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 June 17, 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 August 1, 2000:
Homeland Holding Corporation Common Stock: 4,924,529 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED JUNE 17, 2000
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.......................................... 1
Consolidated Balance Sheets
June 17, 2000, and January 1, 2000........................... 1
Consolidated Statements of Operations
Twelve Weeks and Twenty-four Weeks ended
June 17, 2000, and June 19, 1999............................ 3
Consolidated Statements of Cash Flows
Twelve Weeks and Twenty-four Weeks ended
June 17, 2000, and June 19, 1999............................ 4
Notes to Consolidated Financial Statements.................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders........... 16
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)
ASSETS
(Unaudited)
June 17, January 1,
2000 2000
Current assets:
Cash and cash equivalents $ 7,568 $ 6,136
Receivables, net of allowance for
uncollectible accounts of $738
and $1,361 10,054 11,353
Inventories 55,214 52,663
Prepaid expenses and other current assets 2,025 2,176
Total current assets 74,861 72,328
Property, plant and equipment:
Land and land improvements 8,820 9,046
Buildings 21,659 21,962
Fixtures and equipment 40,849 36,818
Leasehold improvements 21,554 20,446
Software 7,519 7,181
Leased assets under capital leases 8,737 8,737
Construction in progress 125 19
109,263 104,209
Less, accumulated depreciation
and amortization 35,491 30,728
Net property, plant and equipment 73,772 73,481
Other assets and deferred charges 26,361 22,045
Total assets $ 174,994 $ 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)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 17, January 1,
2000 2000
Current liabilities:
Accounts payable - trade $ 20,792 $ 22,968
Salaries and wages 2,058 3,168
Taxes 4,423 3,616
Accrued interest payable 2,500 2,671
Other current liabilities 8,135 6,992
Current portion of long-term debt 3,048 2,918
Current portion of obligations under capital
leases 501 501
Total current liabilities 41,457 42,834
Long-term obligations:
Long-term debt 101,290 94,668
Obligations under capital leases 950 1,197
Other noncurrent liabilities 3,196 1,501
Total long-term obligations 105,436 97,366
Stockholders' equity:
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,923,446 shares
and 4,917,860 shares at June 17, 2000,
and January 1, 2000, respectively 49 49
Additional paid-in capital 56,254 56,254
Accumulated deficit (28,202) (28,649)
Total stockholders' equity 28,101 27,654
Total liabilities and stockholders' equity $ 174,994 $ 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)
12 weeks ended 24 weeks ended
June 17, June 19, June 17, June 19,
2000 1999 2000 1999
Sales, net $ 142,620 $ 127,276 $ 279,227 $ 250,944
Cost of sales 109,672 97,049 214,271 191,792
Gross profit 32,948 30,227 64,956 59,152
Selling and administrative
expenses 30,556 27,468 59,753 53,535
Amortization of excess
reorganization value - 2,539 - 5,178
Operating profit 2,392 220 5,203 439
Gain (loss) on disposal of
assets (56) 10 (29) 14
Interest income 172 130 344 259
Interest expense (2,455) (2,013) (4,797) (4,013)
Income (loss) before income
taxes 53 (1,653) 721 (3,301)
Income tax provision (20) (334) (274) (709)
Net income (loss) $ 33 $ (1,987) $ 447 $ (4,010)
Net income (loss) per
share:
Basic $ 0.01 $ (0.40) $ 0.09 $ (0.82)
Diluted $ 0.01 $ (0.40) $ 0.09 $ (0.82)
Weighted average shares
outstanding:
Basic 4,922,163 4,910,459 4,920,760 4,908,481
Diluted 4,964,288 4,910,459 4,963,231 4,908,481
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 ended 24 weeks ended
June 17, June 19, June 17, June 19,
2000 1999 2000 1999
Cash flows from operating activities:
Net income (loss) $ 33 $ (1,987) $ 447 $ (4,010)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 2,547 2,381 5,068 4,665
Amortization of beneficial interest in
operating leases 28 28 56 56
Amortization of excess reorganization
value - 2,539 - 5,178
Amortization of goodwill 192 42 318 42
Amortization of financing costs 14 11 27 23
Loss (gain) on disposal of assets 56 (10) 29 (14)
Deferred income taxes (10) 333 214 702
Change in assets and liabilities:
(Increase) decrease in receivables (2,568) (1,857) 1,299 1,076
Decrease in inventories 837 330 1,037 267
(Increase) decrease in prepaid
expenses and other current assets 987 99 267 (807)
Increase in other assets and
deferred charges (179) (18) (221) (13)
Increase (decrease) in accounts
payable - trade (563) 1,297 (2,176) (1,474)
Increase (decrease) in salaries
and wages 339 180 (1,110) (686)
Increase in taxes 676 791 864 776
Increase (decrease) in accrued
interest payable 1,369 1,367 (171) (132)
Increase (decrease) in other
current liabilities 617 540 642 (1,454)
Decrease in other noncurrent
liabilities (278) (142) (748) (226)
Total adjustments 4,064 7,911 5,395 7,979
Net cash provided by operating
activities 4,097 5,924 5,842 3,969
Cash flows from investing activities:
Capital expenditures (564) (2,233) (1,563) (3,095)
Acquisition of stores (3,518) (1,315) (3,663) (1,315)
Cash received from sale of assets 47 7 473 17
Net cash used in investing
activities (4,035) (3,541) (4,753) (4,393)
Cash flows from financing activities:
Borrowings under term loan 5,000 - 5,000 -
Payments under term loan (417) (417) (829) (417)
Borrowings under revolving credit
loans 32,836 33,958 77,916 63,113
Payments under revolving credit
loans (33,787) (31,438) (77,881) (61,341)
Payment on tax notes (12) (15) (24) (31)
Proceeds from issuance of common
stock - 21 - 31
Principal payments under notes
payable (534) (2,189) (3,592) (2,189)
Principal payments under capital
lease obligations (109) (256) (247) (518)
Net cash provided by (used in)
financing activities 2,977 (336) 343 (1,352)
Net increase (decrease) in cash
and cash equivalents 3,309 2,047 1,432 (1,776)
Cash and cash equivalents at
beginning of period 4,529 4,033 6,136 7,856
Cash and cash equivalents at
end of period $ 7,568 $ 6,080 $ 7,568 $ 6,080
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 17, June 19, June 17, June 19,
2000 1999 2000 1999
Supplemental information:
Cash paid during the period
for interest $ 979 $ 651 $ 4,655 $ 4,124
Cash paid during the period
for income taxes $ - $ - $ 30 $ -
Supplemental schedule of noncash
investing and financing activities:
Debt assumed in acquisition
of stores $ - $ 6,752 $ 6,162 $ 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, 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. Reserves for Doubtful Accounts:
In the fourth quarter of 1999, the Company increased its reserves for
doubtful accounts by approximately $0.6 million related to the uncertainty
of collection of a receivable from a vendor. This receivable was
subsequently collected during the twelve weeks ended June 17, 2000,
resulting in the reduction of the related reserves for doubtful accounts
and a reduction in selling and administrative expenses during the quarter.
4. 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 and $0.2 million for transaction costs, offset by $6.2 million
of long-term debt, which relates to BFC's obligation to Associated
Wholesale Grocers, Inc. ("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.
6
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.
On April 25, 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 $1.7 million for
fixtures and equipment, leasehold improvements, goodwill and a non-compete
agreement, $1.6 million for inventory, and approximately $0.2 million in
transaction costs. In conjunction with the transaction, the Company also
recorded $1.6 million of identified intangibles and $1.6 million in
liabilities related to an unfavorable contract. 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.
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 17, June 19, June 17, June 19,
2000 1999 2000 1999
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 76.9 76.2 76.7 76.4
Gross Profit 23.1 23.8 23.3 23.6
Selling and administrative expenses 21.4 21.6 21.4 21.3
Amortization of excess reorganization
value - 2.0 - 2.1
Operating profit 1.7 0.2 1.9 0.2
Gain (loss) on disposal of assets (0.1) - - -
Interest income 0.1 0.1 0.1 0.1
Interest expense (1.7) (1.6) (1.7) (1.6)
Income (loss) before income taxes - (1.3) 0.3 (1.3)
Income tax provision - 0.3 0.1 0.3
Net income (loss) - (1.6) 0.2 (1.6)
7
Results of Operations.
Comparison of the Twelve Weeks Ended June 17, 2000 with the
Twelve Weeks Ended June 19, 1999
Net sales increased $15.3 million, or 12.0%, from $127.3 million for
the twelve weeks ended June 19, 1999, to $142.6 million for the twelve weeks
ended June 17, 2000. The increase in sales is attributable to the acquisition
of four stores in November 1999, the acquisition of three stores in February
2000, and the acquisition of three stores in April 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 primarily attributable to competitive
openings during fiscal year 2000, and a labor dispute at AWG, the Company's
primary supplier of merchandise.
Since the beginning of Fiscal 2000, there have been six new
competitive openings within the Company's markets including: three Wal-Mart
Neighborhood Markets in Oklahoma City, two Wal-Mart Supercenters in Oklahoma
City and one United Supermarket in Amarillo, Texas. Based on information
publicly available, the Company expects that, during the remainder of 2000,
Wal-Mart will open a total of three Supercenters and four Neighborhood Markets;
and regional chains and independents will open one additional store.
AWG's labor dispute involved warehousing and transportation employees
and impacted the Company's sales through informational leaflets dissuading
customers from patronizing Company stores, through inaccurate store order
fulfillment, and late deliveries. The labor dispute, which began April 1, 2000
was resolved in mid-June.
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 2.5% during the third 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
8
reduced cost each week. Finally, the Company continues the use of market
research in order to maintain a better understanding of customer behavior and
trends in certain markets.
Gross profit as a percentage of sales decreased 0.7% from 23.8% for
the twelve weeks ended June 19, 1999, to 23.1% for the twelve weeks ended June
17, 2000. The decrease in gross profit margin reflects a reduction in the
anticipated AWG annual patronage rebate due to the labor dispute; 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.
Selling and administrative expenses as a percentage of sales decreased
0.2% from 21.6% for the twelve weeks ended June 19, 1999, to 21.4% for the
twelve weeks ended June 17, 2000. The decrease in operating expenses as a
percentage of sales is attributable to a reduction in the reserves for doubtful
accounts (see Note 3 of Notes to Consolidated Financial Statements (Unaudited)
and a reduction in general liability reserves due to improved claims experience,
partially offset by 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 April 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 $2.5
million for the twelve weeks ended June 19, 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.
Operating profit increased $2.2 million from $0.2 million for the
twelve weeks ended June 19, 1999, to $2.4 million for the twelve weeks ended
June 17, 2000. The increase primarily reflects the elimination of the
amortization of the excess reorganization value.
Interest expense, net of interest income, increased $0.4 million from
$1.9 million for the twelve weeks ended June 19, 1999, to $2.3 million for the
twelve weeks ended June 17, 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 $20,000 of income tax expense for the twelve
weeks ended June 17, 2000, substantially all of which is deferred income tax.
9
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 $2.0 million from a net loss of $2.0 million, or
net loss per diluted share of $0.40, for the twelve weeks ended June 19, 1999 to
net income of $33,000, or net income per diluted share of $0.01, for the twelve
weeks ended June 17, 2000. Excluding the amortization of reorganization value
during the twelve weeks ended June 19, 1999, net income decreased $0.6 million
from a net income of $0.6 million, or net income per diluted share of $0.11,
for the twelve weeks ended June 19, 1999 to net income of $33,000, or net income
per diluted share of $0.01, for the twelve weeks ended June 17, 2000.
EBITDA (as defined hereinafter) was $5.2 million, or 4.1% of sales,
for the twelve weeks ended June 19, 1999 and was $5.2 million, or 3.6% of sales
for the twelve weeks ended June 17, 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.
Comparison of the 24 Weeks Ended June 17, 2000 with the 24
Weeks Ended June 19, 1999
Net sales increased $28.3 million, or 11.3%, from $250.9 million for
the 24 weeks ended June 19, 1999, to $279.2 million for the 24 weeks ended June
17, 2000. The increase in sales is attributable to the acquisition of nine
stores in April 1999, the acquisition of four stores in November 1999, the
acquisition of three stores in February 2000, and the acquisition of three
stores in April 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 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 labor dispute at AWG,
the cycling of strong promotions in the first quarter of 1999, and the mild
winter weather in the Company's trade areas.
10
Gross profit as a percentage of sales decreased 0.3% from 23.6% for
the 24 weeks ended June 19, 1999, to 23.3% for the 24 weeks ended June 17, 2000.
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; the
impact of a reduction in the anticipated AWG annual patronage rebate due to
the labor dispute; and the impact of increased cost of goods for pharmaceutical
products.
Selling and administrative expenses as a percentage of sales increased
0.1% from 21.3% for the 24 weeks ended June 19, 1999, to 21.4% for the 24 weeks
ended June 17, 2000. The increase in operating expenses as a percentage of
sales 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 and April 2000 acquisitions,
partially offset by a reduction in the reserves for doubtful accounts and a
reduction in general liability reserves due to improved claims experience.
The amortization of the excess reorganization value amounted to $5.2
million for the 24 weeks ended June 19, 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.
Operating profit increased $4.8 million from $0.4 million for the 24
weeks ended June 19, 1999, to $5.2 million for the 24 weeks ended June 17, 2000.
The increase primarily reflects the elimination of the amortization of the
excess reorganization value.
Interest expense, net of interest income, increased $0.7 million from
$3.8 million for the 24 weeks ended June 19, 1999, to $4.5 million for the 24
weeks ended June 17, 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. See "Liquidity and Capital Resources."
The Company recorded $0.3 million of income tax expense for the 24
weeks ended June 17, 2000 substantially all of which is deferred income tax.
Net income increased $4.4 million from a net loss of $4.0 million, or
net loss per diluted share of $0.82, for the 24 weeks ended June 19, 1999 to net
income of $0.4 million, or net income per diluted share of $0.09, for the 24
weeks ended June 17, 2000. Excluding the amortization of reorganization value
during the 24 weeks ended June 19, 1999, net income decreased $0.8 million from
a net income of $1.2 million, or net income per diluted share of $0.24, for the
24 weeks ended June 19, 1999 to net income of $0.4 million, or net income per
diluted share of $0.09, for the 24 weeks ended June 17, 2000.
EBITDA (as defined hereinafter) increased $0.2 million from $10.4
11
million, or 4.1% of sales, for the 24 weeks ended June 19, 1999 to $10.6
million, or 3.8% of sales for the 24 weeks ended June 17, 2000.
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 June 17, 2000,
of $10.0 million, represents the balance of $5.0 borrowed under the prior loan
agreement to finance costs and expenses associated with the consummation of the
restructuring of the Company under its bankruptcy reorganization proceedings in
August, 1996, plus $5.0 million borrowed in connection with the termination of
the Acquisition Term Loan, permitting a corresponding reduction in the Revolving
Facility, in April 2000. 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.
12
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 ended 24 weeks ended
June 17, June 19, June 17, June 19,
2000 1999 2000 1999
Income (loss) before income taxes $ 53 $ (1,653) $ 721 $ (3,301)
Interest income (172) (130) (344) (259)
Interest expense 2,455 2,013 4,797 4,013
(Gain) loss on disposal of assets 56 (10) 29 (14)
Amortization of excess reorganization
value - 2,539 - 5,178
Depreciation and amortization 2,767 2,451 5,442 4,763
EBITDA $ 5,159 $ 5,210 $ 10,645 $ 10,380
As a percentage of sales 3.62% 4.09% 3.81% 4.14%
As a multiple of interest expense,
net of interest income 2.26x 2.77x 2.39x 2.77x
13
Net cash provided by operating activities increased $1.8 million, from
$4.0 million in 1999 to $5.8 million in 2000. The increase principally reflects
a reductions in current assets and an increase in EBITDA, partially offset by
reductions in certain current liabilities.
Net cash used in investing activities increased $0.4 million, from
$4.4 million in 1999 to $4.8 million in 2000. The Company invested $9.0 million
and $12.4 million in capital expenditures for 1999 and 1998, 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 and $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 and $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 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 and $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.
14
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.
In April 2000, the Company completed its acquisition of three Baker's
Supermarkets from Fleming. The purchase price was approximately $3.5 million,
which represents $1.7 million for fixtures and equipment, leasehold
improvements, goodwill and a non-compete agreement, $1.6 million for inventory,
and approximately $0.2 million in transaction costs. In conjunction with the
transaction, the Company also recorded $1.6 million of identified intangibles
and $1.6 million in liabilities related to an unfavorable contract. 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.
As of June 17, 2000, the Company had an outstanding balance on the
assumed obligations to AWG of $11.0 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 with respect to 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.
Net cash provided by financing activities increased $1.7 million, from
net cash used by financing activities of $1.4 million in 1999, to net cash
provided by financing activities of $0.3 million in 2000. The increase
primarily reflects the borrowings under the Term Loan in connection with the
termination of the Acquisition Term Loans, partially offset by lower net
borrowings under the Revolving Facility and principal payments made to AWG under
the various obligations assumed by the Company.
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. The estimated
2000 capital expenditures of $10.0 million is expected to be invested primarily
in the equipment and leasehold improvements 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 June
15
17, 2000, the Company had $23.2 million of borrowings, $30,000 of letters of
credit outstanding and $11.0 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.
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 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Stockholders on June 1,
2000. 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 3,918,582 51,383
David B. Clark 3,948,205 21,760
Edward B. Krekeler, Jr. 3,700,867 269,098
Laurie M. Shahon 3,730,867 239,098
John A. Shields 3,946,546 23,419
William B. Snow 3,700,867 269,098
David N. Weinstein 3,735,867 234,098
16
In addition, an amendment to the Homeland Holding Corporation 1996
Stock Option Plan to increase the number of shares of Common Stock available for
the issuance of stock options thereunder from 432,222 shares to 832,222 shares,
1,843,864 votes were cast in favor of approval, 389,407 votes were cast against,
holders of 37,379 shares abstained or did not vote and there were 1,699,315
broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibit is filed as part of this report:
Exhibit No. Description
10ae Computation of Diluted Earnings Per Share.
10af Sixth Amendment to Loan Agreement dated as of
April 25, 2000, among IBJ Whitehall Business Credit
Corporation, Heller Financial, Inc., and National
Bank of Canada, Homeland and Holding.
10ag Letter Agreement and Promissory Note to David B. Clark
regarding relocation expenses.
27 Financial Data Schedule.
(b) Report on Form 8-K: The Company did not file any Form 8-K during
the quarter ended June 17, 2000.
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: August 1, 2000 By: /s/ David B. Clark
David B. Clark, President, Chief Executive
Officer, and Director
(Principal Executive Officer)
Date: August 1, 2000 By: /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice President/
Finance, Chief Financial Officer and
Secretary
(Principal Financial Officer)
