-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IPnnDFVRaNrYKjJMo60TUYRS7Ey0NTAXk9surhHyXC81n5BwELf12CDKQfLkGIC5 48/oudTZSLB8eJGyohcxcg== 0000835582-01-500020.txt : 20010809 0000835582-01-500020.hdr.sgml : 20010809 ACCESSION NUMBER: 0000835582-01-500020 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010616 FILED AS OF DATE: 20010808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMELAND HOLDING CORP CENTRAL INDEX KEY: 0000835582 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 731311075 STATE OF INCORPORATION: DE FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-11555 FILM NUMBER: 1700475 BUSINESS ADDRESS: STREET 1: 2601 N W EXPRESSWAY STREET 2: SUITE 1100E CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4058796600 MAIL ADDRESS: STREET 1: 2601 N W EXPRESSWAY STREET 2: SUITE 1100E CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 FORMER COMPANY: FORMER CONFORMED NAME: SWO ACQUISTION CORP DATE OF NAME CHANGE: 19890716 FORMER COMPANY: FORMER CONFORMED NAME: SWO HOLDING CORP DATE OF NAME CHANGE: 19901017 10-Q/A 1 q10q201.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 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) -----END PRIVACY-ENHANCED MESSAGE-----