ----- ----- -----
Net loss ($776) ($1,011) ($4,047) ($9,336)
======= ======== ======== ========
Net loss available to common
shareholders ($887) ($1,123) ($4,382) ($9,669)
======= ======== ======== ========
Basic and diluted loss per
common share ($0.12) ($0.15) ($0.59) ($1.30)
======= ======= ======= =======
Weighted average common shares
outstanding (in thousands) 7,454 7,454 7,454 7,454
====== ====== ====== ======
See Notes to Consolidated Financial Statements
</TABLE>
4
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Ended
October 3, October 4,
1998 1997
---- ----
(Unaudited) (Unaudited)
(in thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,047) ($9,336)
Adjustments to reconcile net cash
provided by (used in) operating activities:
Depreciation and amortization 1,664 1,609
Changes in operating assets and liabilities:
Inventories (2,321) 1,459
Prepaid expenses and other assets 81 478
Accounts payable 3,498 (535)
Payables to affiliates 1,623 4,548
Accrued liabilities (2,203) 2,877
------- -------
Net cash provided by (used in)
operating activities (1,705) 1,100
-------- -------
Cash flows from investing activities:
Capital expenditures (225) (97)
Other (9) 122
-------- -------
Net cash provided by (used in)
investing activities (234) 25
Cash flows from financing activities:
Repayments to note payable - Jordan Industries (1,004) (905)
Proceeds from line of credit 38,332 55,073
Repayments to line of credit (35,033) (56,639)
Other - (40)
-------- --------
Net cash provided by (used in) financing
activities: 2,295 (2,511)
-------- -------
Net increase (decrease) in cash and
cash equivalents 356 (1,386)
Cash and cash equivalents at
beginning of period 845 1,715
------- -------
Cash and cash equivalents at end of
period $1,201 $ 329
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest - Jordan Industries $ 89 $ 187
======= =======
Interest - third party $ 647 $ 792
======= =======
See Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
WELCOME HOME, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars)
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Welcome
Home, Inc. (together with its subsidiary, the "Company" or "Welcome
Home") pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The financial information included herein reflects all adjustments
(consisting of normal recurring adjustments) which are, in the
opinion of management, necessary to a fair presentation of the
results for interim periods.
Certain 1997 amounts have been reclassified to conform with the 1998
presentation. Such reclassifications had no effect on previously
reported net loss or shareholders' deficit.
The Company's sales volume has historically varied between quarters
based on several factors including the Christmas shopping season and
accordingly, the results of operations for the three and nine month
periods ended October 3, 1998 are not necessarily indicative of
annual results of operations.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). This
Statement established standards for reporting and display of
comprehensive income and its components in the financial statements.
The Company adopted SFAS 130 on January 1, 1998. The Company has
determined total comprehensive loss to be ($942) and ($1,178) for the
three months ended October 3, 1998 and October 4, 1997, respectively.
The total comprehensive loss for the nine months ended October 3,
1998 and October 4, 1997 was ($4,380) and ($9,669), respectively. The
Company's total comprehensive loss represents net loss plus the
change in the cumulative translation adjustment equity account for
the periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Welcome Home is a specialty retailer of gifts and decorative home
furnishings and accessories in North America, with 119 stores located
primarily in factory outlet centers in 36 states. The Company's
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 three months ended October 3, 1998 of $19.21 as compared to
$18.25 for the three months ended October 4, 1997. The average sales
transaction for the nine months ended October 3, 1998 was $18.43 as
compared to the $17.51 for the nine months ended October 4, 1997.
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.
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.
6
<PAGE>
Results of Operations
The following table sets forth certain selected income statement data
of the Company expressed as a percentage of net sales and certain
operating statistics of the Company:
<TABLE>
Three Months Nine Months
Ended Ended
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selected income statement data
as a percentage of net sales:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.2 57.9 56.3 64.1
Gross profit 44.8 42.1 43.7 35.9
Selling, general and
administrative expenses
(excluding depreciation) 41.9 40.1 45.7 49.2
Bankruptcy fees 2.4 2.7 2.7 2.8
Depreciation 4.5 4.1 5.0 4.0
Operating loss (4.0) (4.8) (9.7) (20.1)
Interest expense 2.0 2.5 2.2 3.1
Provision for income taxes 0.1 0.1 0.1 0.0
Net loss (6.2%) (7.4%) (12.1%) (23.0%)
Operating Statistics:
Stores open at period end 119 124 119 124
Total square feet of store space
at period end (in thousands) 335 381 335 381
Percentage increase (decrease)
in comparable store sales (4.1%) 2.4% (0.4%) (0.6%)
</TABLE>
Three Months Ended October 3, 1998 as Compared to Three Months Ended
October 4, 1997
Net Sales. Net sales for the three months ended October 3, 1998
decreased by $1.0 million or 7.4%, as compared to the three months
ended October 4, 1997. This decrease reflects a decrease in
comparative store sales of 4.1% and a decline in the average number
of stores open during the three months ended October 3, 1998 of 120
compared to 124 for the three months ended October 4, 1997. The
Company showed a decrease of 8.4% in the number of sales transactions
on a same store basis in the three months ended October 3, 1998
offset by an increase in its average sales transaction from $19.21
for the three months ended October 3, 1998 compared to $18.34 for the
three months ended October 4, 1997 on the same store basis.
Gross Profit. Gross profit for the three months ended October 3, 1998
decreased $80,000, or 1.4%, as compared to the three months ended
October 4, 1997. Gross profit as a percentage of sales increased to
44.8% from 42.1%, due primarily to a higher initial markup for the
three months ended October 3, 1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended October 3, 1998
decreased by $183,000, or 3.3%, as compared to the three months ended
October 4, 1997, largely as a result of the Company's store closings
in 1997. Selling, general and administrative expense as a percentage
of net sales increased to 41.9% in the three months ended October 3,
1998, as compared to 40.1% in the three months ended October 4, 1997,
due to the decrease in same store sales.
Bankruptcy Fees. The Company recorded $300,000 of bankruptcy fees in
the three months ended October 3, 1998 as compared to $363,000 in the
three months ended October 4, 1997. These charges represent the
expenses associated with the Chapter 11 bankruptcy proceedings.
Interest Expense - Other. Interest expense - other decreased to
$237,000 for the three months ended October 3, 1998 as compared to
$286,000 for the three months ended October 4, 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.
Net Loss. The Company's net loss for the three months ended October
3, 1998 was $776,000 as compared to $1.0 million for the three months
ended October 4, 1997. The decrease in net loss of $235,000 was due
primarily to lower selling, general and administrative expenses and
lower interest expense.
7
<PAGE>
Nine Months Ended October 3, 1998 as compared to Nine Months Ended
October 4, 1997
Net Sales. Net sales for the nine months ended October 3, 1998
decreased by $7.2 million or 17.8%, as compared to the nine months
ended October 4, 1997. This decrease reflects a decline in the
average number of stores open during the nine months ended October 3,
1998 of 120 compared to 143 for the nine months ended October 4,
1997. The Company believes the decrease in comparable store sales,
or 0.4%, is attributed to less traffic in the outlet malls for the
third quarter of 1998. The Company showed a decrease of 5.0% in the
number of sales transactions on a same store basis for the first nine
months of 1998 along with an increase in its average sales
transaction from $18.43 for the nine months ended October 3, 1998
compared to $17.58 for the nine months ended October 4, 1997 on the
same store basis.
Gross Profit. Gross profit for the nine months ended October 3, 1998
increased $25,000, or 0.2%, as compared to the nine months ended
October 4, 1997. Gross profit as a percentage of sales increased to
43.7% from 35.9%, due primarily to markdowns taken during the first
nine months of 1997 on inventory items sold in "Going Out of
Business" sales in the stores that were closed. The cost of
markdowns decreased by $2.9 million, or 53.4%, for the nine months
ended October 3, 1998, as compared to the nine months ended October
4, 1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the nine months ended October 3, 1998
decreased by $4.7 million, or 23.7%, as compared to the nine months
ended October 4, 1997, largely as a result of the Company's store
closings in 1997. In addition, selling, and administrative expense as
a percentage of net sales decreased to 45.7% in the first nine months
of 1998 as compared to 49.2% in the first nine months of 1997. This
decrease was due to closing the non-profitable stores in 1997.
Bankruptcy Fees. The Company recorded $900,000 of bankruptcy fees in
the first nine months of 1998 and $1.1 million in the first nine
months of 1997. These charges represent the expenses associated with
the Chapter 11 bankruptcy proceedings.
Interest Expense - Other. Interest expense - other decreased to
$661,000 for the nine months ended October 3, 1998 as compared to
$1.1 million for the nine months ended October 4, 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.
Net Loss. The Company's net loss for the nine months ended October 3,
1998 was $4.0 million as compared to $9.3 million for the nine months
ended October 4, 1997. The decrease in net loss of $5.3 million was
due to lower selling, general and administrative expenses and lower
interest expense.
Liquidity and Capital Resources
The Company had $27.9 million working capital deficit at October 3,
1998 as compared to $25.1 million deficit at December 31, 1997. The
decrease in working capital was due primarily to an increase in notes
payable - line of credit, an increase in inventory offset by an
increase in accounts payable, and a decrease in the net value of
property and equipment.
On May 15, 1996 the Company closed the Waiver and Amendment No. 1 to
the Loan and Security Agreement (the "New Bank Credit Facility") with
Fleet Capital Corporation (formerly Shawmut Capital Corporation).
The New Bank Credit Facility provided for borrowings of up to 65% of
Eligible Inventory (as defined), with the maximum borrowings of $20
million and also provided for up to $4 million in additional
borrowings through December 31, 1996 (`Additional Borrowings"). The
Company's majority shareholder, Jordan Industries Inc., ("Jordan
Industries") purchased a fifty percent participation in the
additional borrowings. The New Bank Credit Facility, as amended,
was secured by substantially all of the Company's assets.
On January 21, 1997, in connection with its Chapter 11 bankruptcy
proceedings, Welcome Home closed the second waiver and amendment to
allow for post petition advances up to $12.0 million. This amendment
was effective through March 31, 1997. On March 28, 1997, the Company
closed the third waiver and amendment, to continue to allow post
petition advances, up to $12.75 million. In connection with this
amendment, Jordan Industries purchased a $0.75 million junior
participation in this facility. On March 12, 1998 the Company
amended and extended the post petition financing arrangement with
Fleet Capital to be effective through January 31, 1999 and it carries
an interest rate of 1 1/2% above the lender's prime rate.
On October 29, 1998, the Company signed an Amended and Restated Loan
and Security Agreement with Fleet Capital Corporation. This
Agreement replaced the debtor-in-possession credit facility then in
place. This Agreement provides for borrowings of up to $15.0
million, with availability dependent on levels of inventory. There
is also a limited seasonal overadvance borrowing capability. The
Agreement is secured by essentially all assets of the Company.
Outstanding balances under this agreement initially bear interest of
Base Rate (as defined) plus 1.25%, or a eurodollar-based rate +
3.25%. These rates are subject to reductions based on financial
performance. Jordan Industries purchased a $2.0 million junior
participation in the Agreement. The Agreement matures on October 29,
2003.
8
<PAGE>
Net Operating Loss Carryforward
At December 31, 1997, the Company had approximately $36.1 million in
net operating loss carryforwards for Federal income tax purposes. Due
to the uncertainty of generating future taxable income, management
believes it is appropriate to fully reserve the deferred tax asset.
PART II. OTHER INFORMATION
WELCOME HOME, INC.
ITEM 1. LEGAL PROCEEDINGS:
On July 16, 1998 the Company submitted its plan of reorganization to
the United States Bankruptcy Court for the Southern District of New
York. Among other things, the Plan provides that all of the
outstanding shares of common stock of the corporation will be
canceled. The Plan also provides that holders of the Company's
common stock (other than Jordan Industries, Inc.) at the time of the
reorganization will receive five percent (5%) of the new common stock
to be issued by the corporation. This plan was confirmed on
September 28, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WELCOME HOME. INC.
By:
/s/ Mark S. Dudeck
Name: Mark S. Dudeck
Title: Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
November 18, 1998
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000922817
<NAME> WELCOME HOME, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-3-1998
<CASH> $1,201
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,216
<CURRENT-ASSETS> 14,512
<PP&E> 13,214
<DEPRECIATION> (7,718)
<TOTAL-ASSETS> 19,834
<CURRENT-LIABILITIES> 42,408
<BONDS> 0
0
5,289
<COMMON> (85)
<OTHER-SE> (18,178)
<TOTAL-LIABILITY-AND-EQUITY> 19,834
<SALES> 33,434
<TOTAL-REVENUES> 33,434
<CGS> 18,818
<TOTAL-COSTS> 18,818
<OTHER-EXPENSES> 17,868
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 750
<INCOME-PRETAX> (4,002)
<INCOME-TAX> 45
<INCOME-CONTINUING> (4,047)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,047)
<EPS-PRIMARY> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
