-----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, OSRAxzLc7j0RceRey1uPeafV/S7Ux/+IZY/kPcznY7m0j58ks7ssl/PG1PHCYV9j 9xb0O2KNHkMGOFMyYTNpjA== 0000950134-02-004663.txt : 20020507 0000950134-02-004663.hdr.sgml : 20020507 ACCESSION NUMBER: 0000950134-02-004663 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020323 FILED AS OF DATE: 20020507 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11555 FILM NUMBER: 02637129 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 HOLDING CORP DATE OF NAME CHANGE: 19901017 FORMER COMPANY: FORMER CONFORMED NAME: SWO ACQUISTION CORP DATE OF NAME CHANGE: 19890716 10-Q 1 d96610e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 23, 2002 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended March 23, 2002 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 Debtor-in-Possession as of August 1, 2001 ------------------------------------------------------ (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 7, 2002: Homeland Holding Corporation Common Stock: 4,925,871 shares HOMELAND HOLDING CORPORATION Debtor-in-Possession as of August 1, 2001 FORM 10-Q FOR THE 12 WEEKS ENDED MARCH 23, 2002 INDEX
Page ---- PART I FINANCIAL INFORMATION ITEM 1. Financial Statements............................................... 1 Consolidated Balance Sheets March 23, 2002, and December 29, 2001........................... 1 Consolidated Statements of Operations and Comprehensive Income Twelve Weeks ended March 23, 2002, and March 24, 2001.............................................. 3 Consolidated Statements of Cash Flows Twelve Weeks ended March 23, 2002, and March 24, 2001.............................................. 5 Notes to Consolidated Financial Statements......................... ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 11 PART II OTHER INFORMATION ITEM 3. Exhibits and Reports on Form 8-K................................... 18
i PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS
(Unaudited) March 23, December 29, 2002 2001 ----------- ----------- Current assets: Cash and cash equivalents $ 4,748 $ 5,602 Receivables, net of allowance for uncollectible accounts of $232 and $318 5,473 12,006 Inventories 29,287 34,965 Prepaid expenses and other current assets 3,183 2,292 Assets held for sale 97 2,349 -------- -------- Total current assets 42,788 57,214 Property, plant and equipment: Land and land improvements 6,704 6,699 Buildings 18,787 18,772 Fixtures and equipment 32,231 33,165 Leasehold improvements 13,490 13,843 Software 6,881 7,016 Leased assets under capital leases 5,886 5,938 Construction in progress 301 301 -------- -------- 84,280 85,734 Less, accumulated depreciation and amortization 43,305 43,369 -------- -------- Net property, plant and equipment 40,975 42,365 Other assets and deferred charges 21,521 23,159 -------- -------- Total assets $105,284 $122,738 ======== ======== Continued
The accompanying notes are an integral part of these consolidated financial statements. 1 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND STOCKHOLDERS' DEFICIT
(Unaudited) March 23, December 29, 2002 2001 ----------- ------------ Current liabilities: Accounts payable - trade $ 11,960 $ 15,285 Salaries and wages 2,132 2,799 Taxes 983 1,655 Accrued interest payable 130 185 Other current liabilities 7,556 8,269 Current portion of long-term debt 36,020 44,152 Current portion of obligations under capital leases 452 452 --------- --------- Total current liabilities 59,233 72,797 Long-term obligations: Obligations under capital leases 403 519 Other noncurrent liabilities 3,472 4,579 --------- --------- Total long-term obligations 3,875 5,098 Liabilities subject to compromise 72,357 72,718 Stockholders' deficit: Common stock $0.01 par value, authorized - 7,500,000 shares, issued 4,925,871 shares at March 23, 2002, and December 29, 2001 49 49 Additional paid-in capital 56,274 56,274 Accumulated deficit (83,240) (80,934) Accumulated other comprehensive income (3,264) (3,264) --------- --------- Total stockholders' deficit (30,181) (27,875) --------- --------- Total liabilities and stockholders' deficit $ 105,284 $ 122,738 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 2 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (In thousands, except share and per share amounts) (Unaudited)
12 weeks 12 weeks ended ended March 23, March 24, 2002 2001 --------- --------- Sales, net $ 77,911 $ 113,825 Cost of sales 58,270 85,705 --------- --------- Gross profit 19,641 28,120 Selling and administrative expenses 17,848 25,991 --------- --------- Operating income 1,793 2,129 Gain on disposal of assets 8 1 Interest income 149 202 Interest expense (1,265) (2,602) --------- --------- Income (loss) from continuing operations before reorganization expense and income taxes 685 (270) Reorganization expense (1,550) -- --------- --------- Loss from continuing operations before income taxes (865) (270) Income taxes -- -- --------- --------- Loss from continuing operations (865) (270) --------- --------- Continued
The accompanying notes are an integral part of these consolidated financial statements. 3 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME, continued (In thousands, except share and per share amounts) (Unaudited)
12 weeks 12 weeks ended ended March 23, March 24, 2002 2001 ----------- ----------- Discontinued operations: Income (loss) from discontinued stores $ (1,441) $ 392 Income taxes -- -- ----------- ----------- Income (loss) on discontinued operations (1,441) 392 ----------- ----------- Net income (loss) $ (2,306) $ 122 =========== =========== Basic and diluted earnings per share: Loss from continuing operations $ (0.18) $ (0.06) Income (loss) on discontinued operations (0.29) 0.08 ----------- ----------- Net income (loss) per share $ (0.47) $ 0.02 =========== =========== Basic and diluted weighted shares outstanding 4,925,871 4,925,871 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands, except share and per share amounts) (Unaudited)
12 weeks 12 weeks ended ended March 23, March 24, 2002 2001 --------- --------- Cash flows from operating activities: Income (loss) from continuing operations before reorganization expense and income taxes $ 685 $ (270) Adjustments: Depreciation and amortization 1,452 2,278 Amortization of beneficial interest in operating leases 24 28 Amortization of goodwill -- 175 Amortization of financing costs 294 16 Gain on disposal of assets (8) (1) Change in assets and liabilities: Decrease in receivables 6,431 4,306 Decrease in inventories 619 4,274 (Increase) decrease in prepaid expenses and other current assets 976 (495) Increase in other assets and deferred charges (337) (528) Decrease in accounts payable-trade (494) (4,136) Decrease in salaries and wages (667) (191) Decrease in taxes (660) (356) Decrease in accrued interest payable (55) (1,708) Decrease in other current liabilities (2,582) (578) Decrease in other noncurrent liabilities (405) (969) ------- ------- Total adjustments 4,588 2,115 ------- ------- Net cash provided by continuing operations before reorganization expenses and income taxes 5,273 1,845 Reorganization expenses paid (1,054) -- ------- ------- Net cash provided by continuing operations 4,219 1,845 Net cash provided by discontinued operations 2,842 163 ------- ------- Net cash provided by operating activities 7,061 2,008 ------- ------- Continued
The accompanying notes are an integral part of these consolidated financial statements. 5 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED STATEMENT OF CASH FLOWS, continued (In thousands, except share and per share amounts) (Unaudited)
12 weeks ended 12 weeks ended March 23, March 24, 2002 2001 -------------- -------------- Cash flows used in investing activities: Capital expenditures (47) (188) Cash received from sale of assets 2,568 4 ------------ ------------ Net cash provided by (used in) investing activities 2,521 (184) ------------ ------------ Cash flows from financing activities: Borrowings under DIP revolving credit loans 17,545 -- Payments under DIP revolving credit loans (24,769) -- Borrowings under NBC term loan -- (595) Borrowings under NBC revolving credit loans -- 30,047 Payments under NBC revolving credit loans -- (31,006) Payments on tax notes (14) (13) Principal payments under notes payable (894) (306) Principal payments under capital lease obligations (115) (135) Book overdrafts recorded in accounts payable (2,189) (3,173) ------------ ------------ Net cash used in financing activities (10,436) (5,181) ------------ ------------ Net decrease in cash and cash equivalents (854) (3,357) Cash and cash equivalents at beginning of period 5,602 10,198 ------------ ------------ Cash and cash equivalents at end of period $ 4,748 $ 6,841 ============ ============ Supplemental information: Cash paid during the period for interest $ 1,026 $ 3,973 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 6 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES Debtor-in-Possession as of August 1, 2001 CONSOLIDATED STATEMENT OF CASH FLOWS, continued (In thousands, except share and per share amounts) (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. ("SLB"), (collectively referred to herein as the "Company"), reflect all adjustments, which consist, except as discussed below, 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 interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the period ended December 29, 2001, and the notes thereto. As a result of the bankruptcy filings discussed in Note 3 below, the accompanying interim consolidated financial statements have been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under Bankruptcy Code," on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the voluntary bankruptcy filings, such realization of certain of Company assets and liquidation of certain of Company liabilities are subject to significant uncertainty. While operating as debtors-in-possession, the Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications reported in the interim consolidated financial statements, which do not give effect to any adjustments to the carrying value or classification of assets or liabilities that might be necessary as a consequence of a plan of reorganization. 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 29, 2001, and the notes thereto. Newly-adopted accounting policies in 2002 are more fully described herein. 3. Voluntary Bankruptcy Filing On August 1, 2001, Holding and Homeland filed voluntary petitions (the 'Filing") 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, 7 3. Voluntary Bankruptcy Filing,continued: and In re Homeland Stores, Inc., Debtor, Case No. 01-17870TS, respectively ("Chapter 11 Cases"). Holding and Homeland continue in possession of their properties and the management of their businesses as debtors-in-possession pursuant to Section 1107 and Section 1108 of the Bankruptcy Code. Holding and Homeland continue to be managed by their respective directors and officers, subject in each case to the supervision of the Bankruptcy Court. JCH and SLB did not file voluntary petitions under the Bankruptcy Code as part of the Filing. Assets and results of operations of those entities are less than 1% of consolidated totals. The Debtors have received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations in the ordinary course of business, including critical trade creditors, employee wages and benefits and customer programs. As provided by the Bankruptcy Code, the Company initially has the exclusive right to propose a plan of reorganization ("Plan"). The Company's exclusive right was previously set to expire April 30, 2002, however, the Bankruptcy Court has approved the Company's petition to extend this deadline to May 31, 2002. The Company expects to file its proposed Plan in the second quarter of 2002. Nevertheless, the Company is currently executing a strategy to close unprofitable locations and to divest selected locations and markets. As of March 23, 2002, the Company operated 45 stores, and it intends to emerge from bankruptcy with a total of 44 stores. An Unsecured Creditors Committee has been appointed in the Chapter 11 Cases. In accordance with the provisions of the Bankruptcy Code, this committee will have the right to be heard on all matters that come before the Bankruptcy Court in the Chapter 11 Cases. The Company is required to bear certain of the committee's costs and expenses, including those of their counsel and other advisors. 4. Store Closings The Company adopted the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective December 30, 2001. SFAS No. 144 provides new guidance on the recognition of impairment losses on long-lived assets to be held and used or to be disposed of. The statement also broadens the definition of what constitutes a discontinued operation and how the results of a discontinued operation are to be measured and presented. The provisions did not have a material impact on the Company's impairment policy or net earnings; however, adoption of the standard resulted in classifying the operations of certain stores as discontinued operations in the accompanying unaudited interim consolidated financial statements for all periods presented. Effective December 30, 2001, the results of operations of certain owned and leased stores are presented as discontinued operations in accordance with the provisions of SFAS No. 144. The results of operations of stores to be closed or sold are presented as discontinued operations beginning in the quarter in which management commits to a plan to close the related store. The results of operation include current operating results, related write downs of inventories to estimated net realizable value and accruals for future estimated rent and other expenses. 8 The Company had previously disclosed its intentions of closing or selling 10 stores during the beginning of 2002. The Company recorded an asset impairment charge of $3.0 million related to these stores during the fourth quarter ended December 29, 2001. As of December 29, 2001, disposition of these 10 stores was subject to approval of the Bankruptcy Court and, therefore, no store closing charges were recorded in 2001. In the first quarter of 2002 and in connection with the sale or closing of these 10 stores, which was approved by the Bankruptcy Court the Company recorded a pretax charge of $1.0 million, which includes $0.9 million for the write-down of inventory,$0.4 million for holding costs, partially offset by a gain on the sale of one store of $0.3 million. Holding costs primarily consist of obligations under operating leases and related expenses expected to be paid over the remaining lease terms, until the leases are rejected, or until a store is sold. For the 12 weeks ended March 23, 2002 and March 24, 2001, the stores presented as discontinued operations had total sales of $7.2 million and $11.7 million, respectively, and pretax operating loss of $0.4 million and pretax operating income of $0.4 million, respectively. Of the ten stores described herein, 6 have been closed and 3 have been sold. The final store was sold on March 28, 2002, subsequent to the close of the first quarter 2002. As of March 23, 2002 and December 29, 2001, assets held for sale were $0.1 million and $2.3 million, respectively. As of March 23, 2002, reserves for closed stores, including discontinued operations, consist of the following:
Occupancy Other Reserve Severance Costs Costs Total --------- --------- ------- ------- Balance, December 29, 2001 $ 1,246 $ 2,714 $ 590 $ 4,550 January 2001 store closings: Costs charged against reserve -- (47) (5) (52) Bankruptcy related store closings: Closed store charge 285 470 97 852 (Costs) credits charged against reserve (1,531) (876) 127 (2,280) ------- ------- ------- ------- Balance, March 23, 2002 $ 0 $ 2,261 $ 809 $ 3,070 ======= ======= ======= =======
5. Liabilities Subject to Compromise and Reorganization Costs Pursuant to SOP 90-7, Homeland's pre-petition liabilities that are subject to compromise are reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of March 23, 2002, the components of the estimated pre-petition liabilities that are subject to compromise are as follows (amounts are in thousands): Debt, pre-petition plus accrued interest $63,000 Accounts payable 2,860 Other accrued liabilities 6,497 ------- Total: $72,357 =======
9 5. Liabilities Subject to Compromise and Reorganization Costs, continued: SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. As of March 23, 2002, the components of the reorganization items are as follows (amounts are in thousands): Store closing charge $ 446 Claims Expense (177) Fees 1,281 ------- Total: $ 1,550 =======
The store closing charge included above in reorganization costs relates to additional holding costs for stores closed in fiscal year 2001 and prior to the adoption of SFAS No. 144. In accordance with SOP 90-7, interest expense associated with unsecured debt has not been reported subsequent to the date of the Filing. The contractual amount of interest expense on those obligations exceeds the amount reported by $1.4 million during the 12 weeks ended March 23, 2002 and $3.9 million since August 1, 2001. 6. New Accounting Pronouncements Effective December 30, 2001, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prohibits the use of the pooling-of-interest method in accounting for business combinations and further clarifies the criteria to recognize intangible assets separately from goodwill. SFAS No. 141 is effective for business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite lives to no longer require amortization, but rather an annual review for impairment (or more frequently if impairment indicators arise). Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company had $5.1 million of goodwill as of December 29, 2001 (net of accumulated amortization) and March 23, 2002. There was no impact to the Company's financial statements as a result of adopting these standards. In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, effective for fiscal years beginning after June 15, 2002, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is currently assessing the impact of this pronouncement on its financial statements. 10 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 continuing operations consolidated income statement as a percentage of net sales for the periods indicated:
12 weeks ended ----------------------- March 23, March 24, 2002 2001 -------- -------- Net sales 100.0% 100.0% Cost of sales 74.8 75.3 Gross profit 25.2 24.7 Selling and administrative expenses22.9 22.8 Operating profit (loss) 2.3 1.9 Gain on disposal of assets -- -- Interest income 0.2 0.2 Interest expense (1.6) (2.3) Income (loss) from continuing operations before reorganization expense and income taxes 0.9 (0.2) Reorganization expense (2.0) -- Loss from continuing operations before income taxes (1.1) (0.2) Income tax benefit -- -- Loss from continuing operations (1.1) (0.2)
Results of Operations. COMPARISON OF THE TWELVE WEEKS ENDED MARCH 23, 2002 WITH THE TWELVE WEEKS ENDED MARCH 24, 2001 Unless otherwise noted, the results of operations for continuing stores represents a comparison of 44 stores for the twelve weeks ended March 23, 2002 with 68 stores for the twelve weeks ended March 24, 2001. The additional 24 stores in 2001 were stores that were closed in 2001 but are required, pursuant to the transitional rules of SFAS No. 144, to be presented as continuing operations since these stores were closed prior to the adoption of SFAS No. 144. Net sales decreased $35.9 million, or 31.6%, from $113.8 million for the twelve weeks ended March 24, 2001, to $77.9 million for the twelve weeks ended March 23, 2002. The decrease in sales is attributable to the closing of 24 stores and a 0.1% decline in comparable store sales. During the 12 weeks ended March 23, 2002, there were three new competitive openings within the Company's markets, all of which were Target Supercenters. Based on information publicly available, the Company expects that, during the remainder of 2002, Wal-Mart will open one Supercenter and one Neighborhood Market, Aldi will open one store, and independents will open two new stores. 11 The Company intends to emerge from bankruptcy with a total of 44 stores. Net sales for the 44 stores decreased $0.1 million, or 0.1%, from $78.0 million for the 12 weeks ended March 24, 2001 to $77.9 million for the 12 weeks ended March 23, 2002. Based in part on the anticipated impact of proposed and recent new store openings and remodelings by competitors, management believes that market conditions will remain highly competitive, placing continued pressure on these 44 comparable store sales and net sales. Management believes that comparable store sales for these 44 stores will decline approximately 2.0%, during the second quarter of 2002. In response to this highly competitive environment, the Company intends to utilize its merchandising strategy to emphasize a competitive pricing structure, as well as emphasizing 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. Gross profit as a percentage of sales increased 0.5%, from 24.7% for the twelve weeks ended March 24, 2001, to 25.2% for the twelve weeks ended March 23, 2002. The increase principally reflects the unfavorable gross profit performance of the stores that were closed in 2001 partially offset by a decline in gross profit margin in the core group of 44 stores. The decline in the 44 store group is attributable to lower rebates and allowances made available to the Company by its suppliers. Selling and administrative expenses as a percentage of sales increased 0.1% from 22.8% for the twelve weeks ended March 24, 2001, to 22.9% for the twelve weeks ended March 23, 2002. The increase in the operating expense ratio is attributable to increased employee benefit expenses (primarily health care costs), partially offset by lower wage expense as a result of increased productivity and lower supply costs. Operating profit decreased $0.3 million from $2.1 million for the twelve weeks ended March 24, 2001, to $1.8 million for the twelve weeks ended March 23, 2002. 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 expense dollars. Interest expense, net of interest income, decreased $1.3 million from $2.4 million for the twelve weeks ended March 24, 2001, to $1.1 million for the twelve weeks ended March 23, 2002. The decrease reflects a reduction in accrued interest since August 1, 2001 for the Notes (See Notes to Consolidated Financial Statements), a reduction in the variable interest rates, a reduction in interest income due to a lower interest rate on the interest bearing certificates of AWG, partially offset by the amortization of costs associated with obtaining the DIP Financing. In accordance with SOP 90-7, interest expense associated with unsecured debt has not been reported subsequent to the date of the Filing. The contractual amount of interest expense on those obligations exceeds the amount reported by $1.4 million during the 12 weeks ended March 23, 2002 and $3.9 million since August 1, 2001. See "Liquidity and Capital Resources." For the twelve weeks ended March 23, 2002, the Company recorded reorganization charges, which included a store closing charge (See Notes to Consolidated Financial Statements). The store closing charge of $0.4 million represents adjustments to holding costs for previously closed stores. Holding costs primarily consist of obligations under operating leases and related expenses expected to be paid over the remaining lease terms, until the leases are rejected, or until a store is sold. Finally, the reorganization charge also includes a reduction of $0.2 million in accrued liabilities related to potential bankruptcy claims and an expense of $1.3 million in fees attributable to bankruptcy expenses. The Company did not generate income tax expense or benefit for 2002 or 2001. In accordance with SOP 90-7, the tax benefit realized from utilizing pre-reorganization net operating loss carryforwards is 12 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 29, 2001, the Company had a tax net operating loss carryforward of approximately $45.3 million, which may be utilized to offset future taxable income to the limited amount of $27.4 million in 2002 and $3.3 million per year thereafter. If the Company successfully emerges under a confirmed Plan, further restrictions of net operating loss carryforwards could result. 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 March 23, 2002 and December 29, 2001. Loss from continuing operations decreased $0.6 million from a loss of $0.3 million for the twelve weeks ended March 24, 2001 to a loss of $0.9 million for the twelve weeks ended March 23, 2002. The decrease reflects the impact of the reorganization expense and the decline in operating income, partially offset by the decline in interest expense. Income from operation of discontinued stores decreased $1.8 million from income of $0.4 million for the twelve weeks ended March 24, 2001 to a loss of $1.4 million for the twelve weeks ended March 23, 2002. The decrease reflects a decline of $0.8 million in operating profit, a $0.9 million charge for inventory write-down, a $0.4 million charge for holding costs, partially offset by a $0.3 million gain on the sale of one store. Net income decreased $2.4 million from net income of $0.1 million, or net income per diluted share of $0.02, for the twelve weeks ended March 24, 2001 to net loss of $2.3 million, or net loss per diluted share of $0.47, for the twelve weeks ended March 23, 2002. EBITDA from continuing operations (as defined below) decreased $1.3 million from $4.6 million, or 4.1% of sales, for the twelve weeks ended March 24, 2001 to $3.3 million, or 4.2% of sales for the twelve weeks ended March 23, 2002. 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, as subsequently amended, 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 provided a working capital and letter of credit facility, and a term loan facility ("NBC Loan Agreement"). On August 1, 2001, the Bankruptcy Court approved the provision by the lenders led by NBC, of continued financing under the NBC Loan Agreement. 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 was shortened to August 18, 2001, from August 2, 2002, and the maximum amount available under the Revolving Facility was reduced to $33.0 million from $37.0 million. Additionally, the Bankruptcy Court approved the provision by Associated Wholesale Grocers, Inc. ("AWG"), the primary 13 supplier to the Company, of an advance of $3.1 million under a supply agreement between AWG and the Company. The advance provided by AWG bears interest at the prime rate plus 200 basis points per annum, has a maturity date of May 2002 and is secured by liens on, and security interest 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. On August 15, 2001, in connection with the Chapter 11 Cases, the Company entered into New Loan Agreements with Fleet Retail Finance Inc. ("Fleet"), Back Bay Capital Funding L.L.C. ("Back Bay") and Associated Wholesale Grocers, Inc. ("AWG") for debtor-in-possession financing ("DIP Financing") and paid amounts outstanding under the existing Loan Agreement with NBC and certain other lenders. Under the DIP Financing, Fleet and Back Bay provide a revolving credit facility ("Revolver") under which the Company may borrow the lesser of (a) $25.0 million or (b) the applicable borrowing base ($5.4 million at April 26, 2002), and a $10.0 million term loan for a maximum aggregate principal amount of $35.0 million. Funds borrowed under the Revolver were used to repay borrowings under the NBC Loan Agreement, pay certain pre-petition indebtedness approved by the Bankruptcy Court and for general corporate purposes of the Company. An additional $29.0 million of DIP financing was provided by AWG which included a new $16.5 million term loan (used to repay borrowings under the NBC Loan Agreement), a restated term loan totaling $9.4 million replacing previously outstanding acquisition-related loans, and a $3.1 million term loan representing an advance of rebate amounts expected to be earned by the Company under the 1995 Supply Agreement. The DIP Financing loans are 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. In conjunction with the AWG loans described above, the Company entered into a new 10-year supply agreement ("2001 Supply Agreement") with AWG, which contains volume protection rights, right of first refusal and non-compete agreements similar to those in the 1995 Supply Agreement with AWG. With the exception of the $9.4 million and $3.1 million term loans from AWG, the DIP Financing matures on the earlier of (a) August 1, 2003, (b) emergence through a confirmed plan of reorganization approved by the Bankruptcy Court or (c) other events as defined in the New Loan Agreements. The $9.4 million AWG term loan matures in February 2007 and the $3.1 million AWG term loan matures in May 2002. The Company has classified all long-term debt as current with the belief that the Company will emerge from bankruptcy protection during the third quarter of 2002. The interest rate payable on the Revolver can be characterized as either a London Interbank Offered Rate ("LIBOR") Loans, or base rate loan based on the prime rate publicly announced by Fleet National Bank plus a percentage which varies based on a number of factors, including: (a) excess availability under the Revolver; (b) the time period; and (c) whether the Company elects to use LIBOR. The current interest rate pricing under the Revolver is either the base rate plus 50 basis points or LIBOR plus 250 basis points. As of March 23, 2002, the Company had no borrowings under the Revolver and $7.5 million of excess availability. As of April 26, 2002, the Company had no borrowings under the Revolver and $8.5 million of excess availability ($5.4 million attributable to the borrowing base and $2.9 million of cash). The $10.0 million Back Bay term loan, which was fully funded on August 15, 2001, bears interest at an annual fixed rate of 16.50%. The $16.5 million AWG term loan, which was fully funded on August 15, 2001, bears interest at the prime rate plus 200 basis points (6.75% at March 23, 2002). There are no scheduled principal payments on either of the term loans; however, the Company is required to make certain mandatory prepayments as a result of asset sales or events of default as further defined in the New Loan Agreements. The application of the mandatory prepayments to the outstanding principal balances of the term loans is subject to an Inter-Creditor Agreement between Fleet/Back Bay and AWG. The AWG restated term loan has an outstanding balance as of March 23, 2002 of $8.5 million and bears 14 interest at the prime rate plus 100 basis points (5.75% at March 23, 2002), subject to minimum limitations. Principal payments are required weekly. The AWG Supply Agreement term loan has an outstanding balance as of March 23, 2002 of $0.9 million and bears interest at the prime rate plus 200 basis points (6.75% at March 23, 2002). Principal payments are required each four-week period. Subsequent to March 23, 2002, the Company fully re-paid the principal balance of the AWG Supply Agreement term loan. The New Loan Agreements include 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 New Loan Agreement also 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 (predecessor to State Bank and Trust Company), as trustee, under which the Company issued $60.0 million principal amount of 10% Senior Subordinated Notes due 2003 ("Notes"). Homeland failed to make the required $3.0 million interest payment on August 1, 2001, which constituted a default under the Indenture; enforcement by the holders of the Notes of their remedies is stayed by the Bankruptcy Code. During the second quarter of 2001, the Company began to experience increasing liquidity difficulties, particularly following amendments to the then effective NBC Loan Agreement in the second quarter reducing available credit on which NBC and the other lenders under the then effective NBC Loan Agreement insisted. While trade creditors generally continued to provide credit to the Company on customary credit terms during that quarter, some trade creditors imposed tighter credit terms, further reducing the liquidity of 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 trade terms received by the Company prior to the filing. 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. Working Capital and Capital Expenditures. The Company's primary sources of capital have been borrowing availability under revolving facilities 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, inventory write-down, store closing charges, asset impairment, reorganization items and 15 gain/loss on disposal of assets) from continuing operations 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 ended 12 weeks ended March 23, 2002 March 24, 2001 -------------- -------------- Loss from continuing operations before income taxes $ (865) $ (270) Reorganization expense 1,550 -- Interest income (149) (202) Interest expense 1,265 2,602 Gain on disposal of assets (8) (1) Depreciation and amortization 1,476 2,481 ------- ------- EBITDA from continuing operations $ 3,269 $ 4,610 ======= ======= As a percentage of sales 4.20% 4.05% ======= ======= As a multiple of interest expense, net of interest income 2.93x 1.92x ======= =======
Net cash provided by continuing operations increased $2.4 million from $1.8 million in 2001 to $4.2 million in 2002. The increase versus the prior year principally reflects favorable reductions in receivables and prepaid expenses, partially offset by the unfavorable decreases in other current liabilities, the payment of fees related to the bankruptcy, and the decline in EBITDA. Net cash provided by discontinued operations increased $2.6 million from $0.2 million in 2001 to $2.8 million in 2002. The increase principally reflects the liquidation of inventory for these stores. Net cash provided by investing activities increased $2.7 million, from net cash used in investing activities of $0.2 million in 2001 to net cash provided by investing activities of $2.5 million in 2002. The increase principally reflects the proceeds from the sale of assets. Capital expenditures decreased $0.1 million from $0.2 million for the 12 weeks ended March 24, 2001 to $0.1 million for the 12 weeks ended March 23, 2002. The Company invested $1.3 million, $5.5 million, and $9.0 million in capital expenditures for the years 2001, 2000, and 1999, respectively. Net cash used in financing activities increased $5.2 million from $5.2 million in 2001 to $10.4 million in 2002. The increase primarily reflects principal payments of the obligations of the DIP Financing during 2002. The Company considers its capital expenditure program a strategic part of the overall plan to support its market competitiveness. Cash capital expenditures for 2002 are expected to be at approximately 16 $4.7 million, assuming an emergence from the Bankruptcy during the 3rd quarter of 2002. The estimated 2002 capital expenditures, of $4.7 million, is expected to be invested primarily in the on-going maintenance and modernization of certain stores and in information technology. 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. The Company believes that cash on hand, net cash flow from operations, proceeds from certain expected asset sales and borrowings under the DIP Financing will be sufficient to fund its cash requirements through fiscal year 2002 or, if earlier, through the confirmed date of a plan of reorganization which will be contingent, in part, upon securing financing on acceptable terms. Cash requirements will consist primarily of payment of principal and interest on outstanding indebtedness, working capital requirements and capital expenditures. The Company's future operating performance and ability to service or refinance its current indebtedness 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. 17 PART II - OTHER INFORMATION Item 3. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Report on Form 8-K: The Company did not file any Form 8-K during the quarter ended March 23, 2002. 18 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, 2002 By: /s/ David B. Clark -------------------------------- David B. Clark, President, Chief Executive Officer, and Director (Principal Executive Officer) Date: May 7, 2002 By: /s/ Wayne S. Peterson -------------------------------- Wayne S. Peterson, Senior Vice President/Finance, Chief Financial Officer and Secretary (Principal Financial Officer) 19 -----END PRIVACY-ENHANCED MESSAGE-----