10-Q 1 q10qtr1.txt 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 14 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. 15 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. 16 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)