SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: September 7, 1996
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_______to_______
Commission file No.: 33-48862
HOMELAND HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1311075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 Northwest Expressway
Oil Center-East, Suite 1100
Oklahoma City, Oklahoma 73112
(Address of principal executive office) (Zip Code)
(405) 879-6600
(Registrant's telephone number, including area code)
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 whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 14, 1996.
Common Stock: 4,758,025 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS AND THIRY SIX WEEKS
ENDED SEPTEMBER 7, 1996
INDEX
PAGE
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements................................... 1
Consolidated Balance Sheets
September 7, 1996 (Successor Company) and
December 30, 1995 (Predecessor Company)............... 1
Consolidated Statements of Operations
4 weeks ended September 7, 1996 (Successor Company),
8 weeks ended August 10, 1996 and 12 weeks ended
September 9, 1995 (Predecessor Company................ 3
Consolidated Statements of Operations
4 weeks ended September 7, 1996 (Successor Company),
32 weeks ended August 10, 1996 and 36 weeks ended
September 9, 1995 (Predecessor Company)............... 4
Consolidated Statements of Stockholders'
Equity (Deficit)
4 weeks ended September 7, 1996 (Successor Company),
32 weeks ended August 10, 1996 and 36 weeks ended
September 9, 1995 (Predecessor Company).............. 5
Consolidated Statements of Cash Flows
4 weeks ended September 7, 1996 (Successor Company),
32 weeks ended August 10, 1996 and 36 weeks ended
September 9, 1995 (Predecessor Company)............... 6
Notes to Consolidated Financial Statements............. 7
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................ 12
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................... 17
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
Assets Successor Company Predecessor Company
September 7, December 30,
1996 1995
Current assets:
Cash and cash equivalents $ 3,062 $ 6,357
Receivables, net of allowance for
uncollectible accounts of $2,661 at
December 30, 1995 8,959 8,051
Inventories 39,450 42,830
Prepaid expenses and other current assets 3,250 2,052
Total current assets 54,721 59,290
Property, plant and equipment:
Land 8,701 9,919
Buildings 17,294 22,101
Fixtures and equipment 14,281 44,616
Land and leasehold improvements 10,956 23,629
Software 1,782 1,991
Leased assets under capital leases 7,623 29,062
Construction in progress 1,961 4,201
62,598 135,519
Less accumulated depreciation
and amortization 585 63,827
Net property, plant and equipment 62,013 71,692
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $1,154 at
September 7, 1996 43,864 -
Other assets and deferred charges 5,016 6,600
Total assets $165,614 $137,582
Continued
The accompanying notes are an integral part
of these consolidated financial statements
1
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
September 7, December 30,
1996 1995
Current liabilities:
Accounts payable - trade $ 14,411 $ 17,732
Salaries and wages 2,486 1,609
Taxes 5,405 4,876
Accrued interest payable 599 2,891
Other current liabilities 10,546 14,321
Long-term obligations in default classified
as current - 100,467
Current portion of obligations under capital
leases 1,559 2,746
Current portion of restructuring reserve - 3,062
Total current liabilities 35,006 147,704
Long-term obligations:
Long-term debt 70,000 -
Obligations under capital leases 3,348 9,026
Other noncurrent liabilities 2,081 6,133
Noncurrent restructuring reserve - 2,808
Total long-term obligations 75,429 17,967
Commitments and contingencies - -
Redeemable common stock, Class A, $.01 par value,
1,720,718 shares at December 30, 1995, at
redemption value - 17
Stockholders' equity (deficit):
Old common stock
Class A, $.01 par value, authorized - 40,500,000
shares, issued - at December 30, 1995, 33,748,482
outstanding - 30,878,989 shares - 337
New common stock, $0.01 par value, authorized -
7,500,000 shares, issued 4,758,025 shares at
September 7, 1996 48 -
Additional paid-in capital 56,013 55,886
Accumulated deficit (882) (80,188)
Minimum pension liability adjustment - (1,327)
Treasury stock, 2,869,493 shares at December 30,
1995 at cost - (2,814)
Total stockholders' equity (deficit) 55,179 (28,106)
Total liabilities and stockholders' equity
(deficit) $165,614 $137,582
The accompanying notes are an integral part
of these consolidated financial statements.
2
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Successor Company Predecessor Company
4 weeks 8 weeks 12 weeks
ended ended ended
September 7, August 10, September 9,
1996 1996 1995
Sales, net $ 39,536 $ 77,416 $133,020
Cost of sales 29,684 58,513 101,491
Gross profit 9,852 18,903 31,529
Selling and administrative 8,953 17,578 32,465
Amortization of excess reorganization
value 1,154 - -
Operating profit (loss) (255) 1,325 (936)
Interest expense 627 432 3,367
Income (loss) before reorganization items,
income taxes and extraordinary items (882) 893 (4,303)
Reorganization items:
Allowed claims in excess of liabilities - 7,200 -
Professional fees - 1,100 -
Employee buyout expense - 6,386 -
Adjustments of accounts to estimated
fair value - 8,160 -
- 22,846 -
Loss before income taxes and
extraordinary items (882) (21,953) (4,303)
Income tax expense - - -
Loss before extraordinary items (882) (21,953) (4,303)
Extraordinary items-debt discharged - 63,118 -
Net income (loss) $ (882) $ 41,165 $ (4,303)
Loss before extraordinary items per
common share $ (.19) $ (.68) $ (.13)
Extraordinary items per common share - 1.94 -
Net income (loss) per common share $ (.19) $ 1.26 $ (.13)
Weighted average shares outstanding 4,758,025 32,599,707 32,599,707
The accompanying notes are an integral part
of these consolidated financial statements.
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
Successor Company Predecessor Company
4 weeks 32 weeks 36 weeks
ended ended ended
September 7, August 10, September 9,
1996 1996 1995
Sales, net $ 39,536 $323,747 $458,088
Cost of sales 29,684 244,423 347,506
Gross Profit 9,852 79,324 110,582
Selling and administrative 8,953 73,000 108,473
Amortization of excess reorganization
value 1,154 - -
Operating profit (loss) (255) 6,324 2,109
Interest expense 627 5,639 11,677
Income (loss) before reorganization
items, income taxes and
extraordinary items (882) 685 (9,568)
Reorganization items:
Allowed claims in excess of
liabilities - 7,200 -
Professional fees - 4,250 -
Employee buyout expense - 6,386 -
Adjustments of accounts to
estimated fair value - 8,160 -
- 25,996 -
Loss before income taxes and
extraordinary items (882) (25,311) (9,568)
Income tax expense - - -
Loss before extraordinary items (882) (25,311) (9,568)
Extraordinary items-debt discharged - 63,118 -
Extraordinary items-other - - (2,330)
Net income (loss) $ (882) $ 37,807 $(11,898)
Loss before extraordinary items per
common share $ (.19) $ (.78) $ (.29)
Extraordinary items per common share - 1.94 (.07)
Net income (loss) per common share $ (.19) $ 1.16 $ (.36)
Weighted average shares outstanding 4,758,025 32,599,707 33,500,994
The accompanying notes are an integral part
of these consolidated financial statements
4
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<PART 1 of 2>
<S> <C> <C> <C> <C> <C> <C>
Minimum
Common Stock Additional Pension
Successor Predecessor Paid-in Accumulated Liability
Shares Shares Amount Capital Deficit Adjustment
Balance, December 31, 1994 - 31,604,989 $ 316 $ 53,896 $(48,398) $ -
Purchase of treasury stock - 2,143,493 21 1,050 - -
Net loss - - - - (11,898) -
Balance, September 9, 1995 - 33,748,482 $ 337 $ 54,946 $(60,296) $ -
Balance, December 30, 1995 - 33,748,482 $ 337 $ 55,886 $(80,188) $(1,327)
Net income - - - - 37,807 -
Eliminate predecessor equity - (33,748,482) (337) (55,886) (2,637) -
Issuance of successor's
common stock 4,758,025 - 48 56,013 - -
Eliminate adjustment of minimum
pension liability - - - - - 1,327
Record excess of reorganization
value - - - - 45,018 -
Balance, August 10, 1996 4,758,025 - $ 48 $ 56,013 $ - $ -
Net loss - - - - (882) -
Balance, September 7, 1996 4,758,025 - $ 48 $56,013 $ (882) $ -
</TABLE>
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICTI)
(in thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<PART 2 of 2>
<S> <C> <C> <C>
Total
Treasury Stock Stockholders'
Shares Amount Equity (Deficit)
Balance, December 31, 1994 726,000 $(1,743) $ 4,071
Purchase of treasury stock 2,143,493 (1,071) -
Net loss - - (11,898)
Balance, September 9, 1995 2,869,493 $(2,814) $ (7,827)
Balance, December 30, 1995 2,869,493 $(2,814) $(28,106)
Net income - - 37,807
Eliminate predecessor equity (2,869,493) 2,814 (56,046)
Issuance of successor's common
stock - - 56,061
Eliminate adjustment of minimum
pension liability - - 1,327
Record excess of reorganization
value - - 45,018
Balance, August 10, 1996 - $ - $ 56,061
Net loss - - (882)
Balance, September 7, 1996 - $ - $ 55,179
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Successor Company Predecessor Company
4 weeks 32 weeks 36 weeks
ended ended ended
September 7, August 10, September 9,
1996 1996 1995
Cash flows from operating activities:
Net income (loss) $ (882) $37,807 $(11,898)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 588 4,163 8,908
Amortization of excess reorganization value 1,154 - -
Amortization of financing costs 5 359 771
Write-off of financing costs on long term debt retired - - 1,424
Reorganization items - 15,360 -
Extraordinary gain on debt discharge - (63,118) -
(Gain) loss on disposal of assets 85 - (275)
Amortization of beneficial interest in operating
leases 10 75 143
Change in assets and liabilities:
Increase in receivables (876) (32) (426)
Decrease in receivable for taxes - - 2,270
(Increase) decrease in inventories (666) 4,175 14,904
(Increase) decrease in prepaid expenses
and other current assets 41 (83) 3,097
(Increase) decrease in other assets and
deferred charges (21) (649) 228
(Increase) decrease in accounts payable - trade (545) 298 (8,989)
Increase (decrease) in salaries and wages (167) 105 131
Increase (decrease) in taxes 304 226 (317)
Increase (decrease) in accrued interest payable 582 3,823 (2,810)
Increase in other current liabilities (791) (2,656) (1,625)
Increase in noncurrent restructuring reserve - (1,396) (12,196)
Increase in other noncurrent liabilities (146) (886) (1,105)
Total adjustments (443) (41,716) 4,133
Net cash used in operating activities (1,325) (2,429) (7,765)
Cash flows from investing activities:
Capital expenditures (180) (2,395) (1,008)
Cash received from sale of assets 1 1,738 73,038
Net cash (used in) provided by
investing activities (179) (657) 72,030
Cash flows from financing activities:
Borrowings under term loan - 10,000 -
Payments under senior secured floating rate notes - - (9,375)
Payments under senior secured fixed rate notes - - (15,625)
Borrowings under revolving credit loans 6,273 74,250 62,811
Payments under revolving credit loans (6,273) (79,718) (85,095)
Payments under swing loans - - (1,500)
Principal payments under notes payable - - (750)
Principal payments under capital lease obligations (141) (1,596) (6,127)
Payments of secured debt obligations - (1,500) -
Payments to acquire treasury stock - - (1,072)
Net cash (used in) provided by
financing activities (141) 1,436 (56,733)
Net increase (decrease) in cash and cash equivalents (1,645) (1,650) 7,532
Cash and cash equivalents at beginning of period 4,707 6,357 339
Cash and cash equivalents at end of period $ 3,062 $ 4,707 $ 7,871
Supplemental information:
Cash paid during the period for interest $ 48 $ 1,566 $13,636
Cash paid during the period for income taxes $ - $ - $ -
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Preparation of Consolidated Financial Statements:
The accompanying unaudited consolidated financial statements
of Homeland Holding Corporation ("Holding") and its
Subsidiary, Homeland Stores, Inc ("Stores" and together
with Holding, the "Company"), reflect all adjustments,
consisting only of normal and recurring adjustments,
except for the fresh-start adjustments which are, in the opinion
of management, necessary to present fairly the consolidated
financial position and the consolidated results of
operations and cash flows for the periods presented. These
unaudited consolidated financial statements should be read
in conjunction with the consolidated financial statements of
the Company for the 52 weeks ended December 30, 1995 and the
notes thereto.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. The
consolidated financial statements also reflect certain fresh-
start adjustments (see Note 4) that resulted from the
bankruptcy proceedings (see Note 3).
2. Accounting Policies:
The significant accounting policies of the Company are summarized
in the consolidated financial statements of the Company for the 52
weeks ended December 30, 1995 and the notes thereto.
3. Reorganization:
On May 13, 1996, the Comapny filed chapter 11 petitions with
the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). Simultaneous with the
filing of such petitions, the Company filed a plan of
reorganization and disclosure statement, which set forth
the terms of the Company's restructuring (the "Restructuring"). On
June 13, 1996, the Company filed a first amended plan of
reorganization and disclosure statement. The Company's first amended
plan of reorganization, as modified (the "Plan") was confirmed by the
Bankruptcy Court on July 19, 1996 and became effective on
August 2, 1996 (the "Effective Date").
7
On the effective Date, each of Holding and Homeland adopted
amended and restated certificates of incorporation, the
principal effects of which are: (a) eliminate the old
common stock and old class B common stock of Holding, (b)
authorized 7,500,000 shares of new common stock of Holding
(the "New Common Stock") and (c) include a provision to
prohibit the issuance of non-voting securities as and to the
extent required by Section 1123 (a) (6) of the Bankruptcy
Code for both Homeland and Holding.
As of the Effective Date, the outstanding $59.4 million of
Series C Senior Secured Fixed Rate Notes due 1999, $26.1
million of Series D Senior Secured Floating Rate Notes due
1997 and $9.5 million of Series A Senior Secured Floating Rate
Notes due 1997, (collectively, the "Old Notes"), ($95 million
in aggregate face amount plus accrued interest), were
canceled and such holders received (in the aggregate)
$60 million face amount of newly issued 10% Senior Subordinated
Notes due 2003 (the "New Notes"), $1.5 million in cash and
approximately 60% of the New Common Stock. The New Notes
are unsecured and bear interest at 10% per annum and mature
in 2003.
As of the effective Date, all of the outstanding old common
stock of Holding was canceled and the holders received
their ratable share of (a) 250,000 shares of New Common
Stock and (b) warrants to purchase up to 263,158 shares of New
Common stock at an exercise price of $11.85. Holders of general
unsecured claims (including certain trade creditors for
unpaid prepetition trade claims and the allowed unsecured
noteholders' claims) are entitled to receive their ratable
share of 4,450,000 shares of New Common Stock.
As of the Effective Date, the Company entered into the New
Credit Agreement (as defined hereinafter) consisting of a
revolving credit facility of up to $27.5 million (subject to
a borrowing base requirements) and a term loan facility of
$10.0 million The New Credit Agreement is collaterized by a
security interest in, and liens on, substantially all of the
Company's assets and is guaranteed by Holding.
On the Effective Date, the modified union agreements
negotiated with the Company's labor unions (the "Modified
Union Agreements") became effective. The Modified Union Agreements,
which are effective for a term of five years, consist of five basic
elements: (a) wage rate and benefit contribution reductions
and work rule changes, (b) an employee buyout offer, (c) the
establishment of an employee stock bonus plan which will
receive, or be entitled to receive up to 522,222 shares of
New Common Stock, (d) the
8
right to designate one member of the Board of Directors and
(e) the elimination of certain wage reinstatement
provisions, incentive plans and "maintenance of benefits."
4. Fresh-Start Reporting
The Company's Restructuring was accounted for in accordance
with the American Institute of Certified Public Accountants
Statement of Position No. 90-7, entitled "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code"
("SOP No. 90-7"). The accounting of SOP No. 90-7 resulted in
"fresh-start" reporting for the Company in which a new entity was
created for financial reporting purposes. The
Company was able to adopt SOP No. 90-7 as the holders of the
old common stock received less than 50% of the New
Common Stock and the reorganized value of the assets of the
reorganized Company is less than the total of all post-
petition liabilities and allowed claims.
For financial reporting purposes, the Comapny accounted for
the consummation of the Restructuring effective August 10,
1996, which is the Company's normal four week period ending
date. The periods prior to the Effective Date have been
designated "Predecessor Company" and the period subsequent
to the Effective Date has been designated "Successor
Company". As a result of the adoption of the "fresh-start
reporting, the Company's financial statements are not
comparable to the Company's financial statements of prior
periods.
In accordance with the SOP No. 90-7, the Company valued its
assets and liabilities at their estimated fair value and
eliminated its accumulated deficits on the Effective Date. The
total reorganization value of the reorganized Company was
determined by analyzing market cash flow multiples as
applied to the Company's projected annual cash flows as well
as comparing the reorganization vaule to a discounted
projected cash flow calculation. Based on analysis prepared by the
Company's financial advisor and the financial advisor to the ad
hoc committee of noteholders, the total reorganization value
was agreed to by the parties and confirmed by the Bankruptcy Court.
The total reorganization value as of the Effective Date was estimated
to be $167.4 million, which was $45.0 million in excess of the
Company's tangible and identifiable assets. The excess of the
reorganization value over the value of the identifiable
assets is reported as "Reorganization value in excess of
amounts allocable to identifiable assets" and is being
amortized on a straight-line basis over a three year period.
9
The components of reorganization items and gain recognized
on debt discharged resulting from the Restructuring are as
follows (in thousands):
(i) Reorganization items:
Fresh-Start reporting
Allowed claims in excess of recorded
liabilities 7,200
Revalue of property, plant and
equipment, net 4,004
Other adjustments to estimated fair value 4,156
Total fresh-start 15,360
Professional fees incurred with
the Restruturing 4,250
Total reorganization items 19,610
(ii) Gain on debt discharged:
Elimination of Old Notes and accrued interest 101,697
Elimination of other liabilities 21,421
Issuance of New Notes (60,000)
Gain on debt discharged 63,118
10
The effects of the Restructuring and the implementation of "fresh-
start" reporting on the Company's balance sheet as of August 10,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pre "Fresh-Start" "Fresh-Start"
Balance Sheet Debt Discharge "Fresh-Start" Balance Sheet
August 10, 1996 Adjustments Adjustments August 10, 1996
Current assets:
Cash $ 6,207 $ (1,500) $ - $ 4,707
Receivables 8,083 - - 8,083
Inventories 38,655 129 - 38,784
Prepaid expenses and
other current assets 3,428 - (137) 3,291
Total current assets 56,373 (1,371) (137) 54,865
Property, plant and equipment, net 66,513 - (4,004) 62,509
Other assets and deferred charges 6,793 - (1,780) 5,013
Reorganization value in excess
of amounts allocable to
identifiable assets - - 45,018 45,018
Total assets $129,679 $ (1,371) $ 39,097 $167,405
Current liabilities:
Accounts payable-trade 18,030 (10,274) 7,200 14,956
Salaries and wages 1,703 - 950 2,653
Taxes 5,101 - - 5,101
Accrued interest payable 6,714 (6,697) - 17
Other current liabilities 11,760 (3,290) 2,866 11,336
Long-term obligations in
default classified as
current 105,000 (105,000) - -
Current portion of obligations
under capital leases 2,746 (1,187) - 1,559
Current portion of restructuring
reserves 3,062 (1,796) (1,266) -
Total current liabilities $154,116 $(128,244) $ 9,750 $ 35,622
Long-term obligations:
Long-term debt - 70,000 - 70,000
Obligations under capital leases 5,784 (1,870) (425) 3,489
Other noncurrent liabilities 6,407 (3,944) (230) 2,233
Noncurrent restructuring reserve 1,412 (431) (981) -
Total long-term obligations 118,603 63,755 (1,636) 75,722
Redeemable common stock 17 - (17) -
Stockholder's equity (deficit):
Common Stock 337 - (289) 48
Additional paid-in capital 55,886 - 127 56,013
Accumulated (deficit) equity (90,139) 63,118 27,021 -
Minimum pension liability adjustment (1,327) - 1,327 -
Treasury stock (2,814) - 2,814 -
Total stockholder's equity
(deficit) (38,057) 63,118 31,000 56,061
Total liabilities and
stockholder's equities
(deficit) $129,679 $(1,371) $39,097 $167,405
</TABLE>
11
5. Employee Buyout Offer Charges
As of August 3, 1996, the consummation date of the Modified
Union Agreements, 833 of the Company's unionized employees had
accepted the employee buyout offer. The employee buyout offer,
depending on the employee's job classification, date of hire and
full- or part-time status, ranges from $4,500 to $11,000 per
employee. The Company incurred approximately $6.6 million
of expense for the employee buyout offer.
6. Income Taxes
The Company did not record any provision of taxes for the 12
weeks and 36 weeks ended September 7, 1996. As of December
30, 1995, the Company has operating loss carry forward of
approximately $48.6 million. In connection with the Plan, the
Company recorded gains relating to the discharge of certain indebtedness,
which is expected to reduce the Company's operating loss carry
forward. As a result of the discharge of such indebtedness,
management estimates that the operating loss carryforward
as of September 7, 1996, is approximately $30.0 million, subject
to the projected values of the new securities issued by Holding
pursuant to the Plan.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
As discussed in Note 3 and 4 to the accompanying
Consolidated Financial Statements of Homeland Holding Corporation,
the Company Plan of Reorganization became effective on August 2,
1996. For financial reporting purposes the Company accounted for the
consummation of the Restructuring effective as of August 11,
1996. The Company has adopted "fresh-start" reporting pursuant
to SOP No. 90-7. The periods prior to the Restructuring have been
designated "Predecessor Company" and the period subsequent to the
Restructuring has been designated "Successor Company". For
purposes of the discussion of Results of Operations and Liquidity
and Capital Resources for the twelve and thirty-six weeks ended
September 7, 1996, the results of the Predecessor Company and
Successor Company have been combined.
The following discussion includes statements that are
forward-looking in nature. As with any forward-looking
statements, these statements are subject to a number of factors,
including competitive activities in the market area, general
economic conditions and the consummation of the Restructuring
that tend to influence the accuracy of the statements.
Results of Operations
Comparison of Twelve and Thirty-Six Weeks Ended
September 7, 1996 with Twelve and Thirty-Six Weeks Ended
September 9, 1995.
12
Net sales for the 12 weeks and 36 weeks ended September
7, 1996 decreased 12.08% and 20.7% respectively, over the net
sales of the corresponding periods of 1995. The decrease in net
sales was due primarily to the sale of 29 stores to AWG on April
21, 1995 and the closing of 14 stores in 1995, and 2 stores in
the second quarter of 1996 and the sale of the Ponca City store
in April 1996. In addition, while the Company believes it
maintained well stocked stores and good store conditions during
the bankruptcy proceedings, significant management time and
effort was expended to accomplish the demands necessary for a
timely, orderly reorganization which may have affected sales
negatively. Comparable store sales for the 12 weeks ended
September 7, 1996 decreased by 1.4% over the same period of 1995.
Gross profit was 24.6% and 24.5% of sales for the 12
weeks and 36 weeks ended September 7, 1996 as compared to 23.7%
and 24.1% of sales for the corresponding periods of 1995. Gross
profit for the 12 weeks ended September 7, 1996, was higher
primarily due to improved buying skills and store conditions
versus the same period of 1995 when the Company was adapting and
adjusting to the change from being self-supplied to purchasing
from AWG. Gross profit for the 36 weeks ended September 7, 1996,
benefitted from higher vendor allowance and improved purchasing
skills. The improvement was offset somewhat by higher cost of
goods from being supplied by AWG versus self-supplied.
Selling and administrative expenses for the 12 weeks
ended September 7, 1996 decreased to 22.7% of sales compared to 24.4% for
the corresponding period of 1995. For the 36 weeks ended
September 7, 1996, selling and administrative expenses decreased
to 22.6% of sales from 23.7%. The Company's selling and administrative
expense as a percentage of sales has declined due to cost
controls, including reductions in corporate support functions,
the newly negotiated Modified Union Agreements, certain lease
and secured financing concessions and the rejection of certain
burdensome executory contracts. Cost savings from the Modified
Union Agreements were somewhat offset by increased costs
associated with training new employees that were hired to replace
employees that accepted the employee buyout offer.
Interest expense decreased to $1.1 million for the 12
weeks ended September 7, 1996, from $3.4 million in the same
period of 1995. As for the 36 weeks ended September 7, 1996,
interest expense amounted to $6.3 million as compared to $11.7
million of the corresponding period of 1995. The decrease in
interest expense was primarily due to the non-accrual of interest
on the Old Notes during the bankruptcy proceedings and was offset
in part by the interest on the New Notes and the $10.0 million
term loan under the New Credit Agreement, commencing on the
Effective Date.
13
The Company recorded reorganization expenses amounting
to $22.8 million and $26.0 million for the 12 weeks and 36 weeks ended
September 7, 1996. The reorganization expenses consist primarily
of professional fees and result from "fresh start" reporting adjustments.
The excess reorganization value is being amortized over a three
year period and the amortization for the 12 week period ended
September 7, 1996, amounted to $1.2 million, reflecting amortization
commencing after the Effective Date.
As of the Effective Date, pursuant to the terms of the Plan
of Reorganization, certain debt of the Company was discharged.
This resulted in a recognition of extraordinary gain amounting
to $63.1 million.
Liquidity and Capital Resources
The primary sources of liquidity for the Company's
operations have been borrowings under credit facilities and
internally generated funds.
On the Effective Date, the Company entered into a new
credit agreement (the "New Credit Agreement") with National Bank
of Canada, ("NBC"), as agent and lender, Heller Financial, Inc.
and IBJ Shroder Bank and Trust Company. The New Credit Agreement
provides the Company a working capital and letter of credit
facility (the "Credit Facility") of up to the lessor of (a)
$27.5 million or (b) the applicable borrowing base and a $10.0
million term loan. (the "Term Loan")
The Credit Facility provides availability of funds for
general corporate purposes of the Company. The Term Loan was
used to fund certain obligations of the Company under the
Restructuring including the employee buyout offer cost of
approximately $6.6 million, the new health and welfare plan under
the Modified Union Agreements, professional fees and "cure payments"
in connection with certain executory contracts, secured
financing and unexpired leases.
The interest rate under the New Credit Agreement is
based on the prime rate publicly announced by NBC from time to
time in New York, New York plus a percentage which varies based
on an number of factors, including (a) the amounts relating to the
Credit Facility and the Term Loan, (b) the time period, (c)
whether the Company elects to use the London Interbank Offered
Rate and (d) the annual earnings of the Company before interest,
taxes, depreciation and amortization expenses.
The obligations under the New Credit Agreement are
collaterized by liens on, and security interest in, substantially all
of the assets of Homeland, and are guaranteed by Holding, with a
pledge of its Homeland stock to secure its obligation.
14
The New Credit Agreement includes customary
restrictions on acquisitions, assets dispositions, capital
expenditures, consolidations and mergers, distribution, in
debtedness, diversities, liens and security interests and
transactions with affiliates. The New Credit Agreement also
requires the Company to comply with certain financial
requirements including minimum operating income before interest,
taxes, depreciation, amortization and reorganization items (the
"EBITDAR"), Minimum Fixed Charge Coverage Ratio, Funded Debt-
to-EBITDAR Ratio and Minimum Current Ratio, each as defined
in the New Credit Agreement, and other covenants and prohibitions.
The New Credit Agreement matures three years from
the Effective Date or August 2, 1999.
In August 1996, Associated Wholesale Grocers, Inc.
("AWG"), the Company's wholesale supplier, filed a registration
statement with the Securites and Exchange Commission with
respect to a proposed conversion from a cooperative to a public
general business corporation and a related public offering (the
"AWG Conversion"). The AWG members are expected to
vote on the AWG Conversion on November 3, 1996. If the AWG
Conversion is approved by its members, it is expected that the
public offering will commence shortly thereafter.
If the AWG conversion is consummated, AWG will cease
paying annual patronage rebates and Homeland is expected to receive a one-
time distribution of approximately $1.1 million shares of restricted
common stock of Associated Wholesale Grocers Group, Inc., new public company,
("AWG Group"). The common stock to be issued in the AWG Conversion is currently
valued at $20.00 per share by AWG and its advisors and will be listed
on the New York Stock Exchange. AWG expects to pay an initial annualized
dividend of $0.20 on each share of common stock of AWG Group.
Homeland has conducted a financial analysis of the effects on
Homeland of the AWG Conversion. Based on such internal analysis, Homeland does
not believe the AWG Group common stock to be issued to Homeland in the
AWG Conversion will fairly compensate Homeland for the loss of
annual patronage rebates. Homeland has notified AWG that Homeland does not
support the proposed AWG Conversion and believes that the AWG Conversion
and public offering may costitute a default by AWG under the Company's
supply agreement with AWG. AWG has advised Homeland that it does not
believe that such default has or will occur as a result of the AWG Conversion.
Homeland is considering its alternatives including initiation of litigation
to preserve its rights and enforce AWG's obligations.
Homeland received $4.9 million, of which $1.6 million was in the
form of 7-year interest bearing certificates, for the 1995 annual patronage
rebates on purchases made from April 21, 1995 to the end of the 1995 year.
Homeland expects to receive approximately $6.2 million for the 1996 annual
patronage rebates, of which $2.5 million may be in the form of 7-year interest
bearing certificates, assuming that the AWG Conversion is not consummated and
that AWG's board of directors declare a percentage payment of not less than
2.35% on purchases. The 7-year interest bearing certificates are being used to
reduce Homeland's outstanding letter of credit to AWG. AWG's bylaws provide
that annual patronage rebates be declared by the board of directors following
the end of each fiscal year based on the operating income of the cooperative.
Although, there is no guarantee that any annual patronage rebate will be
declared by AWG for future years, AWG has been providing its members with an
average 2.2% of annual patronage rebates on purchases for the past 15 years.
The loss of the annual patronage rebate could materially adversely affect
Homeland's liquidity and its business plan. Homeland is currently evaluating
options that may be available to the Company to maximize the benefits of the
receipt of approximately $22.0 million of the AWG Group restricted common
stock to offset the negative long term impact of not receiving the annual
patronage rebates if the AWG Conversion is consummated.
The Company's Modified Union Agreements which
mature in the year 2001, are expected to result in savings of
approximately $10.0 million during the first full contract year. There can
be no assurance, however, that such savings will actually be realized.
In addition, cost savings are being affected by the recent
federally mandated minimum wage adjustments and contract
15
savings in future years will be offset in part by contract wage and
benefit adjustments.
For the 36 weeks ended September 7, 1996, the Company's
net cash used in operations was $1.3 million compared to $2.4 million
for the corresponding period in 1995. The Company expects
to use $5.7 million of capital expenditures in the fourth
quarter, or an aggregate of $8.3 million capital expenditures for
fiscal 1996. The Company anticipates that the funds for the capital
expenditures would be obtained from the New Credit Agreement and
cash flows from operations. As of October 18, 1996 the Company
had $12.4 million of availability under the Credit Facility.
16
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit: The following exhibit is filed as part of
this report:
Exhibit No. Description
27 Financial Data Schedule
(b) Report on Form 8-K: No report on Form 8-K
was filed during the quarter ended September 7, 1996.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HOMELAND HOLDING CORPORATION
Date: October 28, 1996 By: /s/ James A. Demme
James A. Demme, President
Chief Executive Officer and
Director (Principal Executive
Officer)
Date: October 28, 1996 By: /s/ Larry W. Kordisch
Larry W. Kordisch, Executive
Vice President/Finance,
Treasurer, Chief Financial
Officer and Secretary
(Principal Financial Officer)
Date: October 28, 1996 By: /s/ Terry M. Marczewski
Terry M. Marczewski, Chief
Accounting Officer, Assistant
Treasurer and Assistant
Secretary (Principal
Accounting Officer
18
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<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> SEP-7-1996
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