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 June 16, 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 registrant's classes
of common stock as of August 3, 2001:
Homeland Holding Corporation Common Stock: 4,925,871 shares
HOMELAND HOLDING CORPORATION
FORM 10-Q
FOR THE TWELVE WEEKS ENDED JUNE 16, 2001
INDEX
Page
PART 1 FINANCIAL INFORMATION
ITEM 1. Financial Statements................................... 1
Consolidated Balance Sheets
June 16, 2001, and December 30, 2000.................. 1
Consolidated Statements of Operations
and Comprehensive Income
Twelve Weeks and Twenty-four Weeks ended
June 16, 2001, and June 17, 2000...................... 3
Consolidated Statements of Cash Flows
Twelve Weeks and Twenty-four Weeks ended
June 16, 2001, and June 17, 2000...................... 4
Notes to Consolidated Financial Statements............. 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 7
PART II OTHER INFORMATION
ITEM 3. Submission of Matters to a Vote of Security Holders.... 14
ITEM 4. Exhibits and Reports on Form 8-K....................... 15
i
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
(Unaudited)
June 16, December 30,
2001 2000
Current assets
Cash and cash equivalents $ 7,742 $ 10,198
Receivables, net of allowance
for uncollectible accounts of
$273 and $331 9,980 14,079
Inventories 50,123 54,707
Prepaid expenses and other
current assets 1,169 1,610
Total current assets 69,014 80,594
Property, plant and equipment:
Land and land improvements 8,797 8,797
Buildings 21,716 21,691
Fixtures and equipment 43,519 43,305
Leasehold improvements 20,654 21,202
Software 7,574 7,760
Leased assets under capital leases 9,402 9,886
Construction in progress 337 165
111,999 112,806
Less, accumulated depreciation
and amortization 44,382 41,036
Net property, plant and equipment 67,617 71,770
Other assets and deferred charges 26,179 27,394
Total assets 162,810 179,758
The accompanying notes are an integral part
of these consolidated financial statements.
1
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
June 16, December 30,
2001 2000
Current liabilities:
Accounts payable-trade $ 18,653 $ 28,869
Salaries and wages 1,864 2,107
Taxes 4,632 3,606
Accrued interest payable 2,677 2,819
Other current liabilities 6,494 7,013
Long-Term obligations in default
classified as current 105,775 -
Current portion of long-term debt - 3,860
Current portion of obligations
under capital leases 564 564
Total current liabilities 140,659 48,838
Long-term obligations:
Long-Term debt - 104,592
Obligations under capital leases 1,723 1,996
Other noncurrent liabilities 2,077 3,235
Total long-term obligations 3,800 109,823
Stockholders' equity:
Common stock $0.01 par value,
authorized - 7,500,000 shares
issued 4,925,871 shares
at June 16, 2001, and
December 30, 2000, respectively 49 49
Additional paid-in capital 56,274 56,274
Accumulated deficit (37,284) (34,538)
Accumulated other comprehensive
income (688) (688)
Total stockholders' equity 18,351 21,097
Total liabilities and
stockholders' equity $ 162,810 $ 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 ended 24 weeks ended
June 16, June 17, June 16, June 17,
2001 2000 2001 2000
Sales, net $ 123,409 $ 142,620 $ 248,942 $ 279,227
Cost of sales 93,617 109,672 188,303 214,271
Gross profit 29,792 32,948 60,639 64,956
Selling and administrative
expenses 28,719 30,556 57,045 59,753
Asset impairment 1,702 - 1,702 -
Operating profit (629) 2,392 1,892 5,203
Loss on disposal of assets (15) (56) (14) (29)
Interest income 197 172 399 344
Interest expense (2,421) (2,455) (5,023) (4,797)
Income (loss) before income taxes (2,868) 53 (2,746) 721
Income tax provision - (20) - (274)
Net income (loss) $ (2,868) $ 33 $ (2,746) $ 447
Net income (loss) per share:
Basic $ (0.58) $ 0.01 $ (0.56) $ 0.09
Diluted $ (0.58) $ 0.01 $ (0.56) $ 0.09
Weighted average shares
outstanding:
Basic 4,925,871 4,922,163 4,925,871 4,920,760
Diluted 4,925,871 4,964,288 4,925,871 4,963,231
The accompanying notes are an integral part
of these consolidated financial statements:
3
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share and per share amounts)
(Unaudited)
12 weeks ended 24 weeks ended
June 16, June 17, June 16, June 17,
2001 2000 2001 2000
Cash flows from operating activities:
Net income (loss) $ (2,868) $ 33 $ (2,746) $ 447
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 2,462 2,547 4,948 5,068
Amortization of beneficial
interest in operating leases 27 28 55 56
Amortization of goodwill 146 192 321 318
Amortization of financing costs 39 14 55 27
Loss on disposal of assets 15 56 14 29
Asset impairment 1,702 - 1,702 -
Deferred income taxes - (10) - 214
Change in assets and liabilities:
(Increase)decrease in receivables (224) (375) 4,099 4,623
Decrease in inventories 196 837 4,584 1,037
(Increase) decrease in prepaid
expenses and other current assets 937 987 441 267
Increase in other assets
and deferred charges (575) (1,096) (1,103) (1,138)
Increase (decrease) in accounts
payable - trade (2,445) (2,684) (10,216) (5,812)
Increase (decrease)in salaries
and wages (52) 339 (243) (1,110)
Increase in taxes 1,382 676 1,026 864
Increase (decrease) in accrued
interest payable 1,566 1,369 (142) (171)
Increase (decrease) in other
current liabilities 164 617 (519) 642
Decrease in other noncurrent
liabilities (183) (278) (1,152) (748)
Total adjustments 5,157 3,219 3,870 4,166
Net cash provided by
operating activities 2,289 3,252 1,124 4,613
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)
(Unauditied)
12 weeks ended 24 weeks ended
June 16, June 17, June 16, June 17,
2001 2000 2001 2000
Cash flows from investing activities:
Capital expenditures (464) (564) (652) (1,563)
Store acquisitions - (3,518) - (3,663)
Cash received from sale of assets 18 47 22 473
Net cash used in investing
activities (446) (4,035) (630) (4,753)
Cash flows from financing activities:
Borrowings under term loan - 5,000 - 5,000
Payments under term loan (595) (417) (1,190) (829)
Borrowings under revolving
credit loans 20,809 32,836 50,856 77,916
Payments under revolving
credit loans (20,680) (33,787) (51,686) (77,881)
Payment on tax notes (13) (12) (26) (24)
Principal payments under
notes payable (325) (534) (631) (3,592)
Principal payments under
capital lease obligations (138) (109) (273) (247)
Net cash provided by (used in)
financing activities (942) 2,977 (2,950) 343
Net increase (decrease) in cash and
cash equivalents 901 2,194 (2,456) 203
Cash and cash equivalents at beginning
of period 6,841 8,246 10,198 10,237
Cash and cash equivalents at end
of period $ 7,742 $ 10,440 $ 7,742 $ 10,440
Supplemental information:
Cash paid during the period
for interest $ 574 $ 979 $ 4,547 $ 4,655
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. Subsequent Events
On August 1, 2001, Holding and Homeland filed voluntary petitions under
Chapter 11 of the United States Bankruptcy Code ("Bankruptcy Code"), with
the United States Bankruptcy Court for the Western District of Oklahoma
("Bankruptcy Court"). The cases filed by Holding and Homeland are In re
Homeland Holding Corporation, Debtor, Case No. 01-17869TS, and In re
Homeland Stores, Inc. Debtor, Case No. 01-17870TS. respectively. Holding
and Homeland continues in possession of their properties and the management
of their businesses as debtors-in-possessions pursuant to Section 1107 and
Section 1108 of the Bankruptcy Code. Holding and Homeland continues to be
managed by their respective directors and officers, subject in each case
to the supervision of the Bankruptcy Court.
Under the Indenture dated as of August 2, 1996 ("Indenture"), Homeland
was required to make an interest payment on its 10% Senior Subordinated
Notes Due 2003 ("Notes") of $3.0 million on August 1, 2001. Homeland failed
to make the required interest payment on August 1, 2001, which constitutes a
default under the Indenture. As a result of the default under the Indenture
and the subsequent cross-defaults under the Loan Agreement (as defined
hereinafter) and other obligations, the corresponding balances have been
classified as current liabilities. Additionally, the Company has recorded
an asset impairment charge of $1.7 million related to the portion of
goodwill which the Company believes will not be recoverable.
6
Finally, on August 3, 2001, the Company's union employees, primarily
represented by the United Food and Commercial Workers of North America,
ratified a new three-year contract.
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 statements as a percentage of net sales for the
periods indicated:
12 weeks ended 24 weeks ended
June 16 June 17, June 16, June 17,
2001 2000 2001 2000
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 75.9 76.9 75.6 76.7
Gross Profit 24.1 23.1 24.4 23.3
Selling and administrative
expenses 23.3 21.4 22.9 21.4
Asset Impairment 1.3 - 0.7 -
Operating profit (loss) (0.5) 1.7 0.8 1.9
Interest income 0.2 0.1 0.1 0.1
Interest expense (2.0) (1.7) (2.0) (1.7)
Income (loss) before
income taxes (2.3) 0.1 (1.1) 0.3
Income tax provision - - - (0.1)
Net income (loss) (2.3) 0.1 (1.1) 0.2
Results of Operations.
Comparison of the Twelve Weeks Ended June 16, 2001 with the Twelve
Weeks Ended June 17, 2000
Net sales decreased $19.2 million, or 13.5%, from $142.6 million for
the twelve weeks ended June 17, 2000, to $123.4 million for the twelve weeks
ended June 16, 2001. The decrease in sales is attributable to an 8.4% decline
in comparable store sales and the closing of seven stores in January 2001. The
decrease in comparable store sales is the result of fiscal year 2000 competitive
openings which have yet to reach their first 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 24 weeks ended June 16, 2001, there were six new competitive
openings within the Company's markets including: one Wal-Mart Supercenter and
one Wal-Mart Neighborhood Market in Oklahoma City, one Wal-Mart Neighborhood
Market and one independent store in Tulsa, and two independent stores in rural
Oklahoma. Based on information publicly available, the Company expects that,
during the remainder of 2001, Wal-Mart will open two Neighborhood Markets;
Albertsons will open one store; and regional chains and independents will open
one additional store.
Based in part on the anticipated impact 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. Additionally, sales could be impacted by the potential
disruption of the bankruptcy filing (See "Liquidity and Capital Resources").
As a result of these pressures on sales, management believes that comparable
store sales will decline approximately 10.0% during the third quarter of 2001.
In response to this highly competitive environment, the Company intends to
utilize its merchandising strategy to emphasize a competitive pricing structure,
7
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 2000 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.
Gross profit as a percentage of sales increased 1.0% from 23.1% for the
twelve weeks ended June 17, 2000, to 24.1% for the twelve weeks ended June 16,
2001. The increase in gross profit margin reflects an increase in the AWG
patronage rebate accrual, which was lower in 2000 as a result of the AWG strike,
and 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 performace which in the aggregate was below the total Company
average.
Selling and administrative expenses as a percentage of sales increased
1.9% from 21.4% for the twelve weeks ended June 17, 2000, to 23.3% for the
twelve weeks ended June 16, 2001. The increase in operating expense ratio is
attributable to increase occupancy costs, as a result of higher utility costs
and increased rent expense attributable to the acquired stores, partially offset
by a reduction in advertising expenditures and the absence of start-up expenses
of stores acquired in 2000. Additionally, during the twelve weeks ended June
17, 2000, the Company's expense ratio was lower as a result of reductions in
the reserves for doubtful accounts and in general liability reserves. The
Company continues to review the alternatives to reduce selling and
administrative expenses and cost of sales.
For the twelve weeks ended June 16, 2001, the Company has recorded an
asset impairment charge of $1.7 million related to the portion of goodwill which
the Company believes will not be recoverable.
Operating profit decreased $3.0 million from $2.4 million for the
twelve weeks ended June 17, 2000, to an operating loss of $0.6 million for the
twelve weeks ended June 16, 2001. The decrease primarily reflects the asset
impairment, the decline in sales and the corresponding decrease in gross profit
dollars partially offset by a decrease in selling and administrative expense
dollars.
Interest expense, net of interest income, decreased $0.1 million from
$2.3 million for the twelve weeks ended June 17, 2000, to $2.2 million for the
twelve weeks ended June 16, 2001. The decrease reflects a reduction in variable
interest rates and additional interest income from the interest bearing
certificates of AWG, partially offset by additional interest expense
attributable to the acquired stores and increased borrowings under the Loan
Agreement. See "Liquidity and Capital Resources."
Based upon its estimated annual tax rate, the Company did not record
income tax expense or benefit for the twelve weeks ended June 16, 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.
8
Net income decreased $2.9 million from net income of $33,000, or net
income per diluted share of $0.01, for the twelve weeks ended June 17, 2000 to
a net loss of $2.9 million, or a net loss per diluted share of $0.58, for the
twelve weeks ended June 16, 2001.
EBITDA (as defined hereinafter) decreased $1.5 million from $5.2
million, or 3.6% of sales, for the twelve weeks ended June 17, 2000 to $3.7
million, or 3.0% of sales for the twelve weeks ended June 16, 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.
Comparison of the 24 Weeks Ended June 16, 2001 with the 24 Weeks Ended June 17,
2000
Net sales decreased $30.3 million, or 10.9%, from $279.2 million for
the 24 weeks ended June 17, 2000, to $248.9 million for the 24 weeks ended June
16, 2001. The decrease in sales is attributable to a 8.1% 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.
Gross profit as a percentage of sales increased 1.1% from 23.3% for
the 24 weeks ended June 17, 2000, to 24.4% for the 24 weeks ended June 16,
2001. The increase in gross profit margin reflects an increase in the AWG
patronage rebate accrual, which was lower in 2000 as a result of the AWG strike,
and 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
1.5% from 21.4% for the 24 weeks ended June 17, 2000, to 22.9% for the 24 weeks
ended June 16, 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, during the 24 weeks ended June 17, 2000, the Company's expense
ration was lower as a result of reductions in the reserves for doubtful accounts
and in general liability reserves. Finally, the seven stores closed in January
have expense ratio performance which in the aggregate was above the total
company average.
For the 24 weeks ended June 16, 2001, the Company has recorded an asset
impairment charge of $1.7 million related to the portion of goodwill which the
Company believes will not be recoverable.
Operating profit decreased $3.3 million from $5.2 million for the 24
weeks ended June 17, 2000, to $1.9 million for the 24 weeks ended June 16, 2001.
The decrease primarily reflects the asset impairment, the decline in sales
and the corresponding decrease in gross profit dollars partially offset by a
decrease in selling and administrative expense dollars.
Interest expense, net of interest income, increased $0.1 million from
$4.5 million for the 24 weeks ended June 17, 2000, to $4.6 million for the 24
weeks ended June 16, 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
additonal interest income from the interest bearing certificates of AWG. See
"Liquidity and Capital Resources."
9
Net income decreased $3.2 million from net income of $0.4 million, or
net income per diluted share of $0.09, for the 24 weeks ended June 17, 2000 to
a net loss of $2.8 million, or a net loss per diluted share of $0.56, for the
24 weeks ended June 16, 2001.
EBITDA decreased $1.7 million from $10.6 million, or 3.8% of sales,
for the 24 weeks ended June 17, 2000 to $8.9 million, or 3.6% of sales for the
24 weeks ended June 16, 2001.
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"), as amended by bridge documents, through August 18,
2001.
The Loan Agreement, as amended, permits the Company to borrow under
the Revolving Facility up to the lesser of (a) $33.0 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. Funds borrowed under
the Revolving Facility are available for general corporate purposes of the
Company.
The Term Loan, which had an outstanding balance as of June 16, 2001,
of $7.6 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 ("LIBOR") 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 LIBOR. The Company's ability to elect LIBOR was suspended
effective with the ninth amendment to the Loan Agreement.
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
acquisitons, asset dispositions, capital expenditures, consolidations and
mergers, distributions, 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 lenders.
As of August 2, 1996, the Company entered into an Indenture with Fleet
National Bank (predeccessor to State Bank and Trust Company), as trustee, under
which the Company issued $60.0 million of 10% Senior subordinated Notes due
10
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.
On August 1, 2001, the Company filed voluntary petitions under Chapter
11 of the United States Bankruptcy Code ("Bankruptcy Code") with the United
States Bankruptcy Court for the Western District of Oklahoma ("Bankruptcy
Court"). The cases filed by Holding and Homeland are IN re Homeland Holding
Corporation, Debtor, Case No. 01-17869TS, and In re Homeland Stores, Inc.
Debtor, Case No. 01-17870TS, respectively. The Company continues in possession
of their properties and the management of their businesses as debtors-in-
possessions pursuant to Section 1107 and Section 1108 of the Bankruptcy Code.
The Company continues to be managed by their respective directors and officers,
subject in each case to the supervision of the Bankruptcy Court.
Under the Indenture, Homeland was required to make an interest payment
on the Notes of $3.0 million on August 1, 2001. Homeland failed to make the
required interest payment on August 1, 2001, which constitutes a default under
the Indenture. As a result of the default under the Indenture and the
subsequent cross-defaults under the Loan Agreement and other obligations, the
corresponding balances have been classified as current liabilities.
On August 1, 2001, the Bankruptcy Court approved the provision by the
lenders led by NBC, as agent, of continued financing under the Loan Agreement
and approved the provision by Associated Wholesale Grocers, Inc. ("AWG"),
the primary supplier to the Company, of an advance of $3.1 million under a
supply agreement between AWG and the Company. The financing provided by NBC
and the other lenders was provided on substantially the same terms as NBC and
the lenders provided financing prior to August 1, 2001, with two notable
exceptions; the maturity date has been shortened to August 18, 2001, from
August 2, 2002, and the minimum amount available under the Revolving Facility
has been reduced to $33.0 million from $37.0 million. The advance provided
by AWG bears interest at the prime rate plus 200 basis points per annum, has
a maturity date of April 2002 and is secured by liens on, and security
interests in, the equity of the Company in AWG, as well as the other assets
which secured the pre-petition obligations of the Company to AWG.
In connection with the reorganization proceedings, the Company has
received a commitment letter from Fleet Retail Finance, Inc. ("Fleet") and
Back Bay Capital Funding, L.L.C. ("Back Bay") and a commitment letter from
AWG. Under the commitment letter provided by Fleet and Back Bay, Fleet and
Back Bay would provide a debtor-in-possession revolving credit facility in a
maximum principal amount of $35.0 million and, under the commitment letter
from AWG, AWG would provide a term loan in a maximum amount of $20.0 million
(including the $3.1 million which AWG previously advanced under the supply
agreement). The financing provided by the commitment letters would be secured
by liens on, or security interests in, all of the assets of the Company and
would have a super-priority administrative status under the Bankruptcy Code.
The commitment letters obtained by the Company contain customary
conditions, including the approval by the Bankruptcy Court pursuant to Section
364 of the Bankruptcy Code. While the Company anticipates that such conditions
will be satisfied, there can be no assurance that such conditions will be
satisfied and, to the extent that such conditions are not satisfied, the
financing contemplated by the commitment letters may not be available to the
Company.
During the second quarter of 2001, the Company began to experience
increasing liquidity difficulties, particularly following the amendments
to the Loan Agreement on which NBC and the other lenders insisted in the second
quarter. While trade creditors generally continued to provide credit to the
Company on customary credit terms during that quarter, some trade creditors
had imposed tighter credit terms, further reducing the liquidity of the Company,
and the Company believed that the Company would continue to experience further
tightening of the credit terms available to the Company. Since the August 1,
2001 filing, the Company has been in negotiations with its critical vendors
and has been encouraged by the support received relative to the return to
normal trade terms. The Company believes that the availability of funds
sufficient to permit the Company to pay its trade creditors in accordance with
their customary credit terms is critical to the continued willingness of the
trade creditors to supply the Company.
Assuming the availability of the financing contemplated by the
commitment letters, the Company believes that it will have substantially
greater liquidity, enabling the Company to pay its trade creditors in
accordance with their customary credit terms. If the financing contemplated
by the commitment letters does not become available to the Company, the
Company would continue to experience liquidity difficulties.
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
measurement of internally-generated operating cash for working capital needs,
capital expenditures and payment of debt obligations.
12 weeks 12 weeks 24 weeks 24 weeks
ended ended ended ended
June 16, June 17, June 16, June 17,
2001 2000 2001 2000
Income (loss) before income taxes $ (2,868) $ 53 $ (2,746) $ 721
Asset impairment 1,702 - 1,702 -
Interest income (197) (172) (399) (344)
Interest expense 2,421 2,455 5,023 4,797
Loss on disposal of assets 15 56 14 29
Depreciation and amortization 2,635 2,767 5,324 5,442
EBITDA $ 3,708 $ 5,159 $ 8,918 $ 10,645
As a percentage of sales 3.01% 3.62% 3.58% 3.81%
As a multiple of interest expense,
net of interest income 1.67x 2.26x 1.93x 2.39x
11
Net cash provided by operating activities decreased $3.5 million,
from $4.6 million for the 24 weeks ended June 17, 2000 to $1.1 million for the
24 weeks ended June 16, 2001. The decrease versus the prior year principally
reflects unfavorable decreases in trade payables and other current liabilities,
and the decline in EBITDA, partially offset by favorable decreases in inventory
and accounts receivable. The decrease in trade payables is attributable to
reduced trade credit by selected vendors, the decline in sales and the closing
of the seven stores closed in January 2001. The reduction in inventory is
primarily attributable to the seven stores closed in January 2001.
Net cash used in investing activities decreased $5.4 million, from
$4.8 million for the 24 weeks ended June 17, 2000 to $0.6 million for the 24
weeks ended June 16, 2001. Capital expenditures decreased $1.0 million from
$1.6 million for the 24 weeks ended June 17, 2000 to $0.6 million for the 24
weeks ended June 16, 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
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 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 June 16, 2001, the Company had an outstanding balance on these
assumed obligations to AWG of $9.7 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 $3.3 million from net
cash provided by financing activities of $0.3 million for the 24 weeks ended
June 17, 2000 to net cash used in financing activities of $3.0 million
12
for the twelve weeks ended June 16, 2001. The decrease primarily reflects
additional 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 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
capital expenditures are expected to be provided by internally-generated cash
flows from operations and borrowings under the Term Loan Agreement. As of June
16, 2001, the Company had under its Revolving Facility $28.4 million of
borrowings, $30,000 letter of credit outstanding and $3.0 million of
availability.
Effective July 6, 2001, the Company entered into an amendment to the
Loan Agreement which, among other things, amends the borrowing base, revises
the borrowing limit, consents to a temporary overadvance, and establishes
reserves against the borrowing base. The effect of the changes to the
borrowing base resulted in reducing availability by approximately $4.5
million. In conjunction with the reduction in availability, the lenders
consented to a temporary overadvance of $4.5 million, which overadvance
expires on July 31, 2001. As a result of the reduced availability and the
expiration of the temporary overadvance, the Company will not have the ability
to remit the required interest payment under the Indenture on August 1, 2001.
Additionally, the Company failed to meet the minimum availability covenant for
the ten-business day period ended July 27, 2001.
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 inflation or
deflation will not affect the Company's business in future periods.
13
Item 3. Submission of Matters to a Vote of Security Holders
The Company held its 2001 Annual Meeting of Stockholders on May 31,
2001. At such meeting, Robert E. (Gene) Burris, David B. Clark, Edward B.
Krekeler Jr., Laurie M. Shahon, John A. Shields and William B. Snow were
elected to serve on the Board of Directors for a one-year term, ending at the
next annual meeting.
In the matter of the election of directors, the votes cast were as
follows:
For Withhold Authority
Robert W. (Gene) Burris 3,789,343 183,437
David B. Clark 3,856,329 116,451
Edward B. Krekeler, Jr. 3,638,159 334,621
Laurie M. Shahon 3,670,463 302,317
John A. Shields 3,670,463 302,317
William B. Snow 3,824,025 148,755
PART II - OTHER INFORMATION
Item 4. Exibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as a part of this
report.
Exhibit No. Description
10at* Tenth Amendment to Loan Agreement dated as
of July 6, 2001, among IBJ Whitehall
Business Credit Corporation, Heller
Financial, Inc. and National Bank of
Canada, Homeland and Holding.
10au* Supplemental Compensation Agreement between
David B. Clark and the Company dated as of
May 18, 2001.
10av* Supplemental Compensation Agreement between
Wayne S. Peterson and the Company dated as
of May 18, 2001.
10aw* Supplemental Compensation Agreement between
Deborah A. Brown and the Company dated as
of May 18, 2001.
10ax* Supplemental Compensation Agreement between
Steven M. Mason and the Company dated as of
May 18, 2001.
10ay* Supplemental Compensation Agreement between
John C. Rocker and the Company dated as of
May 18, 2001.
10az* Supplemental Compensation Agreement between
Prentess Alletag and the Company dated as
of May 18, 2001.
11e Computation of Diluted Earnings Per Share.
14
(b) Report on Form 8-K: The Company did not
file any Form 8-K during the quarter ended
June 16, 2001.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMELAND HOLDING CORPORATION
Date: August 6, 2001 By: /s/ David B. Clark
David B. Clark, President, Chief
Executive Officer, and Director
(Principal Executive Officer)
Date: August 6, 2001 /s/ Wayne S. Peterson
Wayne S. Peterson, Senior Vice
President/Finance, Chief Financial
Officer and Secretary
(Principal Financial Officer)