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 24, 2001
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 3, 2001:
Homeland Holding Corporation Common Stock: 4,925,871 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE 12 WEEKS ENDED MARCH 24, 2001
INDEX
Page
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements 1
Consolidated Balance Sheets
March 24, 2001, and December 30, 2000 1
Consolidated Statements of Operations
and Comprehensive Income
Twelve Weeks ended March 24, 2001, and
March 25, 2000 3
Consolidated Statements of Cash Flows
Twelve Weeks ended March 24, 2001, and
March 25, 2000 4
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
ITEM 3. Exhibits and Reports on Form 8-K 16
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
(Unaudited)
March 24, December 30,
2001 2000
Current assets:
Cash and cash equivalents $ 6,841 $ 10,198
Receivables, net of allowance
for uncollectible accounts of
$318 and $331 9,756 14,079
Inventories 50,319 54,707
Prepaid expenses and other
current assets 2,106 1,610
Total current assets 69,022 80,594
Property, plant and equipment:
Land and land improvements 8,797 8,797
Buildings 21,694 21,691
Fixtures and equipment 43,468 43,305
Leasehold improvements 21,238 21,202
Software 7,775 7,760
Leased assets under capital leases 9,892 9,886
Construction in progress 226 165
113,090 112,806
Less, accumulated depreciation
and amortization 43,532 41,036
Net property, plant and equipment 69,558 71,770
Other assets and deferred charges 27,602 27,394
Total assets $ 166,182 $ 179,758
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
1
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
March 24, December 30,
2001 2000
Current liabilities:
Accounts payable - trade $ 21,098 $ 28,869
Salaries and wages 1,916 2,107
Taxes 3,250 3,606
Accrued interest payable 1,111 2,819
Other current liabilities 6,330 7,013
Current portion of long-term debt 3,860 3,860
Current portion of obligations
under capital leases 564 564
Total current liabilities 38,129 48,838
Long-term obligations:
Long-term debt 102,719 104,592
Obligations under capital leases 1,861 1,996
Other noncurrent liabilities 2,254 3,235
Total long-term obligations 106,834 109,823
Stockholders' equity:
Common stock $0.01 par value,
authorized - 7,500,000 shares,
issued 4,925,871 shares at
March 24, 2001, and December
30, 2000, respectively 49 49
Additional paid-in capital 56,274 56,274
Accumulated deficit (34,416) (34,538)
Accumulated other comprehensive
income (688) (688)
Total stockholders' equity 21,219 21,097
Total liabilities and stockholders'
equity $ 166,182 $ 179,758
The accompanying notes are an integral part
of these consolidated financial statements
2
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)
(Unaudited
12 weeks 12 weeks
ended ended
March 24, March 25,
2001 2000
Sales, net $ 125,533 $ 136,607
Cost of sales 94,686 104,599
Gross profit 30,847 32,008
Selling and administrative expenses 28,326 29,197
Operating profit 2,521 2,811
Gain on disposal of assets 1 27
Interest income 202 172
Interest expense (2,602) (2,342)
Income before income taxes 122 668
Income tax provision - (254)
Net income $ 122 $ 414
Other comprehensive income - -
Comprehensive income $ 122 $ 414
Net income (loss) per share:
Basic $ 0.02 $ 0.08
Diluted $ 0.02 $ 0.08
Weighted average shares outstanding:
Basic 4,925,871 4,919,357
Diluted 4,925,871 4,962,174
The accompanying notes are an integral part
of these consolidated financial statements.
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 24, March 25,
2001 2000
Cash flows from operating activities:
Net income (loss) $ 122 $ 414
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 2,486 2,521
Amortization of beneficial
interest in operating leases 28 28
Amortization of goodwill 175 126
Amortization of financing costs 16 13
Gain on disposal of assets (1) (27)
Deferred income taxes - 224
Change in assets and liabilities:
Decrease in receivables 4,323 4,998
Decrease in inventories 4,388 200
Increase in prepaid expenses
and other current assets (496) (720)
Increase in other assets and
deferred charges (528) (42)
Decrease in accounts payable -
trade (7,771) (3,128)
Decrease in salaries and wages (191) (1,449)
Increase (decrease) in taxes (356) 188
Decrease in accrued interest
payable (1,708) (1,540)
Increase (decrease) in other
current liabilities (683) 25
Decrease in other noncurrent
liabilities (969) (470)
Total adjustments (1,287) 947
Net cash provided by (used in)
operating activities (1,165) 1,361
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
4
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS, continued
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks 12 weeks
ended ended
March 24, March 25,
2001 2000
Cash flows used in investing activities:
Capital expenditures (188) (999)
Store acquisition - (145)
Cash received from sale of assets 4 426
Net cash used in investing
Activities (184) (718)
Cash flows from financing activities:
Payments under term loan (595) (412)
Borrowings under revolving credit loans 30,047 45,080
Payments under revolving credit loans (31,006) (44,094)
Payment on tax notes (13) (12)
Principal payments under notes payable (306) (3,058)
Principal payments under capital lease
obligations (135) (138)
Net cash used in financing
activities (2,008) (2,634)
Net decrease in cash and cash equivalents (3,357) (1,991)
Cash and cash equivalents at beginning
of period 10,198 10,237
Cash and cash equivalents at end
of period $ 6,841 $ 8,246
Supplemental information:
Cash paid during the period
for interest $ 3,973 $ 3,676
Cash paid during the period for
income taxes $ - $ 30
Supplemental schedule of noncash investing
and financing activities:
Debt assumed in acquisition of stores $ - $ 6,162
The accompanying notes are an integral part
of these 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 December 30, 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 December 30, 2000, and the notes thereto.
3. January 2001 Store Closings:
In December 2000, the Company committed to a plan to close seven
stores in January 2001 and recorded a store closing charge of $4,246. The
charge included the write-down of property, plant and equipment and other
assets of $2,010, inventory write-downs of $1,423, which was recorded as
a part of cost of sales, and holding costs of $813. Holding costs
primarily consist of obligations under operating leases and related
expenses expected to be paid over the remaining lease terms which range
from 2001 to 2004.
4. Business Conditions and Liquidity
The markets in which the Company operates remain increasingly
competitive negatively affecting the Company's liquidity. The Company's
near and long-term operating strategies focus on improving sales,
improving operational efficiencies, and the productivity of assets. The
Company intends to pursue its merchandising strategy in an attempt to
increase its sales and the Company has devised plans to improve its gross
margin and expense performance. Also, if necessary, the Company will
close or sell under-performing stores or assets. Currently, the Company
has letters of intent regarding certain asset sales to transfer leases
and sell property related to four of the seven stores closed in January
2001 and to sell a parcel of undeveloped land. The estimated proceeds
from these asset sales are $1.4 million and the transactions are subject
to, among other things the signing of definitive agreements for each
6
transaction. The Company has also retained McDonald Investments Inc. as
a financial advisor to explore options for re-financing and raising
capital.
Adequate liquidity in 2001 is predicated on the Company's ability to
achieve improvements in gross margin and expense performance over
historical results and successful completion of the $1.4 million asset
sale in the second quarter of 2001. Improvement over historical gross
margin and expense performance is expected to occur in part as a result
of the January closing of seven underperforming stores. Further
improvement in gross margin is projected to result from an increase in
the annual AWG patronage rebate as AWG is expected to return to a more
historic level of profitability.
The Company's lowest level of liquidity is expected to occur in the
third quarter of 2001. If the Company is successful in meeting its cash
flow projections, including completion of the asset sale in the second
quarter of 2001, sufficient borrowings under the Revolving Facility will
be available to meet the Company's liquidity needs during the third and
fourth quarters of 2001. Furthermore, the projections do not include the
potential favorable cash flow impact of closing or selling additional
underperforming stores or assets.
Effective April 24, 2001, the Company entered into an amendment to
the Loan Agreement which, among other things, amends the financial
covenants pertaining to minimum availability, EBITDA, funded debt to
EBITDA ratio, and capital expenditures. In addition to the covenant
changes, the Loan Agreement was amended to increase the applicable
interest rates by 25 basis points and limit the use of London Interbank
Offered rates. The Company does not expect the increase in rates will
have a material impact on its ability to meet its cash flow projections
or financial covenants. Based on its current projections, management
believes that the Company will be able to meet the revised covenants set
forth in the Loan Agreement, as amended, for the foreseeable future and,
that to the extent the Company is unable to meet these revised covenants,
to obtain waivers from the agent and the lenders. Management continues
to monitor compliance with the revised covenants, particularly the
minimum availability covenant. There can be no assurances the Company
will be able to satisfy the revised covenants or to obtain such waivers.
However, since the amendment to the financial covenants is applicable
only through 2001 and since the Loan Agreement matures on August 2, 2002,
the Company intends to refinance its existing Loan Agreement indebtedness
during 2001. There can be no assurance that the Company will be able to
successfully refinance its existing indebtedness on terms that are
acceptable to it.
The Company believes that cash on hand, net cash flow from
operations, proceeds from certain expected asset sales and borrowings
under the Revolving Facility will be sufficient to fund its cash
requirements through fiscal year 2001, which will consist primarily of
payment of principal and interest on outstanding indebtedness, working
capital requirements and capital expenditures. However, there can be no
assurance that the asset sales will be consummated as planned. The
Company's future operating performance and ability to service or
refinance its current indebtedness, as well as its liquidity, will be
subject to
7
future economic conditions and to financial, business and other factors,
many of which are beyond the Company's control.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
The table below sets forth selected items from the Company's
consolidated income statement as a percentage of net sales for the
periods indicated:
March 24, March 25,
2001 2000
Net Sales 100.0% 100.0%
Cost of sales 75.4 76.6
Gross Profit 24.6 23.4
Selling and administrative expenses 22.6 21.4
Operating profit 2.0 2.0
Interest income 0.2 0.2
Interest expense (2.1) (1.7)
Income before income taxes 0.1 0.5
Income tax provision - (0.2)
Net income 0.1 0.3
Results of Operations.
Comparison of the Twelve Weeks Ended March 24, 2001 with
the Twelve Weeks Ended March 25, 2000
Net sales decreased $11.1 million, or 8.1%, from $136.6 million for
the twelve weeks ended March 25, 2000, to $125.5 million for the twelve weeks
ended March 24, 2001. The decrease in sales is attributable to a 7.8% decline
in comparable store sales and the closing of seven stores in January 2001,
partially offset by the sales of stores acquired in February 2000 and the stores
acquired in April 2000. The decrease in comparable store sales is the result of
fiscal year 2000 competitive openings which have yet to anniversary, increased
sales in 2000 due to the Company's own promotional activities associated with
the grand opening of its acquired stores, fiscal year 2001 new competitive
openings, and increased promotional activity this year by existing competitors.
During the twelve weeks ended March 24, 2001, there were two new
competitive openings within the Company's markets including: one Wal-Mart
Neighborhood Market in Oklahoma City and one independent in rural Oklahoma.
Based on information publicly available, the Company expects that, during the
remainder of 2001, Wal-Mart will open 2 Supercenters and three Neighborhood
Markets; Albertsons will open one store; and regional chains and independents
will open two additional stores.
Based in part on the anticipated impact of proposed and recent new
store openings and remodelings by competitors, management believes that market
8
conditions will remain highly competitive, placing continued pressure on
comparable store sales and net sales. Management believes that comparable store
sales will decline approximately 8.0%, during the second quarter of 2001. In
response to this highly competitive environment, the Company intends to utilize
its merchandising strategy to emphasize a competitive pricing structure, as well
as leadership in quality products and services, selection and convenient store
locations. 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, a customer loyalty card program,
which allows customers with the card the opportunity to purchase over 2,000
items at a reduced cost each week. Additionally, the Company continues the use
of market research in order to maintain a better understanding of customer
behavior and trends in certain markets. Finally, the Company intends to upgrade
its stores by focusing its discretionary capital expenditures on projects that
will improve the overall appeal of its stores to targeted customers.
Gross profit as a percentage of sales increased 1.2% from 23.4% for
the twelve weeks ended March 25, 2000, to 24.6% for the twelve weeks ended March
24, 2001. The increase in gross profit margin reflects a reduced level of
promotional spending versus the prior year as the prior year included more
competitive openings and the grand opening of the Company's acquired stores.
Additionally, the seven stores closed in January had gross margin rate
performance which in the aggregate was below the total Company average.
Selling and administrative expenses as a percentage of sales
increased 1.2% from 21.4% for the twelve weeks ended March 25, 2000, to 22.6%
for the twelve weeks ended March 24, 2001. The increase in operating expense
ratio is attributable to increased occupancy costs, as a result of higher
utility costs and increased rent expense attributable to the acquired stores,
and increased labor and employee benefit costs, partially offset by a reduction
in advertising expenditures and the absence of start-up expenses of stores
acquired in 2000. Additionally, the seven stores closed in January had expense
ratio performance which in the aggregate was above the total company average.
The Company continues to review the alternatives to reduce selling and
administrative expenses and cost of sales.
Operating profit decreased $0.3 million from $2.8 million for the
twelve weeks ended March 25, 2000, to $2.5 million for the twelve weeks ended
March 24, 2001. The decrease primarily reflects the decline in sales and the
corresponding decrease in gross profit dollars partially offset by a decrease
in selling and administrative expenses.
Interest expense, net of interest income, increased $0.2 million
from $2.2 million for the twelve weeks ended March 25, 2000, to $2.4 million
for the twelve weeks ended March 24, 2001. The increase reflects additional
interest expense attributable to the acquired stores and increased borrowings
under the Loan Agreement, partially offset by a decrease in variable interest
rates and additional interest income from the interest bearing certificates of
AWG. During the remainder of 2001, the Company anticipates that interest
expense will increase due to increased debt and increased interest rates under
the Loan Agreement. See "Liquidity and Capital Resources."
9
Based upon its estimated annual tax rate, the Company did not record
income tax expense or benefit for the twelve weeks ended March 24, 2001. In
accordance with SOP 90-7, the tax benefit realized from utilizing 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 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. At December 30, 2000,
the Company had a tax net operating loss carryforward of approximately $32.5
million, which may be utilized to offset future taxable income to the limited
amount of $11.4 million in 2001 and $3.3 million per year thereafter. Due to
the uncertainty of realizing future tax benefits, a full valuation allowance was
deemed necessary to offset entirely the net deferred tax assets as of December
30, 2000.
Net income decreased $0.3 million from net income of $0.4 million,
or net income per diluted share of $0.08, for the twelve weeks ended March 25,
2000 to net income of $0.1 million, or net income per diluted share of $0.02,
for the twelve weeks ended March 24, 2001.
EBITDA (as defined hereinafter) decreased $0.3 million from $5.5
million, or 4.0% of sales, for the twelve weeks ended March 25, 2000 to $5.2
million, or 4.2% of sales for the twelve weeks ended March 24, 2001. 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.
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
National Bank of Canada ("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 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. The Company, with the consent of lenders, can access
an over-advance facility which allows the Company to borrow amounts above the
borrowing base but not above the total Revolving Facility. The lenders have
consented to the use of the over-advance facility through April 30, 2001. Funds
borrowed under the Revolving Facility are available for general corporate
purposes of the Company. Effective April 24, 2001, the Loan Agreement was
amended and the changes are hereinafter discussed within this Liquidity and
Capital Resources section.
10
The Term Loan, which had an outstanding balance as of March 24,
2001, of $8.2 million, represents the remaining 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, or monthly if the borrowings
are characterized as a London Interbank Offered Rate Loan, 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.
In addition, the Loan Agreement provides for acceleration of
principal and interest payments in the event of certain material adverse
changes, as determined by the lender.
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 ("Notes"). The Notes, which are unsecured, will mature on
August 1, 2003. Interest on the Notes accrues at the rate of 10% per annum
and is payable on February 1 and August 1 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, store closing charges, asset impairment, and
gain/loss on disposal of assets), as presented below, is the Company's
11
measurement of internally-generated operating cash for working capital needs,
capital expenditures and payment of debt obligations:
12 weeks 12 weeks
ended ended
March 24, March 25,
2001 2000
Income before income taxes $ 122 $ 668
Interest income (202) (172)
Interest expense 2,602 2,342
Gain on disposal of assets (1) (27)
Depreciation and amortization 2,689 2,675
EBITDA $ 5,210 $ 5,486
As a percentage of sales 4.15% 4.02%
As a multiple of interest
expense, net of interest
income 2.17x 2.53x
Net cash provided by operating activities decreased $2.5 million,
from net cash provided of $1.4 million for the twelve weeks ended March 25, 2000
to net cash used of $1.1 million for the twelve weeks ended March 24, 2001. The
decrease versus the prior year principally reflects unfavorable decreases in
trade payables and accounts receivable partially offset by a favorable decrease
in inventory.
Net cash used in investing activities decreased $0.5 million, from
$0.7 million for the twelve weeks ended March 25, 2000 to $0.2 million for the
twelve weeks ended March 24, 2001. Capital expenditures decreased $0.8 million
from $1.0 million for the twelve weeks ended March 25, 2000 to $0.2 million for
the twelve weeks ended March 24, 2001.
In February 2000, the Company completed its acquisition of three
stores from Belton Food Center, Inc. ("BFC") in Oklahoma City. The net purchase
price, prior to the closed store reserve discussed below, was $0.2 million which
represents $4.2 million for fixtures and equipment, and leasehold improvements,
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. 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
12
interest in the inventory. In April 2000, the Company closed one of the acquired
stores due to its proximity to other Company stores and established a reserve,
which approximated $1.3 million, for future rent payments and other holding
costs. Establishment of the reserve increased the goodwill balance associated
with the acquisition. In October 2000, the lease on the closed store was
assigned resulting in a reduction in the reserve and goodwill of $0.5 million.
Substantially all other costs reserved were paid in 2000.
In April 2000, the Company completed its acquisition of three
Baker's Supermarkets. The purchase price was approximately $4.2 million, which
represents $2.4 million for fixtures and equipment, leasehold improvements, 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 unfavorable contract
represents a five-year minimum purchase commitment and is expected to result in
payments of $405, $864 and $321 in 2001, 2002 and 2003, respectively. The
related intangible asset is amortized on a straight-line basis over the life of
the contract. The Company will sublease the three stores. On September 15, 2000,
the Company subsequently leased a fourth location upon the completion of its
construction. Concurrent with the opening of the acquired store, the Company
closed an existing store resulting in a charge to operations of approximately
$0.3 million, which included future rent payments, other holding costs, and the
write-off of property, plant and equipment. Payments of rent and other holding
costs are expected to continue through 2001. The Company financed this
acquisition principally through increased borrowings under its working capital
facility.
As of March 24, 2001, the Company had an outstanding balance on
these assumed obligations to AWG of $10.0 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 these 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 used in financing activities decreased $0.6 million, from
$2.6 million for the twelve weeks ended March 25, 2000 to $2.0 million for the
twelve weeks ended March 24, 2001. The decrease primarily reflects lower
principal payments of the obligations thus far during 2001.
The Company considers its capital expenditure program a strategic
part of the overall plan to support its market competitiveness. Cash capital
expenditures for 2001 are expected to be at approximately $2.0 million. The
Loan Agreement limits the Company's capital expenditures for 2001 to $5.0
million. The estimated 2001 capital expenditures of $2.0 is expected to be
invested primarily in the on-going maintenance and modernization of certain
stores and does not include provisions for acquisitions. The funds for the
13
capital expenditures are expected to be provided by internally-generated cash
flows from operations and borrowings under the Loan Agreement. As of March 24,
2001, the Company had under its Revolving Facility $28.3 million of borrowings,
$30,000 letter of credit outstanding and $7.6 million of availability, which
includes $3.0 million of the Overadvance Facility.
The markets in which the Company operates remain increasingly
competitive negatively affecting the Company's liquidity. The Company's near
and long-term operating strategies focus on improving sales, improving
operational efficiencies, and the productivity of assets. The Company intends
to pursue its merchandising strategy in an attempt to increase its sales and the
Company has devised plans to improve its gross margin and expense performance.
Also, if necessary, the Company will close or sell under-performing stores or
assets. Currently, the Company has letters of intent regarding certain asset
sales to transfer leases and sell property related to four of the seven stores
closed in January 2001 and to sell a parcel of undeveloped land. The estimated
proceeds from these asset sales are $1.4 million and the transactions are
subject to, among other things the signing of definitive agreements for each
transaction. The Company has also retained McDonald Investments Inc. as a
financial advisor to explore options for re-financing and raising capital.
Adequate liquidity in 2001 is predicated on the Company's ability to
achieve improvements in gross margin and expense performance over historical
results and successful completion of the $1.4 million asset sale in the second
quarter of 2001. Improvement over historical gross margin and expense
performance is expected to occur in part as a result of the January closing of
seven underperforming stores. Further improvement in gross margin is projected
to result from an increase in the annual AWG patronage rebate as AWG is
expected to return to a more historic level of profitability.
The Company's lowest level of liquidity is expected to occur in the
third quarter of 2001. If the Company is successful in meeting its cash flow
projections, including completion of the asset sale in the second quarter of
2001, sufficient borrowings under the Revolving Facility will be available to
meet the Company's liquidity needs during the third and fourth quarters of 2001.
Furthermore, the projections do not include the potential favorable cash flow
impact of closing or selling additional underperforming stores or assets.
Effective April 24, 2001, the Company entered into an amendment to
the Loan Agreement which, among other things, amends the financial covenants
pertaining to minimum availability, EBITDA, funded debt to EBITDA ratio, and
capital expenditures. In addition to the covenant changes, the Loan Agreement
was amended to increase the applicable interest rates by 25 basis points and
limit the use of London Interbank Offered rates. The Company does not expect
the increase in rates will have a material impact on its ability to meet its
cash flow projections or financial covenants. Based on its current projections,
management believes that the Company will be able to meet the revised covenants
set forth in the Loan Agreement, as amended, for the foreseeable future and,
that to the extent the Company is unable to meet these revised covenants, to
obtain waivers from the agent and the lenders. Management continues to monitor
compliance with the revised covenants, particularly the minimum availability
covenant. There can be no assurances the Company will be able to satisfy the
revised covenants or to obtain such waivers. However, since the amendment to the
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financial covenants is applicable only through 2001 and since the Loan Agreement
matures on August 2, 2002, the Company intends to refinance its existing Loan
Agreement indebtedness during 2001. There can be no assurance that the Company
will be able to successfully refinance its existing indebtedness on terms that
are acceptable to it.
The Company believes that cash on hand, net cash flow from
operations, proceeds from certain expected asset sales and borrowings under the
Revolving Facility will be sufficient to fund its cash requirements through
fiscal year 2001, which will consist primarily of payment of principal and
interest on outstanding indebtedness, working capital requirements and capital
expenditures. However, there can be no assurance that the asset sales will be
consummated as planned. The Company's future operating performance and ability
to service or refinance its current indebtedness, as well as its liquidity, will
be subject to future economic conditions and to financial, business and other
factors, many of which are beyond the Company's control.
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.
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PART II - OTHER INFORMATION
Item 3. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as part of this
report:
Exhibit No. Description
10ar* Eighth Amendment to Loan Agreement dated as
of March 23, 2001, among IBJ Whitehall
Business Credit Corporation, Heller
Financial, Inc., and National Bank of
Canada, Homeland and Holding.
10as* Ninth Amendment to Loan Agreement dated as
of April 24, 2001, among IBJ Whitehall
Business Credit Corporation, Heller
Financial, Inc., and National Bank of
Canada, Homeland and Holding.
11e Computation of Diluted Earnings Per Share.
(b) Report on Form 8-K: The Company did not file any Form 8-K
during the quarter ended March 24, 2001.
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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 7, 2001 By: /s/ David B. Clark
David B. Clark, President, Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: May 7, 2001 By: /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice
President/Finance, Chief Financial
Officer and Secretary
(Principal Financial Officer)