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 March 25, 2000
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 8, 2000:
Homeland Holding Corporation Common Stock: 4,920,608 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED MARCH 25, 2000
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Consolidated Balance Sheets
March 25, 2000, and January 1, 2000 1
Consolidated Statements of Operations
Twelve Weeks ended March 25, 2000,
and March 27, 1999 3
Consolidated Statements of Cash Flows
Twelve Weeks ended March 25, 2000,
and March 27, 1999 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. Exhibits and Reports on Form 8-K 16
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
(Unaudited)
March 25, January 1,
2000 2000
Current assets:
Cash and cash equivalents $ 4,529 $ 6,136
Receivables, net of allowance for uncollectible
accounts of $1,338 and $1,361 7,486 11,353
Inventories 54,425 52,663
Prepaid expenses and other current assets 2,896 2,176
Total current assets 69,336 72,328
Property, plant and equipment:
Land and land improvements 8,903 9,046
Buildings 21,654 21,962
Fixtures and equipment 38,877 36,818
Leasehold improvements 21,479 20,446
Software 7,321 7,181
Leased assets under capital leases 8,737 8,737
Construction in progress 162 19
107,133 104,209
Less, accumulated depreciation
and amortization 33,059 30,728
Net property, plant and equipment 74,074 73,481
Other assets and deferred charges 24,753 22,045
Total assets $ 168,163 $ 167,854
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
(Unaudited)
March 25, January 1,
2000 2000
Current liabilities:
Accounts payable - trade $ 21,355 $ 22,968
Salaries and wages 1,719 3,168
Taxes 3,804 3,616
Accrued interest payable 1,131 2,671
Other current liabilities 6,872 6,992
Current portion of long-term debt 3,048 2,918
Current portion of obligations under capital
leases 501 501
Total current liabilities 38,430 42,834
Long-term obligations:
Long-term debt 98,215 94,668
Obligations under capital leases 1,059 1,197
Other noncurrent liabilities 2,391 1,501
Total long-term obligations 101,665 97,366
Stockholders' equity:
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,920,608 shares
and 4,917,860 shares at March 25, 2000,
and January 1, 2000, respectively 49 49
Additional paid-in capital 56,254 56,254
Accumulated deficit (28,235) (28,649)
Total stockholders' equity 28,068 27,654
Total liabilities and stockholders' equity $ 168,163 $ 167,854
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 12 weeks
ended ended
March 25, March 27,
2000 1999
Sales, net $ 136,607 $ 123,668
Cost of sales 104,599 94,743
Gross profit 32,008 28,925
Selling and administrative expenses 29,197 26,067
Amortization of excess reorganization value - 2,639
Operating profit 2,811 219
Gain on disposal of assets 27 4
Interest income 172 129
Interest expense (2,342) (2,000)
Income (loss) before income taxes 668 (1,648)
Income tax provision (254) (375)
Net income (loss) $ 414 $ (2,023)
Net income (loss) per share:
Basic $ 0.08 $ (0.41)
Diluted $ 0.08 $ (0.41)
Weighted average shares outstanding:
Basic 4,919,357 4,906,504
Diluted 4,962,174 4,906,504
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)
(Unaudited)
12 weeks 12 weeks
ended ended
March 25, March 27,
2000 1999
Cash flows from operating activities:
Net income (loss) $ 414 $ (2,023)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 2,521 2,284
Amortization of beneficial interest
in operating leases 28 28
Amortization of excess reorganization value - 2,639
Amortization of goodwill 126 -
Amortization of financing costs 13 12
Gain on disposal of assets (27) (4)
Deferred income taxes 224 369
Change in assets and liabilities:
Decrease in receivables 3,867 2,933
(Increase) decrease in inventories 200 (63)
Increase in prepaid expenses and
other current assets (720) (906)
(Increase) decrease in other assets
and deferred charges (42) 5
Decrease in accounts payable - trade (1,613) (2,771)
Decrease in salaries and wages (1,449) (866)
Increase (decrease) in taxes 188 (15)
Decrease in accrued interest payable (1,540) (1,499)
Increase (decrease) in other current liabilities 25 (1,994)
Decrease in other noncurrent liabilities (470) (84)
Total adjustments 1,331 68
Net cash provided by (used in)
operating activities 1,745 (1,955)
Cash flows from investing activities:
Capital expenditures (999) (862)
Acquisition of stores (145) -
Cash received from sale of assets 426 10
Net cash used in investing activities (718) (852)
Cash flows from financing activities:
Payments under term loan (412) -
Borrowings under revolving credit loans 45,080 29,155
Payments under revolving credit loans (44,094) (29,903)
Payment on tax notes (12) (16)
Proceeds from issuance of common stock - 10
Principal payments under notes payable (3,058) -
Principal payments under capital
lease obligations (138) (262)
Net cash used in financing activities (2,634) (1,016)
Net increase in cash and cash equivalents (1,607) (3,823)
Cash and cash equivalents at beginning of period 6,136 7,856
Cash and cash equivalents at end of period $ 4,529 $ 4,033
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 12 weeks
ended ended
March 25, March 27,
2000 1999
Supplemental information:
Cash paid during the period for interest $ 3,676 $ 3,473
Cash paid during the period for income taxes $ 30 $ -
Supplemental schedule of noncash investing and
financing activities:
Debt assumed in acquisition of stores $ 6,162 $ -
The accompanying notes are an integral part
of these consoldiated 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, JCH
Beverage, Inc. ("JCH") and JCH'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 1, 2000, 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
1, 2000, and the notes thereto.
3. Store Acquisitions:
In February 2000, the Company completed its acquisition of three stores
from Belton Food Center Inc. ("BFC"), in Oklahoma City. The net purchase price
was $0.2 million which represents $4.2 million for fixtures and equipment,
leasehold improvements and goodwill, plus $2.0 million for inventory, $0.2
million for transaction costs, offset by $6.2 million of long-term debt (BFC's
obligation to AWG) assumed by the Company. The Company will lease all three of
the stores from AWG. The Company financed this acquisition principally through
the assumption of $6.2 million in long-term debt, together with increased
borrowings under its Revolving Facility. The debt incurred by the Company to AWG
is secured by liens on, and security interest in, the assets associated with the
three stores. Subsequent to the closing of the acquisition, the Company repaid a
portion of its indebtedness to AWG, which related to inventory and therefore,
AWG released its security interest in the inventory. The Company has
subsequently closed one of the stores due to the proximity to other Company
stores and has established a reserve, which approximates $1.3 million for future
rent payments and other holding costs.
6
4. Subsequent Event:
On April 25, 2000, subsequent to the close of the first quarter of 2000,
the Company completed its acquisition of three Baker's Supermarkets from Fleming
Companies Inc. ("Fleming"). The purchase price was approximately $3.5 million
which represents $1.6 million for fixtures and equipment, leasehold
improvements, goodwill and a non-compete agreement, $1.6 million for inventory,
and approximately $0.3 million in transaction costs. The Company will sublease
the three stores from Fleming. A fourth location will be leased upon the
completion of its construction, which is anticipated during fiscal year 2000.
The Company financed this acquisition principally through increased borrowings
under its working capital facility.
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:
March 25, March 27,
2000 1999
Net Sales 100.0% 100.0%
Cost of sales 76.6 76.6
Gross Profit 23.4 23.4
Selling and administrative expenses 21.4 21.1
Amortization of excess reorganization value - 2.1
Operating profit (loss) 2.0 0.2
Gain (loss) on disposal of assets - -
Interest income 0.2 0.1
Interest expense (1.7) (1.6)
Income (loss) before income taxes 0.5 (1.3)
Income tax provision (0.2) (0.3)
Net income (loss) 0.3 (1.6)
Results of Operations.
Comparison of the Twelve Weeks Ended March 25, 2000 with the Twelve
Weeks Ended March 27, 1999
Net sales increased $12.9 million, or 10.4%, from $123.7 million for the
twelve weeks ended March 27, 1999, to $136.6 million for the twelve weeks ended
March 25, 2000. The increase in sales is attributable to the acquisition of
nine stores in April 1999, the acquisition of four stores in November 1999, and
the acquisition of three stores in February 2000, partially offset by a 2.7%
decline in comparable store sales and the closing of one store in 1999. The
decrease in comparable store sales is the result of competitive openings during
the first quarter of fiscal year 2000, the advancement of purchases by customers
into the final week of 1999 due to uncertainty with the year 2000 year-end
transition, the cycling of strong promotions in the first quarter of 1999, and
the mild winter weather in the Company's trade areas.
During the twelve weeks ended March 25, 2000, there were three new
competitive openings within the Company's markets including: two Wal-Mart
Neighborhood Market's in Oklahoma City and one United Supermarket in Amarillo,
Texas. Based on information publicly available, the Company expects that,
8
during the remainder of 2000, Wal-Mart will open 5 Supercenters and four
Neighborhood Markets; and regional chains and independents will open three
additional stores.
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. As a result of these highly competitive
conditions, management believes that comparable store sales will decline
approximately 1.0% during the second quarter of 2000. 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 of 23.4% was the same as in the
comparable period of 1998. Gross profit margin reflects the impact of specific
promotional activities as the Company responded to certain new competitive store
openings and special advertisements for the grand openings of the Company's
acquired stores; and the impact of increased cost of goods for pharmaceutical
products. The pressure on gross profit margin described above was offset by a
general improvement in the management of promotional spending and the
implementation of initiatives to lower cost of goods.
Selling and administrative expenses as a percentage of sales increased
0.3% from 21.1% for the twelve weeks ended March 27, 1999, to 21.4% for the
twelve weeks ended March 25, 2000. The increase in operating expenses is
attributable to increased occupancy costs associated with the acquired stores,
increased depreciation costs attributable to the Company's capital expenditure
program for store remodels and maintenance and modernization, and start-up
expenses related to the Company's February, 2000, acquisition. The Company
continues to review the alternatives to reduce selling and administrative
expenses and cost of sales.
The amortization of the excess reorganization value amounted to $2.6
million for the twelve weeks ended March 27, 1999. The excess reorganization
value was amortized over three years, on a straight-line basis, and became fully
amortized in the third quarter of 1999.
9
Operating profit increased $2.6 million from $0.2 million for the twelve
weeks ended March 27, 1999, to $2.8 million for the twelve weeks ended March 25,
2000. The increase primarily reflects the elimination of the amortization of
the excess reorganization value.
Interest expense, net of interest income, increased $0.3 million from
$1.9 million for the twelve weeks ended March 27, 1999, to $2.2 million for the
twelve weeks ended March 25, 2000. The increase reflects additional interest
expense attributable to the acquired stores and increases in variable interest
rates, partially offset by additional interest income from the interest bearing
certificates of AWG. During 2000, the Company anticipates that interest expense
will increase due to increased debt and additional increases in variable
interest rates. See "Liquidity and Capital Resources."
The Company recorded $0.3 million of income tax expense for the twelve
weeks ended March 25, 2000, substantially all of which is 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. Additionally,
upon the completion of the amortization of reorganization value in excess of
amounts allocable to identifiable assets, the tax benefit realized from
utilizing the pre-reorganization net operating loss carryforwards is recorded
as a reduction of other intangibles existing at the reorganization date until
reduced to zero and then as an increase to stockholder's equity. Due to the
uncertainty of realizing future tax benefits, a full valuation allowance has
been deemed necessary to entirely offset the net deferred tax assets. At January
1, 2000, the Company had a tax net operating loss carryforward of approximately
$29.5 million, which may be utilized to offset future taxable income to the
limited amount of $5.7 million for 2000 and $3.3 million each year thereafter.
If the Company's current trend toward profitability continues, then net deferred
tax assets of approximately $16.0 million could be recognized.
Net income increased $2.4 million from a net loss of $2.0 million, or net
loss per diluted share of $0.41, for the twelve weeks ended March 27, 1999 to
net income of $0.4 million, or net income per diluted share of $0.08, for the
twelve weeks ended March 25, 2000. Excluding the amortization of reorganization
value during the twelve weeks ended March 27, 1999, net income decreased $0.2
million from a net income of $0.6 million, or net income per diluted share of
$0.13, for the twelve weeks ended March 27, 1999 to net income of $0.4 million,
or net income per diluted share of $0.08, for the twelve weeks ended March 25,
2000.
EBITDA (as defined hereinafter) increased $0.3 million from $5.2 million,
or 4.2% of sales, for the twelve weeks ended March 27, 1999 to $5.5 million, or
4.0% of sales for the twelve weeks ended March 25, 2000. 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.
10
Liquidity and Capital Resources
Debt. The primary sources of liquidity for the Company's operations have
been borrowings under credit facilities and internally generated funds.
On December 17, 1998, the Company entered into a Loan Agreement with
NBC, as agent and lender, and two other lenders, Heller Financial, Inc. and IBJ
Whitehall Business Credit, Inc., under which these lenders provide a working
capital and letter of credit facility ("Revolving Facility"), a term loan ("Term
Loan") and, prior to its termination in April, 2000, an acquisition term loan
("Acquisition Term Loan") through August 2, 2002.
The Loan Agreement, as amended, permits the Company to borrow under the
Revolving Facility up to the lesser of (a) $37.0 million or (b) the applicable
borrowing base. Funds borrowed under the Revolving Facility are available for
general corporate purposes of the Company.
The Term Loan, which had an outstanding balance as of March 25, 2000, of
$5.4 million, represents the balance of $10.0 million borrowed under the prior
loan agreement to finance costs and expenses associated with the consummation of
the Restructuring; in April 2000, the principal balance of the Term Loan was
increased by $5.0 million in connection with the termination of the Acquisition
Term Loan, permitting a corresponding reduction in the Revolving Facility. The
Company is required to make quarterly principal paydowns of approximately $0.6
million.
The interest rate payable quarterly under the Loan Agreement is based on
the prime rate publicly announced by National Bank of Canada from time to time
in New York, New York plus a percentage which varies based on a number of
factors, including: (a) whether it is the Revolving Facility or the Term Loan;
(b) the time period; and (c) whether the Company elects to use a London
Interbank Offered Rate.
The obligations of the Company under the Loan Agreement are secured by
liens on, and security interests in, substantially all of the assets of Homeland
and are guaranteed by Holding, with a pledge of its Homeland stock to secure its
obligation.
The Loan Agreement includes certain customary restrictions on
acquisitions, asset dispositions, capital expenditures, consolidations and
mergers, distributions, divestitures, indebtedness, liens and security interests
and transactions with affiliates and payment of dividends. The Loan Agreement
also requires the Company to comply with certain financial and other covenants.
11
As of August 2, 1996, 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 10% Senior Subordinated Notes due 2003
("New Notes"). The New Notes, which are unsecured, will mature on August 2,
2003. Interest on the New Notes accrues at the rate of 10% per annum and is
payable on February 2 and August 2 of each year.
The Indenture contains certain customary restrictions on acquisitions,
asset sales, consolidations and mergers, distributions, indebtedness,
transactions with affiliates and payment of dividends.
Working Capital and Capital Expenditures. The Company's primary sources
of capital have been borrowing availability under the Revolving 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, asset impairment, 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 12 weeks
ended ended
March 25, March 27,
2000 1999
Income (loss) before income taxes $ 668 $ (1,648)
Interest income (172) (129)
Interest expense 2,342 2,000
Gain on disposal of assets (27) (4)
Amortization of excess reorganization value - 2,639
Depreciation and amortization 2,675 2,312
EBITDA $ 5,486 $ 5,170
As a percentage of sales 4.02% 4.18%
As a multiple of interest expense, net
of interest income 2.53x 2.76x
12
Net cash provided by operating activities increased $3.7 million, from
net cash used of $1.9 million in 1999 to net cash provided of $1.7 million in
2000. The increase principally reflects a smaller reduction in trade payables
and other current liabilities, a reduction in accounts receivable and an
increase in EBITDA.
Net cash used in investing activities decreased $0.2 million, from $0.8
million in 1999 to $0.6 million in 2000. The Company invested $9.0 million,
$12.4 million, and $14.0 million in capital expenditures for 1999, 1998, and
1997, respectively.
In April 1999, the Company completed its acquisition of nine stores from
AWG, in eastern Oklahoma. The net purchase price was $1.3 million which
represents $5.6 million for real property, fixtures and equipment and goodwill
plus $2.3 million for inventory, $0.2 million 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 subsequently
sold to a non-grocery user) 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
Revolving Facility. The debt incurred by the Company to AWG is secured by liens
on, and security interest in, the assets associated with the nine stores.
Subsequent to the closing of the acquisition, the Company repaid a portion of
its indebtedness to AWG which related to inventory and the Pryor store which
was sold. Therefore, AWG released its security interest in the assets relating
to the Pryor store and the inventory.
In November 1999, the Company completed its acquisition of four stores
from Brattain Foods, Inc. ("BFI"), in Muskogee, Oklahoma. The net purchase
price was $1.1 million which represents $6.0 million for fixtures and equipment
and goodwill plus $1.9 million for inventory, $0.2 million for transaction
costs, offset by $7.0 million of long-term debt (BFI's obligation to AWG)
assumed by the Company. The Company leases three of the stores from AWG and
leases the fourth from a third party. The Company financed this acquisition
principally through the assumption of $7.0 million in long-term debt, together
with increased borrowings under its Revolving Facility. The debt incurred by the
Company to AWG is secured by liens on, and security interest in, the assets
associated with the four stores. Subsequent to the closing of the acquisition,
the Company repaid a portion of its indebtedness to AWG, which related to
inventory and therefore, AWG released its security interest in the inventory.
In February 2000, the Company completed its acquisition of three stores
from Belton Food Center Inc. ("BFC"), in Oklahoma City. The net purchase price
was $0.2 million which represents $4.2 million for fixtures and equipment,
leasehold improvements and goodwill, plus $2.0 million for inventory, $0.2
million for transaction costs, offset by $6.2 million of long-term debt (BFC's
obligation to AWG) assumed by the Company. The Company leases all three of the
stores from AWG. The Company financed this acquisition principally through
13
the assumption of $6.2 million in long-term debt, together with increased
borrowings under its Revolving Facility. The debt incurred by the Company to
AWG is secured by liens on, and security interest in, the assets associated with
the three stores. Subsequent to the closing of the acquisition, the Company
repaid a portion of its indebtedness to AWG, which related to inventory and
therefore, AWG released its security interest in the inventory.
As of March 25, 2000, the Company had an outstanding balance on these
assumed obligations to AWG of $11.5 million. The loans have a seven year term
with principal and interest payments scheduled each week, and have a variable
interest rate equal to the prime rate plus 100 basis points. Under the various
agreements of the acquisitions, the individual markets where the stores are
located 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 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.
On April 25, 2000, subsequent to the close of the first quarter of 2000,
the Company completed its acquisition of three Baker's Supermarkets from Fleming
Companies Inc. ("Fleming"). The purchase price was approximately $3.5 million
which represents $1.6 million for fixtures and equipment, leasehold
improvements, goodwill and a non-compete agreement, $1.6 million for inventory,
and approximately $0.3 million in transaction costs. The Company will sublease
the three stores from Fleming. A fourth location will be leased upon the
completion of its construction, which is anticipated during fiscal year 2000.
The Company financed this acquisition principally through increased borrowings
under its working capital facility.
Net cash used in financing activities increased $1.6 million, from $1.0
million used by financing activities in the 12 weeks ended March 27, 1999, to
$2.6 million used in financing activities in the 12 weeks ended March 25, 2000.
The increase primarily reflects the principal payments made to AWG under the
terms of the obligations assumed by the Company in conjunction with the February
2000 acquisition.
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 2000 are expected to be at approximately $10.0 million.
The Loan Agreement limits the Company's capital expenditures for 2000 to $13.0
million plus $2.6 million in carryover from the previous year, and $2.6 million
for capital expenditures which are financed through capital leases or equipment
loans. The estimated 2000 capital expenditures of $10.0 is expected to be
invested primarily in the leasehold improvements and fixturing of the one store
yet to be acquired from Fleming, and the remodeling and maintenance of selected
stores. The funds for the capital expenditures are expected to be provided by
internally-generated cash flows from operations and borrowings under the Loan
Agreement. As of March 25, 2000, the Company had $24.2 million of borrowings,
14
$0.9 million of letters of credit outstanding and $10.1 million of availability
under its Revolving Facility.
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.
Information discussed herein includes statements that are forward-looking
in nature, as defined in the Private Securities Litigation Reform Act. As with
any forward-looking statements, these statements are subject to a number of
factors and assumptions, including competitive activities, economic conditions
in the market area and results of its future capital expenditures. In reviewing
such information, it should be kept in mind that actual results may differ
materially from those projected or suggested in such forward-looking statements.
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
approached, systems using such programs were projected to be unable to
accurately process certain date-based information. 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 assessment was implemented on a system-by-
system basis and included the readiness of external entities, such as vendors,
which interface with the Company. The Company assessed its vendors' Year 2000
readiness through the review of questionnaires circulated to its vendors,
consultation by the Company with the vendors who provided its computer systems
and internal testing by the Company of those computer systems. During 1999, the
Company completed the evaluation of systems, the remediation / replacement
efforts and the testing procedures. Through testing procedures, 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 had been the point of sale
("POS") systems and power management systems which operate various systems in
the stores. These systems were upgraded or replaced prior to January 1, 2000.
The total cost of the program was approximately $2.0 million, the
majority of which was for upgrades to POS software and replacement of power
management systems described above. The Company has funded these costs under
its Revolving Facility.
15
The Company has not experienced any material disruptions to its business
as a result of Year 2000 issues relating to Company systems or its primary
vendors' Year 2000 readiness. Management will continue to monitor the extent of
such compliance and the effects associated with any non-compliance.
Inflation/Deflation
Although the Company does not expect inflation or deflation to have a
material impact in the future, there can be no assurance that the Company's
business will not be affected by inflation or deflation in future periods.
PART II - OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as part of this
report:
Exhibit No. Description
11e Computation of Diluted Earnings Per Share.
27 Financial Data Schedule.
(b) Report on Form 8-K: The Company did not file any Form 8-K
during the quarter ended March 25, 2000.
16
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 8, 2000 By: /s/ David B. Clark
David B. Clark, President, Chief Executive
Officer, and Director
(Principal Executive Officer)
Date: May 8, 2000 By: /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice President/
Finance, Chief Financial Officer and Secretary
(Principal Financial Officer)
EXHIBIT 11e
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Computation of Diluted Earnings Per Share
(In thousands, except per share amounts)
Income Shares Per-Share
(Numerator) (Denominator) Amount
For the 12 weeks ended March 25, 2000:
Basic earnings per share
Income available to common stockholders $ 414 4,919.4 $ 0.08
Effect of dilutive securities:
Stock options - 42.8
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ 414 4,962.2 $ 0.08
For the 12 weeks ended March 27, 1999:
Basic earnings per share
Income available to common stockholders $ (2,023) 4906.5 $(0.41)
Effect of dilutive securities:
Stock options - -
Diluted earnings per share
Income available to common stockholders
and assumed conversions $ (2,023) 4,906.5 $(0.41)
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