-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JUzFX+P31KL0gMbRNS4AsF86IXC5dKRzXhpkE2H7C80VJr3tLlohKnFxF6uJTHxW uuyj0BiMiidG38R63H6Hvw== 0000835582-99-000010.txt : 19990812 0000835582-99-000010.hdr.sgml : 19990812 ACCESSION NUMBER: 0000835582-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990619 FILED AS OF DATE: 19990802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMELAND HOLDING CORP CENTRAL INDEX KEY: 0000835582 STANDARD INDUSTRIAL CLASSIFICATION: 5411 IRS NUMBER: 731311075 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11555 FILM NUMBER: 99674996 BUSINESS ADDRESS: STREET 1: 2601 N W EXPRESSWAY STREET 2: SUITE 1100E CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4058796600 MAIL ADDRESS: STREET 1: 2601 N W EXPRESSWAY STREET 2: SUITE 1100E CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 FORMER COMPANY: FORMER CONFORMED NAME: SWO HOLDING CORP DATE OF NAME CHANGE: 19901017 FORMER COMPANY: FORMER CONFORMED NAME: SWO ACQUISTION CORP DATE OF NAME CHANGE: 19890716 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange X Act of 1934 For the quarterly period ended June 19, 1999 OR Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from_________ to _________ Commission file No.: 33-48862 HOMELAND HOLDING CORPORATION (Exact name of registrant as specified in its charter) Delaware 73-1311075 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2601 Northwest Expressway Oil Center-East, Suite 1100 Oklahoma City, Oklahoma 73112 (Address of principal executive offices) (Zip Code) (405) 879-6600 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution under a plan confirmed by a court. Yes X No ___ Indicate the number of shares outstanding of each of the registrant's classes of common stock as of July 28, 1999: Homeland Holding Corporation Common Stock: 4,914,150 shares HOMELAND HOLDING CORPORATION FORM 10-Q FOR THE TWENTY-FOUR WEEKS ENDED JUNE 19, 1999 INDEX Page PART I FINANCIAL INFORMATION ITEM 1. Financial Statements 1 Consolidated Balance Sheets June 19, 1999, and January 2, 1999 1 Consolidated Statements of Operations Twelve Weeks and Twenty-four Weeks ended June 19, 1999, and June 20, 1998 3 Consolidated Statements of Cash Flows Twelve Weeks and Twenty-four Weeks ended June 19, 1999 and June 20, 1998 4 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations 8 PART II OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 17 i PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) June 19, January 2, 1999 1999 Current assets: Cash and cash equivalents $ 6,080 $ 7,856 Receivables, net of allowance for uncollectible accounts of $905 and $972 8,885 9,961 Inventories 48,173 46,280 Prepaid expenses and other current assets 3,361 2,527 Total current assets 66,499 66,624 Property, plant and equipment: Land and land improvements 9,350 9,346 Buildings 22,137 20,216 Fixtures and equipment 31,533 28,466 Leasehold improvements 19,317 17,488 Software 5,910 5,396 Leased assets under capital leases 9,053 9,053 Construction in progress 969 3,278 98,269 93,243 Less, accumulated depreciation and amortization 25,451 20,832 Net property, plant and equipment 72,818 72,411 Reorganization value in excess of amounts allocable to identifiable assets, less accumulated amortization of $39,196 and $34,018 at June 19, 1999, and January 2, 1999, respectively 1,911 7,791 Other assets and deferred charges 16,310 12,378 Total assets $157,538 $159,204 Continued The accompanying notes are an integral part of these consolidated financial statements 1 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY June 19, January 2, 1999 1999 Current liabilities: Accounts payable - trade $ 18,793 $ 20,267 Salaries and wages 2,189 2,827 Taxes 3,896 3,093 Accrued interest payable 2,490 2,622 Other current liabilities 7,174 8,548 Current portion of long-term debt 2,233 1,728 Current portion of obligations under capital leases 1,207 1,235 Total current liabilities 37,982 40,320 Long-term obligations: Long-term debt 89,234 83,852 Obligations under capital leases 1,210 1,700 Other noncurrent liabilities 1,223 1,464 Total long-term obligations 91,667 87,016 Stockholders' equity: Common stock $0.01 par value, authorized - 7,500,000 shares, issued 4,912,408 shares and 4,904,417 shares at June 19, 1999, and January 2, 1999, respectively 49 49 Additional paid-in capital 56,205 56,174 Accumulated deficit (28,365) (24,355) Total stockholders' equity 27,889 31,868 Total liabilities and stockholders' equity $157,538 $159,204 The accompanying notes are an integral part of these consolidated financial statements 2 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except share and per share amounts) (Unaudited) 12 weeks ended 24 weeks ended June 19, June 20, June 19, June 20, 1999 1998 1999 1998 Sales $ 127,276 $ 123,509 $ 250,944 $ 244,912 Cost of sales 97,049 94,146 191,792 186,068 Gross profit 30,227 29,363 59,152 58,844 Selling and administrative expenses 27,468 26,594 53,535 52,742 Amortization of excess reorganization value 2,539 3,205 5,178 6,486 Operating profit (loss) 220 (436) 439 (384) Gain (loss) on disposal of assets 10 (4) 14 (36) Interest income 130 97 259 195 Interest expense (2,013) (1,945) (4,013) (3,994) Loss before income taxes (1,653) (2,288) (3,301) (4,219) Income tax expense (334) (471) (709) (950) Net loss (1,987) (2,759) (4,010) (5,169) Accumulated deficit at beginning of period (26,378) (16,174) (24,355) (13,764) Accumulated deficit at end of period $ (28,365) $ (18,933) $ (28,365) $ (18,933) Basic and diluted earnings per share: Net loss per common share $ (0.40) $ (0.57) $ (0.82) $ (1.07) Weighted average shares outstanding 4,910,459 4,824,781 4,908,481 4,823,482 The accompanying notes are an integral part of these consolidated financial statements 3 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, except share and per share amounts) 12 weeks ended 24 weeks ended June 19, June 20, June 19, June 20, 1999 1998 1999 1998 Cash flows from operating activities: Net loss $ (1,987) $ (2,759) $ (4,010) $ (5,169) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 2,381 2,242 4,665 4,434 Amortization of beneficial interest in operating leases 28 28 56 56 Amortization of excess reorganization value 2,539 3,205 5,178 6,486 Amortization of goodwill 42 0 42 0 Amortization of financing costs 11 18 23 35 Loss (gain) on disposal of assets (10) 4 (14) 36 Deferred income taxes 333 426 702 905 Change in assets and liabilities: (Increase) decrease in receivables (1,857) (1,347) 1,076 1,756 Decrease in inventories 330 119 267 575 (Increase) decrease in prepaid expenses and other current assets 99 (885) (807) (641) (Increase) decrease in other assets and deferred charges (18) 31 (13) 48 Increase (decrease) in accounts payable - trade 1,297 274 (1,474) (836) Increase (decrease) in salaries and wages 180 524 (686) (278) Increase in taxes 791 618 776 27 Increase (decrease) in accrued interest payable 1,367 1,326 (132) 52 Increase (decrease) in other current liabilities 540 (921) (1,454) (2,488) Decrease in other noncurrent liabilities (142) (98) (226) (61) Total adjustments 7,911 5,564 7,979 10,106 Net cash provided by operating activities 5,924 2,805 3,969 4,937 Cash flows from investing activities: Capital expenditures (2,233) (2,321) (3,095) (3,926) Acquisition of stores (1,315) - (1,315) - Cash received from sale of assets 7 4 17 4 Net cash used in investing activities (3,541) (2,317) (4,393) (3,922) Cash flows from financing activities: Payments under term loan (417) (417) (417) (417) Borrowings under revolving credit loans 33,958 34,394 63,113 60,810 Payments under revolving credit loans (31,438) (33,457) (61,341) (59,855) Payments on tax notes (15) (15) (31) (30) Proceeds from issuance of common stock 21 92 31 119 Principal payments under notes payable (2,189) - (2,189) - Principal payments under capital lease obligations (256) (303) (518) (607) Net cash provided by (used in) financing activities (336) 294 (1,352) 20 Net increase (decrease) in cash and cash equivalents 2,047 782 (1,776) 1,035 Cash and cash equivalents at beginning of period 4,033 5,031 7,856 4,778 Cash and cash equivalents at end of period $ 6,080 $ 5,813 $ 6,080 $ 5,813 Continued The accompanying notes are an integral part of these consolidated financial statements. 4 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS, continued (In thousands, except share and per share amounts) (Unaudited) 12 weeks ended 24 weeks ended June 19, June 20, June 19, June 20, 1999 1998 1999 1998 Supplemental information: Cash paid during the period for interest $ 651 $ 597 $ 4,124 $ 3,909 Cash paid during the period for income taxes $ - $ - $ - $ - Supplemental schedule of noncash investing and financing activities: Debt assumed in the acquisition $ 6,752 $ - $ 6,752 $ - The accompanying notes are an integral part of these consolidated financial statements. 5 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Preparation of Consolidated Financial Statements: The accompanying unaudited interim consolidated financial statements of Homeland Holding Corporation ("Holding"), through its wholly-owned subsidiary, Homeland Stores, Inc. ("Homeland") and Homeland's wholly-owned subsidiary, SLB Marketing, Inc., (collectively referred to herein as the "Company"), reflect all adjustments, which consist only of normal and recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and the consolidated results of operations and cash flows for the periods presented. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the period ended January 2, 1999, and the notes thereto. 2. Accounting Policies: The significant accounting policies of the Company are summarized in the consolidated financial statements of the Company for the 52 weeks ended January 2, 1999, and the notes thereto. 3. Acquisition of Nine Apple Market Stores: On April 23, 1999, the Company completed its acquisition of nine Apple Markets from Associated Wholesale Grocers, Inc. ("AWG"). The purchase price of $8.1 million involves a combination of cash paid of $1.3 million and the assumption of $6.8 million of debt. This acquisition has been accounted for under the purchase method of accounting. The purchase price has been preliminarily allocated based on estimated fair values at date of acquisition, pending final determination of certain acquired balances. This preliminary allocation has resulted in acquired goodwill of $4.1 million, which is being amortized on a straight-line basis over 15 years. The results of the acquired stores have been included in the consolidated financial statements since the date of acquisition. The Company owns one store and leases the remaining eight from AWG. The one owned store in Pryor, Oklahoma, was closed as a result of the proximity to an existing Company store. The Company financed this acquisition principally through the assumption of $6.8 million in long-term debt, together with increased borrowings under its working capital facility. The debt incurred by the Company to AWG is secured by liens on, and security interests in, the 6 assets associated with the nine stores. Subsequent to the closing of the acquisition, the Company repaid the portion of its indebtedness to AWG which relates to inventory and AWG is releasing its liens on inventory. The loan documents with AWG include certain customary restrictions, including restrictions on the payment of dividends. Under the various agreements of the acquisition, the nine market areas are subject to non- compete, supply and right-of-first-refusal agreements with AWG. In addition to the other customary terms associated with a right-of-first refusal agreement, the right-of-first refusal agreement provides for the repurchase by AWG of the nine stores based upon the occurrence of certain exercise events. The exercise events include, among other events, a change in control of Homeland and a transfer of more than 20% of the ownership interest of Holding or Homeland. 4. Distribution of New Common Stock On August 2, 1996, all of the outstanding Old Common Stock of Holding was canceled and the holders received their ratable share of (a) 250,000 shares of New Common Stock and (b) warrants to purchase up to 263,158 shares of New Common Stock at an exercise price of $11.85. Each warrant entitles the holder to purchase one share of New Common Stock at any time up to August 2, 2001. Holders of general unsecured claims (including certain trade creditors for unpaid prepetition trade claims and the allowed unsecured noteholders' claims) are entitled to receive their ratable share of 4,450,000 shares of New Common Stock. As of June 19, 1999, the Company had issued 3,431,252 shares of the 4,450,000 shares of New Common Stock leaving 1,018,748 shares to be distributed in the Class 5 Disputed Claim Reserve ("Reserve"). The Company intends to make the semi-annual distribution under the Plan of Reorganization on or around the beginning of August 1999. 7 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations General The table below sets forth selected items from the Company's consolidated income statement as a percentage of net sales for the periods indicated: 12 weeks ended 24 weeks ended June 19, June 20, June 19, June 20, 1999 1998 1999 1998 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 76.2 76.2 76.4 76.0 Gross Profit 23.8 23.8 23.6 24.0 Selling and administrative 21.6 21.5 21.3 21.5 Amortization of excess reorganization value 2.0 2.6 2.1 2.7 Operating profit 0.2 (0.3) 0.2 (0.2) Gain (loss) on disposal of assets - - - - Interest income 0.1 0.1 0.1 0.1 Interest expense (1.6) (1.6) (1.6) (1.6) Loss before income taxes (1.3) (1.8) (1.3) (1.7) Income tax provision 0.3 0.4 0.3 0.4 Net loss (1.6) (2.2) (1.6) (2.1) Results of Operations. Comparison of the 12 Weeks Ended June 19, 1999 with the 12 Weeks Ended June 20, 1998 Net sales increased $3.8 million, or 3.1%, from $123.5 million for the 12 weeks ended June 20, 1998, to $127.3 million for the 12 weeks ended June 19, 1999. The increase in sales is attributable to the Apple Market stores acquired on April 23, 1999 (the "Acquired Stores") and a 0.2% increase in comparable store sales partially offset by the sales lost due to the closing of one Homeland store during the second quarter of 1998. The increase in comparable store sales is the result of increased promotional activity and the grand re-opening of one remodeled store. During the 24 weeks ended June 19, 1999, there were six new competitive openings within the Company's markets including: two Albertson's; two Wal-Mart Supercenters; one Baker's Supermarket; and the relocation of two independent stores. Based on information publicly available, the Company expects that, during the remainder of 1999, Albertson's will open 1 additional store; 8 Wal-Mart will open 2 additional supercenters; and regional chains and independents will open two additional stores. Additionally, it is now expected that Wal-Mart could open one Neighborhood Supermarket, a new format in Oklahoma City, by the end of the current fiscal year. Based in part on the anticipated impact of proposed and recent new store openings and remodelings by competitors, management believes that market conditions will remain highly competitive, placing continued pressure on comparable store sales and net sales. In response to this highly competitive environment, the Company intends to continue to build on its strengths which consist of: (a) high quality perishable departments; (b) market position and competitive pricing; (c) customer service; (d) excellent locations; and (e) the "Homeland Savings Card," a customer loyalty card program. The Company is upgrading its stores by focusing its capital expenditures on projects that will improve the overall appeal of its stores to targeted customers and is using its merchandising strategy to emphasize a competitive pricing structure, as well as leadership in quality products and services, selection and convenient store locations. Additionally, the in-store merchandising strategy combines a strong presentation of fresh products along with meaningful values throughout the store on a wide variety of fresh and shelf stable products each week. The Company's main vehicle of value delivery is its Homeland Savings Card which allows customers with the card the opportunity to purchase over 2,000 items at a reduced cost each week. Finally, the Company continues the use of market research in order to maintain a better understanding of customer behavior and trends in certain markets. Gross profit as a percentage of sales of 23.8% for the 12 weeks ended June 19, 1999, was equal to the percentage of sales for the 12 weeks ended June 20, 1998. The gross profit margin continues to reflect increased promotional activities including the Company's response to certain new competitive store openings and special advertisements for the grand opening of the Acquired Stores and for one remodeled Company store. Selling and administrative expenses as a percentage of sales increased 0.1% from 21.5% for the 12 weeks ended June 20, 1998, to 21.6% for the 12 weeks ended June 19, 1999. The increase in operating expenses is primarily attributable to an increase in expenses associated with the Acquired Stores, including pre-opening and start-up expenses, and increased depreciation expense from the Company's capital expenditure program, partially offset by reduced labor costs as a result of improved store productivity and by lower advertising expenses during the quarter. The Company continues to review alternatives to reduce selling and administrative expenses and cost of sales in order to achieve its positioning goals and thereby gain a more loyal customer base. The amortization of the excess reorganization value amounted to $2.5 million for the 12 weeks ended June 19, 1999. The excess reorganization value is being amortized over three years, on a straight line basis, and will be fully amortized by the third quarter of 1999. 9 Interest expense, net of interest income, increased $0.1 million from $1.8 million for the 12 weeks ended June 20, 1998, to $1.9 million for the 12 weeks ended June 19, 1999. The increase reflects additional interest expense attributable to the Acquired Stores partially offset by lower interest rates and additional interest income from the interest bearing certificates of AWG. During 1999, the Company anticipates that interest expense will increase as a result of the Acquired Stores. See "Liquidity and Capital Resources." The Company recorded $0.3 million of income tax expense for the 12 weeks ended June 19, 1999, substantially all of which was deferred income tax. In accordance with SOP 90-7, the tax benefit realized from utilizing the pre-reorganization net operating loss carryforwards is recorded as a reduction of the reorganization value in excess of amounts allocable to identifiable assets rather than realized as a benefit on the statement of operations. As of June 19, 1999, the Company had a tax net operating loss carryforward of approximately $36.7 million, which may be utilized to offset future taxable income to the limited amount of $3.3 million for 1999 and each year thereafter. EBITDA (as defined hereinafter) increased $0.2 million, or 4.1% of sales, for the 12 weeks ended June 20, 1998, to $5.2 million, or 4.1% of sales for the 12 weeks ended June 19, 1999. The increase in EBITDA resulted primarily from the increase in gross profit dollars. The Company believes that EBITDA is a useful supplemental disclosure for the investment community. EBITDA, however, should not be construed as a substitute for earnings or cash flow information required under generally accepted accounting principles. Comparison of the 24 Weeks Ended June 19, 1999 with the 24 Weeks Ended June 20, 1998 Net sales increased $6.0 million, or 2.5% from $244.9 million for the 24 weeks ended June 20, 1998, to $250.9 million for the 24 weeks ended June 19, 1999. The increase in sales is attributable to the Acquired Stores and a 1.6% increase in comparable store sales partially offset by the sales lost due to the closing of one Homeland store during the second quarter of 1998. The increase in comparable store sales is the result of increased promotional activity and the grand re-opening of two remodeled stores. Gross profit as a percentage of sales decreased 0.4% from 24.0% for the 24 weeks ended June 20, 1998, to 23.6% for the 24 weeks ended June 19, 1999. The decrease in gross profit margin primarily reflects increased promotional activities including the Company's response to certain new competitive store openings and special advertisements for the grand opening of the Acquired Stores and for the two remodeled Company stores. Selling and administrative expenses as a percentage of sales decreased 0.2% from 21.5% for the 24 weeks ended June 20, 1998, to 21.3% for the 24 weeks ended June 19, 1999. The decrease in operating expenses is attributable 10 to reduced labor costs as a result of improved store productivity, favorable experience in employee benefit programs, reduced utilities costs and reduced administrative expenses partially offset by an increase in expenses associated with the Acquired Stores, including pre-opening and start-up expenses, and increased depreciation expense from the Company's capital expenditure program. The amortization of the excess reorganization value amounted to $5.2 million for the 24 weeks ended June 19, 1999. Interest expense, net of interest income, was $3.8 million for the 24 weeks ended June 20, 1998, equal to the $3.8 million for the 24 weeks ended June 19, 1999. Net interest expense reflects additional interest expense attributable to the Acquired Stores offset by lower interest rates and additional interest income from the interest bearing certificates of AWG. The Company recorded $0.7 million of income tax expense for the 24 weeks ended June 19, 1999, substantially all of which was deferred income tax. EBITDA decreased $0.2 million from $10.6 million, or 4.3% of sales, for the 24 weeks ended June 20, 1998, to $10.4 million, or 4.1% of sales for the 24 weeks ended June 19, 1999. Liquidity and Capital Resources On August 2, 1996, pursuant to the Plan of Reorganization, the Company entered into a loan agreement with National Bank of Canada, as agent and lender, and two other lenders, Heller Financial, Inc. and IBJ Schroder Bank and Trust Company (subsequently assigned its position to IBJ Schroder Business Credit Corporation), under which those lenders provided a working capital and letter of credit facility and a term loan (the "Old Loan Agreement"). The Old Loan Agreement, as amended, permitted the Company to borrow, under the working capital and letter of credit facility (the "Revolving Facility"), up to the lesser of (a) $32.0 million or (b) the applicable borrowing base. Funds borrowed under such facility are available for general corporate purposes of the Company. The Old Loan Agreement also provided the Company a $10.0 million term loan (the "Term Loan"), which was used to fund certain obligations of the Company under the Plan of Reorganization. On December 17, 1998, the Company executed a New Loan Agreement in exchange for the Old Loan Agreement in order to extend the maturity to August 2, 2002, to provide additional term loan borrowing capacity of $10.0 million for acquisitions ("Acquisition Term Loan"), to reduce interest rates, and to incorporate other technical changes. As of June 19, 1999, there were no borrowings outstanding under the Acquisition Term Loan facility. As of June 19, 1999, the original Term Loan has an outstanding balance of $7.1 million, and the Company is required to make quarterly principal paydowns of approximately $0.4 million. 11 The interest rate payable quarterly under the New Loan Agreement is based on the prime rate as defined plus a percentage which varies based on a number of factors, including: (a) whether it is the Revolving Facility or the Term Loan and the amount, if any, which is part of the Acquisition Term Loan; (b) the time period; and (c) whether the Company elects to use a London Interbank Offered Rate. The Revolving Facility provides for certain mandatory prepayments based on occurrence of certain defined and specified transactions. As of June 19, 1999, the Company had $19.7 million of borrowings, $0.9 million of letters of credit outstanding and $9.4 million of availability under its revolving credit facility. The obligations of the Company under the New Loan Agreement are collateralized by liens on, and a security interest in, substantially all of the assets of Homeland and are guaranteed by Holding. The New Loan Agreement, among other things, requires a maintenance of EBITDA, consolidated fixed charge ratio, debt-to-EBITDA ratio, current ratio, excess cash flow paydown, each as defined, and limits the Company's capital expenditures, incurrence of additional debt, consolidation and mergers, acquisitions and payments of dividends. As of the Effective Date, the Company entered into an Indenture with Fleet National Bank (predecessor to State Bank and Trust Company), as trustee, under which the Company issued $60.0 Million of New Notes. Interest on the New Notes accrues at the rate of 10% per annum and is payable on February 1 and August 1 of each year. The New Notes are uncollateralized and will mature on August 1, 2003. The Indenture relating to the New Notes has certain customary restrictions on consolidations and mergers, indebtedness, issuance of preferred stocks, asset sales and payment of dividends. Working Capital and Capital Expenditures. The Company's primary sources of capital have been borrowing availability under the revolving credit facility and cash flow from operations, to the extent available. The Company uses the available capital resources for working capital needs, capital expenditures and repayment of debt obligations. The Company's EBITDA (earnings before net interest expense, taxes, depreciation and amortization, and gain/loss on disposal of assets), as 12 presented below, is the Company's measurement of internally-generated operating cash for working capital needs, capital expenditures and payment of debt obligations: 12 weeks ended 24 weeks ended June 19, June 20, June 19, June 20, 1999 1998 1999 1998 Loss before income taxes $(1,653) $(2,288) $(3,301) $(4,219) Interest income (130) (97) (259) (195) Interest expense 2,013 1,945 4,013 3,994 (Gain) loss on disposal of assets (10) 4 (14) 36 Amortization of excess reorganization value 2,539 3,205 5,178 6,486 Depreciation and amortization 2,451 2,270 4,763 4,490 EBITDA $ 5,210 $ 5,039 $10,380 $10,592 As a percentage of sales 4.1% 4.1% 4.1% 4.3% As a multiple of interest expense, net of interest income 2.77x 2.73x 2.77x 2.79x Net cash provided by operating activities decreased $0.9 million, from cash provided of $4.9 million for 24 weeks ended June 20, 1998, to cash provided of $4.0 million for the 24 weeks ended June 19, 1999. The decrease principally reflects a smaller reduction in current accounts receivable and inventory relative to the prior year. Net cash used in investing activities increased $0.5 million, from $3.9 million for the 24 weeks ended June 20, 1998, to $4.4 million for the 24 weeks ended June 19, 1999. The increase primarily reflects the net investment of $1.1 million for the Acquired Stores. Net cash used by financing activities increased $1.4 million, from a nominal amount for the 24 weeks ended June 20, 1998, to $1.4 million for the 24 weeks ended June 19, 1999. The increase reflects additional repayments under the revolving credit facility relative to the prior year. The Company considers its capital expenditure program a critical and strategic part of the overall plan to support its market competitiveness. Cash capital expenditures for 1999 are expected to be at approximately $10.5 million. The New Loan Agreement limits the Company's capital expenditures for 1999 to $13.0 million in cash capital expenditures and $12.0 million for capital expenditures which are financed through capital leases or equipment loans. The estimated 1999 capital expenditures of $10.5 is expected to be invested 13 primarily in remodeling and maintenance of certain stores and does not include provisions for acquisitions. The funds for the capital expenditures are expected to be provided by internally-generated cash flows from operations and borrowings under the New Loan Agreement. On April 23, 1999, the Company completed its acquisition of nine stores from AWG. The net purchase price was $1.1 million which represents $5.6 million for real property, fixtures and equipment, goodwill and a non-compete agreement, plus $2.3 million for inventory, offset by $6.8 million in long- term debt assumed by the Company. The Company owns one store and leases the remaining eight from AWG. The one owned store in Pryor, Oklahoma was closed as a result of the proximity to an existing Company store. The Company financed this acquisition principally through the assumption of $6.8 million in long-term debt, together with increased borrowings under its working capital facility. The debt incurred by the Company to AWG is secured by liens on, and security interests in, the assets associated with the nine stores. Subsequent to the closing of the acquisition, the Company repaid the portion of its indebtedness to AWG which relates to inventory and AWG is releasing its liens on inventory. The loan documents with AWG include certain customary restrictions, including restrictions on the payment of dividends. Under the various agreements of the acquisition, the nine markets are subject to non- compete, supply and right-of-first-refusal agreements with AWG. In addition to the other customary terms associated with a right-of-first refusal agreement, the right-of-first refusal agreement provides for the repurchase by AWG of the nine stores based upon the occurrence of certain exercise events. The exercise events include, among other events, a change in control of Homeland and a transfer of more than 20% of the ownership interest of Holding or Homeland. The Company's ability to meet its working capital needs, meet its debt and interest obligations and meet its capital expenditure requirements is dependent on its future operating performance. There can be no assurance that future operating performance will provide positive net cash and, if the Company is not able to generate positive cash flow from its operations, management believes that this could have a material adverse effect on the Company's business. Year 2000 The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. As the Year 2000 approaches, systems using such programs may be unable to accurately process certain date-based information. Like many other companies, the Company is continuing to assess and modify its computer applications and business processes to provide for their continued functionality. Commencing in October 1996, the Company implemented a program of evaluating its computer systems to identify areas of potential concern, both with respect to information technology 14 and non-information technology systems (e.g., microcontrollers), remediating / replacing systems to address those potential areas of concern, and ultimately testing those changes for compliance. This continuing assessment has been implemented on a system-by-system basis and includes the readiness of external entities, such as vendors, which interface with the Company. Such program has included and will continue to include both consultation by Homeland with the vendors who provided its computer systems and internal testing by Homeland of those computer systems. The Company has completed its evaluation of systems and its detailed planning for remediating or replacing non-compliant systems. Remediation / replacement efforts are approximately 90% complete and testing procedures are approximately 80% complete. Testing procedures have included tests of certain systems for which remediation / replacement efforts were ultimately deemed unnecessary based on the positive results of such tests. The Company has assessed its vendors' Year 2000 readiness, principally through the review of questionnaires which the Company has circulated to its vendors. AWG, which supplies approximately 70% of the goods sold in the Company's stores, believes that it will be Year 2000 compliant. Although not all of the responses from other vendors have been conclusive, management does not presently expect that it will be adversely affected by its vendors' Year 2000 readiness. A significant portion of the Company's systems were found to be Year 2000 compliant without any remediation or replacement efforts. The area of most concern for management has been the point of sale ("POS") computers used in the operation of the stores. Internal tests conducted by Homeland generally reflect that its POS software is already Year 2000 compliant, however, the Company was unable to obtain reasonable assurance and support from the software provider to corroborate the conclusions of its POS testing of the current software. As a result, the Company has elected to upgrade its POS software to the Year 2000 version which the vendor states is compliant. The incremental cost is approximately $0.4 million and was installed during the second quarter of 1999. Additionally, the Company will further test the software upon full installation. The Company is also replacing older power management systems which operate various systems in the stores. The new systems are currently being installed and it is anticipated that the conversion will be completed by the end of the third quarter of 1999. The estimated capital investment is $1.3 million. The cost of the program is not expected to exceed $2.0 million, the majority of which is described above for power management systems and upgrades to POS software. Approximately $0.7 million has been incurred as of June 19, 1999. Homeland is funding these costs under its working capital facility. Based on its assessment, its progress to date, and its expectation of continued testing of systems, the Company believes that its efforts will result in Year 2000 compliance by the end of the third quarter of 1999. If circumstances arise indicating the Company's and / or vendor's efforts 15 will not be successful in achieving Year 2000 compliance, the Company believes it can develop and implement effective contingency plans in a timely manner. Due to the general uncertainty inherent in the Year 2000 process, primarily due to issues surrounding the Year 2000 readiness of third-party suppliers and vendors, a reasonable worst case scenario is difficult to determine at this time. The Company does not anticipate more than temporary isolated disruptions attributed to Year 2000 issues to affect either the Company or its primary vendors. The measurement of Year 2000 compliance is necessarily fluid and management will continue to monitor the extent of such compliance and the effects associated with any non-compliance. Safe Harbor Statements Under the Private Securities Litigation Reform Act of 1995 The statements made under Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations and other statements in this Form 10-Q which are not historical facts, particularly with respect to future net sales, are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could render them materially inaccurate or different. The risks and uncertainties include, but are not limited to, the effect of economic conditions, the impact of competitive promotional and new store activities, labor cost, capital constraints, availability and costs of inventory, changes in technology and the effect of regulatory and legal developments. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The following exhibit is filed as part of this report: Exhibit No. Description 27 Financial Data Schedule (b) Report on Form 8-K: The Company did not file any Form 8-K during the quarter ended June 19, 1999. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HOMELAND HOLDING CORPORATION Date: July 30, 1999 By: /s/ David B. Clark David B. Clark, President, Chief Executive Officer, and Director (Principal Executive Officer) Date: July 30, 1999 By: /s/ Wayne S. Peterson Wayne S. Peterson, Senior Vice President/ Finance, Chief Financial Officer and Secretary (Principal Financial Officer) EX-27 2
5 6-MOS JAN-01-2000 JUN-17-1999 6,080 0 9,790 905 48,173 66,499 98,269 25,451 157,538 37,982 60,000 0 0 49 27,840 157,538 250,944 250,944 191,792 191,792 58,699 0 3,754 (3,301) 709 (4,010) 0 0 0 (4,010) (.82) (.82)
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