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
X Exchange Act of 1934
For the quarterly period ended: March 28, 1998
OR
Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act
of 1934
For the transition period from ________ to _________
Commission file No.: 33-48862
HOMELAND HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 73-1311075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 Northwest Expressway
Oil Center-East, Suite 1100
Oklahoma City, Oklahoma 73112
(Address of principal executive offices) (Zip Code)
(405) 879-6600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution under a plan confirmed by
a court. Yes X No ___
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of May 1, 1998:
Homeland Holding Corporation Common Stock: 4,976,172 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED MARCH 28, 1998
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.......................................... 1
Consolidated Balance Sheets
March 28, 1998, and January 3, 1998......................... 1
Consolidated Statements of Operations
Twelve Weeks ended March 28, 1998,
and March 22, 1997.......................................... 3
Consolidated Statements of Stockholders' Equity (Deficit)
Twelve Weeks ended March 28, 1998,
and March 22, 1997.......................................... 4
Consolidated Statements of Cash Flows
Twelve Weeks ended March 28, 1998,
and March 22, 1997.......................................... 5
Notes to Consolidated Financial Statements................... 6
ITEM 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations.................................... 7
PART II OTHER INFORMATION
ITEM 5. Other Information............................................. 10
ITEM 6. Exhibits and Reports on Form 8-K.............................. 11
i
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 January
28, 3,
1998 1998
(unaudited)
Current assets:
Cash and cash equivalents $ 5,031 $ 4,778
Receivables, net of allowance
for uncollectible 6,210 9,313
accounts of $1,193 and $1,198
Inventories 45,490 45,946
Prepaid expenses and other
current assets 2,337 2,581
Total current assets 59,068 62,618
Property, plant and equipment:
Land and land improvements 9,409 9,303
Buildings 20,010 19,995
Fixtures and equipment 23,387 22,267
Leasehold improvements 13,481 13,459
Software 4,993 4,991
Leased assets under capital leases 8,610 8,610
Construction in progress 3,060 2,769
82,950 81,394
Less, accumulated depreciation
and amortization 13,473 11,299
Net property, plant and equipment 69,477 70,095
Reorganization value in excess
of amounts allocable to identifiable
assets, less accumulated amortization
of $23,627 at March 28, 1998, and $20,346
at January 3, 1998 19,403 23,162
Other assets and deferred charges 10,096 10,166
Total assets $ 158,044 $ 166,041
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
1
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
March January
28, 3,
1998 1998
(unaudited)
Current liabilities:
Accounts payable - trade $ 17,831 $ 18,941
Salaries and wages 1,706 2,508
Taxes 3,014 3,605
Accrued interest payable 1,345 2,619
Other current liabilities 8,475 10,042
Current portion of long-term 1,753 1,728
debt
Current portion of obligations under
capital leases 1,286 1,286
Total current liabilities 35,410 40,729
Long-term obligations:
Long-term debt 78,332 78,353
Obligations under capital leases 2,304 2,608
Other noncurrent liabilities 2,057 2,027
Total long-term obligations 82,693 82,988
Stockholders' equity:
Common Stock
Class A, $0.01 par value, authorized
- 7,500,000 shares, issued 4,822,857
shares at March 28, 1998, and 4,820,637
at January 3, 1998 48 48
Additional paid-in capital 56,067 56,040
Accumulated deficit (16,174) (13,764)
Total stockholders' equity 39,941 42,324
Total liabilities and stockholders'
equity 158,044 166,041
The accompanying notes are an integral part
of these consolidated financial statements.
2
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share and per share amounts)
(Unaudited)
12 12
weeks weeks
ended ended
March 28, March 22,
1998 1997
Sales, net $ 121,403 $ 120,050
Cost of sales 91,922 90,878
Gross profit 29,481 29,172
Selling and administrative expenses 26,180 25,187
Amortization of excess reorganization value 3,281 3,460
Operating profit 20 525
Interest expense 1,951 1,982
Loss before income taxes (1,931) (1,457)
Income tax expense 479 801
Net loss $ (2,410) $ (2,258)
Basic and diluted earnings per share:
Net loss per common share $ (0.50) $ (0.47)
Weighted average shares outstanding 4,822,112 4,758,025
The accompanying notes are an integral part
of these consolidated financial statements.
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share amounts)
(Unaudited)
part 1 of 2
Common Stock Additional
Paid-In Accumulated
Shares Amount Capital Deficit
Balance, December 28, 1996 4,758,025 $ 48 $56,013 $ (3,120)
Net Loss - - - (2,258)
Balance, March 22, 1997 4,758,025 $ 48 $56,013 $ (5,378)
Balance, January 3, 1998 4,820,637 $ 48 $56,040 $ (13,764)
Net Loss - - - (2,410)
Issuance of common stock 2,220 - 27 -
Balance, March 28, 1998 4,822,857 $ 48 $56,067 $ (16,174)
part 2 of 2
Total
Stockholders'
Equity (Deficit)
Balance, December 28, 1996 $ 52,941
Net Loss (2,258)
Balance, March 22, 1997 $ 50,683
Balance, January 3, 1998 $ 42,324
Net Loss (2,410)
Issuance of common stock 27
Balance, March 28, 1998 $ 39,941
The accompanying notes are an integral part
of these consolidated financial statements.
4
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 28, March 22,
1998 1997
Cash flows from operating activities:
Net loss $ (2,410) $ (2,258)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 2,192 1,717
Amortization of excess reorganization value 3,281 3,460
Amortization of financing costs 17 14
Loss on disposal of assets 32 7
Amortization of beneficial interest in
operating leases 28 28
Adjustment to excess reorganization value - 292
Deferred income taxes 479 801
Change in assets and liabilities:
Decrease in receivables 3,103 2,801
Decrease in inventories 456 477
Decrease in prepaid expenses and
other current assets 244 210
Increase (decrease) in other assets and
deferred charges 17 (101)
Decrease in accounts payable - trade (1,110) (559)
Decrease in salaries and wages (802) (832)
Increase (decrease) in taxes (591) 148
Decrease in accrued interest payable (1,274) (1,513)
Decrease in other current liabilities (1,567) (1,262)
Increase in other noncurrent liabilities 37 108
Net cash provided by operating activities 2,132 3,538
Cash flow used in investing activities:
Capital expenditures (1,605) (1,254)
Cash received from sale of assets - 12
Net cash used in investing activities (1,605) (1,242)
Cash flows used by financing activities:
Borrowings under revolving credit loans 26,416 29,595
Payments under revolving credit loans (26,398) (27,640)
Proceeds from issuance of common stock 27 -
Principal payments under note payable (15) (15)
Principal payments under capital lease obligations (304) (346)
Net cash provided by (used in) financing
activities (274) 1,594
Net increase (decrease) in cash and cash
equivalents 253 3,890
Cash and cash equivalents at beginning of period 4,778 1,492
Cash and cash equivalents at end of period $ 5,031 $ 5,382
Supplemental information:
Cash paid during the period for interest $ 3,312 $ 3,490
The accompanying notes are an integral part
of these consolidated financial statements.
5
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
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") and its Subsidiary,
Homeland Stores, Inc. ("Stores" and, together with Holding, 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 3, 1998, 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 53 weeks ended January 3, 1998, and the notes thereto.
3. Earnings Per Share:
Options to purchase 298,500 shares of common stock with a
weighted average exercise price of $6.80 were outstanding at March 28,
1998 but were not included in the computation of diluted earnings per
share because the effect would be antidilutive.
6
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
March March
28, 22,
1998 1997
Net sales 100.0% 100.0%
Cost of sales 75.7 75.7
Gross profit 24.3 24.3
Selling and administrative 21.6 21.0
Amortization of excess
reorganization value 2.7 2.9
Operating profit - 0.4
Interest expense 1.6 1.6
Loss before income taxes (1.6) (1.2)
Income tax provision 0.4 0.7
Net loss (2.0) (1.9)
Results of Operations
Net sales for the first quarter ended March 28, 1998,
were $121.4 million, an increase of 1.1% over the corresponding
period of 1997. The increase in net sales was due to an additional
four stores in operation during the quarter versus the same quarter
a year ago. The higher sales from the additional stores were
partially offset by a decline in comparable store sales of 4.4%. The
decrease in comparable store sales was due primarily to competitive
store openings after the 1st quarter of 1997. In addition, to a
lesser degree, comparable store sales were affected by a shift in the
1998 New Year's Day selling week. The 1997 New Year's Day selling
week was included in the first quarter of 1997. This is traditionally
a strong sales' week. Because the Company had a 53-week fiscal
year in 1997, the 1998 New Year's Day sales week was included in
fiscal 1997 instead of the first quarter of 1998.
There were no new competitive store openings during the
first quarter of 1998. Management believes that this, combined with
improvement in stores that were affected by competitive openings
in 1997, will result in improved comparable store sales in the
second quarter.
7
Gross profit as a percentage of net sales remained stable
and was 24.3% for both the first quarter of 1998 and the first
quarter of 1997.
Selling and administrative expenses increased by 0.6%, as a
percentage of net sales, to 21.6% in the first quarter of 1998 from
21.0% in the first quarter of 1997. The primary causes of the
increase are additional depreciation expense resulting from higher
levels of capital expenditures and higher wages from the minimum wage
increase. The last minimum wage increase took effect September 1,
1997.
The Company recorded amortization of excess reorganization
value of $3.3 million for the twelve weeks ended March 28, 1998.
For the 12 weeks ended March 22, 1997, the Company recorded $3.5
million for amortization of excess reorganization value. The
amortization of the excess reorganization value will negatively
affect earnings for the next six fiscal quarters.
Interest expense for the first quarter of 1998 was $2.0
million and did not change from the first quarter of 1997. Average
borrowing increased but the additional interest expense from the
higher borrowing was offset by higher interest income from the
interest bearing certificate of Associated Wholesale Grocers, Inc.
The Company recorded an income tax provision of $0.5 million
for the first quarter of 1998. The effective tax rate differs from
the statutory rate due to amortization of excess reorganization
value, which is not deductible for income tax purposes. The net
operating loss carryforwards available for utilization in 1998 are
limited to approximately $3.3 million, the benefit of which is being
recorded as a reduction of excess reorganization value rather than a
reduction of income tax expense.
EBITDA (as defined hereinafter) amounted to $5.5 million or
4.6% of net sales in the first quarter of 1998 as compared to $5.7
million or 4.8% of net sales for the first quarter of 1997. The
decrease in EBITDA is due primarily to the increased selling and
administrative expenses and was somewhat offset by the increased gross
margin contribution that was a result of increased sales.
Net loss for the 12 weeks ended March 28, 1998, was $2.4
million or $0.50 per share compared to a net loss of $2.3 million or
$0.47 per share for the corresponding period of 1997.
The Company is amortizing its excess reorganization value
of $45 million over a three-year period, and such amortization has
affected earnings significantly. Income before amortization of excess
reorganization value for the 12 weeks ended March 28, 1998, was
$0.9 million or $0.18 per share.
8
Liquidity and Capital Resources
The primary sources of liquidity and capital for the
Company's operations have been borrowings under the revolving credit
facility and internally-generated funds.
The Company's EBITDA (earnings before interest, taxes,
depreciation and amortization) before financial restructuring costs,
as presented below, is the Company's measurement of internally-
generated cash for working capital needs, capital expenditures and
payment of debt obligations:
12 weeks ended
March March
28, 22,
1998 1997
Loss before income taxes (1,931) (1,457)
Interest expense 1,951 1,982
Amortization of reorganization value 3,281 3,460
Depreciation and amortization 2,220 1,745
EBITDA 5,521 5,730
As a percentage of sales 4.55% 4.77%
As a multiple of interest expense 2.83x 2.89x
Cash flow from operations provided $2.1 million for the
12 weeks ended March 28, 1998, and $3.5 million for the 12 weeks ended
March 22, 1997. The decrease in cash flow from operations for the
12 weeks ended March 28, 1998, was primarily due to an increase in
the selling and administrative expense and decreases in trade accounts
payable and taxes.
The investing activities of the Company used net cash of
$1.6 million and $1.2 million for the 12 weeks ended March 28, 1998,
and March 22, 1997, respectively. The funds for the first quarter
1998 investing activities were provided primarily by internally-
generated cash.
9
Financing activities of the Company used net cash of
$0.3 million for the 12 weeks ended March 28, 1998, and provided net
cash of $1.6 million for the 12 weeks ended March 22, 1997.
As of March 28, 1998, the Company had $10.8 million of
borrowings and $3.3 million of letters of credit outstanding under
its $32.0 million revolving credit facility. The revolving credit
facility provides for borrowings to the lesser of (a) $32.0
million or (b) the applicable borrowing base. The applicable
borrowing base on March 28, 1998, was $29.7 million. Management
believes that the revolving credit facility and cash flow from
operations will be adequate for the Company's short-term requirements.
The Company is continuing to improve its store
facilities through its capital expenditure program to maintain and
enhance its market competitiveness. Cash capital expenditures for
1998 are expected to be $12.9 million. The credit agreement limits
the Company to $13.0 million cash capital expenditures for 1998. The
Company is also allowed $7.0 million of new capital leases each year.
Safe Harbor Statements Under the Private Securities Litigation Reform
Act of 1995
The statements made under Item: 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.
PART II - OTHER INFORMATION
Item 5. Other Information
Mr. Larry W. Kordisch resigned his position as Executive
Vice President/Finance, C.F.O. and Secretary effective May 15,
1998. The Company is currently recruiting a replacement for
Mr. Kordisch.
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit: 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 March 28, 1998.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
HOMELAND HOLDING CORPORATION
Date: May 8, 1998 By: /s/ David B. Clark_____________________
David B. Clark, President,
Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 8, 1998 By: /s/ Larry W. Kordisch__________________
Larry W. Kordisch, Executive
Vice President/
Finance, Chief Financial
Officer and Secretary
(Principal Financial Officer)