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
X Act of 1934
For the quarterly period ended June 19, 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 July 28, 1999:
Homeland Holding Corporation Common Stock: 4,914,150 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWENTY-FOUR WEEKS ENDED JUNE 19, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Consolidated Balance Sheets
June 19, 1999, and January 2, 1999 1
Consolidated Statements of Operations
Twelve Weeks and Twenty-four Weeks
ended June 19, 1999, and June 20, 1998 3
Consolidated Statements of Cash Flows
Twelve Weeks and Twenty-four Weeks
ended June 19, 1999 and June 20, 1998 4
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations 8
PART II OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
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)
June 19, January 2,
1999 1999
Current assets:
Cash and cash equivalents $ 6,080 $ 7,856
Receivables, net of allowance for uncollectible
accounts of $905 and $972 8,885 9,961
Inventories 48,173 46,280
Prepaid expenses and other current assets 3,361 2,527
Total current assets 66,499 66,624
Property, plant and equipment:
Land and land improvements 9,350 9,346
Buildings 22,137 20,216
Fixtures and equipment 31,533 28,466
Leasehold improvements 19,317 17,488
Software 5,910 5,396
Leased assets under capital leases 9,053 9,053
Construction in progress 969 3,278
98,269 93,243
Less, accumulated depreciation
and amortization 25,451 20,832
Net property, plant and equipment 72,818 72,411
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $39,196 and
$34,018 at June 19, 1999, and January 2,
1999, respectively 1,911 7,791
Other assets and deferred charges 16,310 12,378
Total assets $157,538 $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
June 19, January 2,
1999 1999
Current liabilities:
Accounts payable - trade $ 18,793 $ 20,267
Salaries and wages 2,189 2,827
Taxes 3,896 3,093
Accrued interest payable 2,490 2,622
Other current liabilities 7,174 8,548
Current portion of long-term debt 2,233 1,728
Current portion of obligations under capital
leases 1,207 1,235
Total current liabilities 37,982 40,320
Long-term obligations:
Long-term debt 89,234 83,852
Obligations under capital leases 1,210 1,700
Other noncurrent liabilities 1,223 1,464
Total long-term obligations 91,667 87,016
Stockholders' equity:
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,912,408 shares
and 4,904,417 shares at June 19, 1999,
and January 2, 1999, respectively 49 49
Additional paid-in capital 56,205 56,174
Accumulated deficit (28,365) (24,355)
Total stockholders' equity 27,889 31,868
Total liabilities and stockholders' equity $157,538 $159,204
The accompanying notes are an integral part
of these consolidated financial statements
2
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks ended 24 weeks ended
June 19, June 20, June 19, June 20,
1999 1998 1999 1998
Sales $ 127,276 $ 123,509 $ 250,944 $ 244,912
Cost of sales 97,049 94,146 191,792 186,068
Gross profit 30,227 29,363 59,152 58,844
Selling and administrative
expenses 27,468 26,594 53,535 52,742
Amortization of excess
reorganization value 2,539 3,205 5,178 6,486
Operating profit (loss) 220 (436) 439 (384)
Gain (loss) on disposal of assets 10 (4) 14 (36)
Interest income 130 97 259 195
Interest expense (2,013) (1,945) (4,013) (3,994)
Loss before income taxes (1,653) (2,288) (3,301) (4,219)
Income tax expense (334) (471) (709) (950)
Net loss (1,987) (2,759) (4,010) (5,169)
Accumulated deficit at beginning
of period (26,378) (16,174) (24,355) (13,764)
Accumulated deficit at end
of period $ (28,365) $ (18,933) $ (28,365) $ (18,933)
Basic and diluted earnings per share:
Net loss per common share $ (0.40) $ (0.57) $ (0.82) $ (1.07)
Weighted average shares
outstanding 4,910,459 4,824,781 4,908,481 4,823,482
The accompanying notes are an integral part
of these consolidated financial statements
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share and per share amounts)
12 weeks ended 24 weeks ended
June 19, June 20, June 19, June 20,
1999 1998 1999 1998
Cash flows from operating activities:
Net loss $ (1,987) $ (2,759) $ (4,010) $ (5,169)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation and amortization 2,381 2,242 4,665 4,434
Amortization of beneficial interest
in operating leases 28 28 56 56
Amortization of excess reorganization
value 2,539 3,205 5,178 6,486
Amortization of goodwill 42 0 42 0
Amortization of financing costs 11 18 23 35
Loss (gain) on disposal of assets (10) 4 (14) 36
Deferred income taxes 333 426 702 905
Change in assets and liabilities:
(Increase) decrease in receivables (1,857) (1,347) 1,076 1,756
Decrease in inventories 330 119 267 575
(Increase) decrease in prepaid
expenses and other current assets 99 (885) (807) (641)
(Increase) decrease in other assets
and deferred charges (18) 31 (13) 48
Increase (decrease) in accounts
payable - trade 1,297 274 (1,474) (836)
Increase (decrease) in salaries
and wages 180 524 (686) (278)
Increase in taxes 791 618 776 27
Increase (decrease) in accrued
interest payable 1,367 1,326 (132) 52
Increase (decrease) in other
current liabilities 540 (921) (1,454) (2,488)
Decrease in other noncurrent
liabilities (142) (98) (226) (61)
Total adjustments 7,911 5,564 7,979 10,106
Net cash provided by operating
activities 5,924 2,805 3,969 4,937
Cash flows from investing activities:
Capital expenditures (2,233) (2,321) (3,095) (3,926)
Acquisition of stores (1,315) - (1,315) -
Cash received from sale of assets 7 4 17 4
Net cash used in investing
activities (3,541) (2,317) (4,393) (3,922)
Cash flows from financing activities:
Payments under term loan (417) (417) (417) (417)
Borrowings under revolving credit
loans 33,958 34,394 63,113 60,810
Payments under revolving credit
loans (31,438) (33,457) (61,341) (59,855)
Payments on tax notes (15) (15) (31) (30)
Proceeds from issuance of
common stock 21 92 31 119
Principal payments under notes
payable (2,189) - (2,189) -
Principal payments under capital
lease obligations (256) (303) (518) (607)
Net cash provided by (used in)
financing activities (336) 294 (1,352) 20
Net increase (decrease) in cash
and cash equivalents 2,047 782 (1,776) 1,035
Cash and cash equivalents at
beginning of period 4,033 5,031 7,856 4,778
Cash and cash equivalents at
end of period $ 6,080 $ 5,813 $ 6,080 $ 5,813
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
4
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, continued
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks ended 24 weeks ended
June 19, June 20, June 19, June 20,
1999 1998 1999 1998
Supplemental information:
Cash paid during the period
for interest $ 651 $ 597 $ 4,124 $ 3,909
Cash paid during the period
for income taxes $ - $ - $ - $ -
Supplemental schedule of noncash
investing and financing activities:
Debt assumed in the acquisition $ 6,752 $ - $ 6,752 $ -
The accompanying notes are an integral part
of these consolidated financial statements.
5
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. Acquisition of Nine Apple Market Stores:
On April 23, 1999, the Company completed its acquisition of nine
Apple Markets from Associated Wholesale Grocers, Inc. ("AWG"). The
purchase price of $8.1 million involves a combination of cash paid of
$1.3 million and the assumption of $6.8 million of debt. This acquisition
has been accounted for under the purchase method of accounting. The
purchase price has been preliminarily allocated based on estimated fair
values at date of acquisition, pending final determination of certain
acquired balances. This preliminary allocation has resulted in acquired
goodwill of $4.1 million, which is being amortized on a straight-line
basis over 15 years. The results of the acquired stores have been
included in the consolidated financial statements since the date of
acquisition. 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
6
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 market areas 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.
4. Distribution of New Common Stock
On August 2, 1996, 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. Each warrant
entitles the holder to purchase one share of New Common Stock at any time
up to August 2, 2001. 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 June 19,
1999, the Company had issued 3,431,252 shares of the 4,450,000 shares of
New Common Stock leaving 1,018,748 shares to be distributed in the Class
5 Disputed Claim Reserve ("Reserve"). The Company intends to make the
semi-annual distribution under the Plan of Reorganization on or around
the beginning of August 1999.
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 for the
periods indicated:
12 weeks ended 24 weeks ended
June 19, June 20, June 19, June 20,
1999 1998 1999 1998
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.2 76.2 76.4 76.0
Gross Profit 23.8 23.8 23.6 24.0
Selling and administrative 21.6 21.5 21.3 21.5
Amortization of excess
reorganization value 2.0 2.6 2.1 2.7
Operating profit 0.2 (0.3) 0.2 (0.2)
Gain (loss) on disposal
of assets - - - -
Interest income 0.1 0.1 0.1 0.1
Interest expense (1.6) (1.6) (1.6) (1.6)
Loss before income taxes (1.3) (1.8) (1.3) (1.7)
Income tax provision 0.3 0.4 0.3 0.4
Net loss (1.6) (2.2) (1.6) (2.1)
Results of Operations.
Comparison of the 12 Weeks Ended June 19, 1999 with the 12
Weeks Ended June 20, 1998
Net sales increased $3.8 million, or 3.1%, from $123.5 million
for the 12 weeks ended June 20, 1998, to $127.3 million for the 12 weeks ended
June 19, 1999. The increase in sales is attributable to the Apple Market stores
acquired on April 23, 1999 (the "Acquired Stores") and a 0.2% 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 24 weeks ended June 19, 1999, there were six new
competitive openings within the Company's markets including: two Albertson's;
two Wal-Mart Supercenters; 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;
8
Wal-Mart will open 2 additional supercenters; and regional chains and
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 continue 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 of 23.8% for the 12 weeks
ended June 19, 1999, was equal to the percentage of sales for the 12 weeks ended
June 20, 1998. The gross profit margin continues to reflect increased
promotional activities including the Company's response to certain new
competitive store openings and special advertisements for the grand opening of
the Acquired Stores and for one remodeled Company store.
Selling and administrative expenses as a percentage of sales
increased 0.1% from 21.5% for the 12 weeks ended June 20, 1998, to 21.6% for the
12 weeks ended June 19, 1999. The increase in operating expenses is primarily
attributable to an increase in expenses associated with the Acquired Stores,
including pre-opening and start-up expenses, and increased depreciation expense
from the Company's capital expenditure program, partially offset by reduced
labor costs as a result of improved store productivity and by lower advertising
expenses during the quarter. The Company continues to review alternatives to
reduce selling and administrative expenses and cost of sales in order to achieve
its positioning goals and thereby gain a more loyal customer base.
The amortization of the excess reorganization value amounted to
$2.5 million for the 12 weeks ended June 19, 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.
9
Interest expense, net of interest income, increased $0.1 million
from $1.8 million for the 12 weeks ended June 20, 1998, to $1.9 million for the
12 weeks ended June 19, 1999. The increase reflects additional interest expense
attributable to the Acquired Stores partially offset by lower interest rates and
additional interest income from the interest bearing certificates of AWG. During
1999, the Company anticipates that interest expense will increase as a result
of the Acquired Stores. See "Liquidity and Capital Resources."
The Company recorded $0.3 million of income tax expense for the
12 weeks ended June 19, 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
June 19, 1999, the Company had a tax net operating loss carryforward of
approximately $36.7 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) increased $0.2 million, or
4.1% of sales, for the 12 weeks ended June 20, 1998, to $5.2 million, or 4.1%
of sales for the 12 weeks ended June 19, 1999. The increase in EBITDA resulted
primarily from the increase in gross profit dollars. 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.
Comparison of the 24 Weeks Ended June 19, 1999 with the 24 Weeks Ended
June 20, 1998
Net sales increased $6.0 million, or 2.5% from $244.9 million
for the 24 weeks ended June 20, 1998, to $250.9 million for the 24 weeks ended
June 19, 1999. The increase in sales is attributable to the Acquired Stores and
a 1.6% 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 two remodeled stores.
Gross profit as a percentage of sales decreased 0.4% from 24.0%
for the 24 weeks ended June 20, 1998, to 23.6% for the 24 weeks ended June 19,
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 the Acquired Stores and for the two remodeled Company stores.
Selling and administrative expenses as a percentage of sales
decreased 0.2% from 21.5% for the 24 weeks ended June 20, 1998, to 21.3% for the
24 weeks ended June 19, 1999. The decrease in operating expenses is attributable
10
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 expenses associated
with the Acquired Stores, including pre-opening and start-up expenses, and
increased depreciation expense from the Company's capital expenditure program.
The amortization of the excess reorganization value amounted to
$5.2 million for the 24 weeks ended June 19, 1999.
Interest expense, net of interest income, was $3.8 million for
the 24 weeks ended June 20, 1998, equal to the $3.8 million for the 24 weeks
ended June 19, 1999. Net interest expense reflects additional interest expense
attributable to the Acquired Stores offset by lower interest rates and
additional interest income from the interest bearing certificates of AWG.
The Company recorded $0.7 million of income tax expense for the
24 weeks ended June 19, 1999, substantially all of which was deferred income
tax.
EBITDA decreased $0.2 million from $10.6 million, or 4.3% of
sales, for the 24 weeks ended June 20, 1998, to $10.4 million, or 4.1% of sales
for the 24 weeks ended June 19, 1999.
Liquidity and Capital Resources
On August 2, 1996, pursuant to the Plan of Reorganization, the
Company entered into a loan agreement with National Bank of Canada, 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 June 19, 1999, there were no
borrowings outstanding under the Acquisition Term Loan facility. As of June 19,
1999, the original Term Loan has an outstanding balance of $7.1 million, and the
Company is required to make quarterly principal paydowns of approximately $0.4
million.
11
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 June
19, 1999, the Company had $19.7 million of borrowings, $0.9 million of letters
of credit outstanding and $9.4 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
12
presented below, is the Company's measurement of internally-generated operating
cash for working capital needs, capital expenditures and payment of debt
obligations:
12 weeks ended 24 weeks ended
June 19, June 20, June 19, June 20,
1999 1998 1999 1998
Loss before income taxes $(1,653) $(2,288) $(3,301) $(4,219)
Interest income (130) (97) (259) (195)
Interest expense 2,013 1,945 4,013 3,994
(Gain) loss on disposal of assets (10) 4 (14) 36
Amortization of excess
reorganization value 2,539 3,205 5,178 6,486
Depreciation and amortization 2,451 2,270 4,763 4,490
EBITDA $ 5,210 $ 5,039 $10,380 $10,592
As a percentage of sales 4.1% 4.1% 4.1% 4.3%
As a multiple of interest expense,
net of interest income 2.77x 2.73x 2.77x 2.79x
Net cash provided by operating activities decreased $0.9 million,
from cash provided of $4.9 million for 24 weeks ended June 20, 1998, to cash
provided of $4.0 million for the 24 weeks ended June 19, 1999. The decrease
principally reflects a smaller reduction in current accounts receivable and
inventory relative to the prior year.
Net cash used in investing activities increased $0.5 million,
from $3.9 million for the 24 weeks ended June 20, 1998, to $4.4 million for the
24 weeks ended June 19, 1999. The increase primarily reflects the net investment
of $1.1 million for the Acquired Stores.
Net cash used by financing activities increased $1.4 million,
from a nominal amount for the 24 weeks ended June 20, 1998, to $1.4 million for
the 24 weeks ended June 19, 1999. The increase reflects additional repayments
under the revolving credit facility relative to the prior year.
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
13
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 April 23, 1999, the Company completed its acquisition of nine
stores from 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.
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 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.
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 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
14
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 90% complete and testing
procedures are approximately 80% 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 was 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. 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 $0.7 million has been incurred as of
June 19, 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
15
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.
16
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 June 19, 1999.
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: July 30, 1999 By: /s/ David B. Clark
David B. Clark, President, Chief Executive
Officer, and Director
(Principal Executive Officer)
Date: July 30, 1999 By: /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice President/
Finance, Chief Financial Officer and Secretary
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUN-17-1999
<CASH> 6,080
<SECURITIES> 0
<RECEIVABLES> 9,790
<ALLOWANCES> 905
<INVENTORY> 48,173
<CURRENT-ASSETS> 66,499
<PP&E> 98,269
<DEPRECIATION> 25,451
<TOTAL-ASSETS> 157,538
<CURRENT-LIABILITIES> 37,982
<BONDS> 60,000
0
0
<COMMON> 49
<OTHER-SE> 27,840
<TOTAL-LIABILITY-AND-EQUITY> 157,538
<SALES> 250,944
<TOTAL-REVENUES> 250,944
<CGS> 191,792
<TOTAL-COSTS> 191,792
<OTHER-EXPENSES> 58,699
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,754
<INCOME-PRETAX> (3,301)
<INCOME-TAX> 709
<INCOME-CONTINUING> (4,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,010)
<EPS-BASIC> (.82)
<EPS-DILUTED> (.82)
</TABLE>
