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 JULY 04, 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 August 15, 1998. Determination
of affiliate status for this purpose is not a determination of
affiliate status for any other purpose. As of August 15, 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
July 4, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
July 4, 1998 and July 5, 1997 4
Consolidated Statements of Cash Flows
for the Six Months Ended
July 4, 1998 and July 5, 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>
July 4, December 31,
1998 1997
---- ----
(Unaudited) (Audited)
(in thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 694 $ 845
Inventories 11,139 10,895
Prepaid and other assets 70 131
------ ------
Total current assets 11,903 11,871
Property & equipment, net 5,496 6,488
Other assets 268 309
------ ------
Total assets $17,667 $18,668
====== ======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Bank overdraft $ 724 $ 1,179
Notes payable - line of credit 9,650 5,960
Note payable to Jordan Industries 935 1,356
Accounts payable 498 338
Accounts payable to affiliates 4,464 4,018
Accrued expenses 3,535 4,164
Accrued restructuring charges 383 605
------ ------
Total current liabilities 20,189 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 5,178 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 (30,972) (27,477)
------ ------
Subtotal (16,914) (13,642)
Less treasury stock, at cost
(1,046,385 shares) 4,885 4,885
------ ------
Total shareholders' deficit (21,799) (18,527)
------ ------
Total liabilities and shareholders'
deficit $17,667 $18,668
====== ======
See Notes to Consolidated Financial Statements
</TABLE>
3
<PAGE>
WELCOME HOME, INC.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 4, July 5, July 4, July 5,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
(in thousands of dollars) (in thousands of dollars)
<S> <C> <C> <C> <C>
Net sales $11,211 $13,735 $20,818 $27,059
Cost of goods sold 6,058 9,123 11,857 18,202
----- ----- ------ ------
Gross margin 5,153 4,612 8,961 8,857
Selling, general and
administrative expenses
(excluding depreciation) 4,971 6,673 10,009 14,564
Bankruptcy fees 300 255 600 571
Depreciation 557 551 1,096 1,097
----- ----- ------ ------
Operating loss (675) (2,867) (2,744) (7,375)
Interest expense:
Jordan Industries 30 63 68 133
Other 227 373 424 739
Other expense (income) - - 6 (122)
---- ----- ----- -----
Pretax loss (932) (3,303) (3,242) (8,125)
Provision (benefit) for
income taxes 15 - 30 -
----- ----- ----- -----
Net loss ($947) ($3,303) ($3,272) ($8,125)
====== ======== ======== ========
Net loss available to common
shareholders ($1,058) ($3,413) ($3,494) ($8,348)
======== ======== ======== ========
Basic and diluted loss per
common share ($0.14) ($0.46) ($0.47) ($1.12)
======= ======= ======= =======
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>
Six Months Ended
July 4, July 5,
1998 1997
---- ----
(Unaudited) (Unaudited)
(in thousands of dollars)
<S> <C> <C>
Cash flows from operating
activities:
Net loss ($3,272) ($8,125)
Adjustments to reconcile net cash
provided by (used in) operating activities:
Depreciation and amortization 1,096 1,097
Changes in operating assets and
liabilities:
Inventories (244) 5,558
Prepaid expenses and other assets 102 353
Accounts payable (296) (1,017)
Payables to affiliates 446 2,664
Accrued liabilities (908) 245
------ ------
Net cash provided by (used in)
operating activities (3,076) 775
------- ------
Cash flows from investing
activities:
Capital expenditures (104) 25
------ ------
Net cash provided by (used in)
investing activities (104) 25
Cash flows from financing
activities:
Repayments to note payable - Jordan Industries (661) (596)
Proceeds from line of credit 25,381 38,980
Repayments to line of credit (21,691) (40,014)
Other - (40)
-------- --------
Net cash provided by (used in)
financing activities: 3,029 (1,670)
----- -------
Net increase (decrease) in cash and
cash equivalents (151) (870)
Cash and cash equivalents at
beginning of period 845 1,715
------ ------
Cash and cash equivalents at end of
period $694 $845
===== =====
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest - Jordan Industries $ 68 $ 133
====== ======
Interest - third party $ 488 $ 580
====== ======
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 six month
periods ended July 4, 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 ($1,058) and ($3,413) for
the three months ended July 4, 1998 and July 5, 1997, respectively.
The total comprehensive loss for the six months ended July 4, 1998
and July 5, 1997 was ($3,494) and ($8,348), 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 120 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 July 4, 1998 of $18.63 as compared to $17.82
for the three months ended July 5, 1997. The average sales
transaction for the six months ended July 4, 1998 was $17.99 as
compared to the $17.16 for the six months ended July 5, 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 Six Months Ended
Ended
July 4, July 5, July 4, July 5,
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 54.0 66.4 57.0 67.3
Gross profit 46.0 33.6 43.0 32.7
Selling, general and
administrative expenses
(excluding depreciation) 44.3 48.6 48.1 53.8
Bankruptcy fees 2.7 1.9 2.9 2.1
Depreciation 5.0 4.0 5.3 4.1
Operating loss (6.0) (20.9) (13.2) (27.3)
Interest expense 2.3 3.2 2.4 3.2
Provision for income taxes 0.1 0.0 0.1 0.0
Net loss (8.4%) (24.0%) (15.7%) (30.0%)
Operating Statistics:
Stores open at period end 120 127 120 127
Total square feet of store
space at period end (in thousands) 337 397 337 397
Percentage increase (decrease)
in comparable store sales (3.9%) (2.1%) 2.0% (7.5%)
</TABLE>
Three Months Ended July 4, 1998 as Compared to Three Months Ended
July 5, 1997
Net Sales. Net sales for the three months ended July 4, 1998
decreased by $2.5 million or 18.4%, as compared to the three months
ended July 5, 1997. This decrease reflects a decrease in comparative
store sales of 3.9% and a decline in the average number of stores
open during the three months ended July 4, 1998 of 120 compared to
136 for the three months ended July 5, 1997. The Company showed a
decrease of 8.1% in the number of sales transactions on a same store
basis in the three months ended July 4, 1998 offset by an increase in
its average sales transaction from $18.65 for the three months ended
July 4, 1998 compared to $17.85 for the three months ended July 5,
1997 on the same store basis.
Gross Profit. Gross profit for the three months ended July 4, 1998
increased $541,000, or 11.7%, as compared to the three months ended
July 5, 1997. Gross profit as a percentage of sales increased to
46.0% from 33.6%, due primarily to markdowns taken during the three
months ended July 5, 1997 on inventory items sold in "Going Out of
Business" sales in the stores that were closed. The cost of
markdowns decreased by $1.4 million, or 67.3% for the three months
ended July 4, 1998, as compared to the three months ended July 5,
1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended July 4, 1998
decreased by $1.7 million, or 25.5%, as compared to the three months
ended July 5, 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 44.3% in the three months
ended July 4, 1998, as compared to 48.6% in the three months ended
July 5, 1997.
Bankruptcy Fees. The Company recorded $300,000 of bankruptcy fees in
the three months ended July 4, 1998 and July 5, 1997. These charges
represent the expenses associated with the Chapter 11 bankruptcy
proceedings.
Interest Expense - Other. Interest expense - other decreased to
$227,000 for the three months ended July 4, 1998 as compared to
$373,000 for the three months ended July 5, 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 July 4,
1998 was $947,000 as compared to $3.3 million for the three months
ended July 5, 1997. The decrease in net loss of $2.4 million was due
primarily to higher gross margin, lower selling, general and
administrative expenses and lower interest expense.
7
<PAGE>
Six Months Ended July 4, 1998 as compared to Six Months Ended July 5,
1997
Net Sales. Net sales for the six months ended July 4, 1998 decreased
by $6.2 million or 23.1%, as compared to the six months ended July 5,
1997. This decrease reflects a decline in the average number of
stores open during the six months ended July 4, 1998 of 120 compared
to 152 for the six months ended July 5, 1997. This decline is offset
by a 2.0% increase in comparable store sales. The Company believes
the increase in comparable store sales is attributed to modifications
of the Company's merchandise assortment implemented during the latter
half of 1997. The Company showed a decrease of 2.9% in the number of
sales transactions on a same store basis for the first six months of
1998 along with an increase in its average sales transaction from
$17.99 for the six months ended July 4, 1998 compared to $17.16 for
the six months ended July 5, 1997 on the same store basis.
Gross Profit. Gross profit for the six months ended July 4, 1998
increased $104,000, or 1.2%, as compared to the six months ended July
5, 1997, largely reflecting the closure of 59 stores in the first six
months of 1997. Gross profit as a percentage of sales increased to
43.0% from 32.7%, due primarily to markdowns taken during the first
six 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 65.1%, for the six months ended July 4,
1998, as compared to the six months ended July 5, 1997.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the six months ended July 4, 1998
decreased by $4.6 million, or 31.3%, as compared to the six months
ended July 5, 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 48.1% in the first six months
of 1998 as compared to 53.8% in the first six months of 1997. This
decrease was due to the increase in the Company's comparable store
sales.
Bankruptcy Fees. The Company recorded $600,000 of bankruptcy fees in
the first six months of 1998 and $571,000 in the first six months of
1997. These charges represent the expenses associated with the
Chapter 11 bankruptcy proceedings.
Interest Expense - Other. Interest expense - other decreased to
$424,000 for the six months ended July 4, 1998 as compared to
$739,000 for the six months ended July 5, 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 six months ended July 4,
1998 was $3.3 million as compared to $8.1 million for the six months
ended July 5, 1997. The decrease in net loss of $4.9 million was due
to a comparative store sales increase, an increase in gross profit,
lower selling, general and administrative expenses and lower interest
expense.
Liquidity and Capital Resources
The Company had $27.6 million working capital deficit at July 4, 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 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. The Company
expects to satisfy its anticipated demands and commitments for cash
from borrowings under this post-petition credit facility.
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.
8
<PAGE>
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 thatn 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. Management expects
the Plan to be confirmed by the court by October 1998 substantially in its
current form.
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)
August 15, 1998
9
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000922817
<NAME> WELCOME HOME, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUL-4-1998
<CASH> 694
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 11,139
<CURRENT-ASSETS> 11,903
<PP&E> 13,214
<DEPRECIATION> (7,718)
<TOTAL-ASSETS> 17,667
<CURRENT-LIABILITIES> 39,466
<BONDS> 0
0
5,178
<COMMON> (85)
<OTHER-SE> (17,292)
<TOTAL-LIABILITY-AND-EQUITY> 17,667
<SALES> 20,818
<TOTAL-REVENUES> 20,818
<CGS> 11,857
<TOTAL-COSTS> 11,857
<OTHER-EXPENSES> 11,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 492
<INCOME-PRETAX> (3,242)
<INCOME-TAX> 30
<INCOME-CONTINUING> (3,272)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,272)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
