Conformed Copy
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
X Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: March 23, 1996
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
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 No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 30, 1996.
Class A Common Stock, including redeemable common stock: 32,599,707 shares
Class B Common Stock: None
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED MARCH 23, 1996
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS......................... 1
Consolidated Balance Sheets
March 23, 1996 and December 30, 1995........ 1
Consolidated Statements of Operations
Twelve Weeks Ended March 23, 1996
and March 25, 1995.......................... 3
Consolidated Statements of Stockholders
Equity (Deficit)
Twelve Weeks Ended March 23, 1996 and
March 25, 1995............................. 4
Consolidated Statement of Cash Flows
Twelve Weeks Ended March 23, 1996 and
March 25, 1995.............................. 5
Notes to Consolidated Financial Statements
March 23, 1996.............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................. 8
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............. 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
March 23, December 30,
1996 1995
(Unaudited)
Current assets:
Cash and cash equivalents $ 4,283 $ 6,357
Receivables, net of allowance for uncollectible
accounts of $1,934 and $2,661 6,629 8,051
Inventories 40,477 42,830
Prepaid expenses and other current assets 1,765 2,052
Total current assets 53,154 59,290
Property, plant and equipment:
Land 9,919 9,919
Buildings 22,104 22,101
Fixtures and equipment 44,304 44,616
Land and leasehold improvements 23,726 23,629
Software 2,001 1,991
Leased assets under capital leases 28,966 29,062
Construction in progress 4,194 4,201
135,214 135,519
Less accumulated depreciation
and amortization 64,865 63,827
Net property, plant and equipment 70,349 71,692
Other assets and deferred charges 6,493 6,600
Total assets $129,996 $137,582
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' DEFICIT
March 23, December 30,
1996 1995
(Unaudited)
Current liabilities:
Accounts payable - trade $ 17,519 $ 17,732
Salaries and wages 1,247 1,609
Taxes 3,559 4,876
Accrued interest payable 5,198 2,891
Other current liabilities 12,446 14,321
Long-term obligations in default classified as current 98,161 100,467
Current portion of obligations under capital
leases 2,746 2,746
Current portion of restructuring reserve 3,062 3,062
Total current liabilities 143,938 147,704
Long-term obligations:
Obligations under capital leases 8,405 9,026
Other noncurrent liabilities 5,289 6,133
Noncurrent restructuring reserve 2,796 2,808
Total long-term obligations 16,490 17,967
Commitments and contingencies - -
Redeemable common stock, Class A, $.01 par value,
1,720,718 shares at March 23, 1996 and at
December 30, 1995, at redemption value 17 17
Stockholders' deficit:
Common stock
Class A, $.01 par value, authorized - 40,500,000
shares, issued - 33,748,482 shares at March 23,
1996 and at December 30, 1995,
outstanding - 30,878,989 shares 337 337
Additional paid-in capital 55,886 55,886
Accumulated deficit (82,531) (80,188)
Minimum pension liability adjustment (1,327) (1,327)
Treasury stock, 2,869,493 shares at March 23, 1996
and at December 30, 1995, at cost (2,814) (2,814)
Total stockholders' deficit (30,449) (28,106)
Total liabilities and stockholders' deficit $129,996 $137,582
The accompanying notes are an integral part
of these consolidated financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 23, March 25,
1996 1995
Sales, net $124,350 $178,009
Cost of sales 94,207 135,485
Gross profit 30,143 42,524
Selling and administrative 27,980 39,969
Financial restructuring costs 1,350 -
Operating profit 813 2,555
Interest expense 3,156 4,411
Loss before income taxes (2,343) (1,856)
Income tax expense - -
Net loss $ (2,343) $ (1,856)
Net loss per common share $ (.07) $ (.05)
Weighted average shares outstanding 32,599,707 34,651,117
The accompanying notes are an integral part
of these consolidated financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
(Unaudited)
Minimum
Class A Pension Total
Common Stock Paid-in Accumulated Liability Treasury Stock Stockholders'
Shares Amount Capital Deficit Adjustment Shares Amount Equity (Deficit)
Balance, December 31,1994 31,604,989 $316 $53,896 $(48,398) $ - 726,000 $(1,743) $ 4,071
Purchase of treasury stock 455,000 5 224 - - 455,000 229) -
Net loss - - - (1,856) - - - (1,856)
Balance, March 25, 1995 32,059,989 $321 $54,120 $(50,254) $ - 1,181,000 $(1,972) $ 2,215
Balance, December 30,1995 33,748,482 $337 $55,886 $(80,188) $(1,327) 2,869,493 $(2,814) $(28,106)
Net loss - - - (2,343) - - - (2,343)
Balance, March 23, 1996 33,748,482 $337 $55,886 $(82,531) $(1,327) 2,869,493 $(2,814) $(30,449)
The accompanying notes are an integral part
of these consolidated financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 23, March 25,
1996 1995
Cash flows from operating activities:
Net loss $(2,343) $(1,856)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 1,658 3,681
Amortization of financing costs 186 334
Gain on disposal of assets (78) (27)
Amortization of beneficial interest in operating
leases 30 60
Change in assets and liabilities:
Decrease in receivables 1,422 4,305
Decrease in receivable for taxes - 719
Decrease in inventories 2,353 9,649
Decrease in prepaid expenses and other current assets 287 1,685
Increase in other assets and deferred charges (117) (51)
Decrease in accounts payable - trade (213) (4,623)
Increase (decrease) in salaries and wages (362) 476
Increase (decrease) in taxes (1,318) 500
Increase (decrease) in accrued interest payable 2,307 (1,912)
Decrease in other current liabilities (1,875) (1,339)
Decrease in noncurrent restructuring reserve (12) (1,459)
Decrease in other noncurrent liabilities (825) (554)
Net cash provided by operating activities 1,100 9,588
Cash flows used in investing activities:
Capital expenditures (307) (98)
Cash received from sale of assets 60 -
Net cash used in investing activities (247) (98)
Cash flows used by financing activities:
Borrowings under revolving credit loans 25,067 20,440
Payments under revolving credit loans (27,373) (25,413)
Net borrowings under swing loans - 25
Principal payments under notes payable - (750)
Principal payments under capital lease obligations (621) (1,258)
Payments to acquire treasury stock - (229)
Net cash used by financing activities (2,927) (7,185)
Net increase (decrease) in cash and cash equivalents (2,074) 2,305
Cash and cash equivalents at beginning of period 6,357 339
Cash and cash equivalents at end of period $ 4,283 $ 2,644
Supplemental information:
Cash paid during the period for interest $ 604 $ 5,990
The accompanying notes are an integral part
of these financial statements.
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Preparation of Consolidated Financial Statements:
The accompanying unaudited consolidated financial statements
of Homeland Holding Corporation ("Holding") and its
Subsidiary, Homeland Stores, Inc. ("Stores" and together
with Holding, the "Company"), reflect all adjustments
consisting only of normal and recurring adjustments which
are, in the opinion of management, necessary to present
fairly 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 December 30, 1995 and the notes thereto.
2. Accounting Policies:
The policies of the Company are summarized in the
consolidated financial statements of the Company for the 52
weeks ended December 30, 1995 and the notes thereto.
3. Operational Restructuring:
On April 21, 1995, the Company sold 29 of its stores and its
distribution center to Associated Wholesale Grocers, Inc.
("AWG"), pursuant to a strategic plan approved by the Board
of Directors in December 1994. In connection with the plan,
the Company closed 14 underperforming stores in 1995 and
sold one store and expects to close two additional stores in
the second quarter of 1996. During the first quarter of
1996, the Company paid expenses associated with the
operational restructuring as follows:
Payments applied
against
operational
Operational restructuring Operational
restructuring reserve for restructuring
reserve at the 12 weeks ended reserve at
December 30, 1995 March 23, 1996 March 23, 1996
Expenses associated with the
planned store closings,
primarily occupancy costs
from closing date to lease
termination or sublease date $4,860 $ (12) $4,848
Expenses associated with the AWG
transaction, primarily service
and equipment contract
cancellation fees 58 - 58
Estimated severance costs
associated with the AWG
transaction 927 - 927
Legal and consulting fees
associated with the
AWG transaction 25 - 25
Operational restructuring
reserve $5,870 $ (12) $5,858
The separately identifiable revenue and store contribution to
operating profit related to the stores sold to AWG or closed
and expenses related to the warehouse facility are as follows:
12 weeks
ended
March 25,
1995
Sales, net $53,354
Store contribution to
operating profit before
allocation of administrative
and advertising expenses 1,808
Warehouse expenses 2,945
4. Subsequent Events:
On May 13, 1996, the Company filed chapter 11 petitions with
the United States Bankruptcy Court for the District of
Delaware. Simultaneous with the filings of such petitions,
the Company filed a plan of reorganization and a disclosure
statement, which sets forth the terms of a proposed
restructuring of the Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net sales for the first quarter ended March 23, 1996
decreased to $124.4 million, a 30.1% decline over the
corresponding period of 1995. The decrease in net sales was due
primarily to the sale of 29 stores to AWG on April 21, 1995 and
the closing of 14 stores in 1995, 5 of which occurred during the
first quarter of 1995 and the remainder over the balance of 1995.
Comparable store sales decreased by 0.2% compared to the
corresponding period of 1995. The decrease in comparable store
sales was primarily due to higher 1995 general merchandise sales
resulting from certain continuity programs that did not recur in
1996.
Gross profit as a percentage of sales increased to
24.2% in the first quarter of 1996 compared with 23.9% in the
first quarter of 1995. The improvement was primarily due to
higher vendor allowances and rebates, which were lower in 1995
due to the pending sale of the Company's distribution center and
29 stores to AWG. The higher vendor allowances and rebates are
somewhat offset by the higher cost of goods purchased through AWG
versus self-supply.
Selling and administrative expenses increased 0.05% to
22.50% in the first quarter of 1996 from 22.45% in the first
quarter of 1995. This increase was due to higher advertising
expenses and a new retail store lighting program implemented
throughout 1995 and continuing in 1996, offset by lower corporate
office and related administrative expenses.
The Company incurred $1.4 million of financial
restructuring expenses in the first quarter of 1996, primarily in
professional fees.
Interest expense for the first quarter of 1996
decreased to $3.2 million from $4.4 million in the first quarter
of 1995, due primarily to the redemption of $25.0 million of
senior secured notes on June 1, 1995.
Liquidity and Capital Resources
The primary sources of liquidity for the Company's
operations have been borrowings under credit facilities and
internally generated funds. In March 1992, the Company
refinanced its indebtedness by entering into an Indenture with
United States Trust Company of New York, as trustee, pursuant to
which the Company has outstanding as of May 30, 1996, $59.4
million of Series C Senior Secured Fixed Rate Notes due 1999,
$26.1 million of Series D Senior Secured Floating Rate Notes due
1997 and $9.5 Series A Senior Secured Floating Rates Notes due
1997 (collectively the "Senior Notes").
On April 21, 1995, the Company entered into a Revolving
Credit Agreement (the "Revolving Credit Agreement") with National
Bank of Canada, ("NBC"), as agent and as lender, Heller
Financial, Inc., and any other lenders thereafter parties
thereto. The Revolving Credit Agreement permits borrowings up to
$25 million, subject to a borrowing base, for working capital
needs including certain letters of credit.
In December 1995, the Company informed the lenders
under the Revolving Credit Agreement and the trustee for the
Senior Notes that it would be unable to comply with certain year-
end financial maintenance covenants (the Consolidated Fixed
Change Coverage Ratio and Debt-to EBITDA Ratio) contained in the
Revolving Credit Agreement and the Indenture. The Revolving
Credit Agreement lenders and the trustee under the Indenture
(acting at the direction of a majority in principal amount of the
Senior Notes then outstanding) waived compliance by the Company
with these financial covenants through the earlier to occur of
April 15, 1996 and the date on which the Company defaulted on any
of its payment obligations with respect to the Senior Notes.
On March 1, 1996, the Company failed to make the
scheduled interest payment on its Senior Notes in the amount of
approximately $4.5 million. This payment default resulted in a
termination of the December 1995 waiver under the indenture.
Notwithstanding such termination, an ad hoc committee (the
"Committee"), representing approximately 80% of the Company's
outstanding Senior Notes, advised the Company that, so long as
restructuring negotiations between the Company and the Committee
were proceeding, the Committee would not exercise any contractual
or other remedies in response to the interest payment default.
Moreover, the lenders under the Revolving Credit Agreement agreed
that their waiver would continue to be effective through May 20,
1996, notwithstanding such payment default.
On May 13, 1996, the Company filed chapter 11 petitions
with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). Simultaneous with the filing
of such petitions, the Company filed a "pre-arranged" plan of
reorganization (the "Plan") and a disclosure statement, which
sets forth the terms of a proposed restructuring of the Company.
The restructuring is designed to reduce substantially the
Company's debt service obligations and labor costs and to create
a capital and cost structure that will allow the Company to
maintain and enhance the competitive position of its business and
operations. The restructuring was negotiated with, and is
supported by, the lenders under the Company's existing revolving
credit facility, the Committee and the Company's labor unions.
As part of the restructuring, the $95 million of
Homeland's outstanding Senior Notes, plus accrued interest of
approximately $6.6 million, will be canceled and such noteholders
will receive (in the aggregate) $60 million face amount of new
senior subordinated notes and $1.5 million in cash. The new
senior subordinated notes will mature in 2003, bear interest
semi-annually at a rate of 10% per annum and will not be secured.
Additionally, it is anticipated that the noteholders and the
Company's general unsecured creditors will receive approximately
60% and 35%, respectively, of the equity of the reorganized
Holding (assuming total unsecured claims of approximately $63
million, including noteholders's unsecured claims). Holding's
existing equity holders will receive 5% of the new equity, plus
five-year warrants to purchase an additional 5% of such equity.
An integral part of the restructuring is the Company's
previously-announced deal with its labor unions to modify certain
elements of the Company's existing collective bargaining
agreements. The modified collective bargaining agreements will
provide for, among other things, wage and benefit modifications,
the buyout of certain employees and the issuance and purchase of
new equity to a trust acting on behalf of the unionized
employees. The modified collective bargaining agreements are
conditioned on, and will become effective upon, the consummation
of the restructuring.
On May 13, 1996, the Company also entered into a
debtor-in possession lending facility ("DIP Facility"), with its
existing bank group to provide up to $27 million of working
capital financing. This facility has been approved by the
Bankruptcy Court on an interim basis, with a stipulation that the
aggregate principal outstanding indebtedness does not exceed
$21.1 million, until a final approval hearing scheduled on June
7, 1996. Management anticipates that the Bankruptcy Court will
approve the DIP Facility at the June 7, 1996 hearing. Management
also believes that the DIP Facility will be adequate to meet the
Company's working capital requirements while it is operating
under the auspices of the Bankruptcy Court.
Upon the final approval of the Bankruptcy Court, the
DIP Facility will permit the Company to borrow up to the lesser
of $27 million and the Borrowing Base. The borrowings under the
DIP Facility bears interest at a rate equal to the prime rate
announced publicly by NBC from time to time in New York, New York
plus two percent. Interest is payable quarterly in arrears on
the last day of March, June, September and December, commencing
on June 30, 1996. The DIP Facility will mature on the earlier of
(1) one year from the date of filing of the Company's voluntary
petition under Chapter 11 of the United States Federal Bankruptcy
Code, and (2) the effective date of the Plan.
The DIP Facility provides that NBC, on behalf of itself
and as agent for the lenders under the DIP Facility, will have
liens on, and security interests in, all of the pre-petition and
post-petition property of the Company (other than the collateral
under the Indenture), which liens and security interests will
have priority over substantially all other liens on, and security
interests in, the Company's property (other than properly
perfected liens and security interests which existed prior to the
date of filing of the Company's voluntary petition under the
Bankruptcy Code).
The DIP Facility includes certain customary restrictive
covenants, including restrictions on acquisitions, asset
dispositions, capital expenditures, consolidations and mergers,
distributions, divestitures, indebtedness, liens and security
interests and transactions with affiliates. The DIP Facility
also requires the Company to comply with certain financial
maintenance and other covenants. At May 30, 1996, the net unused
and available amount under the DIP Facility was $12.1 million
(assuming the Bankruptcy Court approves the DIP Facility).
On the effective date of the Plan (the "Effective
Date") the Company anticipates that it will enter into a new bank
credit agreement or an amendment and restatement of its existing
credit agreement (the "New Credit Agreement"), the general terms
of which must be approved by the Committee. As of the date
hereof, the Company is in discussions with a number of banks
potentially interested in providing this credit facility,
including the lenders under its existing credit facility. There
can be no assurance, however, that any bank or group of banks
will agree to provide a bank credit facility on terms acceptable
to the Company and the Committee.
The Company anticipates that the New Credit Agreement
would provide for up to $37.5 million in borrowings, including
approximately $27.5 million under a revolving credit facility
(subject to borrowing base requirements) and a $10 million term
loan. Proceeds from the term loan would be used primarily to
fund certain obligations under the modified collective bargaining
agreements and to pay certain transaction expenses relating to
the restructuring. The Company expects that its obligations
under the New Credit Agreement would be secured by a security
interest in, and liens on, substantially all of the Company's
assets and would be guaranteed by Holding.
The Company expects to complete the restructuring by
mid-summer 1996. Management believes the restructuring will have
a favorable effect on the Company's liquidity; however, there can
be no assurance that future operating cash flows will yield
positive net cash flows or that the restructuring will be
successful. If the Company is not able to generate positive cash
flows from its operation or if the restructuring is not
consummated successfully, management believes that this could
have a material adverse effect on the Company's business and the
continuing viability of the Company.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as
part of this report:
Exhibit No. Description
10uu.3 Ratification and Amendment
Agreement to the $27,000,000
Amended and Restated Revolving
Credit Agreement, dated as of May
10, 1996, among Homeland, Holding,
National Bank of Canada, as Agent
and lender, Heller Financial, Inc.
and any other lenders thereafter
parties thereto.
27 Financial Data Schedule.
(b) Report on Form 8-K: The following report on Form
8-K was filed during the quarter ended March 23,
1996.
Date Description
March 8, 1996 Interest Payment Default and
Waiver Agreement.
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: June 4, 1996 By: /s/ James A. Demme
James A. Demme, President,
Chief Executive Officer and
Director (Principal Executive
Officer)
Date: June 4, 1996 By: /s/ Larry W. Kordisch
Larry W. Kordisch, Executive
Vice President/Finance,
Treasurer, Chief Financial
Officer and Secretary
(Principal Financial Officer)
Date: June 4, 1996 By: /s/ Terry M. Marczewski
Terry M. Marczewski, Chief
Accounting Officer, Assistant
Treasurer and Assistant
Secretary (Principal
Accounting Officer)