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 Exchange
Act of 1934
For the quarterly period ended March 27, 1999
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 May 10, 1999:
Homeland Holding Corporation Common Stock: 4,908,427 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED MARCH 27, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Consolidated Balance Sheets
March 27, 1999, and January 2, 1999 1
Consolidated Statements of Operations
Twelve Weeks ended March 27, 1999,
and March 28, 1998 3
Consolidated Statements of Cash Flows
Twelve Weeks ended March 27, 1999,
and March 28, 1998 4
Notes to Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 7
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
March 27, January 2,
1999 1999
Current assets:
Cash and cash equivalents $ 4,033 $ 7,856
Receivables, net of allowance for uncollectible
accounts of $916 and $972 7,028 9,961
Inventories 46,343 46,280
Prepaid expenses and other current assets 3,433 2,527
Total current assets 60,837 66,624
Property, plant and equipment:
Land and land improvements 9,346 9,346
Buildings 21,668 20,216
Fixtures and equipment 29,101 28,466
Leasehold improvements 18,907 17,488
Software 5,428 5,396
Leased assets under capital leases 9,053 9,053
Construction in progress 578 3,278
94,081 93,243
Less, accumulated depreciation
and amortization 23,098 20,832
Net property, plant and equipment 70,983 72,411
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $36,657 and
$34,018 at March 27, 1999, and January 2,
1999, respectively 4,783 7,791
Other assets and deferred charges 12,326 12,378
Total assets $ 148,929 $ 159,204
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
1
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 27, January 2,
1999 1999
Current liabilities:
Accounts payable - trade $ 17,496 $ 20,267
Salaries and wages 1,961 2,827
Taxes 3,078 3,093
Accrued interest payable 1,123 2,622
Other current liabilities 6,554 8,548
Current portion of obligations under capital
leases 1,207 1,235
Current portion of long-term debt 1,728 1,728
Total current liabilities 33,147 40,320
Long-term obligations:
Long-term debt 83,088 83,852
Obligations under capital leases 1,466 1,700
Other noncurrent liabilities 1,373 1,464
Total long-term obligations 85,927 87,016
Stockholders' equity:
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,908,427 shares
and 4,904,417 shares at March 27, 1999,
and January 2, 1999, respectively 49 49
Additional paid-in capital 56,184 56,174
Accumulated deficit (26,378) (24,355)
Total stockholders' equity 29,855 31,868
Total liabilities and stockholders' equity $ 148,929 $ 159,204
The accompanying notes are an integral part
of these consolidated financial statements.
2
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
March 27, March 28,
1999 1998
Sales, net $ 123,668 $ 121,403
Cost of sales 94,743 91,922
Gross profit 28,925 29,481
Selling and administrative expenses 26,067 26,148
Amortization of excess reorganization value 2,639 3,281
Operating profit 219 52
Gain (loss) on disposal of assets 4 (32)
Interest income 129 98
Interest expense (2,000) (2,049)
Loss before income taxes (1,648) (1,931)
Income tax expense (375) (479)
Net loss (2,023) (2,410)
Accumulated deficit at beginning of period (24,355) (13,764)
Accumulated deficit at end of period $ (26,378) $ (16,174)
Basic and diluted earnings per share:
Net loss per common share $ (0.41) $ (0.50)
Weighted average shares outstanding 4,906,504 4,822,112
The accompanying notes are an integral part
of these consolidated financial statements.
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 27, March 28,
1999 1998
Cash flows from operating activities:
Net loss $ (2,023) $ (2,410)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 2,284 2,192
Amortization of beneficial interest in
operating leases 28 28
Amortization of excess reorganization value 2,639 3,281
Amortization of financing costs 12 17
Loss (gain) on disposal of assets (4) 32
Deferred income taxes 369 479
Change in assets and liabilities:
Decrease in receivables 2,933 3,103
(Increase) decrease in inventories (63) 456
(Increase) decrease in prepaid expenses
and other current assets (906) 244
Decrease in other assets and
deferred charges 5 17
Decrease in accounts payable - trade (2,771) (1,110)
Decrease in salaries and wages (866) (802)
Decrease in taxes (15) (591)
Decrease in accrued interest payable (1,499) (1,274)
Decrease in other current liabilities (1,994) (1,567)
Increase (decrease) in other noncurrent
liabilities (84) 37
Total adjustments 68 4,542
Net cash provided by (used in)
operating activities (1,955) 2,132
Cash flows from investing activities:
Capital expenditures (862) (1,605)
Cash received from sale of assets 10 -
Net cash used in investing activities (852) (1,605)
Cash flows from financing activities:
Borrowings under revolving credit loans 29,155 26,416
Payments under revolving credit loans (29,903) (26,398)
Principal payments under notes payable (16) (15)
Proceeds from issuance of common stock 10 27
Principal payments under capital lease obligations (262) (304)
Net cash used in financing activities (1,016) (274)
Net increase (decrease) in cash and cash equivalents (3,823) 253
Cash and cash equivalents at beginning of period 7,856 4,778
Cash and cash equivalents at end of period $ 4,033 $ 5,031
Supplemental information:
Cash paid during the period for interest $ 3,473 $ 3,312
Cash paid during the period for income taxes $ - $ -
The accompanying notes are an integral part
of these consolidated financial statements.
4
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
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"), through its
wholly-owned subsidiary, Homeland Stores, Inc. ("Homeland") and Homeland's
wholly-owned subsidiary, SLB Marketing, Inc., (collectively referred to
herein as 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 2, 1999, 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 52 weeks
ended January 2, 1999, and the notes thereto.
3. Subsequent Event:
On April 23, 1999, subsequent to the close of the first quarter
of 1999, the Company completed its acquisition of nine Apple Markets from
Associated Wholesale Grocers, Inc. ("AWG"). The net purchase price was
$1.1 million which represents $5.6 million for real property, fixtures and
equipment, goodwill and a non-compete agreement, plus $2.3 million for
inventory, offset by $6.8 million in long-term debt assumed by the Company.
The Company owns one store and leases the remaining eight from AWG. The
one owned store in Pryor, Oklahoma was closed as a result of the
proximity to an existing Company store.
5
The Company financed this acquisition principally through the
assumption of $6.8 million in long-term debt, together with increased
borrowings under its working capital facility. The debt incurred by the
Company to AWG is secured by liens on, and security interests in, the
assets associated with the nine stores. Subsequent to the closing of the
acquisition, the Company repaid the portion of its indebtedness to AWG
which relates to inventory and AWG is releasing its lien on inventory.
The loan documents with AWG include certain customary restrictions,
including restrictions on the payment of dividends. Under the various
agreements of the acquisition, the nine markets are subject to non-compete,
supply and right-of-first refusal agreements with AWG. In addition to
the other customary terms associated with a right-of-first refusal
agreement, the right-of-first refusal agreement provides for the repurchase
by AWG of the nine stores based upon the occurrence of certain exercise
events. The exercise events include, among other events, a change in
control of Homeland and a transfer of more than 20% of the ownership
interest of Holding or Homeland.
6
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:
March 27, March 28,
1999 1998
Net Sales 100.0% 100.0%
Cost of sales 76.6 75.7
Gross Profit 23.4 24.3
Selling and administrative 21.1 21.6
Amortization of excess reorganization
value 2.1 2.7
Operating profit 0.2 -
Gain (loss) on disposal of assets - -
Interest income 0.1 0.1
Interest expense (1.6) (1.7)
Loss before income taxes (1.3) (1.6)
Income tax provision (0.3) (0.4)
Net loss (1.6) (2.0)
Results of Operations.
Comparison of the Twelve Weeks Ended March 27, 1999 with the
Twelve Weeks Ended March 28, 1998
Net sales increased $2.3 million, or 1.9%, from $121.4 million
for the twelve weeks ended March 28, 1998, to $123.7 million for the twelve
weeks ended March 27, 1999. The increase in sales is attributable to a 3.0%
increase in comparable store sales partially offset by the sales lost due to
the closing of one Homeland store during the second quarter of 1998. The
increase in comparable store sales is the result of increased promotional
activity and the grand re-opening of one remodeled store.
During the twelve weeks ended March 27, 1999, there were six new
competitive openings within the Company's markets including: two Albertson's;
one Wal-Mart Supercenter; one Baker's Supermarket; and, the relocation of
two independent stores. Based on information publicly available, the Company
expects that, during the remainder of 1999, Albertson's will open 1 additional
store; Wal-Mart will open 3 additional supercenters; and regional chains and
7
independents will open two additional stores. Additionally, it is now expected
that Wal-Mart could open one Neighborhood Supermarket, a new format in
Oklahoma City, by the end of the current fiscal year.
Based in part on the anticipated impact of proposed and recent
new store openings and remodelings by competitors, management believes that
market conditions will remain highly competitive, placing continued pressure
on comparable store sales and net sales. In response to this highly
competitive environment, the Company intends to build on its strengths which
consist of: (a) high quality perishable departments; (b) market position and
competitive pricing; (c) customer service; (d) excellent locations; and (e)
the "Homeland Savings Card," a customer loyalty card program. The Company is
upgrading its stores by focusing its capital expenditures on projects that
will improve the overall appeal of its stores to targeted customers and is
using its merchandising strategy to emphasize a competitive pricing structure,
as well as leadership in quality products and services, selection and
convenient store locations. Additionally, the in-store merchandising strategy
combines a strong presentation of fresh products along with meaningful values
throughout the store on a wide variety of fresh and shelf stable products
each week. The Company's main vehicle of value delivery is its Homeland
Savings Card which allows customers with the card the opportunity to purchase
over 2,000 items at a reduced cost each week. Finally, the Company continues
the use of market research in order to maintain a better understanding of
customer behavior and trends in certain markets.
Gross profit as a percentage of sales decreased 0.9% from 24.3%
for the twelve weeks ended March 28, 1998, to 23.4% for the twelve weeks
ended March 27, 1999. The decrease in gross profit margin primarily reflects
increased promotional activities including the Company's response to certain
new competitive store openings and special advertisements for the grand
opening of one remodeled Company store and a higher concentration of sales
in lower gross profit departments.
Selling and administrative expenses as a percentage of sales
decreased 0.5% from 21.6% for the twelve weeks ended March 28, 1998, to 21.1%
for the twelve weeks ended March 27, 1999. The decrease in operating expenses
is attributable to reduced labor costs as a result of improved store
productivity, favorable experience in employee benefit programs, reduced
utilities costs and reduced administrative expenses partially offset by an
increase in advertising expenses and depreciation expenses during the quarter.
The Company continues to review the alternatives to reduce selling and
administrative expenses and cost of sales in order to provide opportunities
to pass additional savings along to its customers in the form of price
reductions in certain categories.
The amortization of the excess reorganization value amounted to
$2.6 million for the twelve weeks ended March 27, 1999. The excess
reorganization value is being amortized over three years, on a straight line
basis, and will be fully amortized by the third quarter of 1999.
8
Interest expense, net of interest income, decreased $0.1 million
from $2.0 million for the twelve weeks ended March 28, 1998, to $1.9 million
for the twelve weeks ended March 27, 1999. The decrease reflects lower
interest rates and additional interest income from the interest bearing
certificates of AWG, partially offset by an additional amount of debt
outstanding. During 1999, the Company anticipates that interest expense will
increase with the acquisition of nine stores from AWG completed in April,
1999. See "Liquidity and Capital Resources."
The Company recorded $0.4 million of income tax expense for the
twelve weeks ended March 27, 1999, substantially all of which was deferred
income tax. In accordance with SOP 90-7, the tax benefit realized from
utilizing the pre-reorganization net operating loss carryforwards is recorded
as a reduction of the reorganization value in excess of amounts allocable to
identifiable assets rather than realized as a benefit on the statement of
operations. As of March 27, 1999, the Company had a tax net operating loss
carryforward of approximately $37.4 million, which may be utilized to offset
future taxable income to the limited amount of $3.3 million for 1999 and each
year thereafter.
EBITDA (as defined hereinafter) decreased $0.4 from $5.6 million,
or 4.6% of sales, for the twelve weeks ended March 28, 1998, to $5.2 million,
or 4.2% of sales for the twelve weeks ended March 27, 1999. The decline in
EBITDA resulted primarily from the decrease in gross profit. The Company
believes that EBITDA is a useful supplemental disclosure for the investment
community. EBITDA, however, should not be construed as a substitute for
earnings or cash flow information required under generally accepted accounting
principles.
Liquidity and Capital Resources
On August 2, 1996, pursuant to the Plan of Reorganization, the
Company entered into a loan agreement with NBC, as agent and lender, and
two other lenders, Heller Financial, Inc. and IBJ Schroder Bank and Trust
Company (subsequently assigned its position to IBJ Schroder Business Credit
Corporation), under which those lenders provided a working capital and
letter of credit facility and a term loan (the "Old Loan Agreement").
The Old Loan Agreement, as amended, permitted the Company to borrow, under
the working capital and letter of credit facility (the "Revolving Facility"),
up to the lesser of (a) $32.0 million or (b) the applicable borrowing base.
Funds borrowed under such facility are available for general corporate
purposes of the Company. The Old Loan Agreement also provided the Company
a $10.0 million term loan (the "Term Loan"), which was used to fund certain
obligations of the Company under the Plan of Reorganization.
On December 17, 1998, the Company executed a New Loan Agreement
in exchange for the Old Loan Agreement in order to extend the maturity to
August 2, 2002, to provide additional term loan borrowing capacity of $10.0
million for acquisitions ("Acquisition Term Loan"), to reduce interest rates,
and to incorporate other technical changes. As of March 27, 1999, there
were no borrowings outstanding under the Acquisition Term Loan facility.
As of March 27, 1999, the original Term Loan has an outstanding balance
of $7.5 million, and the Company is required to make quarterly principal
paydowns of approximately $0.4 million.
9
The interest rate payable quarterly under the New Loan Agreement
is based on the prime rate as defined plus a percentage which varies based
on a number of factors, including: (a) whether it is the Revolving Facility
or the Term Loan and the amount, if any, which is part of the Acquisition Term
Loan; (b) the time period; and (c) whether the Company elects to use a London
Interbank Offered Rate.
The Revolving Facility provides for certain mandatory prepayments
based on occurrence of certain defined and specified transactions. As of
March 27, 1999, the Company had $17.1 million of borrowings, $3.3 million
of letters of credit outstanding and $10.1 million of availability under
its revolving credit facility.
The obligations of the Company under the New Loan Agreement are
collateralized by liens on, and a security interest in, substantially all of
the assets of Homeland and are guaranteed by Holding. The New Loan Agreement,
among other things, requires a maintenance of EBITDA, consolidated fixed
charge ratio, debt-to-EBITDA ratio, current ratio, excess cash flow paydown,
each as defined, and limits the Company's capital expenditures, incurrence
of additional debt, consolidation and mergers, acquisitions and payments of
dividends.
As of the Effective Date, the Company entered into an Indenture
with Fleet National Bank (predecessor to State Bank and Trust Company), as
trustee, under which the Company issued $60.0 Million of New Notes. Interest
on the New Notes accrues at the rate of 10% per annum and is payable on
February 1 and August 1 of each year. The New Notes are uncollateralized and
will mature on August 1, 2003. The Indenture relating to the New Notes has
certain customary restrictions on consolidations and mergers, indebtedness,
issuance of preferred stocks, asset sales and payment of dividends.
Working Capital and Capital Expenditures. The Company's primary
sources of capital have been borrowing availability under the revolving
credit facility and cash flow from operations, to the extent available. The
Company uses the available capital resources for working capital needs,
capital expenditures and repayment of debt obligations.
The Company's EBITDA (earnings before net interest expense, taxes,
depreciation and amortization, and gain/loss on disposal of assets), as
presented below, is the Company's measurement of internally-generated
10
operating cash for working capital needs, capital expenditures and payment
of debt obligations:
12 Weeks Ended 12 Weeks Ended
March 27, 1999 March 28, 1998
Loss before income taxes $ (1,648) $ (1,931)
Interest income (129) (98)
Interest expense 2,000 2,049
(Gain) loss on disposal of assets (4) 32
Amortization of excess
reorganization value 2,639 3,281
Depreciation and amortization 2,312 2,220
EBITDA $ 5,170 $ 5,553
As a percentage of sales 4.18% 4.57%
As a multiple of interest expense, net
of interest income 2.76x 2.85x
Net cash provided by operating activities decreased $4.0 million,
from cash provided of $2.1 million for twelve weeks ended March 28, 1998, to
cash used of $1.9 million for the twelve weeks ended March 27, 1999. The
decrease principally reflects a reduction in trade payables and other accrued
liabilities and an increase in prepaid expenses during the first quarter of
1999.
Net cash used in investing activities decreased $0.7 million,
from $1.6 million for the twelve weeks ended March 28, 1998, to $0.9 million
for the twelve weeks ended March 27, 1999. The Company invested $12.4 million,
$14.0 million and $6.9 million in capital expenditures for 1998, 1997 and
1996, respectively. In August 1997, the Company acquired a Pratt Discount
Food store and in October 1997, the Company acquired three Food Lion stores.
The acquisitions amounted to approximately $3.6 million. The capital
expenditures for 1998 were funded by internally-generated cash flows from
operations and the revolving credit facility under the Old Loan Agreement.
Net cash used by financing activities increased $0.7 million,
from $0.3 million for the twelve weeks ended March 28, 1998, to $1.0 million
for the twelve weeks ended March 27, 1999. The decrease reflects lower
borrowings outstanding under the revolving credit facility.
11
The Company considers its capital expenditure program a critical
and strategic part of the overall plan to support its market competitiveness.
Cash capital expenditures for 1999 are expected to be at approximately $10.5
million. The New Loan Agreement limits the Company's capital expenditures
for 1999 to $13.0 million in cash capital expenditures and $12.0 million
for capital expenditures which are financed through capital leases or
equipment loans. The estimated 1999 capital expenditures of $10.5 is expected
to be invested primarily in remodeling and maintenance of certain stores and
does not include provisions for acquisitions. The funds for the capital
expenditures are expected to be provided by internally-generated cash flows
from operations and borrowings under the New Loan Agreement.
On February 15, 1999, the Company signed a letter of intent with
AWG for the purchase of nine Apple Market supermarkets operated by Horner
Foods, Inc. in eastern Oklahoma. On April 23, 1999, subsequent to the
close of the first quarter of 1999, the Company completed its acquisition of
these nine stores. The net purchase price was $1.1 million which represents
$5.6 million for real property, fixtures and equipment, goodwill and a non-
compete agreement, plus $2.3 million for inventory, offset by $6.8 million
in long term debt assumed from Horner Foods, Inc. The Company owns one
store and leases the remaining eight from AWG. The one owned store in Pryor,
Oklahoma was closed as a result of the proximity to an existing Company
store.
The Company financed this acquisition principally through the
assumption of $6.8 million in long-term debt, together with increased
borrowings under its working capital facility. The debt incurred by the
Company to AWG is secured by liens on, and security interests in, the assets
associated with the nine stores. Subsequent to the closing of the acquisition,
the Company repaid the portion of its indebtedness to AWG which relates to
inventory and AWG is releasing its liens on inventory.
The loan documents with AWG include certain customary restrictions,
including restrictions on the payment of dividends. Under the various
agreements of the acquisition, the nine markets are subject to non-compete,
supply and right-of-first refusal agreements with AWG. In addition to the
other customary terms associated with a righ-of-first refusal agreement, the
right-of-first refusal agreement provides for the repurchase by AWG of the
nine stores based upon the occurrence of certain exercise events. The
exercise events include, among other events, a change in control of Homeland
and a transfer of more than 20% of the ownership interest of Holding and
Homeland.
The Company's ability to meet its working capital needs, meet its
debt and interest obligations and meet its capital expenditure requirements
is dependent on its future operating performance. There can be no assurance
that future operating performance will provide positive net cash and, if the
12
Company is not able to generate positive cash flow from its operations,
management believes that this could have a material adverse effect on the
Company's business.
Year 2000
The Year 2000 issue results from computer programs being written
using two digits rather than four to define the applicable year. As the Year
2000 approaches, systems using such programs may be unable to accurately
process certain date-based information. Like many other companies, the
Company is continuing to assess and modify its computer applications and
business processes to provide for their continued functionality. Commencing
in October 1996, the Company implemented a program of evaluating its computer
systems to identify areas of potential concern, both with respect to
information technology and non-information technology systems (e.g.,
microcontrollers), remediating / replacing systems to address those potential
areas of concern, and ultimately testing those changes for compliance. This
continuing assessment has been implemented on a system-by-system basis and
includes the readiness of external entities, such as vendors, which interface
with the Company. Such program has included and will continue to include both
consultation by Homeland with the vendors who provided its computer systems
and internal testing by Homeland of those computer systems. The Company has
completed its evaluation of systems and its detailed planning for remediating
or replacing non-compliant systems. Remediation / replacement efforts are
approximately 80% complete and testing procedures are approximately 75%
complete. Testing procedures have included tests of certain systems for which
remediation / replacement efforts were ultimately deemed unnecessary based
on the positive results of such tests.
The Company has assessed its vendors' Year 2000 readiness,
principally through the review of questionnaires which the Company has
circulated to its vendors. AWG, which supplies approximately 70% of the goods
sold in the Company's stores, believes that it will be Year 2000 compliant.
Although not all of the responses from other vendors have been conclusive,
management does not presently expect that it will be adversely affected by
its vendors' Year 2000 readiness.
A significant portion of the Company's systems were found to be
Year 2000 compliant without any remediation or replacement efforts. The area
of most concern for management has been the point of sale ("POS") computers
used in the operation of the stores. Internal tests conducted by Homeland
generally reflect that its POS software is already Year 2000 compliant,
however, the Company was unable to obtain reasonable assurance and support
from the software provider to corroborate the conclusions of its POS testing
of the current software. As a result, the Company has elected to upgrade its
POS software to the Year 2000 version which the vendor states is compliant.
The incremental cost is approximately $0.4 million and will be installed
during the second quarter of 1999. Additionally, the Company will further
test the software upon full installation. The Company is also replacing
older power management systems which operate various systems in the stores.
13
The new systems are currently being installed and it is anticipated that the
conversion will be completed by the end of the third quarter of 1999. The
estimated capital investment is $1.3 million.
The cost of the program is not expected to exceed $2.0 million,
the majority of which is described above for power management systems and
upgrades to POS software. Approximately $0.2 million has been incurred as
of March 27, 1999. Homeland is funding these costs under its working capital
facility.
Based on its assessment, its progress to date, and its expectation
of continued testing of systems, the Company believes that its efforts will
result in Year 2000 compliance by the end of the third quarter of 1999. If
circumstances arise indicating the Company's and / or vendor's efforts will
not be successful in achieving Year 2000 compliance, the Company believes it
can develop and implement effective contingency plans in a timely manner.
Due to the general uncertainty inherent in the Year 2000 process,
primarily due to issues surrounding the Year 2000 readiness of third-party
suppliers and vendors, a reasonable worst case scenario is difficult to
determine at this time. The Company does not anticipate more than temporary
isolated disruptions attributed to Year 2000 issues to affect either the
Company or its primary vendors. The measurement of Year 2000 compliance is
necessarily fluid and management will continue to monitor the extent of such
compliance and the effects associated with any non-compliance.
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.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibit is 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 March 27, 1999.
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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: May __, 1999 By:
David B. Clark, President, Chief Executive
Officer, and Director
(Principal Executive Officer)
Date: May __, 1999 By:
Wayne S. Peterson, Senior Vice President/
Finance, Chief Financial Officer and
Secretary
(Principal Financial Officer)
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] JAN-01-2000
[PERIOD-END] MAR-27-1999
[CASH] 4,033
[SECURITIES] 0
[RECEIVABLES] 7,944
[ALLOWANCES] 916
[INVENTORY] 46,343
[CURRENT-ASSETS] 60,837
[PP&E] 94,081
[DEPRECIATION] 23,098
[TOTAL-ASSETS] 148,929
[CURRENT-LIABILITIES] 33,147
[BONDS] 60,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 49
[OTHER-SE] 29,806
[TOTAL-LIABILITY-AND-EQUITY] 148,929
[SALES] 123,668
[TOTAL-REVENUES] 123,668
[CGS] 94,743
[TOTAL-COSTS] 94,743
[OTHER-EXPENSES] 28,702
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,871
[INCOME-PRETAX] (1,648)
[INCOME-TAX] 375
[INCOME-CONTINUING] (2,023)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2,023)
[EPS-PRIMARY] (.41)
[EPS-DILUTED] (.41)
</TABLE>
