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 September 11, 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 October 20, 1999:
Homeland Holding Corporation Common Stock: 4,341,171 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 11, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statement.......................................... 1
Consolidated Balance Sheets
September 11, 1999, and January 2, 1999..................... 1
Consolidated Statements of Operations
Twelve Weeks and Thirty-six Weeks
ended September 11, 1999, and September 12, 1998........... 3
Consolidated Statements of Cash Flows
Twelve Weeks and Thirty-six Weeks
ended September 11, 1999 and September 12, 1998............ 4
Notes to Consolidated Financial Statements................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
PART II OTHER INFORMATION
ITEM 3. Submission of Matters to a Vote of Security Holders.......... 17
ITEM 4. 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)
ASSETS
September 11, January 2,
1999 1999
Current assets:
Cash and cash equivalents $ 5,439 $ 7,856
Receivables, net of allowance for uncollectible
accounts of $896 and $972 10,154 9,961
Inventories 48,217 46,280
Prepaid expenses and other current assets 2,810 2,527
Total current assets 66,620 66,624
Property, plant and equipment:
Land and land improvements 9,046 9,346
Buildings 21,516 20,216
Fixtures and equipment 32,245 28,466
Leasehold improvements 19,490 17,488
Software 6,012 5,396
Leased assets under capital leases 9,053 9,053
Construction in progress 1,345 3,278
98,707 93,243
Less, accumulated depreciation
and amortization 27,869 20,832
Net property, plant and equipment 70,838 72,411
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $40,908
and $34,018. - 7,791
Other assets and deferred charges 16,194 12,378
Total assets $ 153,652 $ 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
September 11, January 2,
1999 1999
Current liabilities:
Accounts payable - trade $ 17,862 $ 20,267
Salaries and wages 2,521 2,827
Taxes 4,043 3,093
Accrued interest payable 835 2,622
Other current liabilities 7,361 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 36,062 40,320
Long-term obligations:
Long-term debt 89,397 83,852
Obligations under capital leases 949 1,700
Other noncurrent liabilities 1,094 1,464
Total long-term obligations 91,440 87,016
Stockholders' equity:
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,914,513 shares
and 4,904,417 shares at September 11, 1999,
and January 2, 1999, respectively 49 49
Additional paid-in capital 56,226 56,174
Accumulated deficit (30,125) (24,355)
Total stockholders' equity 26,150 31,868
Total liabilities and stockholders' equity $ 153,652 $ 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 36 weeks ended
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
Sales, net $ 125,867 $ 118,129 $ 376,811 $ 363,041
Cost of sales 94,953 89,665 286,745 275,733
Gross profit 30,914 28,464 90,066 87,308
Selling and administrative
expenses 28,323 26,499 81,858 79,241
Amortization of excess
reorganization value 1,712 3,123 6,890 9,609
Asset impairment -
closed store 925 - 925 -
Operating profit (loss) (46) (1,158) 393 (1,542)
Gain (loss) on disposal
of assets 203 2 217 (34)
Interest income 132 98 391 293
Interest expense (2,073) (1,931) (6,086) (5,925)
Loss before income taxes (1,784) (2,989) (5,085) (7,208)
Income tax (expense) benefit 24 (481) (685) (1,431)
Net loss (1,760) (3,470) (5,770) (8,639)
Accumulated deficit at
beginning of period (28,365) (18,933) (24,355) (13,764)
Accumulated deficit at
end of period $ (30,125) $ (22,403) $ (30,125) $ (22,403)
Basic and diluted earnings
per share:
Net loss per common
share $ (0.36) $ (0.72) $ (1.18) $ (1.79)
Weighted average shares
outstanding 4,912,979 4,839,425 4,909,842 4,827,671
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 ended 36 weeks ended
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
Cash flows from operating
activities:
Net loss $ (1,760) $ (3,470) $ (5,770) $ (8,639)
Adjustments to reconcile
net loss to net cash from
operating activities:
Depreciation and
amortization 2,439 2,309 7,104 6,743
Amortization of beneficial
interest in operating
leases 28 28 84 84
Amortization of excess
reorganization value 1,712 3,123 6,890 9,609
Amortization of goodwill 55 - 97 -
Amortization of financing
costs 3 17 26 52
Loss (gain) on disposal
of assets (203) (2) (217) 34
Asset impairment -
closed store 925 - 925 -
Deferred income taxes 199 478 901 1,383
Change in assets and
liabilities:
Increase in receivables (1,269) (2,232) (193) (476)
(Increase) decrease
in inventories (44) 471 223 1,046
(Increase) decrease in
prepaid expenses and
other current assets 551 639 (256) (2)
Decrease in other assets
and deferred charges 22 18 9 66
Decrease in accounts
payable - trade (931) (554) (2,405) (1,390)
Increase (decrease) in
salaries and wages 332 184 (354) (94)
Increase in taxes 147 334 923 361
Decrease in accrued
interest payable (1,655) (1,712) (1,787) (1,660)
Increase (decrease) in
other current
liabilities 187 67 (1,267) (2,421)
Decrease in other
noncurrent liabilities (122) (130) (348) (191)
Total adjustments 2,376 3,038 10,355 13,144
Net cash provided by
operating activities 616 (432) 4,585 4,505
Cash flow from investing
activities:
Capital expenditures (1,389) (2,157) (4,484) (6,083)
Acquisition of stores - - (1,315) -
Cash received from sale
of stores 209 15 226 19
Net cash used in
investing activities (1,180) (2,142) (5,573) (6,064)
Cash flow from financing
activities:
Payments under term loan (417) (416) (834) (833)
Borrowings under revolving
credit loans 31,061 32,527 94,174 93,337
Payments under revolving
credit loans (30,366) (29,983) (91,707) (89,838)
Payment on tax notes - (16) (31) (46)
Proceeds from issuance
of common stock 21 27 52 146
Principal payments under
notes payable (115) - (2,304) -
Principal payments under
capital lease obligations (261) (371) (779) (978)
Net cash provided by
(used in) financing
activities (77) 1,768 (1,429) 1,788
Net increase (decrease) in
cash and cash equivalents (641) (806) (2,417) 229
Cash and cash equivalents at
beginning of period 6,080 5,813 7,856 4,778
Cash and cash equivalents at
end of period $ 5,439 $ 5,007 $ 5,439 $ 5,007
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 36 weeks ended
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
Supplemental information:
Cash paid during the
period for interest $ 3,760 $ 3,632 $ 7,884 $ 7,541
Cash paid during the
period for income
taxes $ - $ - $ - $ -
Supplemental schedule
of noncash investing
and financing
activities:
Debt assumed in the
acquisition $ - $ - $ 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 sigfificant 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 involved 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 acquired title to one store and leases the
remaining eight from AWG. The one store to which Homeland acquired
title in Pryor, Oklahoma, was closed (and which was subsequently sold
to a non-grocery user after the close of the third quarter of 1999) 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,
6
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 has released 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 October 25, 1999, the Company had issued approximately 3,801,000
shares of the 4,450,000 shares of New Common Stock, leaving
approximately 649,000 shares to be distributed in the Class 5
Disputed Claim Reserve ("Reserve"). The Company believes that the
next distribution under the Plan of Reorganization could occur during
the first quarter of 2000.
5. Subsequent Event
On September 16, 1999, the Company signed a non-binding expression
of interest to acquire four stores operated by Brattain Foods Inc.
("BFI"), in Muskogee, Oklahoma. On October 18, 1999, the Company
signed a definitive asset purchase agreement, consummation of which
is subject to due diligence and third party approval. The Company
intends to finance the transaction through a combination of accessing
availability under its working capital facility and assuming BFI debt
which is currently outstanding to AWG.
6. Asset Impairment - Closed Store
In the third quarter of 1999, the Company made the decision to
dispose of a store and related assets which was closed in 1998. The
carrying value of these assets held for sale was reduced to fair
7
value, based on current estimates of selling value less costs to
dispose. The resulting adjustment of $925 was recorded in the third
quarter of 1999. It is anticipated the store and related assets could
be sold during the next year. The Company decided to sell these
assets rather than continue the previous plan of leasing the assets.
Item 2. Management's Discussion and Analysis of Financial Condition 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 36 weeks ended
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.4 75.9 76.1 76.0
Gross Profit 24.6 24.1 23.9 24.0
Selling and administrative 22.5 22.4 21.7 21.8
Amortization of excess
reorganization value 1.4 2.7 1.8 2.7
Asset impairment -
closed store 0.7 - 0.3 -
Operating profit 0.7 (1.0) 0.4 (0.5)
Gain (loss) on disposal
of assets 0.2 - 0.1 -
Interest income 0.1 0.1 0.1 0.1
Interest expense (1.7) (1.6) (1.6) (1.6)
Loss before income taxes (1.4) (2.5) (1.3) (2.0)
Income tax provision - (0.4) (0.2) (0.4)
Net loss (1.4) (2.9) (1.5) (2.4)
Results of Operations.
COMPARISON OF THE 12 WEEKS ENDED SEPTEMBER 11, 1999 WITH THE 12 WEEKS
ENDED SEPTEMBER 12, 1998
Net sales increased $7.8 million, or 6.6%, from $118.1 million for the
12 weeks ended September 12, 1998, to $125.9 million for the 12 weeks ended
September 11, 1999. The increase in sales is attributable to the Apple Market
stores acquired on April 23, 1999 (the "Acquired Stores") and a 1.0% increase in
comparable store sales partially offset by the sales lost due to the closing of
one Homeland store at the end of the third quarter of 1999. The increase in
comparable store sales is the result of promotional activity and competitor
consolidations within the Company's market.
8
During the 36 weeks ended September 11, 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; Wal-Mart will open 1 additional supercenter; and regional chains and
independents will open two additional stores. Additionally, it is now expected
that Wal-Mart could open at least one Neighborhood Supermarket, a new format in
Oklahoma City, Oklahoma, by the end of the current fiscal year of the Company.
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. 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 increased 0.5% from 24.1% for
the 12 weeks ended September 12, 1998, to 24.6% for the 12 weeks ended September
11, 1999. The increase in gross profit margin reflects an improved management
of promotional spending and the implementation of initiatives to lower cost of
goods and to reduce the loss of merchandise.
Selling and administrative expenses as a percentage of sales increased
0.1% from 22.4% for the 12 weeks ended September 12, 1998, to 22.5% for the 12
weeks ended September 11, 1999. The increase in operating expenses is primarily
attributable to an increase in expenses associated with the Acquired Stores, and
increased depreciation expense from the Company's capital expenditure program.
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.
9
The amortization of the excess reorganization value decreased $1.4
million from $3.1 million for the 12 weeks ended September 12, 1998, to $1.7
million for the 12 weeks ended September 11, 1999. The excess reorganization
value was fully amortized on August 2, 1999 resulting in a lower expense level
in the third quarter of 1999.
The Company recorded an asset impairment provision in the amount of
$0.9 million related to a store closed in the second quarter of 1998. The
provision reduces the carrying value of the real property to a current estimate
of fair value.
Interest expense, net of interest income, increased $0.1 million from
$1.8 million for the 12 weeks ended September 12, 1998, to $1.9 million for the
12 weeks ended September 11, 1999. The increase reflects additional interest
expense attributable to the Acquired Stores partially offset by 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 $24,000 of income tax expense for the 12 weeks
ended September 11, 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
September 11, 1999, the Company had a tax net operating loss carryforward of
approximately $35.8 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 $0.8 from $4.3 million, or
3.6% of sales, for the 12 weeks ended September 12, 1998, to $5.1 million, or
4.1% of sales for the 12 weeks ended September 11, 1999. The increase in EBITDA
resulted primarily from the increase 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.
COMPARISON OF THE 36 WEEKS ENDED SEPTEMBER 11, 1999 WITH THE 36 WEEKS
ENDED SEPTEMBER 12, 1998
Net sales increased $13.8 million, or 3.8%, from $363.0 million for
the 36 weeks ended September 12, 1998, to $376.8 million for the 36 weeks ended
September 11, 1999. The increase in sales is attributable to the Acquired
Stores and a 1.4% increase in comparable store sales partially offset by the
sales lost due to the closing of two Homeland stores, one during the second
quarter of 1998 and one at the end of the third quarter 1999. The increase in
comparable store sales is the result of increased promotional activity, the
grand re-opening of two remodeled stores, and competitor consolidations within
the Company's market.
10
Gross profit as a percentage of sales decreased 0.1% from 24.0% for
the 36 weeks ended September 12, 1998, to 23.9% for the 36 weeks ended September
11, 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, which occurred
primarily in the first two quarters of 1999. This decrease was partially offset
by an improved management of promotional spending and the implementation of
initiatives to lower cost of goods and to reduce the loss of merchandise during
the third quarter of 1999.
Selling and administrative expenses as a percentage of sales decreased
0.1% from 21.8% for the 36 weeks ended September 12, 1998, to 21.7% for the 36
weeks ended September 11, 1999. The decrease in operating expenses is
attributable to favorable experience in insurance programs, and reduced
advertising costs 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 decreased $2.7
million from $9.6 million for the 36 weeks ended September 12, 1998, to $6.9
million for the 36 weeks ended September 11, 1999. The excess reorganization
value was fully amortized on August 2, 1999 resulting in a lower expense level
in 1999.
The Company recorded an asset impairment provision in the amount of
$0.9 million related to a store closed in the second quarter of 1998. The
provision reduces the carrying value of the real property to a current estimate
of fair value.
Interest expense, net of interest income, increased $0.1 million from
$5.6 million for the 36 weeks ended September 12, 1998, to $5.7 million for the
36 weeks ended September 11, 1999. The increase reflects additional interest
expense attributable to the Acquired Stores partially offset by additional
interest income from the interest bearing certificates of AWG.
The Company recorded $0.7 million of income tax expense for the 36
weeks ended September 11, 1999, substantially all of which was deferred income
tax.
EBITDA increased $0.6 from $14.9 million, or 4.1% of sales, for the 36
weeks ended September 12, 1998, to $15.5 million, or 4.1% of sales for the 36
weeks ended September 11, 1999.
Liquidity and Capital Resources
On August 2, 1996 (the "Effective Date"), 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
11
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
to replace 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 September 11, 1999, there were no
borrowings outstanding under the Acquisition Term Loan facility. As of September
11, 1999, the original Term Loan had an outstanding balance of $6.7 million, and
the Company is required to make quarterly principal paydowns of approximately
$0.4 million.
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
September 11, 1999, the Company had $20.4 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.
12
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 operating
cash for working capital needs, capital expenditures and payment of debt
obligations:
12 weeks ended 36 weeks ended
September 11, September 12, September 11, September 12,
1999 1998 1999 1998
Loss before income taxes $ (1,784) $ (2,989) $ (5,085) $ (7,208)
Interest income (132) (98) (391) (293)
Interest expense 2,073 1,931 6,086 5,925
(Gain) loss on disposal
of assets (203) (2) (217) 34
Asset impairment -
closed store 925 - 925 -
Amortization of excess
reorganization value 1,712 3,123 6,890 9,609
Depreciation and
amortization 2,522 2,337 7,285 6,827
EBITDA $ 5,113 $ 4,302 $ 15,493 $ 14,894
As a percentage of sales 4.1% 3.6% 4.1% 4.1%
As a multiple of interest
expense, net of interest
income 2.6x 2.3x 2.7x 2.6x
Net cash provided by operating activities increased $0.1 million, from
cash provided of $4.5 million for 36 weeks ended September 12, 1998, to cash
provided of $4.6 million for the 36 weeks ended September 11, 1999.
Net cash used in investing activities decreased $0.5 million, from
$6.1 million for the 36 weeks ended September 12, 1998, to $5.6 million for the
36 weeks ended September 11, 1999. The decrease reflects a $1.6 million
reduction in capital expenditures and a $0.2 million increase in cash received
from asset sales partially offset by the net investment of $1.3 million for the
Acquired Stores.
13
Net cash used by financing activities decreased $3.2 million, from net
cash provided of $1.8 million the 36 weeks ended September 12, 1998, to net cash
used of $1.4 million for the 36 weeks ended September 11, 1999. The increase
reflects additional repayments under the revolving credit facility relative to
the prior year and payments to AWG to retire the loans on the inventory of the
Acquired Stores.
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 April 23, 1999, the Company completed its acquisition of nine
stores from AWG. The net purchase price was $1.3 million which represents $5.6
million for real property, fixtures and equipment, goodwill and a non-compete
agreement, plus $2.3 million for inventory, $0.2 for transaction costs, offset
by $6.8 million in long-term debt assumed by the Company. The Company acquired
title to one store and leases the remaining eight from AWG. The one store to
which Homeland acquired title in Pryor, Oklahoma, was closed (and which was
subsequently sold to a non-grocery user after the close of the third quarter of
1999) 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 has
released its security interest in 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.
14
On September 16, 1999, the Company signed a non-binding expression of
interest to acquire four stores operated by BFI, in Muskogee, Oklahoma.
Consummation of the transaction, which is expected during the fourth quarter of
1999, is subject to, among other things, the execution of a definitive asset
purchase agreement and the completion of due diligence by the Company. The
Company intends to finance the transaction through a combination of accessing
availability under its working capital facility and assuming BFI debt which is
currently outstanding to AWG.
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 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 95% 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.
15
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 such software 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 installation of the new
systems has been substantially completed. 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 $1.0 million has been incurred as of September
11, 1999. Homeland is funding these costs under its working capital facility.
Based on its assessment, its progress to dae, and its expectation of
continued testing of systems, the Company believes that its efforts will result
in Year 2000 compliance. 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.
16
PART II - OTHER INFORMATION
Item 3. Submission of Matters to a Vote of Security Holders
The Company held its 1999 Annual Meeting of Stockholders on June 30,
1999. At such meeting, Robert E. (Gene) Burris, David B. Clark, Edward B.
Krekeler, Jr., Laurie M. Shahon, John A. Shields, William B. Snow and David N.
Weinstein were elected to serve on the Board of Directors for a one-year term,
ending at the next annual meeting.
In the matter of the election of directors, the votes cast were as
follows:
For Withhold Authority
Robert E. (Gene) Burris 4,153,556 85,283
David B. Clark 4,201,608 37,231
Edward B. Krekeler, Jr. 4,201,608 37,231
Laurie M. Shahon 4,199,832 39,007
John A. Shields 4,201,608 37,231
William B. Snow 4,165,753 73,086
David N. Weinstein 4,201,608 37,231
In the matter of ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditors for Fiscal 1999, 4,233,169
votes were cast in favor of approval, 3,412 votes were cast against, and holders
of 2,258 shares abstained or did not vote.
Item 4. 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 September 11, 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: October 25, 1999 By: /s/ David B. Clark
David B. Clark, President, Chief Executive
Officer, and Director
(Principal Executive Officer)
Date: October 25, 1999 By: /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice President/
Finance, Chief Financial Officer and
Secretary
(Principal Financial Officer)
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<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> SEP-11-1999
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