UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Under Section 13 or 15 (d) of the Securities
X Exchange Act of 1934
For the quarterly period ended June 20, 1998
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 offices) (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 under a plan confirmed by
a court. Yes X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of July 28, 1998:
Homeland Holding Corporation Common Stock: 4,835,901 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 20, 1998
INDEX
Page
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements......................................... 1
Consolidated Balance Sheets as of
June 20, 1998, and January 3, 1998........................ 1
Consolidated Statements of Operations
Twelve Weeks ended June 20, 1998, and June
14, 1997.................................................. 3
Consolidated Statements of Operations
Twenty-four Weeks ended June 20, 1998, and June
14, 1997.................................................. 4
Consolidated Statements of Stockholders Equity (Deficit)
Twenty-four Weeks ended June 20, 1998 and June
14, 1997.................................................. 5
Consolidated Statements of Cash Flows
Twenty-four Weeks ended June 20, 1998 and June
14, 1997.................................................. 6
Notes to Consolidated Financial Statements................... 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
PART II OTHER INFORMATION
ITEM 5. Other Information............................................ 12
ITEM 6. Exhibits and Reports on Form 8-K............................. 13
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)
ASSETS
June 20, January 3,
1998 1998
(Unaudited)
Current assets:
Cash and cash equivalents $ 5,813 $ 4,778
Receivables, net of allowance for
uncollectible accounts of $1,108
and $1,198 7,557 9,313
Inventories 45,371 45,946
Prepaid expenses and other current assets 3,222 2,581
Total current assets 61,963 62,618
Property, plant and equipment:
Land and land improvements 9,417 9,303
Buildings 20,029 19,995
Fixtures and equipment 25,372 22,267
Leasehold improvements 16,676 13,459
Software 5,115 4,991
Leased assets under capital leases 8,610 8,610
Construction in progress 30 2,769
85,249 81,394
Less, accumulated depreciation
and amortization 15,702 11,299
Net property, plant and equipment 69,547 70,095
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $26,832 at
June 20, 1998, and $20,346 at
January 3, 1998 15,772 23,162
Other assets and deferred charges 10,011 10,166
Total assets $ 157,293 $ 166,041
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)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 20, January 3,
1998 1998
(unaudited)
Current liabilities:
Accounts payable - trade $ 18,105 $ 18,941
Salaries and wages 2,230 2,508
Taxes 3,632 3,605
Accrued interest payable 2,671 2,619
Other current liabilities 7,554 10,042
Current portion of long-term debt 1,753 1,728
Current portion of obligations under
capital leases 1,286 1,286
Total current liabilities 37,231 40,729
Long-term obligations:
Long-term debt 78,836 78,353
Obligations under capital leases 2,001 2,608
Other noncurrent liabilities 1,951 2,027
Total long-term obligations 82,788 82,988
Stockholders' equity:
Common Stock,
$0.01 par value, authorized - 7,500,000
shares, issued 4,825,899 shares at June
20, 1998, and issued 4,820,637
shares at January 3, 1998 48 48
Additional paid-in capital 56,159 56,040
Accumulated deficit (18,933) (13,764)
Total stockholders' equity 37,274 42,324
Total liabilities and stockholders'
equity $ 157,293 $ 166,041
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)
12 weeks 12 weeks
ended ended
June 20, June 14,
1998 1997
Sales, net $ 123,509 $ 116,264
Cost of sales 94,146 87,603
Gross profit 29,363 28,661
Selling and administrative expenses 26,598 25,079
Amortization of excess reorganization value 3,205 3,364
Operating profit (loss) (440) 218
Interest expense 1,848 1,833
Loss before income taxes (2,288) (1,615)
Income tax expense 471 920
Net loss (2,759) (2,535)
Basic and diluted earnings per share:
Net loss per share $ (0.57) $ (0.53)
Weighted average shares outstanding 4,824,781 4,758,025
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)
24 weeks 24 weeks
ended ended
June 20, June 14,
1998 1997
Sales, net $ 244,912 $ 236,314
Cost of sales 186,068 178,481
Gross profit 58,844 57,833
Selling and administrative expenses 52,778 50,266
Amortization of excess reorganization value 6,486 6,824
Operating profit (loss) (420) 743
Interest expense 3,799 3,815
Loss before income taxes (4,219) (3,072)
Income tax expense 950 1,721
Net loss (5,169) (4,793)
Basic and diluted earnings per share:
Net loss per share $ (1.07) $ (1.01)
Weighted average shares outstanding 4,823,482 4,758,025
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>
Common Stock Additional
Paid-In Accumulated Stockholder's
Shares Amount Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, December 28, 1996 4,758,025 $ 48 $ 56,013 $ (3,120) $ 52,941
Net loss - - - (4,793) (4,793)
Balance, June 14, 1997 4,758,025 48 $ 56,013 $ (7,913) $ 48,148
Balance, January 3, 1998 4,820,637 $ 48 $ 56,040 $ (13,764) $ 42,324
Net loss - - - (5,169) (5,169)
Issuance of common stock 15,262 - $ 119 - $ 119
Balance, June 20, 1998 4,835,899 $ 48 $ 56,159 $ (18,933) $ 37,274 -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
24 weeks 24 weeks
ended ended
June 20, June 14,
1998 1997
Cash flows from operating activities:
Net loss $ (5,169) $ (4,793)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 4,434 3,510
Amortization of excess reorganization value 6,486 6,824
Amortization of financing costs 35 29
(Gain) loss on disposal of assets 36 (1)
Amortization of beneficial interest in
operating leases 56 56
Adjustment to excess reorganization value - 292
Deferred income taxes 905 1,721
Change in assets and liabilities:
Decrease in receivables 1,756 1,892
Decrease in inventories 575 1,849
Decrease (increase) in prepaid expenses
and other current assets (641) 534
Decrease (increase) in other assets and
deferred charges 48 (118)
Decrease in accounts payable-trade (836) (1,670)
Decrease in salaries and wages (278) (752)
Increase in taxes 27 804
Increase (decrease) in accrued interest payable 52 (211)
Decrease in other current liabilities (2,488) (1,352)
Increase (decrease) in other noncurrent
liabilities (61) 113
Net cash provided by operating activities 4,937 8,727
Cash flow used in investing activities:
Capital expenditures (3,926) (3,559)
Cash received from sale of assets 4 20
Net cash used in investing activities (3,922) (3,539)
Cash flows used by financing activities:
Borrowings under term loan - -
Borrowings under revolving credit loans 60,810 63,409
Payments under revolving credit loans (59,855) (63,241)
Proceeds from issuance of common stock 119 -
Principal payments under note payable (447) (31)
Principal payments under capital lease obligations (607) (683)
Payments of secured debt obligations - -
Net cash provided (used) in
financing activities 20 (546)
Net increase in cash and cash equivalents 1,035 4,642
Cash and cash equivalents at beginning of period 4,778 1,492
Cash and cash equivalents at end of period $ 5,813 $ 6,134
Supplemental information:
Cash paid during the period for interest $ 3,909 $ 4,005
Cash paid during the period for income taxes $ - $ -
The accompanying notes are an integral part
of these consolidated 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 interim consolidated financial
statements of Homeland Holding Corporation ("Holding") and its
Subsidiary, Homeland Stores, Inc. ("Stores" and together with Holding,
the "Company"), reflect all adjustments, which consist only of normal
and recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of 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 period ended January 3, 1998, and the notes thereto.
2. Accounting Policies:
The significant accounting policies of the Company are summarized
in the consolidated financial statements of the Company for the 53 weeks
ended January 3, 1998, and the notes thereto.
3. Net Loss Per Share:
Options to purchase 256,000 shares of common stock with a weighted
average exercise price of $6.68 were outstanding at June 20, 1998, but
were not included in the computation of diluted earnings per share
because the effect would be antidilutive.
7
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
General
The table below sets forth selected items from the Company's
consolidated income statement as a percentage of net sales of the
periods indicated:
12 weeks ended 24 weeks ended
June 20, June 14, June 20, June 14,
1998 1997 1998 1997
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 76.2 75.3 76.0 75.5
Gross Profit 23.8 24.7 24.0 24.5
Selling and
administrative 21.5 21.6 21.5 21.3
Amortization of
excess reorganization
value 2.6 2.9 2.6 2.9
Operating profit
(loss) (0.3) 0.2 (0.1) 0.3
Interest expense 1.5 1.6 1.6 1.6
Loss before income
taxes (1.8) (1.4) (1.7) (1.3)
Income tax
provision 0.4 0.8 0.4 0.7
Net loss (2.2) (2.2) (2.1) (2.0)
Results of Operations.
Comparison of Twelve Weeks and Twenty-Four Weeks ended June 20,
1998, with Twelve Weeks and Twenty-Four Weeks ended June 14, 1997.
Net sales for the 12 weeks and 24 weeks ended June 20, 1998,
increased 6.2 % and 3.6%, respectively, from the net sales of the
corresponding period of 1997. Comparable store sales for the 12 weeks
and 24 weeks ended June 20, 1998, increased by 0.4% and decreased by
2.1%, respectively, as compared to the corresponding periods of 1997.
The improvement in total sales in the quarter is partially due
to an additional four stores in operation versus the same quarter last
year. The sales improvement in the quarter is also due to a change in
like-store sales trends from a decline of 4.4% in the first quarter
to an increase of 0.4% in the second quarter. This turnaround in trend
is primarily due to increasing customer acceptance of card-based promotions,
re-grand openings of five remodeled stores, greater usage of targeted
localized promotions, and better store level execution.
8
There were 4 competitive grand openings during the second
quarter of 1998, two of which were Wal-Mart Supercenters.
The Company also closed a small store less than 2 miles away
from a larger, remodeled store during the second quarter.
Gross profit as a percentage of sales for the 12 weeks ended
June 20, 1998, was 23.8%, a decrease from the corresponding period in
1997 of 24.7%. The decrease in gross profit margin was primarily a result
of increased promotional activities relating to new competitors and re-
grand opening sales of the five remodeled stores. Management anticipates
that future improvements in cost of goods will help offset increases
in promotional costs. Gross profit as a percentage of sales for the 24
weeks ended June 20, 1998, was 24.0%, a decrease from the corresponding
period in 1997 of 24.5%.
Selling and administrative expenses for the 12 weeks ended
June 20, 1998, decreased to 21.5%, as a percentage of net sales,
compared to 21.6% for the corresponding period of 1997. The reduction
during the second quarter reflects improvements in store level productivity
and lower fixed expense ratios due to increased sales. For the 24
weeks ended June 20, 1998, selling and administrative expenses as a
percentage of sales increased by 0.2% to 21.5% from 21.3% in the
corresponding period of 1997.
The Company recorded amortization of excess reorganization value
of $3.2 million and $6.5 million for the 12 weeks and 24 weeks ended
June 20, 1998, respectively. The amortization of the excess
reorganization value will negatively affect earnings for the next five
fiscal quarters.
Interest expense for the 12 weeks ended June 20, 1998, and
June 14, 1997, was $1.8 million. Interest expense for the 24 weeks ended
June 20, 1998, and June 14, 1997, was $3.8 million.
The Company recorded an income tax provision of $0.5 million and
$0.9 million for the 12 weeks and 24 weeks ended June 20, 1998,
respectively. The effective tax rate differs from the statutory rate due
to amortization of excess reorganization value, which is not deductible for
income tax purposes. The net operating loss ("NOL") carryforwards
available for utilization in 1998 are limited to approximately
$3.3 million, the benefit of which is being recorded as a reduction of
excess reorganization value rather than a reduction of income tax expense.
The NOL carryforward available in 1998 is expected to be fully utilized
in the third quarter of 1998, and accordingly, the Company will commence
to incur income tax liabilities.
9
The Company's EBITDA (as defined hereinafter) for the 12 weeks
ended June 20, 1998, declined to $5.0 million or 4.1% of net sales,
from the EBITDA of $5.4 million or 4.7% of net sales for the corresponding
period in 1997. For the 24 weeks ended June 20, 1998, EBITDA was $ 10.6
million or 4.3% of net sales compared to $11.1 million or 4.7% for the
corresponding period of 1997.
Net loss for the 12 weeks ended June 20, 1998, was $2.8
million or $0.57 per share compared to a net loss of $2.5 million or
$0.53 per share for the corresponding period in 1997. Net loss for the
24 weeks ended June 20, 1998, was $5.2 million or $1.07 per share
compared to a net loss of $4.8 million or $1.01 per share for the
corresponding period in 1997.
The Company is amortizing its excess reorganization value of $45
million over a three-year period, and such amortization has affected
earnings significantly. If the Company excluded such amortization of
excess reorganization value for the 12 weeks and 24 weeks ended June
20, 1998, the Company would record income of $0.4 million or $0.9 per
share and income of $1.3 million or $0.27 per share, respectively.
Liquidity and Capital Resources
The primary sources of liquidity and capital for the Company's
operations have been borrowing under the revolving credit facility and
internally-generated funds.
The Company's EBITDA (earnings before interest, taxes,
depreciation and amortization), as presented below, is the Company's
measurement of internally-generated cash for working capital needs,
capital expenditures and payment of debt obligations:
12 weeks ended 24 weeks ended
June 20, June 14, June 20, June 14,
1998 1997 1998 1997
Loss before income taxes (2,288) (1,615) (4,219) (3,072)
Interest expense 1,848 1,833 3,799 3,815
Amortization of
reorganization value 3,205 3,364 6,486 6,824
Depreciation and
amortization 2,272 1,821 4,492 3,566
EBITDA 5,037 5,403 10,558 11,133
As a percentage of
sales 4.10% 4.70% 4.30% 4.70%
As a multiple of
interest expense 2.7x 3.0x 2.8x 2.9x
10
Cash flow from operations provided $4.9 million for the 24 weeks
ended June 20, 1998, and $8.7 million for the 24 weeks ended June 14, 1997.
The decrease in cash flow from operations in comparison between the two
periods was due primarily to higher purchases of inventory and decreases
in other current liabilites.
The Company's investing activities used net cash of $3.9 million
in the 24 weeks ended June 20, 1998, as compared to net cash used by
investing activities of $3.5 million in the 24 weeks ended June 14, 1997.
Financing activities of the Company provided net cash of $0.1
million and used net cash of $0.5 million for the 24 weeks ended June 20,
1998, and June 14, 1997, respectively.
As of June 20, 1998, the Company had $11.6 million of borrowings
and $3.3 million of letters of credit outstanding under its $32.0 million
revolving credit facility. The revolving credit facility provides for
borrowings to the lesser of (a) $32.0 million or (b) the applicable
borrowing base. The applicable borrowing base on June 20, 1998, was
$29.7 million. Management believes that the revolving credit facility and
cash flow from operations will be adequate for the Company's short-
term requirements.
The Company is continuing to improve its store facilities through
its capital expenditure program to maintain and enhance its market
competitiveness. Cash capital expenditures for 1998 are expected to be
at $12.9 million. The credit agreement limits the Company to $13.0 million
cash capital expenditures for 1998. The Company is also allowed $7.0
million of new capital leases each year.
Safe Harbor Statements Under the Private Securities Litigation Reform Act
of 1995
The statements made under Item 2: Management's Discussion and
Analysis of Financial Condition and Results of Operations and other
statements in this Form 10-Q which are not historical facts, particularly
with respect to future net sales, are forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that
could render them materially inaccurate or different. The risks and
uncertainties include, but are not limited to, the effect of economic
conditions, the impact of competitive promotional and new store activities,
labor cost, capital constraints, availability and costs of inventory,
changes in technology and the effect of regulatory and legal developments.
11
PART II - OTHER INFORMATION
Item 5. Other Information
Ms. Deborah A. Brown was elected Vice President - Accounting,
Corporate Controller, Treasurer and Assistant Secretary on July 9, 1998.
Mr. Wayne S. Peterson has accepted the position of Senior Vice
President, Chief Financial Officer, and Secretary pending the completion
of the merger of his current employer, Buttrey Food & Drug with Albertson's
Inc.
12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as part
of this report:
Exhibit No. Description
27 Financial Data Schedule.
(b) Report on Form 8-K: The Company did not file any
Form 8-K during the quarter ended June 20, 1998.
13
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: August 4, 1998 By: /s/ David B. Clark
David B. Clark, President, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: August 4, 1998 By: /s/ Deborah A. Brown
Deborah A. Brown, Vice President - Accounting
Corporate Controller, Treasurer and
Assistant Secretary
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUN-20-1998
<CASH> 5,813
<SECURITIES> 0
<RECEIVABLES> 8,665
<ALLOWANCES> 1,108
<INVENTORY> 45,371
<CURRENT-ASSETS> 61,963
<PP&E> 85,249
<DEPRECIATION> 15,702
<TOTAL-ASSETS> 157,293
<CURRENT-LIABILITIES> 37,231
<BONDS> 60,000
0
0
<COMMON> 48
<OTHER-SE> 37,226
<TOTAL-LIABILITY-AND-EQUITY> 157,293
<SALES> 244,912
<TOTAL-REVENUES> 244,912
<CGS> 186,068
<TOTAL-COSTS> 186,068
<OTHER-EXPENSES> 59,264
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,799
<INCOME-PRETAX> (4,219)
<INCOME-TAX> 950
<INCOME-CONTINUING> (5,169)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,169)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
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