-----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, U34o7LWzRTvY8Mfq2GVymjH5/L5tq8SW3C9+E/XgSnSoMIDu/1MVLeL0ooLmuh/G sFsufmuKWWs5LuAk/YHgqQ== 0000835582-98-000002.txt : 19980403 0000835582-98-000002.hdr.sgml : 19980403 ACCESSION NUMBER: 0000835582-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980402 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 001-11555 FILM NUMBER: 98585840 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-K 1 CONFORMED COPY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the fiscal year ended January 3, 1998 OR Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the transition period from to . Commission file number 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 N. W. Expressway Oil Center - East, Suite 1100E Oklahoma City, Oklahoma 73112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (405) 879-6600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $ .01 per share. 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 of securities under a plan confirmed by a court. Yes X No State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 27, 1998: $25,543,164, based on a closing price of $7 7/8 of the registrant's common stock on the NASDAQ NMS. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 27, 1998: Homeland Holding Corporation Common Stock: 4,822,857 shares Documents incorporated by reference: None. HOMELAND HOLDING CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS................................................... 1 General.................................................... 1 Background................................................. 1 AWG Transaction............................................ 1 Restructuring.............................................. 2 Business Strategy.......................................... 3 Homeland Supermarkets...................................... 4 Merchandising Strategy and Pricing......................... 6 Customer Service........................................... 6 Advertising and Promotion.................................. 6 Products................................................... 7 Supply Arrangements........................................ 7 Employees and Labor Relations.............................. 8 Computer and Management Information Systems................ 9 Competition................................................ 10 Trademarks and Service Marks............................... 10 Regulatory Matters......................................... 11 ITEM 2. PROPERTIES................................................. 11 ITEM 3. LEGAL PROCEEDINGS.......................................... 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS........................... 12 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 12 i Page ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 16 Results of Operations...................................... 16 Liquidity and Capital Resources............................ 20 Recently-Issued Accounting Standards....................... 23 Year 2000.................................................. 23 Inflation/Deflation........................................ 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................... 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................... 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................... 25 Compliance with Section 16 (a) of the Securities Exchange Act of 1934 (the "1934 Act")...................... 28 ITEM 11. EXECUTIVE COMPENSATION..................................... 28 Summary of Cash and Certain Other Compensation............................................... 28 Compensation of Directors.................................. 30 Employment Agreements...................................... 31 Management Incentive Plan.................................. 32 Retirement Plan............................................ 32 Management Stock Option Plan............................... 33 Compensation Committee Report.............................. 33 Compensation Committee Interlocks and Insider Participation...................................... 33 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 34 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 37 ii Page SIGNATURES........................................................... II-1 INDEX TO FINANCIAL STATEMENTS AND EXHIBITS........................... F-1 EXHIBIT INDEX........................................................ E-1 iii HOMELAND HOLDING CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 3, 1998 ITEM 1. BUSINESS General Homeland Holding Corporation ("Holding"), through its wholly-owned subsidiary, Homeland Stores, Inc. ("Homeland," and, together with Holding, the "Company"), is a leading supermarket chain in the Oklahoma, southern Kansas and Texas Panhandle region. The Company operates in four distinct market places: Oklahoma City, Oklahoma; Tulsa, Oklahoma; Amarillo, Texas; and certain rural areas of Oklahoma, Kansas and Texas. As of March 18, 1998, the Company operates 70 stores throughout these markets. The Company's executive offices are located at 2601 N.W. Expressway, Oklahoma City, Oklahoma 73112, and its telephone number is (405) 879-6600. Background Holding and Homeland were organized as Delaware corporations in 1987 by a group of investors led by Clayton, Dubilier & Rice, Inc. ("CD&R"), a private investment firm specializing in leveraged acquisitions with the participation of management, for the purpose of acquiring substantially all of the assets and assuming specified liabilities of the Oklahoma division of Safeway Inc. ("Safeway"). The stores changed their name to "Homeland" in order to highlight the Company's regional identity. AWG Transaction On April 21, 1995, the Company sold 29 of its stores and its warehouse and distribution center to Associated Wholesale Grocers, Inc. ("AWG") pursuant to an Asset Purchase Agreement dated as of February 6, 1995 (the "AWG Purchase Agreement"), for a cash purchase price of approximately $72.9 million, including inventory, and the assumption of certain liabilities by AWG. At the closing, the Company and AWG also entered into a seven-year supply agreement, whereby the Company became a retail member of the AWG cooperative and AWG became the Company's primary supplier. The Company has purchased 15 shares of AWG Class A Common Stock, representing an equity position of 0.3%, in order to be a member of AWG. The transactions between the Company and AWG are referred to herein as the "AWG Transaction." AWG is a buying cooperative which sells groceries on a wholesale basis to its retail member stores. AWG has more than 800 member stores located in a ten-state region and is the nation's sixth largest grocery wholesaler, with approximately $3.1 billion in revenues in 1997. The AWG Transaction enabled the Company: (a) to reduce the Company's borrowed money indebtedness by approximately $37.2 million in the aggregate; (b) to have AWG assume, or provide certain undertakings with respect to, certain contracts and leases and certain pension liabilities of the Company; (c) to sell the Company's warehouse and distribution center, which eliminated the high fixed overhead costs associated with the operation of the warehouse and distribution center and thereby permitted the Company to close marginal and unprofitable stores; and (d) to obtain the benefits of becoming a member of the AWG cooperative, including increased purchases of private label products, special product purchases, dedicated support programs and access to AWG's store systems and participation in the membership rebate and patronage programs. Restructuring On May 13, 1996, Holding and Homeland filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Simultaneously with such filings, the Company submitted a "pre-arranged" plan of reorganization which set forth the terms of the restructuring of the Company (the "Restructuring"). The purpose of the Restructuring was to substantially reduce the Company's debt service obligations and labor costs and to create a capital and cost structure that would allow the Company to maintain and enhance the competitive position of its business and operations. The Restructuring was negotiated with, and supported by, the lenders under the Company's then existing revolving credit facility, an ad hoc committee (the "Noteholders Committee") representing approximately 80% of the Company's outstanding Old Notes (as defined in Note 2 - Reorganization in Notes to Consolidated Financial Statements) and the Company's labor unions. The Bankruptcy Court confirmed the Company's First Amended Joint Plan of Reorganization, as modified (the "Plan of Reorganization") on July 19, 1996, and the Plan of Reorganization became effective on August 2, 1996 (the "Effective Date"). Pursuant to the Restructuring, the $95 million of the Company's Old Notes (as defined hereinafter) plus accrued interest were cancelled, and the holders of the Old Notes received in the aggregate, $60 million face amount of newly-issued 10% Senior Subordinated Notes Due 2003 of the Company (the "New Notes") and $1.5 million in cash. In addition, the Noteholders and the Company's general unsecured creditors will receive approximately 60% and 35%, respectively, of the equity of reorganized Holding (assuming total unsecured claims of approximately $63 million, including Noteholder unsecured claims). Holding's existing equity holders will receive the remaining 5% of the new equity, together with five-year warrants to purchase an additional 5% of such equity. In connection with the Restructuring, the Company negotiated an agreement with its labor unions to modify certain elements of the Company's existing collective bargaining agreements. These modifications include, among other things, wage and benefit modifications, the buyout of certain employees and the issuance to and purchase of new equity by a trust acting on behalf of the unionized employees. The modified collective bargaining agreements became effective on the Effective Date. See "Business -- Employees and Labor Relations." On the Effective Date, the Company entered into a loan agreement (the "Loan Agreement") with National Bank of Canada ("NBC""), as agent and lender, and two other lenders, Heller Financial, Inc. and IBJ Schroder Bank and Trust Company, under which the lenders provided a working capital and letter of credit facility and a term loan. The Loan Agreement permits the Company to borrow, under the working capital and letter of credit facility, up to the lesser of: (a) $27.5 million (subsequently increased to $32 million in November 1997) and (b) the applicable borrowing base. Funds borrowed under such facility are available for general corporate purposes of the Company. The Loan Agreement also provides the Company a $10.0 million term loan, which has been used to fund certain obligations of the Company under the Plan of Reorganization, including an employee buyout offer and a health and welfare plan required by the modified collective bargaining agreements, professional fees and "cure amounts" relating to executory contracts, secured financing and unexpired leases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a description of the Loan Agreement. Business Strategy The Company's general business strategy is to continue to build and improve on its current strengths which consist of: (a) high quality perishable departments; (b) market leading position and competitive pricing; (c) customer service; (d) excellent locations; and (e) the "Homeland Savings Card," a customer loyalty card program. The Company is also able to effectively reach a large customer base with its weekly advertising inserts and radio and television media advertisement. In addition, the Company is upgrading its stores by focusing its capital expenditures on projects that will improve the overall condition of the stores. Having been in its market for more than 65 years (through its predecessor Safeway), the Company enjoys a high recognition with its customers. The Company continues to build this rapport with its customers by participating in local community events and offering the "Apples for Students" program, whereby schools can obtain computers and other educational products by collecting Homeland receipts. The Company is also a major sponsor of the Easter Seals program in its markets. The Company is anticipating growth in home meal replacement business through the development of hot and chilled meal solutions for lunch and dinner. Capital investment is being made to support the growth of these products and menus are being developed to match the quick meal and entertainment needs of its customers. The Company's plan also involves reviewing marginal and unprofitable stores for closing and reviewing new sites, independent stores or new markets for growth in its market share. The Company closed 14 stores in 1995 and closed 2 additional stores in 1996. The Company also sold its store in Ponca City, Oklahoma in April 1996. In 1997, the Company acquired 4 stores, two in Oklahoma City, Oklahoma, one in Shawnee, Oklahoma and the other in Lawton, Oklahoma. For additional information, see also "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Homeland Supermarkets The Company's current network of stores features three basic store formats. Homeland's conventional stores are primarily in the 25,000 total square feet range and carry the traditional mix of grocery, meat, produce and variety products. These stores contain more than 20,000 stock keeping units, including food and general merchandise. Sales volumes of conventional stores range from $60,000 to $125,000 per week. Homeland's superstores are in the 35,000 total square feet range and offer, in addition to the traditional departments, two or more specialty departments. Sales volumes of superstores range from $95,000 to $265,000 per week. Homeland's combo store format includes stores of approximately 45,000 total square feet and larger and was designed to enable the Company to expand shelf space devoted to general merchandise. Sales volumes of combo stores range from $140,000 to $310,000 per week. The Company's new stores and certain remodeled locations have incorporated Homeland's new, larger superstore and combo formats. Of the 70 stores operated by the Company as of March 18, 1998, 10 are conventional stores, 49 are superstores and 11 are combo stores. The chart below summarizes Homeland's store development over the last three fiscal years: Fiscal Year Ended 1/3/98 (1) 12/28/96 12/30/95 Average sales per store (in millions).............................$ 7.9 $ 7.9 $ 7.9 (2) Average total square feet per store....................................37,232 37,295 38,204 (2) Average sales per square foot................................... $212 $212 $207 (2) Number of stores: Stores at start of period.................... 66 68 111 Stores remodeled............................. 6 4 5 New stores opened............................ 4 1 0 Stores sold or closed........................ 0 3 43 Stores at end of period...................... 70 66 68 Size of stores: Less than 25,000 sq. ft...................... 7 7 8 25,000 to 35,000 sq. ft...................... 27 24 24 35,000 sq. ft. or greater.................... 35 35 36 Store formats: Conventional................................. 10 10 11 SuperStore................................... 49 45 44 Combo........................................ 11 11 13 (1) 53 weeks' data. (2) Reflects the operations of the 68 stores remaining after the AWG Transaction. The Company's network of stores is managed by district managers on a geographical basis through four districts. Each district manager oversees store operations for approximately 17 stores. Store managers are responsible for determining staffing levels, managing store inventories (within the confines of certain parameters set by the Company's corporate headquarters) and purchasing products. Store managers have significant flexibility with respect to the quantities of items carried while the Company's corporate headquarters is directly responsible for merchandising, advertising, pricing and capital expenditure decisions. Merchandising Strategy and Pricing The Company's merchandising strategy emphasizes a competitive pricing structure, as well as leadership in quality products and service, selection, convenient store locations, specialty departments and perishable products (i.e., meat, produce, bakery and seafood). The Company's strategy is to price competitively with targeted supermarket operator in each market area. In certain areas with discount store competition, the Company will be competitive on high-volume, price sensitive items. The Company's in-store promotion strategy is to offer all display items at a lower price than the store's regular price and at or below the price offered by the store's competitors. The Company also offers double coupons, with some limitations, in all areas in which it operates. Customer Service The Company's stores provide a variety of customer services including, among other things, carry-out services, facsimile services, automated teller machines, pharmacies, video rentals, check cashing, utility payments, money transfers and money orders. The Company believes it is able to attract new customers and retain its existing customers because of its level of customer service and convenience. Advertising and Promotion All advertising and promotion decisions are made by the Company's corporate merchandising and advertising staff. The Company's advertising strategy is designed to enhance its value-oriented merchandising concept and emphasize its reputation for variety and quality. Accordingly, the Company is focused on presenting itself as a competitively-priced, promotions-oriented operator that offers value to its customers and an extensive selection of high quality merchandise in clean, attractive stores. This strategy allows the Company to accomplish its marketing goals of attracting new customers and building loyalty with existing customers. In addition, new signage was implemented in the stores calling attention to various in-store specials and creating a friendlier and more stimulating shopping experience. The Company currently utilizes a broad range of print and broadcast advertising in the markets it serves, including newspaper advertisements, advertising inserts and circulars, television and radio commercials and promotional campaigns that cover substantially all of the Company's markets. The Company receives cooperative and performance advertising reimbursements from vendors which reduce its advertising costs. In September 1995, the Company introduced a customer loyalty card called the "Homeland Savings Card," in its Amarillo, Texas stores. The Company introduced the "Homeland Savings Card" in its other stores in August 1996. The Company believes that it is the only supermarket chain in its market area that can capitalize on a customer loyalty card program because of the Company's advertising coverage and its leading market share. Products The Company provides a wide selection of name-brand and private label products to its customers. All stores carry a full line of meat, dairy, produce, frozen food, health and beauty aids and selected general merchandise. As of the close of fiscal year 1997, approximately 83% of the Company's stores had service delicatessens and/or bakeries and approximately 63% had in-store pharmacies. In addition, some stores provide additional specialty departments that offer ethnic food, fresh and frozen seafood, floral services and salad bars. The Company's private label name is "Pride of America." The Company's private label program allows customers to purchase high quality products at lower than national brand retail prices. The Company's private label products include over 400 items covering most major categories in the Company's stores, including dairy products, meat, frozen foods, canned fruits and vegetables and eggs. As a result of the Company's supply relationship with AWG, the Company's stores also offer certain AWG private label goods, including Best Choice and Always Save. Private label products generally represent quality and value to customers and typically contribute to a higher gross profit margin than national brands. The promotion of private label products is an integral part of the Company's merchandising philosophy of building customer loyalty as well as improving the Company's "pricing image." Supply Arrangements The Company is a party to the supply agreement with AWG (the "Supply Agreement"), pursuant to which the Company became a member of the AWG cooperative and AWG became the Company's primary supplier. AWG currently supplies approximately 70% of the goods sold in the Company's stores. See "Business -- AWG Transaction." Pursuant to the Supply Agreement, AWG is required to supply products to the Company at the lowest prices and on the best terms available to AWG's retail members. In addition, the Company is: (a) eligible to participate in certain cost-savings programs available to AWG's other retail members; (b) is entitled to receive certain member rebates and refunds based on the dollar amount of the Company's purchases from AWG's distribution center; and (c) is to receive periodic cash payments from AWG, up to a maximum of $1.2 million per fiscal quarter, based on the dollar amount of the Company's purchases from AWG's distribution centers during such fiscal quarter. The Company purchases goods from AWG on an open account basis. AWG requires that each member's account be secured by a letter of credit or certain other collateral in an amount based on such member's estimated weekly purchases through the AWG distribution center. The Company's open account with AWG, as of March 18, 1998, is secured by a $3.3 million letter of credit (the "AWG Letter of Credit") issued in favor of AWG by NBC. In addition, the Company's obligations to AWG are secured by a first lien on all "AWG Equity" owned from time to time by the Company, which includes, among other things, AWG membership stock, the Company's right to receive monthly payments and certain other rebates, refunds and other credits owed to the Company by AWG (including patronage refund certificates, direct patronage or year-end patronage and concentrated purchase allowances). The amount of the AWG Letter of Credit may be decreased on a biannual basis upon the request of the Company based on the Company's then-current average weekly volume of purchases and by an amount equal to the face amount of the Company's issued and outstanding AWG patronage refund certificates. In the event that the Company's open account with AWG exceeds the amount of the AWG Letter of Credit plus any other AWG Equity held as collateral for the Company's open account, AWG is not required to accept orders from, or deliver goods to, the Company until the amount of the AWG Letter of Credit has been increased to make up for any such deficiency. The Supply Agreement with AWG contains certain "Volume Protection Rights," including: (a) the right of first offer (the "First Offer Rights") with respect to any proposed sales of stores supplied under the Supply Agreement (the "Supplied Stores") and a sale of more than 50% of the outstanding stock of Holding or Homeland to an entity primarily engaged in the retail or wholesale grocery business; (b) the Company's agreement not to compete with AWG as a wholesaler of grocery products during the term of the Supply Agreement; and (c) the Company's agreement to dedicate the Supplied Stores to the exclusive use of a retail grocery facility owned by a retail member of AWG (the "Use Restrictions"). The Company's agreement not to compete and the Use Restrictions contained in the Supply Agreement are terminable with respect to a Supplied Store upon the occurrence of certain events, including the Company's compliance with AWG's First Offer Rights with respect to any proposed sale of such store. In addition, the Supply Agreement provides AWG with certain purchase rights in the event the Company closes 90% or more of the Supplied Stores. Employees and Labor Relations At March 18, 1998, the Company had a total of 4,287 employees, of whom 3,001, or approximately 70%, were employed on a part-time basis. The Company employs 4,181 in its supermarket operations. The remaining employees are corporate and administrative personnel. The Company is the only unionized grocery chain in its market areas. Approximately 91% of the Company's employees are union members, represented primarily by the United Food and Commercial Workers of North America ("UFCWNA"). In March and April of 1996, prior to the Restructuring, the Company entered into new collective bargaining agreements with the UFCWNA and the local union chapter of the Bakery, Confectionery and Tobacco Workers International Union (collectively, the "Modified Union Agreements"). The Modified Union Agreements have a term of five years commencing on the Effective Date. The Modified Union Agreements consist of five basic elements: (a) wage rate and benefit contribution reductions and work rule changes; (b) the Employee Buyout Offer, pursuant to which the Company made up to $6.4 million available for the buyout of certain unionized employees; (c) the establishment of an employee stock option trust (acting on behalf of the Company's unionized employees), which will receive, or be entitled to purchase, up to 522,222 shares of New Common Stock, or 10% of the New Common Stock, pursuant to the terms of the Modified Union Agreements; (d) the UFCWNA's right to designate one member of the Boards of Directors of Homeland and Holding following the Restructuring; and (e) the elimination of certain "snap back" provisions, incentive plans and "maintenance of benefits" provisions. Upon the consummation date of the Employee Buyout Offer, 833 of the Company's unionized employees accepted the Employee Buyout Offer. The Company paid approximately $6.0 million in the aggregate (which excludes the Company's portion of payroll taxes) with each employee receiving an amount that ranged from $4,500 to $11,000 (depending on job classification, date of hire and full- or part-time status). The Employee Buyout Offer payment was funded through borrowings under the Loan Agreement. Computer and Management Information Systems During 1995, the Company installed new client/server systems in order to enhance its information management capabilities, improve its competitive position and enable the Company to terminate its outsourcing arrangement. The new systems include the following features: time and attendance, human resource, accounting and budget tracking, and scan support and merchandising systems. In 1997, the Company installed a direct store delivery system and a check verification and credit card system. The Company is currently installing a centralized scale and pricing system for its meat, deli and bakery departments with installation expected to be completed by the end of 1998. The Company has scanning checkout systems in all of its 70 stores. The Company will continue to invest and upgrade its scanning and point-of-sale systems to improve efficiency. The Company utilizes the information collected through its scanner systems to track sales and to coordinate purchasing. The Company also utilizes the information collected on the purchases made by its "Homeland Savings Card" holders to target its promotional activities on this market segment. See "Business -- Advertising and Promotion." Competition The supermarket business in the Company's market area is highly competitive, but very fragmented, and includes numerous independent operators. The Company estimates that these operators represent a substantial percentage of its markets. The Company also competes with larger store chains such as Albertson's and Wal-Mart, which operate 27 stores and 13 stores, respectively, in the Company's market areas, "price impact" stores such as Crest, large independent store groups such as IGA, regional chains such as United and discount warehouse stores. The Company is a leading supermarket chain in Oklahoma, southern Kansas and the Texas Panhandle region. The Company attributes its leading market position to certain advantages it has over certain of its competitors including its high quality perishable departments, effective advertising, excellent long-standing store locations and a strong reputation within the communities in which the Company operates. The Company's business has been adversely affected in recent years by the entry of new competition into the Company's key markets, which has resulted in a decline in the Company's comparable store sales in 1995 and 1997. In 1995, there were 8 competitive openings in the Company's market areas including 1 new Wal-Mart supercenter and 3 new Albertson's. In 1996, there were 6 additional competitive openings in the Company's market areas, including 1 new Albertson's. In 1997, there were 8 additional competitive openings in the Company's market area, including 3 new Wal-Mart's and 2 new Albertson's. Based on information publicly available, the Company expects that, between mid- to late-1998, Albertson's will open 1 new store, Wal-Mart will open 3 new stores and independents will open 3 additional stores. Trademarks and Service Marks During the transition from "Safeway" to "Homeland," the Company was able to generate a substantial amount of familiarity with the "Homeland" name. The Company continues to build and enhance this name recognition through promotional advertising campaigns. The "Homeland" name is considered material to the Company's business and is registered for use as a service mark and trademark. The Company has received federal and certain state registrations of the "Homeland" mark as a service mark and a trademark for use on certain products. The Company also received a federal registration of the service mark "A Good Deal Better" in early 1994. Regulatory Matters Homeland is subject to regulation by a variety of local, state and federal governmental agencies, including the United States Department of Agriculture, state and federal pharmacy regulatory agencies and state and local alcoholic beverage and health regulatory agencies. By virtue of this regulation, Homeland is obligated to observe certain rules and regulations, the violation of which could result in suspension or revocation of various licenses or permits held by Homeland. In addition, most of Homeland's licenses and permits require periodic renewals. To date, Homeland has experienced no material difficulties in obtaining or renewing its licenses and permits. ITEM 2. PROPERTIES Of the 70 supermarkets operated by the Company, 14 are owned by Homeland and the balance are held under leases which expire at various times between 1998 and 2016. Most of the leases are subject up to six (6) five-year renewal options. Out of 56 leased stores, only four have terms (including option periods) of fewer than 10 years remaining. Most of the leases require the payment of taxes, insurance and maintenance costs and many of the leases provide for additional contingent rentals based on sales in excess of certain stipulated amounts. No individual store operated by Homeland is by itself material to the financial performance or condition of Homeland as a whole. The average rent per square foot under Homeland's existing leases is $3.12 (without regard to amortization of beneficial interest). Substantially all of the Company's properties are subject to mortgages securing the borrowings under the Loan Agreement (see "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources"). ITEM 3. LEGAL PROCEEDINGS The Company is a party to ordinary routine litigation incidental to its business. Homeland and Holding were debtors in cases styled In re Homeland Holding Corporation, Debtor, Case No. 96-748 (PJW), and In re Homeland Stores, Inc., Debtor, Case No. 96-747 (PJW), initiated with the Bankruptcy Court on May 13, 1996. While the Plan of Reorganization was confirmed on July 19, 1996, and became effective on August 2, 1996, the Company is still involved in the resolution of claims filed in these proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted by Holding to a vote of Holding's security holders during the quarter ended January 3, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS The Common Stock of Holding commenced public trading on the Nasdaq National Market System ("Nasdaq/NMS") on April 14, 1997. On March 18, 1998, there are 577 stockholders of record. High and low sales prices of the Common Stock as reported by Nasdaq/NMS for each fiscal quarter of 1997 following the commencement of the Nasdaq/NMS listing are listed below: High Low June 14, 1997 $9.000 $6.250 September 6, 1997 $8.813 $7.500 January 3, 1998 $9.000 $6.500 As additional claims are resolved pursuant to the Plan of Reorganization, the Company expects that the number of stockholders will increase, assuming that there is no change in the number of current stockholders. No cash dividends were declared or paid during the last two years. Holding is restricted from paying dividends by the Loan Agreement and Indenture. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company which has been derived from financial statements of the Company for the 53 weeks ended January 3, 1998, and 20 weeks ended December 28, 1996 (Successor Company), the 32 weeks ended August 10, 1996, and the 52 weeks ended December 30, 1995, December 31, 1994, and January 1, 1994 (Predecessor Company), respectively, which have been audited by Coopers & Lybrand L.L.P. See "Notes to Selected Consolidated Financial Data" for additional information. As discussed in "Business -- Restructuring," the Company emerged from Chapter 11 proceedings effective August 2, 1996. For financial reporting purposes, the Company accounted for the consummation of the Restructuring effective as of August 10, 1996. The Company has adopted "fresh-start" reporting pursuant to SOP No. 90-7. The periods prior to the Restructuring have been designated "Predecessor Company" and the periods subsequent to the Restructuring have been designated "Successor Company." The selected consolidated financial data should be read in conjunction with the respective consolidated financial statements and notes thereto which are contained elsewhere herein.
(In thousands, except per share amounts) Successor Company Predecessor Company 53 weeks 20 weeks 32 weeks 52 weeks 52 weeks 52 weeks ended ended ended ended ended ended 1/3/98 12/28/96 8/10/96 12/30/95 12/31/94 01/01/94 Summary of Operations Data: Sales, net $ 527,993 $ 204,026 $ 323,747 $ 630,275 $ 785,121 $ 810,967 Cost of sales 401,691 154,099 244,423 479,119 588,405 603,220 Gross profit 126,302 49,927 79,324 151,156 196,716 207,747 Selling and administrative expense 112,322 44,029 73,000 151,985 196,643 190,483 Operational restructuring costs (1) - - - 12,639 23,205 - Amortization of excess reorganization value (2) 14,527 5,819 - - - - Operating profit (loss) (547) 79 6,324 (13,468) (20,132) 17,264 Gain on sale of plants - - - - - 2,618 Interest expense (8,408) (3,199) (5,639) (15,992) (18,067) (18,928) Income (loss) before reorganization items, income taxes and extraordinary items (8,955) (3,120) 685 (29,460) (38,199) 954 Reorganization items (3) - - (25,996) - - - Income tax benefit (provision) (1,689) - - - (2,446) 3,252 Income (loss) before extraordinary items (10,644) (3,120) (25,311) (29,460) (40,645) 4,206 Extraordinary items (4)(5)(6) - - 63,118 (2,330) - (3,924) Net income (loss) (10,644) (3,120) 37,807 (31,790) (40,645) 282 Reduction in redemption value - redeemable common stock - - - 940 7,284 - Net income (loss) available to common stockholders $ (10,644) $ (3,120) $ 37,807 $ (30,850) $ (33,361) $ 282 Basis and diluted net income (loss) per common share (7) $ (2.23) $ (0.66) $ 1.16 $ (0.93) $ (0.96) $ 0.01 Consolidated Balance Sheet Data: 1/3/98 12/28/96 8/10/96 12/30/95 12/31/94 01/01/94 Total assets $ 166,041 $ 168,486 $ 129,679 $ 137,582 $ 239,134 $ 274,290 Long-term obligations, including current portion of long-term debt obligations $ 86,002 $ 80,568 $ 124,411 $ 124,242 $ 176,731 $ 172,600 Redeemable common stock $ - $ - $ 17 $ 17 $ 1,235 $ 8,853 Stockholders' equity (deficit) $ 42,324 $ 52,941 $ (38,057) $ (28,106) $ 4,071 $ 36,860
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA (In thousands) (1) Operational restructuring costs during 1995 included the write-off of software no longer utilized by the Company, the write-off of goodwill in connection with the Restructuring and a termination charge resulting from the cancellation of the Company's computer outsourcing agreement. Operational restructuring costs during 1994 included the estimated losses to be incurred on the AWG Transaction and associated expenses and the estimated losses and expenses in connection with the anticipated closing of 15 stores during 1995. (2) The Company's reorganization value in excess of amounts allocable to identifiable assets, established in accordance with "fresh-start" reporting, of $45,389 is being amortized on a straight-line basis over three years. (3) As a result of the Company's Restructuring, the Company recorded certain reorganization expenses separately in accordance to SOP 90-7. Reorganization items for 1996 consist of: (a) $7,200 of allowed claims in excess of liabilities; (b) $4,250 in professional fees; (c) $6,386 in employee buyout expenses; and (d) $8,160 in adjusting certain assets and liabilities to estimated fair value. (4) Extraordinary items during 1996 consist of obligations of the Company that were discharged by the Bankruptcy Court pursuant to the Company's Plan of Reorganization. (5) Extraordinary items during 1995 included the payment of $906 in premiums and consent fees on the redemption of $15,600 of the Company's Old Notes and the write-off of $1,424 in unamortized financing costs related to the Old Notes so redeemed and the prior revolving credit facility. (6) Extraordinary items during 1993 included the payment of approximately $2,776 in premiums on the redemption of $47,750 in aggregate principal amount of the Company's remaining 15-1/2% Subordinated Notes due November 1, 1997 (the "Subordinated Notes") at a purchase price of 105.8% of the outstanding principal amount, and the write-off of $1,148 in unamortized financing costs related to the Subordinated Notes so redeemed. (7) Old Common Stock held by management investors are presented as redeemable common stock and excluded from stockholder's equity since the Company had agreed to repurchase such shares under certain defined conditions, such as death, retirement or permanent disability. In addition, net income (loss) per common share reflects the accretion in/reduction to redemption value as a reduction/increase in income available to all common stockholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations General As discussed in Note 2 to the accompanying Consolidated Financial Statements of Holding and Subsidiary, the Company's Plan of Reorganization became effective on August 2, 1996. For financial reporting purposes, the Company accounted for the consummation of the Restructuring effective as of August 10, 1996. The Company has adopted "fresh-start" reporting pursuant to SOP No. 90-7. The periods prior to the Restructuring have been designated "Predecessor Company" and the periods subsequent to the Restructuring have been designated "Successor Company." For purposes of the discussion of Results of Operations and Liquidity and Capital Resources for the fifty-two weeks ended December 28, 1996, the results of the Predecessor Company and Successor Company have been combined. Because of the adjustments associated with the adoption of "fresh-start" reporting pursuant to SOP No. 90-7, the periods prior to and subsequent to the Effective Date for financial reporting purposes are not necessarily comparable. In addition, it is difficult to identify trends between periods which are not necessarily comparable, particularly to the extent prior trends have been affected by the Restructuring. The table below sets forth selected items from the Company's consolidated income statement as a percentage of net sales for the periods indicated: Fiscal Year 1997 1996 1995 Sales, net.................................. 100.00% 100.00% 100.00% Cost of sales............................... 76.08 75.51 76.02 Gross profit............................... 23.92 24.49 23.98 Selling and administrative.................. 21.27 22.17 24.11 Amortization of excess reorganization value...................... 2.75 1.10 - Operational restructuring costs............. - - 2.01 Operating profit (loss)..................... (0.10) 1.22 (2.14) Interest expense............................ (1.59) (1.67) (2.53) Income (loss) before reorganization items, income taxes and extraordinary items........................ (1.69) (0.45) (4.67) Reorganization items........................ - (4.93) - Income (loss) before income taxes and extraordinary items.............. (1.69) (5.38) (4.67) Income tax benefit (provision).............. (0.32) - - Income (loss) before extraordinary items........................ (2.01) (5.38) (4.67) Extraordinary items......................... - 11.96 (0.37) Net income (loss)........................... (2.01) 6.58 (5.04) Comparison of Fifty-Three Weeks Ended January 3, 1998, with Fifty- Two Weeks Ended December 28, 1996. Net sales for 1997 amounted to $528.0 million, a slight increase from the net sales of $527.8 million in 1996. The slight increase is attributable to the additional week in 1997 and the newly acquired stores. Excluding the additional week, 1997 net sales were $517.2 million, a 2% decline from 1996. The Company acquired four new stores in 1997, one on August 11, 1997, and the other three on October 15, 1997. The Company's comparable store sales for the 66 stores that were in operation throughout 1997 decreased 3.2%. The decrease in comparable store sales was attributable to the eight new competitive store openings and lower food price inflation as well as lower sales to food stamp recipients as a result of more stringent eligibility requirements. The decrease was somewhat offset by grand opening events at certain of the Company's stores plus the closing of five Food Lion stores in the Company's market area in October 1997. Gross profit as a percentage of sales decreased to 23.9% in 1997 compared to 24.5% in 1996. The decrease in gross profit margin was primarily a result of increased promotional activities as the Company responded to certain new competitive store openings and special advertisements at the grand openings of six remodeled stores. Selling and administrative expenses as a percentage of sales decreased in 1997 to 21.3% of sales as compared to 22.2% in 1996. The decrease in selling and administrative expense is primarily a result of lower labor costs associated with the Modified Union Agreements and lower occupancy cost that resulted from renegotiated leases. The labor savings from the Modified Union Agreements were somewhat offset by the federally-mandated minimum wage increases. The amortization of the excess reorganization value amounted to $14.5 million in 1997. The excess reorganization value is being amortized over three years, on a straight line basis. The excess reorganization value will be fully amortized by the third quarter of 1999. Interest expenses decreased slightly to $8.4 million in 1997 from $8.8 million in 1996. The decrease is a result of higher borrowings by the Predecessor Company during the 32 weeks ended August 10, 1996, and to a lesser degree, a decline in interest rates. The Company recorded $1.7 million of income tax expense for 1997, of which $1.6 million was deferred income tax. In accordance with SOP 90-7, the tax benefit realized from utilizing the 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. At January 3, 1998, the Company had a tax net operating loss carryforward of approximately $40.9 million, which may be utilized to offset future taxable income to the limited amount of $3.5 million for 1998 and $3.3 million per year thereafter. EBITDA (as defined hereinafter) amounted to $22.5 million or 4.3% of net sales in 1997 as compared to $19.5 million or 3.7% of net sales in 1996. The improvement in EBITDA resulted primarily from reduced selling and administrative expenses. 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 Fifty-Two Weeks Ended December 28, 1996, with Fifty- Two Weeks Ended December 30, 1995. Net sales for 1996 amounted to $527.8 million, a decrease of 16.3% from the net sales of $630.3 million in 1995, which is attributable primarily to a decline in the number of stores operated by the Company. The Company began 1996 with 68 stores. In April 1996, it sold one store and closed two additional stores during the year. The Company opened one new store in December 1996 but its impact on net sales was negligible. The Company's comparable store sales for the 65 stores in operation through 1996 increased by 0.3%. This increase was due primarily to the introduction of the "Homeland Savings Card" in August 1996, and increased promotional activities. See "Business - - Advertising and Promotion." Gross profit as a percentage of sales for 1996 increased to 24.5% from 24.0% in 1995. This improvement in gross profit is attributable to an improved purchasing environment resulting from the Company better adapting to purchasing its merchandise from AWG, rather than operating on a self-supplied basis as it did prior to April 1995. See "Business -- AWG Transaction." During 1995 (after the consummation of the AWG Transaction in April 1995), the Company experienced a number of difficulties associated with this conversion from self-supply. These difficulties were largely resolved in 1996 and the Company improved its purchasing skills. The higher gross profit from the improved purchasing environment was partially offset by more promotional activities in the fourth quarter of 1996 with the introduction of the "Homeland Savings Card." Selling and administrative expenses as a percentage of sales decreased in 1996 to 22.2% of sales from 24.1% in 1995. The percentage decline is due to cost controls, including reductions in corporate support functions and lower operating and occupancy costs commencing as of the Effective Date. These lower costs include the wage rate and benefit contribution reduction associated with the Modified Union Agreements, certain lease and secured financing concessions, and the rejection of certain burdensome executory contracts in connection with the Restructuring. See "Business -- Restructuring." Cost savings from the Modified Union Agreements were somewhat offset by increased costs associated with training new employees that were hired to replace the 19% of the work force that accepted the Employee Buyout Offer and by an increase in the federally mandated minimum wage on October 1, 1996. See "Business -- Employees and Labor Relations." Interest expense decreased from $16.0 million in 1995 to $8.8 million in 1996. This decrease is primarily due to the non-accrual of interest on the Old Notes during the bankruptcy proceedings and the restructuring of certain indebtedness of the Company, principally the Old Notes, during 1996. The decline in indebtedness associated with the restructuring of the Old Notes was offset, in part, by the term loan obtained by the Company under the Plan of Reorganization to fund certain costs associated with the Restructuring. The Company recorded reorganization expenses of $26.0 million in 1996. The reorganization expenses consisted primarily of professional fees and "fresh-start" reporting adjustments. The excess reorganization value is being amortized over a three-year period and the amortized amount for 1996 was $5.8 million, reflecting amortization commencing after the Effective Date. The Company did not record any provision for income taxes for 1996. Operating loss carryforwards of the Company have been partially reduced by the debt discharged pursuant to the Plan of Reorganization. At December 28, 1996, the Company had tax net operating loss carryforwards of approximately $42.0 million. As of the Effective Date, pursuant to the terms of the Plan of Reorganization, certain debt of the Company, principally related to the Old Notes and the general unsecured claims of the Company, was discharged. This resulted in a recognition of extraordinary gain amounting to $63.1 million. EBITDA, before operational restructuring costs, amounted to $19.5 million or 3.69% of net sales in 1996 versus $10.5 million or 1.67% of net sales in 1995. The improvement in EBITDA is due primarily to factors reflected above including improved comparable store sales and decreases in selling and administrative expenses and interest expense associated with the Restructuring. 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 the Effective Date, pursuant to the Plan of Reorganization, the Company entered into a Loan Agreement with NBC, as agent and lender, and two other lenders, Heller Financial, Inc. and IBJ Schroder Bank and Trust Company (subsequently assigned its position to IBJ Schroder Business Credit Corporation), under which those lenders provided a working capital and letter of credit facility and a term loan. The Loan Agreement permitted the Company to borrow, under the working capital and letter of credit facility, up to the lesser of (a) $27.5 million or (b) the applicable borrowing base. Funds borrowed under such facility are available for general corporate purposes of the Company. The Loan Agreement also provided the Company a $10.0 million term loan (the "Term Loan"), which was used to fund certain obligations of the Company under the Plan of Reorganization, including the Employee Buyout Offer and a new health and welfare plan required by the Modified Union Agreements, professional fees and "cure amounts" which were required to be paid under the Plan of Reorganization in connection with executory contracts, secured financing and unexpired leases. On November 24, 1997, the Company entered into an amendment to the Loan Agreement (the "Amendment") with its lenders which increased the maximum amount available under the working capital and letter of credit facility from $27.5 million to $32.0 million, added vendor receivables to the borrowing base (with an advance rate of 65%) and otherwise addressed the acquisition and conversion of the three Food Lion stores. The interest rate 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) the amount which is part of the working capital and letter of credit facility and the amount which is part of the term loan, (b) the time period, (c) whether the Company elects to use a London Interbank Offered Rate, and (d) the earnings of the Company before interest, taxes, depreciation and amortization expenses. The indebtedness under the Loan Agreement matures on August 1, 1999. The Term Loan, however, requires a principal paydown of approximately $0.4 million each calendar quarter. As of March 18, 1998, $9.2 million of the Term Loan remains outstanding. 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. The Loan Agreement also requires the Company to comply with certain financial and other covenants. As of the Effective Date, the Company entered into an Indenture with Fleet National Bank, as trustee, under which the Company issued $60.0 Million of New Notes. The New Notes, which are unsecured, will mature on August 1, 2003. Interest on the New 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 credit 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 interest, taxes, depreciation and amortization) before operational restructuring costs, as presented below, is the Company's measurement of internally-generated operating cash for working capital needs, capital expenditures and payment of debt obligations: 53 Weeks Ended 52 Weeks Ended January 3, December 28, December 30, 1998 1996 1995 Income before reorganization items, income taxes and extraordinary items $ (8,955) $ (2,435) $(29,460) Interest expense 8,408 8,838 15,992 Amortization of excess reorganization value 14,527 5,819 - Operational restructuring costs - - 12,639 Depreciation and amortization 8,525 7,243 11,373 EBITDA $ 22,505 $ 19,465 $ 10,544 As a percentage of sales 4.26% 3.69% 1.67% As a multiple of interest expense 2.68x 2.20x 0.66x The Company has positive cash flow from operations of $12.4 million as compared to negative cash flow of $3.7 million and $8.0 million for 1996 and 1995, respectively. The improvement in cash flow in 1997 was largely the result of improved operating performance and better working capital management. The Company's investing activities used net cash of $14.0 million and $5.2 million for 1997 and 1996, respectively, while it provided net cash of $65.1 million in 1995. The substantial increase in cash provided in investing activities for 1995 was the result of the sale of the warehouse, 29 stores and inventory to AWG. The Company invested $14.0 million, $6.9 million and $4.7 million in capital expenditures for 1997, 1996 and 1995, respectively. In August 1997 and October 1997, the Company acquired a Pratt Discount Food store and three Food Lion stores, respectively. The acquisitions amounted to approximately $3.6 million. The capital expenditures for 1997 were funded by internally-generated cash flows from operations and the revolving credit facility under the Loan Agreement. Financing activities of the Company provided net cash of $4.9 million and $4.0 million in 1997 and 1996, respectively, and used net cash of $51.0 million in 1995. The net cash provided in financing activities for 1997 was primarily the result of borrowings under the revolving facility of the Loan Agreement. The Company considers its capital expenditure program a critical and strategic part of the overall plan to support its market competitiveness. Cash capital expenditures for 1998 are expected to be at approximately $12.9 million. The Loan Agreement limits the Company's capital expenditures for 1998 to $13.0 million in cash capital expenditures and $7.0 million for capital leases. The 1998 capital expenditures are expected to be invested primarily in remodeling and maintenance of certain stores. The funds for the capital expenditures are expected to be provided by internally-generated cash flows from operations and borrowings under the Loan Agreement. As of March 18, 1998, the Company had $10.8 million of borrowings, $3.3 million of letters of credit outstanding and $15.6 million of availability under its revolving credit facility. The Company's ability to meet its working capital needs, meet its debt and interest obligations and capital expenditure requirements is dependent on its future operating performance. There can be no assurance that future operating performance will provide positive net cash and if the Company is not able to generate positive cash flow from its operations, management believes that this could have a material adverse effect on the Company's business. 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. Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements for pensions and other postretirement benefits and requires that additional information be disclosed regarding changes in the benefit obligation and fair values of plan assets. Both statements are effective for fiscal years beginning after December 15, 1997. Because these statements are limited to presentation and disclosure changes, their implementation will not have an impact on the Company's financial position or results of operations. Year 2000 The Company is currently working to resolve the impact of Year 2000 on its data information systems including store level systems. Based on management's most recent evaluation of this issue, the cost to address and correct any potential problems is not expected to have a material adverse impact on the Company's financial position, results of operations or cash flows in future periods. The Company expects to resolve the Year 2000 issue by the first quarter of 1999. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements and notes thereto are included in this report following the signature pages. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, present positions and years of service (in the case of members of management) of the directors and management of Homeland: Years with the Company and/or Age Position Safeway John A. Shields* 55 Acting Chairman of the -- Board, Director David B. Clark* 45 President, Chief Executive -- Officer and Director Larry W. Kordisch* 50 Executive Vice President - 3 Finance, Chief Financial Officer and Secretary Steven M. Mason 43 Vice President - Marketing 27 Terry M. Marczewski* 43 Vice President and Controller 3 Prentess E. Alletag, Jr. 51 Vice President - Human 30 Resources Francis T. Wong* 38 Vice President - Finance, 9 Treasurer and Assistant Secretary Robert E. (Gene) Burris 51 Director -- Edward B. Krekeler, Jr. 54 Director -- Laurie M. Shahon 46 Director -- William B. Snow 66 Director -- David N. Weinstein 39 Director -- * Holding's Board of Directors is identical to that of Homeland. Mr. Shields serves as Holding's Acting Chairman of the Board, Mr. Clark as President and Chief Executive Officer, Mr. Kordisch as Executive Vice President - Finance, Chief Financial Officer and Secretary and Mr. Marczewski as Vice President and Controller and Mr. Wong as Vice President - Finance, Treasurer and Assistant Secretary. John A. Shields became a director of the Company in May 1993 and Acting Chairman of the Board in September 1997. Mr. Shields has been the Chairman and Chief Executive Officer of Delray Farms Fresh Markets, a retail perishables specialty chain, since January 1994. From 1983 to 1993, he served as President, Chief Executive Officer, Chief Operating Officer and a member of the Board of Directors of First National Supermarkets. Mr. Shields is a director of D.I.Y. Home Warehouse, Inc., Delray Farms, Inc. and Wild Oats Markets, Inc. David B. Clark became President, Chief Executive Officer and a director of the Company in February 1998. From 1996 to February 1998, Mr. Clark was Executive Vice President, Merchandising and Distribution, for Bruno's, Inc., a $2.8 billion sales company with over 200 stores, having joined in 1995 as Senior Vice President, Operations and Distribution. Bruno's Inc. filed Chapter 11 bankruptcy on February 2, 1998. From 1992 through 1995, Mr. Clark was Vice President, Operations and subsequently Executive Vice President, Merchandising and Operations for the Cub Foods Division of Super Valu, Inc., responsible for stores producing sales volume of $1.7 billion. Larry W. Kordisch joined the Company in February 1995 and became Executive Vice President - Finance, Treasurer, Chief Financial Officer and Secretary as of May 1995. Prior to joining Homeland, Mr. Kordisch served as Executive Vice President - Finance and Administration, Chief Financial Officer and member of the Board of Directors of Scrivner, Inc. and was responsible for the Finance, Accounting, Risk Management, Legal and Administrative functions. Mr. Kordisch is a director of Eateries, Inc. Steven M. Mason joined Safeway in 1970 and the Oklahoma Division in 1986. At the time of the acquisition of the Oklahoma division of Safeway by Homeland, he was serving as Special Projects Coordinator for the Oklahoma Division. In November 1987, he joined Homeland and in October 1988, he was appointed to the position of Vice President - Retail Operations. In October 1993, Mr. Mason was appointed to the position of Vice President - Marketing. Terry M. Marczewski joined the Company in April 1995 and became the Chief Accounting Officer, Assistant Treasurer and Assistant Secretary as of May 1995. From July 1994 to April 1995, he was the controller at Fleming Companies, Inc.- Scrivner Group. From 1990 to July 1994, Mr. Marczewski was the Vice President and Controller at Scrivner, Inc., the nation's third largest grocery wholesaler, prior to its acquisition by Fleming Companies, Inc. In December 1996, Mr. Marczewski was appointed to the position of Vice President and Controller. Prentess E. Alletag, Jr. joined the Oklahoma Division in October 1969, where, at the time of the acquisition of the Oklahoma division of Safeway by Homeland, he was serving as Human Resources and Public Affairs Manager. In November 1987, Mr. Alletag joined Homeland as Vice President - Human Resources. Francis T. Wong joined the Company in July 1989. In 1997, Mr. Wong was appointed to the additional position of Vice President - Finance. From December 1996 to August 1997, Mr. Wong was the Treasurer and Assistant Secretary. Prior to this appointment, Mr. Wong served as Director of Finance, Assistant Secretary and Assistant Treasurer of the Company. Robert E. (Gene) Burris became a director of the Company on August 2, 1996. Since 1988, Mr. Burris has been President of the UFCW Local No. 1000, which represents approximately 65% of the Company's unionized employees. Pursuant to the Modified Union Agreements, the UFCW has the right to designate one member of the Boards of Directors of Holding and Homeland. Mr. Burris is the designee of the UFCW. Since February 1995, Mr. Burris has been the Chief Executive Officer and owner of G&E Railroad, a retail store. Edward B. Krekeler, Jr. became a director of the Company on August 2, 1996. Mr. Krekeler has been a senior product manager of First National Bank of North Dakota since September 1997. From 1994 to August 1997, he was the President of Krekeler Enterprises, Ltd., a corporate financial consulting firm. From 1984 to 1994, he served in various positions as an officer of Washington Square Capital, Inc., including Vice-President, Special Investments, Vice-President, Administration, Private Placements, Vice- President, Portfolio Manager, Private Placements, and Chief Investment Analyst. From 1970 to 1984, Mr. Krekeler was Director, Fixed Income Investments, of The Ohio National Life Insurance Company, Inc. He was Chairman of the Board of Directors of Convenient Food Marts, Inc. from 1990 to 1994. Laurie M. Shahon became a director of the Company on August 2, 1996. Ms. Shahon has been President of Wilton Capital Group, a private direct investment firm since January 1994. Ms. Shahon previously served as Vice Chairman and Chief Operating Officer of Color Tile, Inc. in 1989. From 1988 to 1993, she served as Managing Director of 21 International Holdings, Inc., a private holding company. From 1980 to 1988, she was Vice President of Salomon Brothers Inc, where she was founder and head of the retailing and consumer products group. Ms. Shahon is a director of Arbor Drugs, Inc., One Price Clothing Stores, Inc. and Ames Department Stores, Inc. William B. Snow became a director of the Company on August 2, 1996. Mr. Snow previously served as Vice Chairman of Movie Gallery, Inc., the second largest video specialty retailer in the United States from 1994 to 1997. From 1985 to 1994, he was Executive Vice President and a director of Consolidated Stores Corporation. From 1980 to 1985, Mr. Snow was Chairman, President and Chief Executive Officer of Amerimark, Inc., a diversified supermarket retailer and institutional food service distributor. From 1974 to 1980, he was President of Continental Foodservice, Inc. From 1966 to 1974, Mr. Snow was Senior Vice President of Hartmarx, Inc. Mr. Snow is a director of Movie Gallery, Inc. and Action Industries, Inc. David N. Weinstein became a director of the Company on August 2, 1996. He is a Managing Director of the High Yield Capital Markets group at BancBoston Securities, Inc. From 1993 to March 1996, he served as Managing Director and High Yield Capital Market Specialist of Chase Securities, Inc. Mr. Weinstein is also a director of Ithaca Industries, Inc. Compliance with Section 16 (a) of the Securities Exchange Act of 1934 (the "1934 Act") Section 16 (a) of the 1934 Act requires directors, executive officers and persons who are the beneficial owners of more than 10% of any class of any equity security of the Company to file reports with the Securities and Exchange Commission (the "SEC"). Two directors failed to file timely reports under Section 16(a) with respect to the year ended January 3, 1998. John A. Shields failed to file a Form 4 to report his acquisition of 298 shares of Common Stock at a purchase price of $7.875 on September 5, 1997, and reported such acquisition on his timely filed Form 5. William B. Snow filed his Form 5 on February 19, 1998, two days after the Form 5 was required to be filed. ITEM 11. EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table provides certain summary information concerning compensation paid or accrued by the Company to, or on behalf of, the Company's Chief Executive Officer and each of the three other most highly compensated executive officers of the Company (hereinafter referred to as the "Named Executive Officers") for the fiscal years ended January 3, 1998, December 28, 1996 and December 30, 1995: SUMMARY COMPENSATION TABLE Annual Compensation Name and Long-Term Principal Compensation All Other Position Year Salary Bonus Option Awards Compensation (3) David B. Clark (1) 1997 $ - $ - - $ - President, Chief Executive Officer and Director James A. Demme (2)(4) 1997 $ 172,115 $ - - $ 3,181 Former Chairman 1996 200,000 200,000 135,000 4,675 President and Chief 1995 200,000 100,000 - 4,396 Executive Officer Larry W. Kordisch(4)(5) 1997 $ 166,154 $ 150,000 - $ 2,387 Executive Vice Pres. 1996 150,000 150,000 62,500 1,539 Finance, Chief Financial 1995 126,923 100,000 - 3,907 Officer and Secretary Steven M. Mason(4) 1997 $ 135,519 $ 24,469 12,000 $ 2,865 Vice President - 1996 130,500 130,500 - 2,620 Marketing 1995 130,500 19,575 - 6,414 Terry M. Marczewski(6) 1997 $ 98,462 $ 17,813 12,000 $ 86 Vice President - 1996 90,000 45,000 - 86 Controller 1995 69,326 20,000 - 43 _______________ (1) Mr. Clark joined the Company in February 1998. (2) Mr. Demme resigned from the Company on September 19, 1997. (3) Personal benefits provided to the Named Executive Officer under various Company programs do not exceed 10% of total annual salary and bonus reported for the Named Executive Officer. (4) The Company provides reimbursement for medical benefit insurance premiums for certain of the Named Executive Officers. These persons obtain individual private medical benefit insurance policies with benefits substantially equivalent to the medical benefits currently provided under the Company's group plan. The Company also provides for life insurance premiums for executive officers, including certain Named Executive Officers and one other executive officer, who obtain private term life insurance policies with benefits of $500,000 per person. Amounts paid during 1997 are as follows: James A. Demme, $2,581; Larry W. Kordisch, $1,859; and Steven M. Mason, $2,705. (5) Mr. Kordisch joined the Company in February 1995 and was appointed Executive Vice President-Finance, Chief Financial Officer, Treasurer and Secretary of the Company as of May 5, 1995. (6) Mr. Marczewski joined the Company in April 1995 and was appointed the Chief Accounting Officer and Controller of the Company as of May 5, 1995. The following table sets forth certain information with respect to grants of options to the Named Executive Officers during 1997: Option Grants in Last Fiscal Year Potential Realized Value at Assumed Rates of Stock Appreciation for Individual Grants Option Terms _____________________________________________________ _________________ Number of Securities % of Total Underlying Options Granted Options to Employees Exercise Expiration Name Granted in Fiscal Year Price Date 5% 10% Steven M. Mason 12,000(1) 26.1% $6.50 May 13, 2007 $49,054 $124,312 Terry M. Marczewski 12,000(1) 26.1% $6.50 May 13, 2007 $49,054 $124,312 (1) The options are exercisable in its entirety on January 1, 1998. As of March 18, 1998, none of these options have been exercised. Compensation of Directors Directors who are not employees of the Company or otherwise affiliated with the Company (presently consisting of Ms. Shahon and Messrs. Burris, Krekeler, Shields, Snow and Weinstein) are paid annual retainers of $15,000 and meeting fees of $1,000 for each meeting of the board or any committee attended in person and $250 for each meeting attended by telephone. Mr. Shields previously served as a consultant to the Company at the request of CD&R. During 1995, Mr. Shields received $166,662 from CD&R for consulting fees for services provided to the Company. In 1997, with the approval of the Company's stockholders, the Company established the Homeland Holding Corporation 1997 Non-Employee Directors Stock Option Plan ("Directors Plan"). The maximum number of shares of Common Stock which may be subject to options is 90,000. The Directors Plan is administered by a committee appointed by the Board of Directors. Options granted under this Plan are "non-qualified options." Any option granted will terminate and expire at the earlier of (a) 10 years from date of grant; (b) termination of optionee's directorship for cause; and (c) 45 days after termination of service as director for other than a result of removal for cause. As of July 15, 1997, each of the non-employee directors was granted the option to purchase up to 15,000 shares of Common Stock of Holding at $7 5/8 per share. The options granted become exercisable ratably over 3 years commencing on the grant date. Employment Agreements On February 17, 1998, the Company entered into an employment agreement with David B. Clark, the Company's President and Chief Executive Officer, for an indefinite period. The agreement provides a base annual salary of $250,000 subject to increase from time to time at the discretion of the Board of Directors. Mr. Clark is also entitled to participate in the Company's incentive plan with a target annual bonus of 75% of his base annual salary. The agreement also provides for (a) relocation expenses of up to $45,000 as it relates to the sale and relocation of his residence; (b) a company car; (c) a temporary residence in Oklahoma City up to six months; (d) reimbursement of travel expenses up to two round trips per month; and (e) a loan of $125,000. Under the agreement, Mr. Clark is entitled to participate in the Company's employee benefit plans and programs generally available to employees and senior executives, if any. At the commencement of Mr. Clark's employment, he was granted options to purchase 100,000 shares of Common Stock of Holding at an exercise price of $5.50 per share and on June 1, 1998, Mr. Clark will be granted additional options to purchase 30,000 shares of Common Stock of Holding at an exercise price equal to the fair market value of the Common Stock as of such date. If the Company terminates Mr. Clark's employment for any reason other than cause or disability or his employment is terminated by Mr. Clark after February 16, 1999, following a change of control or certain trigger events (each as defined), Mr. Clark will be paid (a) his annual base salary, (b) a pro rata amount of incentive compensation for the portion of the incentive year that precedes the date of termination, and (c) continuation of welfare benefit arrangements for a period of one year after the date of termination. Mr. Clark's loan of $125,000 from the Company shall be deemed to be cancelled with all accrued interest if he remains in continuous employment until February 16, 2001 or upon his termination of employment on or after February 16, 1999, following a change in control or trigger event. On September 26, 1995, the Company entered into an employment agreement with Larry W. Kordisch, the Company's Executive Vice President- Finance and Chief Financial Officer. The agreement provides for a base annual salary of not less than $150,000, subject to increase from time to time at the discretion of the Board of Directors. Mr. Kordisch is also entitled to participate in the Management Incentive Plan based upon the attainment of performance objectives as the Board of Directors shall determine from time to time. The agreement was amended in April 1996 and on September 19, 1997, to provide that, if the agreement is terminated by the Company for other than cause or disability prior to December 31, 1999, or is terminated by Mr. Kordisch following a change of control or a trigger event (as defined), Mr. Kordisch is entitled to receive (a) payment, which would not be subject to any offset as a result of his receiving compensation from other employment, equal to two years' salary, plus a pro rata amount of the incentive compensation for the portion of the incentive year that precedes the date of termination, and (b) continuation of welfare benefit arrangements for a period of two years after the date of termination. In addition, the September 19, 1997, amendment also provides Mr. Kordisch with a minimum guaranteed bonus of $100,000 for fiscal 1997 plus a special bonus of $50,000 for the additional duties performed as acting chief executive officer. On February 25, 1998, the Company entered into agreements with Steven M. Mason, the Company's Vice President of Marketing, and Terry M. Marczewski, the Company's Vice President and Controller. The agreements provide that in the event their employment is terminated prior to December 31, 1998, for any reason other than cause or disability, the Company will continue to pay them their base salary for a period of one year plus a pro rata target amount of the incentive compensation for the portion of the incentive year that precedes the date of termination. On January 8, 1997, the Company entered into a settlement agreement (the "Settlement Agreement") with Alfred F. Fideline, Sr., the Company's former Vice President - Retail Operations, in connection with his termination of employment with the Company. Pursuant to the terms of the Settlement Agreement, the Company agreed to provide Mr. Fideline with the following: (a) medical and dental benefits through December 31, 1997; (b) payment of his base salary through January 2, 1998; and (c) conveyance of the Company car. Management Incentive Plan Homeland maintains a Management Incentive Plan to provide incentive bonuses for members of its management and key employees. Bonuses are determined according to a formula based on both corporate, store and individual performance and accomplishments or other achievements and are paid only if minimum performance and/or accomplishment targets are reached. At minimum performance level, the bonus payout ranges from 25% to 50% of salaries for officers (as set forth in the plan), including the Chief Executive Officer. Maximum bonus payouts range from 100% to 200% of salary for officers and up to 200% of salary for the Chief Executive Officer. Performance levels must significantly exceed target levels before the maximum bonuses will be paid. Under limited circumstances, individual bonus amounts can exceed these levels if approved by the Compensation Committee of the Board. Incentive bonuses paid to managers and supervisors vary according to their reporting and responsibility levels. The plan is administered by a committee consisting, unless otherwise determined by the Board of Directors, of members of the Board who are ineligible to participate in the plan. Incentive bonuses earned for certain highly compensated executive officers under the plan for performance during fiscal year 1997 are included in the Summary Compensation Table. Retirement Plan Homeland maintains a retirement plan in which all non-union employees, including members of management, participate. Under the plan, employees who retire at or after age 65 and after completing five years of vesting service (defined as calendar years in which employees complete at least 1,000 hours of service) will be entitled to retirement benefits equal to 1.50% of career average annual compensation (including basic, overtime and incentive compensation) plus .50% of career average annual compensation in excess of the social security covered compensation, such sum multiplied by years of benefit service (not to exceed 35 years). Retirement benefits will also be payable upon early retirement beginning at age 55, at rates actuarially reduced from those payable at normal retirement. Benefits are paid in annuity form over the life of the employee or the joint lives of the employee and his or her spouse or other beneficiary. Under the retirement plan, estimated annual benefits payable to the named executive officers of Homeland upon retirement at age 65, assuming no changes in covered compensation or the social security wage base, would be as follows: David B. Clark, $52,946; Larry W. Kordisch, $47,270; Steven M. Mason, $88,539; and Terry M. Marczewski, $60,038. Management Stock Option Plan In December 1996, the Board of Directors of the Company, pursuant to the Plan of Reorganization, adopted the Homeland Holding Corporation 1996 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan, to be administered by the Board of Directors ("Board"), or a committee of the Board (the "Committee"), provides for the granting of options to purchase up to an aggregate of up to 432,222 shares of Common Stock. Options granted under the Stock Option Plan are "non-qualified options." The option price of each option must not be less than the fair market value as determined by the Board or the Committee. Unless the Board or the Committee otherwise determines, options shall become exercisable ratably over a five-year period or immediately in the event of a "change of control" as defined in the Stock Option Plan. Each option must be evidenced by a written agreement and must expire and terminate on the earliest of (a) ten years from the date the option is granted (b) termination for cause and (c) three months after termination for other than cause. Compensation Committee Report The Company's Compensation and Benefits Committee was formed in September 1996 at the first meeting of the newly installed Board of Directors. See "Directors and Executive Officers of the Registrant." The duties of the Compensation and Benefits Committee will include the review and recommendation of salary, other compensation arrangements for the officers, management incentive and stock option plans, including the 1997 Management Incentive Plan, the Stock Option Plan and the Directors Plan. No member of the Compensation and Benefits Committee is a current or former officer or employee of the Company. Compensation Committee Interlocks and Insider Participation Ms. Shahon and Messrs. Snow and Shields serve on the Company's Compensation and Benefits Committee of the Board of Directors. During 1995, Mr. Shields received $166,662 from CD&R for consulting fees for services provided to the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Under the Company's Plan of Reorganization, each holder of a general unsecured claim against the Company, including $40.1 million of general unsecured claims in respect of the Old Notes, will receive its ratable share of 4,450,000 shares of Common Stock, based on the amount of such holder's claim relative to all general unsecured claims. As of March 18, 1998, the final amount of the general unsecured claims has not been determined. Under the Plan of Reorganization, the Company has reserved for the account of each creditor holding a disputed general unsecured claim the Common Stock that would otherwise be distributable to such creditor on the Effective Date if such disputed claim were allowed by the Bankruptcy Court. If a disputed claim is disallowed in whole or in part, the Company will distribute the Common Stock held in reserve ratably to holders of general unsecured claims allowed by the Bankruptcy Court. Such distribution will be made on June 30 and December 31 of each following year until the earlier of (a) the date on which all disputed claims have been resolved or (b) less than 5,000 shares of Common Stock are on deposit in the disputed claims reserve. If any time after the Effective Date, the number of shares of Common Stock in the disputed claims reserve is less than 5,000, the remaining shares of Common Stock held in such reserve will, at the Company's option, be cancelled or treated as treasury shares. The Company estimates that total general unsecured claims will be approximately $63.1 million, consisting of approximately $40.1 million in general unsecured claims in respect of the Old Notes and approximately $23.0 million of other general unsecured claims. Based on such estimate (a) holders of the Old Notes will receive (in the aggregate) approximately 2,827,922 shares of Common Stock representing approximately 60.2% of the Common Stock to be outstanding upon consummation of the Restructuring and (b) holders of the other general unsecured claims will receive (in the aggregate) approximately 1,622,029 shares of Common Stock representing approximately 34.5% of the Common Stock to be outstanding upon consummation of the Restructuring. In addition, under the Plan of Reorganization, all of the Company's issued and outstanding Class A Common Stock, par value $.01 per share (the "Old Common Stock"), will be exchanged for (a) an aggregate of 250,000 shares of Common Stock, representing approximately 5.3% of the Common Stock to be outstanding, and (b) warrants to purchase (in the aggregate) up to 263,158 shares of Common Stock (the "New Warrants") at an exercise price of $11.85 per share. Each holder of the Old Common Stock will receive 7.73 shares of Common Stock and 8.14 New Warrants for each 1,000 shares of Old Common Stock held by such holder. Set forth below is certain information as of March 18, 1998, regarding the beneficial ownership of Holding's Common Stock by: (a) any person or group known to have beneficial ownership of more than 5% of the Common Stock of Holding; (b) each of the Named Executive Officers; (c) each director; (d) other officers of the Company and (e) all directors, Named Executive Officers and officers as a group: Shares Beneficially Percent of Name of Beneficial Owner Owned Class Soros Fund Management, LLC (1) 630,815 12.71% 888 Seventh Avenue, 33rd Floor New York, NY 10106 Jeffrey D. Tannebaum (2) 540,196 10.89% Fir Tree Partners 1211 Avenue of the Americas New York, NY 10036 Franklin Resources, Inc. (3) 405,662 8.18% 777 Mariners Island Boulevard San Mateo, CA 94404 John A. Shields (4)(5) 6,498 * David B. Clark (6) - - Larry W. Kordisch (7) 62,500 1.26% Steve M. Mason (8)(9) 12,665 * Terry M. Marczewski (8) 12,000 * Prentess E. Alletag (10) 12,792 * Francis T. Wong (11) 10,400 * Robert E. (Gene) Burris (4) 5,000 * Edward B. Krekeler, Jr. (4) 5,000 * Laurie M. Shahon (4) 5,000 * William B. Snow (4) 5,000 * David N. Weinstein (4) 5,000 * Officers and directors as a group (12 persons) 141,855 2.86% ______________________ * Less than 1% (1) Based on the Schedule 13G filed by Soros Fund Management LLC, these shares are held for the accounts of Quantum Partners (as defined below) and Quasar Partners (as defined below). Soros Fund Management LLC, a Delaware limited liability company, serves as principal investment manager to Quantum Partners LDC, a Cayman Island exempted duration company ("Quantum Partners"), and Quasar International Partners, C.V., a Netherlands Antilles limited partnership ("Quasar Partners"), and as such, has been granted investment discretion over the shares of Holding. (2) Based on the Schedule 13D filed by Mr. Jeffrey Tannebaum and Fir Tree Partners, these shares are for the accounts of Fir Tree Value Fund, L.P., Fir Tree Institutional Value Fund, L.P. and Fir Tree Value Partners LDC. Mr. Tannebaum is the sole shareholder, officer, director and principal of Fir Tree Partners and he serves as general partner of the Fir Tree Value Fund L.P. and the Fir Tree Institutional Value Fund L.P. and as an investment advisor to the Fir Tree Value Partners LDC. (3) Based on the Schedule 13G filed by Franklin Resources, Inc., these shares are beneficially-owned by one or more open or closed-end investment companies or other managed accounts which are advised by direct or indirect investment advisory subsidiaries of Franklin Resources, Inc. (4) Stock options for 15,000 shares were granted to each director under the Directors Plan in 1997. The options are exercisable ratably over three years commencing July 15, 1997, and will expire on July 15, 2007. (5) Mr. Shields is the beneficial owner of 1,498 shares of Common Stock. (6) Mr. Clark was awarded options to purchase 100,000 shares under the Stock Option Plan as provided for under his employment agreement with the Company. The options become exercisable ratably over five years commencing February 17, 1999, and will expire on February 17, 2008. (7) Mr. Kordisch was awarded options to purchase 62,500 shares under the Stock Option Plan in 1996. The options are exercisable immediately and will expire on December 26, 2006. (8) Messrs. Mason, Marczewski, Alletag and Wong were awarded stock options pursuant to the Stock Option Plan in May 1997 amounting to 12,000, 12,000, 12,000 and 10,000 shares, respectively. The options are exercisable as of January 1, 1998, and will expire on May 13, 2007. (9) Mr. Mason is the beneficial owner of 324 shares of Common Stock and 341 New Warrants. (10) Mr. Alletag is the beneficial owner of 386 shares of Common Stock and 406 New Warrants. (11) Mr. Wong is the beneficial owner of 400 shares of Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Gene Burris, a director of the Company, is President of UFCW Local No. 1000, which represents approximately 95% of the Company's unionized employees. Pursuant to the Modified Union Agreements, the UFCW has the right to designate one member of the Board of Directors of Holding and Homeland. Mr. Burris is the designee of the UFCW. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this Report: (a) Financial Statements and Exhibits. 1. Financial Statements. The Company's financial statements are included in this report following the signature pages. See Index to Financial Statements and Financial Statement Schedules on page F-1. 2. Exhibits. See attached Exhibit Index on page E-1. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 31, 1998 By: /s/ David B. Clark David B. Clark, President & C.E.O. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ John A. Shields Acting Chairman of the Board March 31, 1998 John A. Shields /s/ David B. Clark President, Chief Executive March 31, 1998 David B. Clark Officer and Director (Principal Executive Officer) /s/ Larry W. Kordisch Executive Vice President/ March 31, 1998 Larry W. Kordisch Finance, C.F.O. and Secretary (Principal Financial Officer) /s/ Terry M. Marczewski Vice President, Controller March 31, 1998 Terry M. Marczewski (Principal Accounting Officer) Signature Title Date /s/ Robert E. (Gene) Burris Director March 31, 1998 Robert E. (Gene) Burris /s/ Edward B. Krekeler, Jr. Director March 31, 1998 Edward B. Krekeler, Jr. /s/ Laurie M. Shahon Director March 31, 1998 Laurie M. Shahon /s/ William B. Snow Director March 31, 1998 William B. Snow /s/ David N. Weinstein Director March 31, 1998 David N. Weinstein INDEX TO FINANCIAL STATEMENTS HOMELAND HOLDING CORPORATION Consolidated Financial Statements Report of Independent Accountants F-2 Consolidated Balance Sheets as of January 3, 1998, and December 28, 1996 F-3 Consolidated Statements of Operations for the 53 weeks ended January 3, 1998, and 20 weeks ended December 28, 1996, (Successor Company), and the 32 weeks ended August 10, 1996, and 52 weeks ended December 30, 1995 (Predecessor Company) F-5 Consolidated Statements of Stockholders' Equity for the 53 weeks ended January 3, 1998, and 20 weeks ended December 28,1996 (Successor Company), and the 32 weeks ended August 10, 1996, and 52 weeks ended December 30, 1995 (Predecessor Company) F-6 Consolidated Statements of Cash Flows for the 53 weeks ended January 3, 1998, and 20 weeks ended December 28, 1996 (Successor Company), and the 32 weeks ended August 10, 1996, and 52 weeks ended December 30, 1995 (Predecessor Company) F-7 Notes to Consolidated Financial Statements F-9 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Homeland Holding Corporation We have audited the accompanying consolidated financial statements of Homeland Holding Corporation and Subsidiary as listed on page F-1 of this Form 10-K. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Homeland Holding Corporation and Subsidiary as of January 3, 1998, and December 28, 1996, and the consolidated results of their operations and their cash flows for the 53 weeks ended January 3, 1998, the 20 weeks ended December 28, 1996, the 32 weeks ended August 10, 1996, and the 52 weeks ended December 30, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND, L.L.P. Oklahoma City, Oklahoma March 5, 1998 F-2 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS January 3, December 28, 1998 1996 Current assets: Cash and cash equivalents (Notes 3 and 6) $ 4,778 $ 1,492 Receivables, net of allowance for uncollectible accounts of $1,198 and $1,587 9,313 8,522 Inventories 45,946 45,009 Prepaid expenses and other current assets 2,581 2,760 Total current assets 62,618 57,783 Property, plant and equipment: Land and improvements 9,303 8,731 Buildings 19,995 18,124 Fixtures and equipment 22,267 15,078 Leasehold improvements 13,459 11,374 Software 4,991 2,930 Leased assets under capital leases (Note 10) 8,610 7,569 Construction in progress 2,769 2,675 81,394 66,481 Less, accumulated depreciation and amortization 11,299 3,012 Net property, plant and equipment 70,095 63,469 Reorganization value in excess of amounts allocable to identifiable assets, less accumulated amortization of $20,346 and $5,819 at January 3, 1998, and December 28, 1996, respectively 23,162 39,570 Other assets and deferred charges 10,166 7,664 Total assets $ 166,041 $ 168,486 The accompanying notes are an integral part of these consolidated financial statements. F-3 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY January 3, December 28, 1998 1996 Current liabilities: Accounts payable - trade $ 18,941 $ 17,416 Salaries and wages 2,508 3,499 Taxes 3,605 2,903 Accrued interest payable 2,619 2,689 Other current liabilities 10,042 8,470 Current portion of long-term debt (Notes 5 and 6) 1,728 894 Current portion of obligations under capital leases (Note 10) 1,286 1,343 Total current liabilities 40,729 37,214 Long-term obligations: Long-term debt (Notes 5 and 6) 78,353 72,724 Obligations under capital leases (Note 10) 2,608 3,005 Other noncurrent liabilities 2,027 2,602 Total long-term obligations 82,988 78,331 Commitments and contingencies (Notes 9, 10 and 12) - - Stockholders' equity: Common stock (Note 2): Class A, $0.01 par value, authorized - 7,500,000 shares, issued 4,820,637 shares and 4,758,025 shares at January 3, 1998, and December 28, 1996, respectively 48 48 Additional paid-in capital 56,040 56,013 Accumulated deficit (13,764) (3,120) Total stockholders' equity 42,324 52,941 Total liabilities and stockholders' equity $ 166,041 $ 168,486 The accompanying notes are an integral part of these consolidated financial statements. F-4 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
Successor Company Predecessor Company 53 weeks 20 weeks 32 weeks 52 weeks ended ended ended ended January 3, December 28, August 10, December 30, 1998 1996 1996 1995 Sales, net $ 527,993 $ 204,026 $ 323,747 $ 630,275 Cost of sales 401,691 154,099 244,423 479,119 Gross profit 126,302 49,927 79,324 151,156 Selling and administrative expenses 112,322 44,029 73,000 151,985 Operational restructuring costs - - - 12,639 Amortization of excess reorganization value 14,527 5,819 - - Operating profit (loss) (547) 79 6,324 (13,468) Interest expense (8,408) (3,199) (5,639) (15,992) Income (loss) before reorganization items, income taxes and extraordinary items (8,955) (3,120) 685 (29,460) Reorganization items: Allowed claims in excess of liabilities - - 7,200 - Professional fees - - 4,250 - Employee buyout expense - - 6,386 - Adjustments of accounts to estimated fair value - - 8,160 - - - 25,996 - Income tax provision 1,689 - - - Income (loss) before extraordinary items (10,644) (3,120) (25,311) (29,460) Extraordinary items - debt discharge (Note 2) - - 63,118 - Extraordinary items - other (Note 5) - - - (2,330) Net income (loss) (10,644) (3,120) 37,807 (31,790) Reduction in redemption value - redeemable common stock - - - 940 Net income (loss) available to common stockholders $ (10,644) $ (3,120) $ 37,807 $ (30,850) Basic and diluted earnings per share: Loss before extraordinary items per common share $ (2.23) $ (0.66) $ (0.78) $ (0.86) Extraordinary items per common share - - 1.94 (0.07) Net income (loss) per common share $ (2.23) $ (0.66) $ 1.16 $ (0.93) Weighted average shares outstanding 4,782,938 4,758,025 32,599,707 33,223,675
The accompanying notes are an integral part of these consolidated financial statements F-5 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
Common Stock Additional Successor Predecessor Paid-In Accumulated Shares Shares Amount Capital Deficit Balance, December 31, 1994 - 31,604,989 $ 316 $ 53,896 $ (48,398) Purchase of treasury stock - 2,143,493 21 1,050 - Adjustment to recognize minimum pension liability - - - - - Redeemable common stock reduction in redemption value - - - 940 - Net loss - - - - (31,790) Balance, December 30, 1995 - 33,748,482 337 55,886 (80,188) Net income - - - - 37,807 Eliminate predecessor equity - (33,748,482) (337) (55,886) (2,637) Issuance of successor's common stock 4,758,025 - 48 56,013 - Adjustment to eliminate minimum pension liability - - - - - Record excess of reorganization value - - - - 45,018 Balance, August 10, 1996 4,758,025 - 48 56,013 - Net loss - - - - (3,120) Balance, December 28, 1996 4,758,025 - 48 56,013 (3,120) Net loss - - - - (10,644) Issuance of common stock 62,612 - - 27 - Balance, January 3, 1998 4,820,637 - $ 48 $ 56,040 $ (13,764)
Continued
HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts) Minimum Pension Total Liability Treasury Stock Stockholders' Adjustment Shares Amount Equity(Deficit) Balance, December 31, 1994 $ - 726,000 $ (1,743) $ 4,071 Purchase of treasury stock - 2,143,493 (1,071) - Adjustment to recognize minimum pension liability (1,327) - - (1,327) Redeemable common stock reduction in redemption value - - - 940 Net loss - - - (31,790) Balance, December 30, 1995 (1,327) 2,869,493 (2,814) (28,106) Net income - - - 37,807 Eliminate predecessor equity - (2,869,493) 2,814 (56,046) Issuance of successor's common stock - - - 56,061 Adjustment to eliminate minimum pension liability 1,327 - - 1,327 Record excess of reorganization value - - - 45,018 Balance, August 10, 1996 - - - 56,061 Net loss - - - (3,120) Balance, December 28, 1996 - - - 52,941 Net loss - - - (10,644) Issuance of common stock - - - 27 Balance, January 3, 1998 $ - - $ - $ 42,324
The accompanying notes are an integral part of these consolidated financial statements. F-6 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share and per share amounts)
Successor Company Predecessor Company 53 weeks 20 weeks 32 weeks 52 weeks ended ended ended ended January 3, December 28, August 10, December 30, 1998 1996 1996 1995 Cash flows from operating activities: Net income (loss) $ (10,644) $ (3,120) $ 37,807 $ (31,790) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,404 2,954 4,163 11,192 Amortization of beneficial interest in operating leases 121 51 75 181 Amortization of excess reorganization value 14,527 5,819 - - Amortization of financing costs 64 24 359 1,019 Write-off of financing costs on long-term debt retired - - - 1,424 Reorganization items - - 15,360 - Extraordinary gain on debt discharged - - (63,118) - Loss (gain) on disposal of assets 117 90 (114) 8,349 Gain on sale of stores - - - (15,795) Impairment of assets - - - 2,360 Deferred income taxes 1,589 - - - Provision for losses on accounts receivable - - - 1,750 Provision for write down of inventories - - - 847 Change in assets and liabilities: (Increase) decrease in receivables (791) (439) (32) 3,227 Decrease in receivable for taxes - - - 2,270 (Increase) decrease in inventories (937) (6,225) 3,754 18,297 (Increase) decrease in prepaid ex- penses and other current assets 179 531 (83) 5,542 Increase in other assets and deferred charges (2,722) (3,110) (649) (1,215) Increase (decrease) in accounts payable - trade 1,525 2,460 298 (12,587) Increase (decrease) in salaries and wages (991) 846 105 (316) Increase (decrease) in taxes 702 (2,198) 226 (1,616) Increase (decrease) in accrued interest payable (70) 2,672 3,823 (422) Increase (decrease) in other current liabilities 1,572 (1,181) (2,656) (3,264) Increase (decrease) in restructuring reserve - - (1,396) 1,356 Increase (decrease) in other non- current liabilities (783) 122 (886) 1,157 Net cash provided by (used in) operating activities 12,362 (704) (2,964) (8,034) Continued
The accompanying notes are and integral part of these consolidated financial statements. F-7 HOMELAND HOLDING CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (In thousands, except share and per share amounts)
Successor Company Predecessor Company 53 weeks 20 weeks 32 weeks 52 weeks ended ended ended ended January 3, December 28, August 10, December 30, 1998 1996 1996 1995 Cash flows from investing activities: Capital expenditures (14,021) (5,085) (1,860) (4,681) Purchase of assets under capital leases - - - (3,966) Cash received from sale of assets 70 5 1,738 73,721 Net cash provided by (used in) in investing activities (13,951) (5,080) (122) 65,074 Cash flows from financing activities: Borrowings under term loan - - 10,000 - Payments under term loan (833) - - - Payments under senior secrued floating rate notes - - - (9,375) Payments under senior secured fixed rate notes - - - (15,625) Borrowings under revolving credit loans 141,463 42,349 74,250 104,087 Payments under revolving credit loans (134,106) (39,080) (79,718) (123,620) Net payments under swing loans - - - (1,500) Principal payments under notes payable (61) - - (750) Principal payments under capital lease obligations (1,615) (700) (1,596) (3,166) Payment of obligations to noteholders - - (1,500) - Proceeds from issuance of common stock 27 - - - Payments to acquire treasury stock - - - (1,073) Net cash provided by (used in) financing activities 4,875 2,569 1,436 (51,022) Net increase (decrease) in cash and cash equivalents 3,286 (3,215) (1,650) 6,018 Cash and cash equivalents at beginning of period 1,492 4,707 6,357 339 Cash and cash equivalents at end of period $ 4,778 $ 1,492 $ 4,707 $ 6,357 Supplemental information: Cash paid during the period for interest $ 8,414 $ 524 $ 1,566 $ 13,439 Cash paid during the period for income taxes $ 100 $ - $ - $ - Supplemental schedule of non-cash investing activities: Capital lease obligations assumed $ 1,161 $ - $ - $ -
The accompanying notes are an integral part of these consolidated financial statements F-8 HOMELAND HOLDING CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share amounts) 1. Organization: Homeland Holding Corporation ("Holding"), a Delaware corporation, was incorporated on November 6, 1987, but had no operations prior to November 25, 1987. Effective November 25, 1987, Homeland Stores, Inc. ("Homeland"), a wholly-owned subsidiary of Holding, acquired substantially all of the net assets of the Oklahoma Division of Safeway Inc. Holding and its consolidated subsidiary, Homeland, are collectively referred to herein as the "Company." Holding has guaranteed substantially all of the debt issued by Homeland. Holding is a holding company with no significant operations other than its investment in Homeland. Separate financial statements of Homeland are not presented herein since they are identical to the consolidated financial statements of Holding in all respects except for stockholders' equity which is as follows: January 3, December 28, 1998 1996 Homeland stockholder's equity: Common stock, $.01 par value, authorized, issued and outstanding 100 shares $ 1 $ 1 Additional paid-in capital 56,087 56,060 Accumulated deficit (13,764) (3,120) Total Homeland stockholder's equity $ 42,324 $ 52,941 2. Reorganization: On May 13, 1996, the Company filed Chapter 11 petitions with the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Simultaneous with the filing of such petitions, the Company filed a plan of reorganization and a disclosure statement, which set forth the terms of the Company's restructuring (the "Restructuring"). On June 13, 1996, the Company filed a first amended plan of reorganization and disclosure statement. The Company's 2. Reorganization, continued: first amended plan of reorganization, as modified (the "Plan"), was confirmed by the Bankruptcy Court on July 19, 1996 and became effective on August 2, 1996 (the "Effective Date"). On the Effective Date, each of Holding and Homeland adopted amended and restated certificates of incorporation, the principal effects of which were: (a) eliminate the old common stock (the "Old Common Stock") and old class B common stock of Holding, (b) authorize 7,500,000 shares of new common stock of Holding (the "New Common Stock") and (c) include a provision to prohibit the issuance of non-voting securities as and to the extent required by Section 1123 (a) (6) of the Bankruptcy Code for both Homeland and Holding. As of the Effective Date, the outstanding $59,375 of Series C Senior Secured Fixed Rate Notes due 1999, $26,126 of Series D Senior Secured Floating Rate Notes due 1997 and $9,499 of Series A Senior Secured Floating Rate Notes due 1997, (collectively, the "Old Notes"), ($95,000 in aggregate face amount plus accrued interest), were cancelled and such holders received (in the aggregate) $60,000 face amount of newly-issued 10% Senior Subordinated Notes due 2003 (the "New Notes"), $1,500 in cash and approximately 60% of the New Common Stock. The New Notes are unsecured and bear interest at 10% per annum and mature in 2003. As of the Effective Date, all of the outstanding Old Common Stock of Holding was canceled and the holders received their ratable share of (a) 250,000 shares of New Common Stock and (b) warrants to purchase up to 263,158 shares of New Common Stock at an exercise price of $11.85. Each warrant entitles the holder to purchase one share of New Common Stock at any time up to August 2, 2001. Holders of general unsecured claims (including certain trade creditors for unpaid prepetition trade claims and the allowed unsecured noteholders' claims) are entitled to receive their ratable share of 4,450,000 shares of New Common Stock. As of the Effective Date, the Company entered into a new Loan Agreement (as defined hereinafter) consisting of a revolving credit facility of up to $27,500 (subject to a borrowing base requirement) and a term loan facility of $10,000. The Loan Agreement is collateralized by a security interest in, and liens on, substantially all of the Company's assets and is guaranteed by Holding. 2. Reorganization, continued: On the Effective Date, the modified union agreements negotiated with the Company's labor unions (the "Modified Union Agreements") became effective. The Modified Union Agreements, which are effective for a term of five years, consist of five basic elements: (a) wage rate and benefit contribution reductions and work rule changes, (b) an employee buyout offer, (c) the establishment of an employee stock bonus plan which will entitle plan participants to receive/purchase up to 522,222 shares of New Common Stock, (d) the right to designate one member of the Board of Directors, and (e) the elimination of certain wage reinstatement provisions, incentive plans and "maintenance of benefits." The Company's Restructuring was accounted for in accordance with the American Institute of Certified Public Accountants Statement of Position No. 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP No. 90-7"). The accounting under SOP No. 90-7 resulted in "fresh-start" reporting for the Company in which a new entity was created for financial reporting purposes. The Company applied the provisions of SOP No. 90-7 as the holders of the Old Common Stock received less than 50% of the New Common Stock and the reorganized value of the assets of the reorganized Company is less than the total of all post-petition liabilities and allowed claims. For financial reporting purposes, the Company accounted for the consummation of the Restructuring effective August 10, 1996, which is the Company's normal four week period ending date. The periods prior to the Effective Date have been designated "Predecessor Company" and the periods subsequent to the Effective Date have been designated "Successor Company." As a result of the adoption of the "fresh-start" reporting, the Successor Company's financial statements are not comparable to the Predecessor Company's financial statements. In accordance with SOP No. 90-7, the Company valued its assets and liabilities at their estimated fair value and eliminated its accumulated deficits on the Effective Date. The total reorganization value of the reorganized Company was determined by analyzing market cash flow multiples as applied to the Company's projected annual cash flows as well as comparing the reorganization value to a discounted projected cash flow calculation. Based on analyses prepared by the Company's financial advisor and by the financial advisor to the ad hoc committee of noteholders, the total reorganization value was agreed to by the parties and confirmed by the Bankruptcy Court. The total reorganization value as of the Effective Date was estimated to be $167.4 million, which was $45.4 million in excess of the Company's tangible and identifiable assets. The excess of the reorganization value over the value of the identifiable assets is reported as "Reorganization value in excess of amounts allocable to identifiable assets" and is being amortized on a straight-line basis over a three year period. 2. Reorganization, continued: The components of reorganization items and gain recognized on debt discharged resulting from the Restructuring are as follows: (i) Reorganization items: Fresh-start reporting Allowed claims in excess of recorded liabilities $ 7,200 Revaluation of property, plant and equipment, net 4,004 Other adjustments to estimated fair value 4,156 Total fresh-start 15,360 Employee buyout expense 6,386 Professional fees incurred with the Restructuring 4,250 Total reorganization items $ 25,996 (ii) Gain on debt discharged: Elimination of Old Notes and accrued interest $ 101,697 Elimination of other liabilities 22,921 Cash payment to holders of Old Notes (1,500) Issuance of New Notes (60,000) Gain on debt discharged $ 63,118 3. Summary of Significant Accounting Policies: Fiscal year - The Company has adopted a fiscal year which ends on the Saturday nearest December 31. Fiscal 1996 includes the 32 weeks prior to the Effective Date which has been designated "Predecessor Company" and the 20 weeks subsequent to the Effective Date which has been designated "Successor Company." Basis of consolidation - The consolidated financial statements include the accounts of Homeland Holding Corporation and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Revenue recognition - The Company recognizes revenue at the "point of sale," which occurs when groceries and related merchandise are sold to its customers. 3. Summary of Significant Accounting Policies, continued: Concentrations of credit and business risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables. The Company places its temporary cash investments with high quality financial institutions. Concentrations of credit risk with respect to receivables are limited due to the diverse nature of those receivables, including a large number of retail customers within the region and receivables from vendors throughout the country. The Company purchases approximately 70% of its products from Associated Wholesale Grocers, Inc. ("AWG"). Although there are similar wholesalers that could supply the Company with merchandise, if AWG were to discontinue shipments, this could have a material adverse effect on the Company's financial condition. Inventories - Inventories are stated at the lower of cost or market, with cost being determined primarily using the gross margin method. Property, plant and equipment - As discussed in Note 2, in conjunction with the emergence from Chapter 11 proceedings, the Company implemented "fresh-start" reporting and, accordingly, all property, plant and equipment was restated to reflect reorganization value, which approximates fair value in continued use. Property, plant and equipment acquired subsequent to "fresh start" are stated at cost. Depreciation and amortization, including amortization of leased assets under capital leases, are computed on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining term of the lease. Depreciation and amortization, of newly acquired assets, for financial reporting purposes are based on the following estimated lives: Estimated lives Buildings 10 - 40 Fixtures and equipment 5 - 12.5 Leasehold improvements 15 Software 3 - 5 The costs of repairs and maintenance are expensed as incurred, and the costs of renewals and betterments are capitalized and depreciated at the appropriate rates. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is included in the results of operations for that period. In the fourth quarter of 1995, approximately $7.9 million of capitalized software costs, net of accumulated depreciation, were charged to operational restructuring costs as a result of management's decision to replace such software. 3. Summary of Significant Accounting Policies, continued: Reorganization value in excess of amounts allocable to identifiable assets - The Company's reorganization value in excess of amounts allocable to identifiable assets, established in accordance with "fresh start" reporting (see Note 2), is being amortized on a straight-line basis over three years. Other assets and deferred charges - Other assets and deferred charges consist primarily of patronage refund certificates issued by AWG as part of its year-end distribution of income from AWG's cooperative operations and beneficial interests in operating leases amortized on a straight-line basis over the remaining terms of the leases, including all available renewal option periods. The AWG patronage refund certificates bear annual interest of 6% and are redeemable for cash seven years from the date of issuance. Earnings per share - The Company presents the two earnings per share ("EPS") amounts as required under Statement of Accounting Standard No. 128, Earnings Per Share ("SFAS 128"). Basic EPS is computed using the weighted average number of common shares outstanding. Diluted earnings per share is computed using the weighted average number of common shares outstanding and equivalent shares based on the assumed exercise of stock options and warrants (using the treasury method). Earnings (loss) per share data is not meaningful for periods prior to the Effective Date due to the significant change in the Company's capital structure. Cash and cash equivalents - For purposes of the statements of cash flows, the Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Advertising costs - Costs of advertising are expensed as incurred. Gross advertising costs for 1997, 1996 and 1995, were $7,906, $8,453 and $10,700, respectively. Income taxes - The Company provides for income taxes based on enacted tax laws and statutory tax rates at which items of income and expense are expected to be settled in the Company's income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes also are recognized for operating losses that are available to offset future taxable income and tax credits that are available to offset future Federal income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. 3. Summary of Significant Accounting Policies, continued: Self-insurance reserves - The Company is self-insured for property loss, general liability and automotive liability coverage subject to specific retention levels. Estimated costs of these self-insurance programs are accrued based on projected settlements for claims using actuarially determined loss development factors based on the Company's prior experience with similar claims. Any resulting adjustments to previously recorded reserves are reflected in current operating results. As a result of the Company's filing of Chapter 11 petitions with the Bankruptcy Court on May 13, 1996, all outstanding claims under the self-insured programs, as of that date, will be settled under the terms of the Plan. Pre-opening costs - Store pre-opening costs are charged to expense as incurred. Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant assumptions and estimates relate to the reserve for self-insurance programs, the deferred income tax valuation allowance, the accumulated benefit obligation relating to the employee retirement plan and the allowance for bad debts. Actual results could differ from those estimates. Impact of new financial accounting standards. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in the financial statements. In February 1998, the FASB issued Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes the disclosure requirements for pensions and other postretirement benefits and requires that additional information be disclosed regarding changes in the benefit obligation and fair values of plan assets. Both statements are effective for fiscal years beginning after December 15, 1997. Because these statements are limited to presentation and disclosure changes, their implementation will not have an impact on the Company's financial position or results of operations. 4. Store Acquisitions. The Company acquired one store from Pratt Discount Foods, Inc. and three stores from Food Lion, Inc. on August 11, 1997, and October 15, 1997, respectively. The result of operations from these stores from the acquisition date through fiscal year-end are included in the fiscal 1997 Consolidated Statements of Operations. 5. Current and Long-Term Debt: Long-term debt at year-end consists of: January 3, December 28, 1998 1996 New Notes $ 60,000 $ 60,000 Term Loan 9,167 10,000 Revolving Credit Loans 10,626 3,269 Note Payable 288 349 80,081 73,618 Less current portion 1,728 894 Long-term debt due after one year $ 78,353 $ 72,724 The New Notes bear an interest rate of 10%, which is payable semi- annually each February 1 and August 1. The New Notes are unsecured and will mature on August 1, 2003. The Indenture relating to the New Notes has certain customary restrictions on consolidations and mergers, indebtedness, issuance of preferred stocks, asset sales and payment of dividends. On the Effective Date, the Company entered into a new bank credit agreement with a group of lenders (the "Loan Agreement"). The Loan Agreement consists of a $27,500 revolving facility for working capital and letters of credit (the "Revolving Facility") and a $10,000 term loan (the "Term Loan"). The Revolving Facility permits the Company to borrow up to the lesser of $27,500 or the applicable borrowing base. On November 24, 1997, the Company entered into an amendment to the Loan Agreement whereby the Revolving Facility was increased from $27,500 to $32,000. The amendment also provided the Company a waiver of the capital expenditure limitation as it relates to the Company's acquisition of three Food Lion stores. 5. Current and Long-Term Debt, continued: The interest rate, payable quarterly, under the Loan Agreement is based on the Prime Rate, as defined, plus a percentage that varies based on a number of factors, including (a) whether it is the Revolving Facility or the Term Loan, (b) the time period, (c) whether the Company elects to use the London Interbank Offered Rate, and (d) the earnings of the Company before interest, taxes, depreciation and amortization expenses. At January 3, 1998, the interest rate on borrowings on the Revolving Facility was 9.00% and the Term Loan was 9.25%. The Revolving Facility provides for certain mandatory prepayments based on occurrence of certain defined and specified transactions. The Term Loan requires quarterly principal payments of $417 and will mature, along with the Revolving Facility, on August 1, 1999. The obligations of the Company under the Loan Agreement are collateralized by liens on, and a security interest in, substantially all of the assets of Homeland and are guaranteed by Holding. The Loan Agreement, among other things, requires a maintenance of EBITDA, consolidated fixed charge ratio, debt-to-EBITDA ratio, current ratio, excess cash flow paydown, each as defined, and limits the Company's capital expenditures, incurrence of additional debt, consolidation and mergers, acquisitions and payments of dividends. In connection with the early redemption of a portion of the Old Notes on April 21, 1995, the Company incurred an extraordinary loss of $2,330. The loss was comprised of premium and consent fees paid and the write- off of unamortized financing costs. At January 3, 1998, the aggregate annual debt maturities were as follows: 1998 $ 1,728 1999 18,186 2000 61 2001 61 2002 45 Thereafter 60,000 $ 80,081 6. Fair Value of Financial Instruments: The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The carrying amount and fair value of financial instruments as of January 3, 1998, and December 28, 1996, are as follows: January 3, December 28, 1998 1996 Carrying Fair Carrying Fair Amount Value Amount Value Assets: Cash and Cash Equivalents $ 4,778 $ 4,778 $ 1,492 $ 1,492 Liabilities: Current and Long-Term Debt $80,081 $74,081 $73,618 $68,818 Cash and cash equivalents - The carrying amount of this item is a reasonable estimate of its fair value due to its short-term nature. Current and long-term debt - The fair value of publicly traded debt is valued based on quoted market values. Based on borrowing rates currently available to the Company for bank borrowings with similar terms and maturities, the Company believes the carrying amount of borrowings under the Loan Agreement approximates fair value. 7. Income Taxes: The components of the income tax provision for 1997, the 20 weeks ended December 28, 1996, the 32 weeks ended August 10, 1996, and 1995 were as follows: Successor Company Predecessor Company 20 Weeks 32 Weeks Ended Ended 1997 December 28, 1996 August 10, 1996 1995 Federal: Current - AMT $ ( 100) $ - $ - $ - Deferred (1,589) - - - Total income tax provision $ (1,689) $ - $ - $ - A reconciliation of the income tax benefit (provision) at the statutory Federal income tax rate to the Company's effective tax rate is as follows: Successor Company Predecessor Company 20 Weeks 32 Weeks Ended Ended 1997 December 28, 1996 August 10, 1996 1995 Federal income tax at statutory rate $ 3,134 $ 1,092 $ (13,232) $ 11,127 Benefit of non-taxable forgiveness of debt - 945 14,720 - Non-deductible reorganization expenses - - (1,488) - Amortization of intangibles (5,084) (2,037) - - Change in valuation allowance 261 - - - Limitation of benefit of deferred tax assets - - - (10,074) Other - net - - - (1,053) Total income tax provision $ (1,689) $ - $ - $ - 7. Income Taxes, continued: The components of deferred tax assets and deferred tax liabilities are as follows: January 3, December 28, 1998 1996 Current assets (liabilities): Allowance for uncollectible receivables $ 419 $ 555 Prepaid pension (393) (507) Other, net 18 12 Net current deferred tax assets 44 60 Noncurrent assets (liabilities): Property, plant and equipment 855 170 Targeted job credit carryforward - 815 Employee compensation and benefits 262 929 Self-insurance reserves 673 522 Net operating loss carryforwards 14,315 14,704 AMT credit carryforwards 737 630 Capital leases 104 159 Other, net 185 742 Net noncurrent deferred tax assets 17,131 18,671 Total net deferred assets 17,175 18,731 Valuation allowance (17,175) (18,731) Net deferred tax assets $ - $ - Due to the uncertainty of realizing the future tax benefits, the full valuation allowance was established to entirely offset the net deferred tax assets as of January 3, 1998. At January 3, 1998, the Company had the following operating loss and tax credit carryforwards available for tax purposes: 7. Income Taxes, continued: Expiration Amount Dates Federal regular tax net operating loss carryforwards $40,900 2002-2010 Federal AMT credit carryforwards against regular tax $ 737 indefinite The net operating loss carryforwards are subject to utilization limitations due to ownership changes. The net operating loss carryforwards may be utilized to offset future taxable income as follows: $3,467 in 1998, $3,251 in each of years 1999 through 2009 and $1,672 in 2010. Loss carryforwards not utilized in any year that they are available may be carried over and utilized in subsequent years, subject to their expiration provisions. In accordance with SOP 90-7, the tax benefit realized from utilizing the 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 in the statement of operations. The Company recorded $1,589 of such reduction in 1997. 8. Incentive Compensation Plans: The Company has bonus arrangements for store management and other key management personnel. During 1997, 1996, and 1995, approximately $981, $2,273, and $934, respectively, were charged to costs and expenses for such bonuses. In December 1996, the Board of Directors of the Company, pursuant to the Plan, adopted the Homeland Holding Corporation 1996 Stock Option Plan (the "Stock Option Plan"). In 1997, the Company established the 1997 Non-Employee Directors Stock Option Plan (the "Directors Stock Option Plan"). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations in accounting for these plans. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted, changes the methods for recognition of expense on plans similar to the Company's. Adoption of SFAS 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 in 1996 and 1997 are presented below. The Stock Option Plan and the Directors Stock Option Plan, to be administered by the Board of Directors (the "Board"), or a committee of the Board (the "Committee"), provides for the granting of options to purchase up to an aggregate of 432,222 and 90,000 shares of New Common Stock, respectively. Options granted under the plans must be "non- qualified options." The option price of each option is determined by the Board or the Committee and it must be not less than the fair market value at the date of grant. Unless the Board or the Committee otherwise determines, options must become exercisable ratably over a five-year period or immediately in the event of a "change of control" as defined in each of the plans. Each option must be evidenced by a written agreement and must expire and terminate on the earliest of: (a) ten years from the date the option is granted; (b) termination for cause; or (c) three months after termination for other than cause. 8. Incentive Compensation Plans, continued: Options granted under the Company's stock option plans have exercise prices ranging from $6.50 to $8.00 per share and have a weighted average contractual life of 9.4 years. A summary of the status of the Company's outstanding stock options as of January 3, 1998, and December 28, 1996, and changes during the years ended on those dates is as follows: Weighted Average Shares Exercise Price Options granted 197,500 $8.00 Options exercised - - Options forfeited or cancelled - - Outstanding at December 28, 1996 197,500 8.00 Options granted 136,000 7.20 Options exercised - - Options forfeited or cancelled 135,000 8.00 Outstanding at January 3, 1998 198,500 $7.45 Exercisable at January 3, 1998 138,500 $7.42 The weighted average fair value of options granted during 1997 and 1996 was $3.53 and $4.02, respectively. No compensation was charged against income in 1997 and 1996. The fair value of the options granted was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions used: 1997 1996 Expected dividend yield 0% 0% Expected stock price volatility 39% 30% Weighted average risk-free interest rate 6.4% 6.4% Weighted average expected life of options 6 years 8 years 8. Incentive Compensation Plans, continued: Had compensation cost of the Company's option plans been determined using the fair value at the grant date of awards consistent with the method of SFAS 123, the Company's net loss and net loss per common share for the Successor Company would have been reduced to the pro forma amounts indicated in the table below: Successor Company 20 weeks Ended 1997 12/28/96 Net loss - as reported $(10,644) $(3,120) Net loss - pro forma $(10,956) $(3,914) Basic EPS - as reported $(2.23) $(0.66) Basic EPS - pro forma $(2.29) $(0.82) Diluted EPS - as reported $(2.23) $(0.66) Diluted EPS - pro forma $(2.29) $(0.82) 8. Incentive Compensation Plans, continued: Options outstanding at January 3, 1998, and December 28, 1996, were not included in the computation of diluted earnings per share because the effect would be antidilutive to applicable periods. Pursuant to the terms of the Modified Union Agreements, the Company established an employee stock bonus plan for the benefit of the unionized employees (the "Stock Bonus Plan"). The Stock Bonus Plan consists of three separate elements: (a) the issuance of 58,025 shares of New Common Stock each year for three years; (b) up to 58,025 shares of the New Common Stock may be purchased by the plan participants during each of the second, third and fourth years of the Modified Union Agreements (the "Stock Purchase") and (c) the granting of 58,025 shares of New Common Stock for each of the first, second and third anniversaries of the Modified Union Agreements upon the Company's achievement of certain escalating EBITDA-based performance goals (see Note 2). The purchase price of the shares under the Stock Purchase element shall be equal to the appraised value or at fair value if the shares are readily tradable on a securities market. For each share of New Common Stock purchased by a participant under the Stock Purchase element, the Company will match 33 1/3% of such purchase in the form of stock. The Stock Bonus Plan does not fall under the provisions of SFAS 123. 9. Retirement Plans: Effective January 1, 1988, the Company adopted a non-contributory, defined benefit retirement plan for all executive and administrative personnel. Benefits are based on length of service and career average pay with the Company. The Company's funding policy is to contribute an amount equal to or greater than the minimum funding requirement of the Employee Retirement Income Security Act of 1974, but not in excess of the maximum deductible limit. Plan assets were held in investment mutual funds during 1997, 1996 and 1995. Net pension cost consists of the following: 1997 1996 1995 Service cost $ 449 $ 503 $ 517 Interest cost 630 574 465 Return on assets (1,418) (918) (1,140) Net amortization and deferral 666 345 690 Curtailment charge - - (37) Net periodic pension cost $ 327 $ 504 $ 495 9. Retirement Plans, continued: The funded status of the plan and the amounts recognized in the Company's balance sheet at January 3, 1998, and December 28, 1996, consist of the following: 1997 1996 Actuarial present value of benefit obligations: Vested benefits $ (9,031) $ (7,066) Non-vested benefits (205) (152) Accumulated benefit obligations $ (9,236) $ (7,218) Projected benefit obligations $ (9,911) $ (7,694) Plan assets at fair value 9,673 8,436 Excess (deficiency) of plan assets versus projected benefit obligations (238) 742 Unrecognized prior service cost (73) (84) Unrecognized net loss 1,533 867 Net pension asset $ 1,222 $ 1,525 9. Retirement Plans, continued: Actuarial assumptions used to determine year-end plan status were as follows: 1997 1996 Assumed rate for determination of net periodic pension cost 7.75 % 7.25% Assumed discount rate to determine the year-end plan disclosures 7.00% 7.75% Assumed long-term rate of return on plan assets 9.0% 9.0% Assumed range of rates of future compensation increases (graded by age) for net periodic pension cost 3.5% to 5.5% 3.5% to 5.5% Assumed range of rates of future compensation increases (graded by age) for year-end plan disclosures 3.5% to 5.5% 3.5% to 5.5% The prior service cost is being amortized on a straight line basis over approximately 13 years. As a result of the sale of the Company's warehouse and distribution center and 29 stores to AWG, as well as the closure of 14 under- performing stores during 1995, a significant number of employees were terminated that participated in the Company's non-contributory defined benefit retirement plan. The effect of the curtailment resulting from the terminations of such employees was not material to the statement of operations for the year ended December 30, 1995. The Company also contributes to various union-sponsored, multi-employer defined benefit plans in accordance with collective bargaining agreements. The Company could, under certain circumstances, be liable for the Company's unfunded vested benefits or other costs of these multi-employer plans. The allocation to participating employers of the actuarial present 9. Retirement Plans, continued: value of vested and nonvested accumulated benefits in multi-employer plans as well as net assets available for benefits is not available and, accordingly, is not presented. The costs of these plans for 1997, 1996, and 1995 were $1,188, $1,412, and $2,110, respectively. Effective January 1, 1988, the Company adopted a defined contribution plan covering substantially all non-union employees of the Company. Participants may contribute from 1% to 12% of their pre-tax compensation. The plan allows for a discretionary Company matching contribution formula based on the Company's operating results. The Company did not make any contributions to this plan in 1997, 1996 or 1995. 10. Leases: The Company leases 56 of its retail store locations under noncancellable agreements, which expire at various times between 1998 and 2013. These leases, which include both capital leases and operating leases, generally are subject to six five-year renewal options. Most leases also require the payment of taxes, insurance and maintenance costs and many of the leases covering retail store properties provide for additional contingent rentals based on sales in excess of certain stipulated amounts. Leased assets under capital leases consists of the following: January 3, December 28, 1998 1996 Buildings $ 2,705 $ 2,738 Equipment 2,730 1,658 Beneficial interest in capital leases 3,173 3,173 8,608 7,569 Accumulated amortization 1,984 546 Net leased assets $ 6,624 $ 7,023 10. Leases, continued: Future minimum lease payments under capital leases and noncancellable operating leases as of January 3, 1998, are as follows: Capital Operating Fiscal Year Leases Leases 1998 $ 1,671 $ 6,541 1999 1,367 5,951 2000 523 5,571 2001 182 4,683 2002 182 3,372 Thereafter 1,470 18,502 Total minimum obligations 5,395 $ 44,619 Less estimated interest 1,501 Present value of net minimum obligations 3,894 Less current portion 1,286 Long-term obligations under capital leases $ 2,608 Rent expenses for 1997, 1996 and 1995 are as follows: 1997 1996 1995 Minimum rents $ 6,067 $ 6,039 $10,264 Contingent rents 105 105 107 $ 6,172 $ 6,144 $10,371 11. Related Party Transactions: Clayton, Dubilier & Rice, Inc. ("CDR"), a private investment firm of which four directors of the Predecessor Company are employees, received $125 in 1995, for financial advisory and consulting services. As of the Effective Date, CDR, through C&D Fund III and C&D Fund IV, received its ratable share of the 250,000 shares of New Common Stock, and the 263,518 warrants (see Note 2) for their 76.3% majority holding in the Old Common Stock of Holding. 12. Commitments and Contingencies: On April 21, 1995, the Company and AWG entered into a seven-year supply agreement (the "Supply Agreement"), whereby the Company became a retail member of the AWG cooperative and AWG became the Company's primary supplier (see Note 4 - Concentrations of credit and business risk). The terms of the Supply Agreement allow the Company to purchase products at the lowest prices and best terms available to AWG members and also entitle the Company to participate in its store cost savings programs and receive member rebates and refunds on purchases. The Company has entered into employment contracts with certain key executives providing for the payment of minimum salary and bonus amounts in addition to certain other benefits in the event of termination of the executives or change of control of the Company. The Company is party to various lawsuits arising from the Restructuring and also in the normal course of business. Management believes that the ultimate outcome of these matters will not have a material effect on the Company's consolidated financial position, results of operations and cash flows. The Company has outstanding at January 3, 1998, $5,748 in letters of credit which are not reflected in the accompanying financial statements. The letters of credit are issued under the credit agreements and the Company paid associated fees of $146, $259 and $335 in 1997, 1996 and 1995, respectively. 13. Operational Restructuring: In December 1994, the Board of Directors approved a strategic plan for the Company. Pursuant to the plan, the Company sold 29 of its stores and its warehouse and distribution center to AWG on April 21, 1995, and closed sixteen under-performing stores in 1995 and 1996. The charges recognized in 1995 were $12,639. The 1995 charges consist principally of the write-off of capitalized software costs, write-off of the unamortized balance of the excess of purchase price over fair value of net assets acquired, the expense associated with the termination of an EDP outsourcing agreement, and expenses associated with closed stores. At August 10, 1996, the carrying amount of reserve relating to the operational restructuring was $3,424. As a result of the Restructuring, certain obligations relating to the reserves for the closed stores were discharged under the terms of the Plan. The reserve relating to the operational restructuring at January 3, 1998, amounts to $595 and it is included in other current and other non-current liabilities of the Consolidated Balance Sheet. EXHIBIT INDEX Exhibit No. Description 2a Disclosure Statement for Joint Plan of Reorganization of Homeland Stores, Inc. and Homeland Corporation dated as of May 13, 1996. (Incorporated by reference to Exhibit 2a to Form 8-K dated May 31, 1996.) 2b First Amended Joint Plan of Reorganization, as modified, of Homeland Holding Corporaion ("Holding") and Homeland Stores, Inc. ("Homeland"), dated July 19, 1996. (Incorporated by reference to Exhibit 2b to Form 10-Q for the quarterly period ended June 15, 1996.) 3a Restated Certificate of Incorporation of Holding, dated August 2, 1996. 3b By-laws of Holding, as amended and restated on November 14, 1989 and further amended on September 23, 1992. (Incorporated by reference to Exhibit 3b to Form 10-Q for quarterly period ended June 19, 1993.) 3c Restated Certificate of Incorporation of Homeland, dated August 2, 1996. 3d By-laws of Homeland, as amended and restated on November 14, 1989, and further amended on September 23, 1992. (Incorporated by reference to Exhibit 3d to Form 10-Q for quarterly period ended June 19, 1993.) 4a Indenture, dated as of August 2, 1996, among Homeland, Fleet National Bank, as Trustee, and Holding, as Guarantor. (Incorporated by reference to Exhibit T3C to Form T-3 of Homeland, SEC File No. 22-22239.) 4b Warrant Agreement, dated as of August 2, 1996, between Holding and Liberty Bank and Trust Company of Oklahoma City, N.A., as Warrant Agent. (Incorporated by reference to Exhibit 4h to Amendment No. 1 to Form 10.) 4c Equity Registration Rights Agreement, dated as of August 2, 1996, by Holding for the benefit of holders of Old Common Stock. (Incorporated by reference to Exhibit 4i to Amendment No. 1 to Form 10.) 4d Noteholder Registration Rights Agreement, dated as of August 2, 1996, by Holding for the benefit of holders of Old Notes. (Incorporated by reference to Exhibit 4j to Amendment No. 1 to Form 10.) 10a 1 Homeland Profit Plus Plan, effective as of January 1, 1988. (Incorporated by reference to Exhibit 10q to Form S-1 Registration Statement, Registration No. 33-22829.) 10a.1 1 Homeland Profit Plus Plan, effective as of January 1, 1989. (Incorporated by reference to Exhibit 10q.1 to Form 10-K for the fiscal year ended December 29, 1990.) 10b Homeland Profit Plus Trust, dated March 8, 1988, between Homeland and the individuals named therein, as Trustees. (Incorporated by reference to Exhibit 10r to Form S-1 Registration Statement, Registration No. 33-22829.) 10c Homeland Profit Plus Trust, dated January 1, 1989, between Homeland and Bank of Oklahoma, N.A., as Trustee. (Incorporated by reference to Exhibit 10r.1 to Form 10-K for the fiscal year ended December 29, 1990.) 10d.1 1 1995 Homeland Management Incentive Plan. (Incorporated by reference to Exhibit 10s.7 to Form 10-K for the fiscal year ended December 30, 1995.) 10d.2 1 1996 Homeland Management Incentive Plan. (Incorporated by reference to Exhibit 10.d3 to Form 10-K for the fiscal year ended December 28, 1996.) 10d.3 *1 1997 Homeland Management Incentive Plan. 10e 1 Form of Homeland Employees' Retirement Plan, effective as of January 1, 1988. (Incorporated by reference to Exhibit 10t to Form S-1 Registration Statement, Registration No. 33-22829.) 10e.1 1 Amendment No. 1 to Homeland Employees' Retirement Plan effective January 1, 1989. (Incorporated by reference to Form 10-K for the fiscal year ended December 30, 1989.) 10e.2 1 Amendment No. 2 to Homeland Employees' Retirement Plan effective January 1, 1989. (Incorporated herein by reference to Form 10-K for the fiscal year ended December 30, 1989.) 10e.3 1 Third Amendment to Homeland Employees' Retirement Plan effective as of January 1, 1988. (Incorporated by reference to Exhibit 10t.3 to Form 10-K for the fiscal year ended December 29, 1990.) 10e.4 1 Fourth Amendment to Homeland Employees' Retirement Plan effective as of January 1, 1989. (Incorporated by reference to Exhibit 10t.4 to Form 10-K for the fiscal year ended December 28, 1991.) 10e.5 1 Fifth Amendment to Homeland Employees' Retirement Plan effective as of January 1, 1989. (Incorporated by reference to Form 10-Q for the quarterly period ended September 9, 1995.) 10f 1 Executive Officers Medical/Life Insurance Benefit Plan effective as of December 9, 1993. (Incorporated by reference to Exhibit 10kk to Form 10-K for the fiscal year ended January 1, 1994.) 10g Asset Purchase Agreement, dated as of February 6, 1995, between Homeland and Associated Wholesale Grocers, Inc. (Incorporated by reference to Exhibit 10pp.1 to Form 10-K for the fiscal year ended December 30, 1995.) 10h Amended and Restated Revolving Credit Agreement, dated as of April 21, 1995, among Homeland, Holding, National Bank of Canada, as Agent and lender, Heller Financial, Inc. and any other lenders thereafter parties thereto. (Incorporated by reference to Exhibit 10uu to Form 8-K dated March 14, 1996.) 10h.1 Waiver Agreement, dated as of December 29, 1995, among Homeland, Holding, National Bank of Canada and Heller Financial, Inc. (Incorporated by reference to Exhibit 10uu.1 to Form 8-K dated March 14, 1996.) 10h.2 Second Waiver Agreement, dated as of March 1, 1996, among Homeland, Holding, National Bank of Canada and Heller Financial, Inc. (Incorporated by reference to Exhibit 10uu.2 to Form 8-K dated March 14, 1996.) 10h.3 Ratification and Amendment Agreement to the $27,000,000 Amended and Restated Revolving Credit Agreement, dated as of May 10, 1996, among Homeland, Holding, National Bank of Canada, as Agent and lender, Heller Financial, Inc. and any other lenders thereafter parties thereto. (Incorporated by reference to Exhibit 10uu.3 to Form 10-Q for quarterly period ended March 23, 1996.) 10i 1 Employment Agreement dated as of July 10, 1995 and as amended September 26, 1995, between Homeland and Larry W. Kordisch. (Incorporated by reference to Exhibit 10pp to Form 10 Form 10-K dated September 9, 1995.) 10i.1 1 Amendment to Employment Agreement between Homeland and Larry W. Kordisch, dated as of April 29, 1996. (Incorporated by reference to Exhibit 10vv.1 to Form 10-K for the fiscal year ended December 30, 1995.) 10i.2 *1 Second Amendment to Employment Agreement between Homeland and Larry W. Kordisch, dated as of September 19, 1997. 10j *1 Employment Agreement dated as of February 25, 1998, between Homeland and Steven M. Mason. 10k *1 Employment Agreement dated as of February 25, 1998, between Homeland and Terry Marczewski. 10l *1 Employment Agreement dated as of February 17, 1998, between Homeland and David B. Clark. 10m Indenture, dated as of August 2, 1996, among Homeland, Fleet National Bank, as Trustee, and Holding, as Guarantor. (Incorporated by reference to Exhibit 10aaa to Form 8-K dated September 30, 1996.) 10n Loan Agreement, dated as of August 2, 1996, among IBJ Schroder Bank & Trust Company, Heller Financial, Inc., National Bank of Canada, Homeland and Holding. (Incorporated by reference to Exhibit 10q to Form 10-K for the fiscal year ended December 28, 1996.) 10n.1 * First Amendmant to the Loan Agreement dated as of November 24, 1997, among IBJ Schroder Bank & Trust Company, Heller Financial, Inc., National Bank of Canada, Homeland and Holding. 10o Subsidiaries. (Incorporated by reference to Exhibit 22 to Form S-1 Registration Statement, Registration No. 33-22829.) 10p 1 Employee Stock Bonus Plan for union employees effective as of August 2, 1996. (Incorporated by reference to Exhibit 10s to Form 10-K for the fiscal year ended December 28, 1996.) 10q 1 Management Stock Option Plan effective as of December 11, 1996. (Incorporated by reference to Exhibit 10t to Form 10-K for the fiscal year ended December 28, 1996.) 27 * Financial Data Schedule 99a Press Release issue by Homeland Stores, Inc. on April 8, 1997. (Incorporated by reference to Exhibit 99 to Form 10-Q for quarterly period ended March 22, 1997.) 99b Press Release issued by Homeland Stores, Inc. on July 10, 1997. (Incorporated by reference to Exhibit 99 to Form 10-Q for quarterly period ended June 14, 1997.) 99c Press Release issued by Homeland Stores, Inc. on September 19, 1997. (Incorporated by reference to Exhibit 99 to Form 10-Q for quarterly period ended September 6, 1997.) 99d * Press Release issued by Homeland Stores, Inc. on March 6, 1998. EX-10 2 HOMELAND STORES, INC. 1997 MANAGEMENT INCENTIVE PLAN 1997 MANAGEMENT INCENTIVE PLAN MANAGEMENT INCENTIVE PLAN Page # I) Purpose of Plan 3 II) Definitions 3 III) Administration and Interpretation 4 IV) Eligible Employees 4 V) Amount Available for Annual Performance Bonus 4 VI) Bonus Elements 5 VII) Allocation of Annual Performance Bonus 6 VIII) Form and Settlement of Incentive Compensation Award 6 IX) Limitations 7 X) Retail Management Incentive Plan 7 XI) Amendment, Suspension or Termination of the Plan 7 XII) Exhibits: A. 1997 EBITDA Table 8 B. 1997 Bonus Sharing Pool 9 C. Corporate Incentive Potential & Weighting Factors 10 D. Bonus Potential by Individual Corporate Management 11-14 E. Retail Management Incentive Plan 15-17 I) PURPOSE OF THE PLAN The purpose of this Plan is to aid in obtaining and retaining qualified and competent management personnel and to encourage significant contributions to the success of Homeland Stores, Inc. by providing incentive compensation to those individuals who contribute to the successful and profitable operation of the affairs of Homeland Stores, Inc. II) DEFINITIONS Unless as otherwise defined elsewhere in this Plan, these terms shall have the following meanings. 1) "Annual Performance Incentive Award" (Bonus) shall mean an award of cash which is made pursuant to this Plan; 2) "Board of Directors" shall mean the duly elected and serving Board of Directors of the Company; 3) "Committee" shall mean the persons appointed to administer the Plan in accordance with Section III; 4) "Company" shall mean Homeland Stores, Inc.; 5) "EBITDA" shall mean the consolidated net income (loss) as determined by GAAP for any period adjusted to exclude (without duplication) the following items that are included in calculating such consolidated net income: (i) consolidated interest expense; (ii) provision for income taxes; (iii) extraordinary gains or losses; (iv) depreciation and amortization; (v) any other non-cash charges and (vi) union contract contingency payments 6) "Participant" shall mean an employee to whom the Committee makes an award under the Plan; 7) "Performance Period" shall be any twelve consecutive month period designated by the Board of Directors. Unless otherwise so specified, such period shall commence on December 29, 1996 and expire on January 3, 1998 (fiscal 1997); 8) "Plan" shall mean this Management Incentive Plan; III) ADMINISTRATION AND INTERPRETATION The Plan shall be administered by a Committee which, unless otherwise determined by the Board of Directors, shall be members of the Compensation and Benefits Committee of the Board of Directors who are not participants hereunder. The membership of the Committee may be reduced, changed, or increased from time to time at the absolute discretion of the Board of Directors. The Committee shall have full power and authority to interpret and administer the Plan and, subject to the provisions herein set forth, to prescribe, amend and rescind rules and regulations and make all other determinations necessary or desirable for the Plan's administration. The decision of the Committee relating to any question concerning or involving the interpretation or administration of the Plan shall be final and conclusive, and nothing in the Plan shall be deemed to give any officer or employee his legal representatives or assignees, any right to participate in the Plan except to such extent, if any, as the Committee may have determined or approved pursuant to the provisions of the Plan. IV) ELIGIBLE EMPLOYEES Employees eligible to participate in the Plan shall be management or executive-level employees and corporate officers. Also included are other key employees recommended by senior management. Any such employee or officer may be designated a participant by the Board of Directors and those eligible to participate for any given performance year shall be as determined by such Board and set forth in Exhibit D for that performance year. V) AMOUNT AVAILABLE FOR ANNUAL PERFORMANCE BONUS The bonus amounts to be made available to participants at each level of EBITDA achieved will be determined from time to time by the Board of Directors of the Company. For this 1997 Plan, the bonus amount for each EBITDA level is set forth in Exhibit B. These amounts will be determined and they will be: 1) Target Bonus Potential - This is an amount expressed as a percentage of each participant's base compensation determined at the beginning of the performance year which is payable if the Target EBITDA goals as set forth in Exhibit A are met. 2) Maximum Bonus Potential - This is the maximum amount of bonus which will be payable to a participant and will be attained only if the EBITDA plan goals are exceeded, as set forth in Exhibit A. 3) Threshold Bonus Potential - This is the minimum acceptable level of performance for awards to commence. The Company has to achieve a minimum EBITDA before bonus of $24.3 million before any bonus payments can be made. 4) Newly Eligible or New Hires - Bonus paid is prorated, based on length of time in current position. Termination's - Not eligible to receive a bonus unless the individual was employed at the end of the year or unless otherwise provided for in any severance agreement. Final determination, as in all cases, will be made by the Committee of the Board of Directors. VI) BONUS ELEMENTS The bonus structure shall be built around two separate individual elements which together will determine the ultimate bonus to be paid. They are as follows: 1) CORPORATE PERFORMANCE AWARD (CPA) - This bonus award will be determined based upon the achievement of specific goals by the Company. This amount will represent a fixed percentage of the total award, as defined in the exhibit and will be different by level within the organization. 2) INDIVIDUAL PERFORMANCE AWARD (IPA) - This bonus award will be based upon the participant's performance of duties and achievement of individual goals and objectives as determined by the Chief Executive Officer. This bonus may be awarded or not awarded or awarded in any percentage as determined by the President, based upon attainment of goals as set forth below. The balance or weighting between each element will be determined by the Committee each year based upon recommendations made by the President. (The IPA will only be payable if the CPA is payable). The bonus CPA and IPA elements for the various management category at the different level of EBITDA is listed in Exhibit C. VII) ALLOCATION OF ANNUAL PERFORMANCE BONUS As soon as practical after the end of the Company's fiscal year and after audit, the Committee will assess the financial performance of the Company and specifically determine which incentive EBITDA level for the fiscal year has been met. The Committee will request of the Chief Executive Officer assessment of individual performance levels of Plan participants and recommendation for Individual Performance Award levels. Based upon achievement of corporate performance level and individual award recommendations made by the Chief Executive Officer, the Committee will then determine the amount of each Annual Performance Bonus for each participant in accordance with the provisions of the Plan and the specifics in force for the performance period. The Committee shall be under no compulsion to award the full amount of the bonus pool if the corporate awards and individual awards together do not exhaust the potential bonus pool. Any bonuses available but not awarded, will cease to be bonuses and will revert to the Company. Amounts awarded are not to be considered as compensation of any employee for the purpose of calculating benefits, unless expressly provided for under the provision of a specific plan. VIII) FORM AND SETTLEMENT OF INCENTIVE COMPENSATION AWARDS Bonus awards shall be paid in cash. Notwithstanding that, the Committee shall have complete and absolute authority to determine the form and settlement of each individual bonus. All bonus awards (except for the retail employees) has to be approved by the Committee prior to payout. The settlement of an award to any participant for any year will be handled in the following manner except for any separate severance agreement approved by the Board. If a participant dies before the payment of a bonus and without having forfeited his right to the payment thereof pursuant to Section IX hereof, such unpaid bonus shall be paid to his estate or legal representative either as originally provided or otherwise as the Committee may determine in each individual case. IX) LIMITATIONS No participant or any other person shall have any interest in any fund or in any specific asset or assets of the Company by reason of a bonus that has been made but has not been paid or distributed to him. No participant shall have the right to assign, pledge or otherwise dispose of any bonus distributable to him in the future, nor shall such participant's contingent interests in such unpaid installments be subject to garnishment, transfer by operation of law or any legal process. X) RETAIL INCENTIVE PLAN The Retail Plan as more fully described in Exhibit E is applicable for retail stores management only. XI) AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN The Board of Directors of the Company may at any time amend, suspend or terminate the Plan, in whole or in part, except that no amendment, suspension or termination shall reduce any benefits payable to a participant or his estate or legal representative or shall reduce any benefits awarded to a participant prior to the date of such amendment, suspension or termination. 1997 Retail Incentive Plan ELIGIBILITY All Store Managers, Assistant Store Managers, Pharmacy Managers and Assistant Pharmacy Managers are eligible to participate in the plan. Each participant in the plan must be actively employed in the position at the time of payment. No store bonus will be paid unless store hits a minimum of 90% of its N.O.P. target. INCENTIVE PLAN PAYMENT The total maximum bonus for all Store Managers will be 30% of their base pay ("Bonus Rate"), with the exception of the Special N.O.P Incentive paid to Store Managers who exceed their N.O.P. target. There will be no cap on the Special N.O.P. Incentive. First Assistant Managers will be paid 10% of the Store Managers bonus and 5% will be paid to Second Assistants. TRANSFERS AND NEW HIRES Store Managers will receive pro rata portion of bonus from the previous store and a pro rata portion from the new store based on the length of time in each assignment during the bonus period. Assistant Store Managers bonus will be based on the store assigned to at the end of the bonus period. New hires or newly eligible participants will have their bonus based on length in current position. BONUS ELEMENTS The bonus plan will be broken down into three parts, excluding the Special Incentive. Eligible participants will be paid on the following: 1) One Percent of all N.O.P. up to 50% of their Bonus Rate. 2) Up to 30% of their Bonus Rate for achievement of their sales target. 3) An additional 20% of Bonus Rate amount for attaining controllable expense target: Wages 12% Supplies 2% Checks 2% Cash 2% Inventory Turns 2% AWARD PAYMENT The incentive bonus will be paid in cash on an semi-annual basis. BONUS CALCULATION (After Eligibility of 90% of N.O.P. Target) 1)NOP: After eligibility participants earn 1% of N.O.P. up to 50% of Bonus Rate. 92.5 to 94% of Sales Target: .25% of N.O.P. 95 to 97.4% of Sales Target: .50% of N.O.P. 97.5 to 99% of Sales Target: .75% of N.O.P. 100% of Sales Target: 1% of N.O.P. 2)SALES: (Maximum 30% of Bonus Rate) to be paid in the following manner: 90 to 94% of Sales Target: 10% 95 to 99% of Sales Target: 20% 100% of Sales Target: 30% 3)CONTROLLABLES: (Maximum 20% of Bonus Rate) Wages 12% Supplies 2% Checks 2% Cash 2% Inventory Turns 2% SPECIAL N.O.P. INCENTIVE Eligible participants will receive the following additional percentages of N.O.P. over their N.O.P. target: a) the first $50,000 of actual N.O.P. over the N.O.P. target : 1% b) the second $50,000 of actual N.O.P. over the N.O.P. target : 2% c) any additional actual N.O.P. over the N.O.P. target after a & b : 2.25% This special incentive will have no cap on it. PHARMACY INCENTIVE BONUS Pharmacy managers will receive the following sales incentive bonus based on their actual sales: Pharmacy Manager receives 0.75% of store pharmacy sales. Assistant Pharmacy Manager receives 0.60% of store pharmacy sales. If the pharmacy department achieves or exceeds it sales budget for the year, then an additional incentive bonus will be paid based on the following: Pharmacy Manager receives 0.15% of store pharmacy sales. Assistant Pharmacy Manager receives 0.15% of store pharmacy sales. This incentive will be paid out on a quarterly basis except for the additional 0.15% which will be paid in the last quarterly payment, one quarter in arrears, and is independent of corporate EBITDA or Store NOP performance. Exhibit B 1997 BONUS SHARING POOL% $ in (000) EBITDA EBITDA "BEFORE" BONUS "AFTER" BONUS POOL BONUS 24,278 0 24,278 24,528 250 24,278 24,778 500 24,278 25,028 750 24,278 25,278 1,000 24,278 25,528 1,250 24,278 Threshold 25,778 1,500 24,278 26,028 1,563 24,466 26,278 1,625 24,653 26,528 1,688 24,841 26,778 1,750 25,028 27,028 1,813 25,216 27,278 1,875 25,403 27,528 1,938 25,591 27,778 2,000 25,778 28,028 2,063 25,966 Target 28,278 2,125 26,153 28,528 2,188 26,341 28,778 2,250 26,528 29,028 2,313 26,716 29,278 2,375 26,903 29,528 2,438 27,091 29,778 2,500 27,278 30,028 2,563 27,466 30,278 2,625 27,653 30,528 2,688 27,841 30,778 2,750 28,028 31,028 2,813 28,216 31,278 2,875 28,403 31,528 2,938 28,591 31,778 3,000 28,778 32,028 3,063 28,966 32,278 3,125 29,153 32,528 3,188 29,341 32,778 3,250 29,528 33,028 3,313 29,716 Maximum 33,278 3,375 29,903 Exhibit C Award Weighting Table Threshold Target Maximum Corporate Individual EBITDA EBITDA EBITDA Performance Performance $24.3 M $26.1 M $29.9M (CPA) (IPA) Senior Officers 50% 100% 200% 75% 25% Other Officers 25% 50% 100% 75% 25% Directors 20% 40% 70% 50% 50% Managers 10% 20% 30% 40% 60% Supervisors 5% 10% 15% 30% 70% Others 2.5% 5.0% 7.5% 20% 80% EX-10 3 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 September 19, 1997 Mr. Larry W. Kordisch 11324 Shady Glen Road Oklahoma City, OK 73162 Dear Larry: The purpose of this letter is to confirm the following amendments to your employment agreement dated April 29, 1996 (the "Agreement") with Homeland Stores Inc. (the "Company"). 1. Expansion of Duties. Section 1 of the Agreement is hereby amended to provide that, in addition to serving as the Executive Vice President and Chief Financial Officer of the Company and Homeland Holding Corporation ("Holding"), commencing on the date hereof, you will be the acting Chief Executive Officer of the Company and Holding. 2. Base Salary. Section 2 of the Agreement is hereby amended to confirm that your base salary has been increased to $160,000 per annum. 3. Minimum Guaranteed Bonus for Fiscal 1997. Section 3 of the Agreement is hereby amended to provide that for fiscal year 1997 you will receive a minimum guaranteed bonus of $100,000 to be paid on March 1, 1998; provided, however, that you must be employed by the Company on March 1, 1998 to be entitled to receive such minimum guaranteed bonus amount. 4. Extension of Application of Severance. The first clause of Section 8 of the Agreement is hereby amended to read as follows: "If the Company terminates your employment for any reason other than Cause or Disability prior to December 31, 1999, or if you shall terminate your employment following . . . ." 5. Special Bonus Payment. In consideration of the additional duties that you have agreed to undertake on behalf of the Company and Holding hereunder, the Company agrees to pay you a special bonus in the amount of $50,000, payable in cash on the earlier of (a) the date a new Chief Executive Officer is hired by the Company (to be payable whether or not you are the person so hired) or (b) March 1, 1998. 6. Acting Member of Board of Directors. During the period of time in which you are serving as the acting Chief Executive Officer of the Company and Holding, you will be appointed as an acting member of the Board of Directors of the Company and Holding. Your service as an acting member of the Board of Directors of the Company and Holding will continue until a new Chief Executive Officer is hired by the Company, at which time it is anticipated that if you are the person so hired, you will be elected as a member of the Board of Directors of the Company and Holding. 7. Continuation of Agreement. Except as amended herein, the Agreement shall remain in full force and effect. If the foregoing accurately sets forth the terms of the amendment to the Agreement, please so indicate by signing below and returning one signed copy of this letter agreement to me. Sincerely, HOMELAND STORES, INC. John A. Shields, Chairman of the Board ACCEPTED AND AGREED as of this ___ day of _________, 1997 Larry W. Kordisch 460732.v2 EX-10 4 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 February 25, 1998 Mr. Steven M. Mason Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, OK 73125 Dear Steve: The purpose of this letter is to confirm our understanding with respect to a termination of your employment with Homeland Stores, Inc. (the "Company"). If the Company terminates your employment prior to December 31, 1998 for any reason other than Cause or Disability, the Company will (i) continue to pay you your base salary for one year after the date of your termination of employment, and (ii) within 5 business days after your employment terminates, pay you in a lump sum payment an amount equal to the product of (A) your target bonus under the Company's incentive bonus plan for the year in which your employment terminates and (B) a fraction, the numerator of which is the number of days during such year prior to and including the date of your termination of employment and the denominator of which is 365. In the event (i) you terminate your employment for any reason, (ii) your employment terminates due to your death or Disability or (iii) your employment is terminated by the Company for Cause, you will only be entitled to receive the compensation and benefits payable to you under the Company's otherwise applicable employee benefit plans or programs. As used in this letter agreement, "Cause" means (i) your willful failure to perform substantially your duties as an officer and employee of the Company (other than due to physical or mental illness), (ii) your engaging in serious misconduct that is injurious to the Company, (iii) your having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony, or (iv) your unauthorized disclosure of confidential information (other than to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) that has resulted or is likely to result in material economic damage to the Company. As used in this letter agreement, "Disability" means that, as a result of your incapacity due to physical or mental illness, you have been absent from your duties to the Company on a substantially full-time basis for 180 days in any twelve-month period and within 30 days after the Company notifies you in writing that it intends to replace you, you shall not have returned to the performance of your duties on a full-time basis. All amounts payable to you hereunder will be paid net of any and all applicable income or employment taxes required to be withheld therefrom under applicable Federal, State or local laws or regulations. If the foregoing accurately sets forth our understanding, please so indicate by signing below and returning one signed copy of this letter agreement to me. Sincerely, HOMELAND STORES, INC. ____________________________ David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 25th day of February, 1998. _________________________ Steven M. Mason 489094 EX-10 5 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 February 25, 1998 Mr. Terry M. Marczewski Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, OK 73125 Dear Terry: The purpose of this letter is to confirm our understanding with respect to a termination of your employment with Homeland Stores, Inc. (the "Company"). If the Company terminates your employment prior to December 31, 1998 for any reason other than Cause or Disability, the Company will (i) continue to pay you your base salary for one year after the date of your termination of employment, and (ii) within 5 business days after your employment terminates, pay you in a lump sum payment an amount equal to the product of (A) your target bonus under the Company's incentive bonus plan for the year in which your employment terminates and (B) a fraction, the numerator of which is the number of days during such year prior to and including the date of your termination of employment and the denominator of which is 365. In the event (i) you terminate your employment for any reason, (ii) your employment terminates due to your death or Disability or (iii) your employment is terminated by the Company for Cause, you will only be entitled to receive the compensation and benefits payable to you under the Company's otherwise applicable employee benefit plans or programs. As used in this letter agreement, "Cause" means (i) your willful failure to perform substantially your duties as an officer and employee of the Company (other than due to physical or mental illness), (ii) your engaging in serious misconduct that is injurious to the Company, (iii) your having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony, or (iv) your unauthorized disclosure of confidential information (other than to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate government agency) that has resulted or is likely to result in material economic damage to the Company. As used in this letter agreement, "Disability" means that, as a result of your incapacity due to physical or mental illness, you have been absent from your duties to the Company on a substantially full-time basis for 180 days in any twelve-month period and within 30 days after the Company notifies you in writing that it intends to replace you, you shall not have returned to the performance of your duties on a full-time basis. All amounts payable to you hereunder will be paid net of any and all applicable income or employment taxes required to be withheld therefrom under applicable Federal, State or local laws or regulations. If the foregoing accurately sets forth our understanding, please so indicate by signing below and returning one signed copy of this letter agreement to me. Sincerely, HOMELAND STORES, INC. ____________________________ David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 25th day of February, 1998. _________________________ Terry M. Marczewski 489089 EX-10 6 Mr. David B. Clark February 17, 1998 Page Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 February 17, 1998 Mr. David B. Clark 518 Castlebridge Lane Birmingham, AL 35242 Dear Dave: This letter confirms the terms of your employment with Homeland Stores, Inc. (the "Company"). 1. Duties. You will serve as the President and Chief Executive Officer of the Company and Homeland Holding Corporation ("Holding") commencing on February 16, 1998. You will devote all of your skill, knowledge and full working time (reasonable vacation time and absence for sickness or disability excepted) solely and exclusively to the conscientious performance of your duties hereunder. 2. Base Salary. As compensation for the duties to be performed by you under the terms of this letter agreement, the Company will pay you a base salary in the amount of $250,000 per annum, payable at the same time as the Company pays salary to its other executive employees. The Company will review your base salary from time to time and, at the discretion of the Board of Directors, may increase your base salary based upon your performance and other relevant factors. 3. Incentive Bonus. While you are providing services pursuant to this letter, you will be given the opportunity to receive an annual bonus upon the attainment of such performance objectives as the Board of Directors shall determine from time to time after consulting with you. The target amount for your annual bonus will be 75% of your base salary based on the satisfaction of such performance objectives. Any bonus payable to you will be paid to you at the same time as bonuses are paid to other executives. 4. Relocation and Transition Matters. (a) The Company will reimburse you up to a maximum aggregate amount of $45,000 for costs and expenses related to the sale of your residence in Birmingham and your relocation to and purchase of a residence in the Oklahoma City area, including the cost of moving all household goods and automobiles to the Oklahoma City area and the costs of purchasing a residence in the Oklahoma City area such as closing costs, real estate commissions and reasonable attorneys fees. To the extent any payments made to you pursuant to this subparagraph 4(a) are includable as compensation income to you for income tax purposes and are not otherwise deductible, the amount of such payments shall be increased by the amount of the tax so that you will be "made whole" by such tax gross up to the maximum extent possible. (b) The Company will provide you with a company car and a temporary Oklahoma City area residence for you while your family remains in Birmingham for up to the earlier of six months or your acquisition of an Oklahoma City area residence. In addition, during the time your family remains in Birmingham, the Company will reimburse you for travel expenses between Oklahoma City and Birmingham for up to two round trips per month. (c) The Company will loan you up to $125,000 to be applied by you to repay your indebtedness to your former employer. The loan will be evidenced by a promissory note, in the form of Exhibit A attached hereto. 5. Stock Options. Upon commencement of your employment hereunder, you will be granted options to purchase 100,000 shares of common stock of Holding at an exercise price equal to the fair market value for the common stock on February 17, 1998 ($5-1/2 per share). The options will be granted pursuant to Holding's 1996 Stock Option Plan (the "Plan"). The Plan provides that if there is a change in control of Holding, all options shall be immediately exercisable. As defined in the Plan and for purposes of this paragraph, the term "change in control" means (i) the earliest date a new shareholder or related group of new shareholders acquires beneficial ownership of 30% or more of the then issued and outstanding common stock, (ii) the date on which Holding ceases to own all of the issued and outstanding capital stock of the Company or (iii) the date on which Holding or the Company disposes of 50% or more of its assets. In the event a change in control occurs before June 1, 1998 (the "Determination Date"), whereby the acquiring party is a non-strategic, financial investor not primarily engaged in the retail or wholesale grocery business (a "Financial Acquiror"), the agreement between the Company, Holding and such Financial Acquiror will provide that you will be entitled to exchange such options, in a tax-free exchange to the extent permitted by applicable law, for equity in such Financial Acquiror that would vest 50% on the first anniversary of such change in control and 50% on the second anniversary of such change in control. In the event a Financial Acquiror does not acquire control in a change in control of Holding prior to the Determination Date, you will be granted, on the Determination Date, additional options to purchase 30,000 shares of common stock of Holding at an exercise price equal to the fair market value for the common stock as of the Determination Date. Such additional options will also be granted pursuant to the Plan. 6. Employee Benefits. While you are providing services pursuant to this letter agreement, you will be eligible to participate in the employee benefit plans and programs generally available to the Company's employees (including, but not limited to, coverage under the Company's medical, dental, life and disability insurance plans and participation in the Company's qualified plans) as in effect from time to time on the same basis as the Company's other employees, subject to the terms and provisions of such plans and programs. 7. Executive Perquisites. You will be eligible to receive the perquisites and other personal benefits made available to the Company's senior executives from time to time. You will be entitled to no less than three weeks paid vacation in each calendar year, which shall be taken at such times as are consistent with your responsibilities hereunder. 8. Expenses. The Company will reimburse you for all reasonable expenses incurred by you in connection with your performance of services under this letter agreement in accordance with the Company's policies, practices and procedures. 9. Termination of Employment. If the Company terminates your employment for any reason other than Cause or Disability, or if you shall terminate your employment on or after February 16, 1999 following (i) the closing of a sale (a "Stock Sale") of at least 50% of the voting securities of the Company or Holding to a Financial Acquiror, (ii) the effective date of a merger (a "Merger") of Holding with or into a Financial Acquiror immediately following which the persons or entities who were the shareholders of Holding immediately prior to the merger, together with their affiliates, own, directly or indirectly, less than 50% of the voting power of all voting securities of the surviving or resulting entity, (iii) the sale of all or substantially all of the Company's assets (an "Asset Sale") to a Financial Acquiror, or (iv) a Change of Control (as defined in the Amended and Restated Revolving Credit Agreement dated as of April 21, 1995, among National Bank of Canada, as agent, the Company and Holding) involving a Financial Acquiror (a Stock Sale, a Merger, an Asset Sale or such a Change of Control being referred to herein as a "Trigger Event"), the Company will pay you an amount equal to the sum of (i) your Base Salary in effect immediately prior to a Trigger Event, and (ii) an amount equal to the product of (A) your target bonus under the incentive bonus plan described in Section 3 of this letter for the year in which your termination occurs and (B) a fraction, the numerator of which is the number of days during such year prior to and including the date of your termination of employment and the denominator of which is 365. The Company will pay you the cash amounts in a lump sum payment no later than 5 business days after the date your employment terminates or in 12 approximately equal monthly installments, as directed by you at your option. Such amounts will not be subject to any offset, mitigation or other reduction as a result of your receiving salary or other benefits by reason of your securing other employment. The Company will also continue your coverage under the medical, dental, vision, life and disability insurance and other welfare benefits provided to its other executive employees (the "Welfare Benefit Arrangements") for a period of one year after the date your employment terminates; provided, however, that if the Company is unable to or chooses not to continue any such coverage for all or any portion of such period, it shall not be obligated to provide such coverage and shall instead pay you (within 15 days after such coverage is to cease) an amount equal to (A) the remainder of (x) 12 minus (y) the number of months that such coverage that is so provided times (B) the monthly amount it would have paid with respect to such coverage under the applicable Welfare Benefit Arrangement. You will also have the option to purchase the automobile furnished to you by the Company during your employment at its fair market (wholesale) value. If the Company terminates your employment for Cause or due to your death or Disability, you will only be entitled to receive (i) your Base Salary earned through the date of such termination, (ii) all benefits due and owing through the date of such termination and (iii) the amount necessary to reimburse you for expenses incurred prior to the date of such termination for which the Company has agreed to reimburse you and, to the extent provided under the Company's generally applicable policies and procedures, any unused vacation time, plus (iv) if your employment terminates upon your death or Disability, your target bonus under the incentive bonus plan described in Section 3 of this letter for the portion of the incentive year that precedes the date of such termination, such target bonus to be a pro rata amount of the target bonus payable for the entire incentive year. As used herein, "Cause" means (i) your willful failure to perform substantially your duties as an officer and employee of the Company (other than due to physical or mental illness), (ii) your engaging in serious misconduct that is injurious to the Company, (iii) your having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony, or (iv) your unauthorized disclosure of confidential information (other than to the extent required by an order of a court having competent jurisdiction or under subpoena from an appropriate governmental agency) that has resulted or is likely to result in material economic damage to the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there is delivered to you a copy of a resolution duly adopted by the Company's Board of Directors, finding that the Company has "Cause" to terminate you as contemplated in this paragraph. As used herein, "Disability" means that, as a result of your incapacity due to physical or mental illness, you have been absent from your duties to the Company on a substantially full-time basis for 180 days in any twelve-month period and within 30 days after the Company notifies you in writing that it intends to replace you, you shall not have returned to the performance of your duties on a full-time basis. 10. Representation to the Company. By signing below, you represent to the Company that you are not restricted by or subject to any agreement or obligation that would be violated by your acceptance of this letter agreement or the performance of your duties hereunder. 11. Binding Effect. This letter agreement shall be binding upon and inure to the benefit of your heirs and representatives and the successors and assigns of the Company, but neither this letter agreement nor any rights or obligations hereunder shall be assignable or otherwise subject to hypothecation by you (except by will or by operation of the laws of intestate succession) or by the Company, except that the Company may assign this Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of the Company, if such successor expressly agrees to assume the obligations of the Company hereunder. If you should die while any amounts would still be payable to you under this letter agreement if you had continued to live, all such amounts, unless otherwise provided herein, will be paid in accordance with the terms of this letter agreement to your personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees or estate, as the case may be. 12. Indemnification. The Company agrees to indemnify you to the fullest extent permitted under its By laws as in effect from time to time. 13. General Provisions. No provisions of this letter agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by the Company's Board of Directors and is agreed to in a writing signed by you and such Company officer as may be specifically designated by the Board. No agreements or representations, oral or other wise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this letter agreement. The invalidity or unenforceability of any one or more provisions of this letter agreement will not affect the validity or enforce ability of any other provision of this letter agreement, which will remain in full force and effect. This letter agreement may be executed in one or more counterparts, each of which will be deemed to be an original but all of which together will constitute one and the same instrument. All amounts payable to you hereunder will be paid net of any and all applicable income or employment taxes required to be withheld therefrom under applicable Federal, State or local laws or regulations. The validity, interpretation, construction and performance of this letter agreement will be governed by the laws of the State of Oklahoma, without giving effect to its conflict of laws provisions. If the foregoing accurately sets forth the terms of your employment with the Company, please so indicate by signing below and returning one signed copy of this letter agreement to me. Sincerely, HOMELAND STORES, INC. John A. Shields, Chairman of the Board ACCEPTED AND AGREED as of this 17th day of February, 1998 David B. Clark 494611.v4 EXHIBIT A PROMISSORY NOTE $125,000.00 Oklahoma City, Oklahoma February 17, 1998 FOR VALUE RECEIVED, the undersigned, David B. Clark (the "Executive"), hereby unconditionally promises to pay to the order of Homeland Stores, Inc., a Delaware corporation (the "Company"), at its offices, in lawful money of the United States of America, the principal amount of One Hundred Twenty-Five Thousand and No/100 Dollars ($125,000.00), or, if less, the unpaid principal amount of the loan made by the Company (the "Loan") pursuant to Section 4(c) of that certain letter agreement dated February 17, 1998, between the Company and the Executive (the "Agreement"). The interest on the Loan shall accrue at the federal funds rate as quoted in The Wall Street Journal for the close of business on February 13, 1998, and the amount of accrued interest shall be added to the unpaid principal amount of the Loan on each anniversary date of this Promissory Note. The principal amount of the Loan, together with all interest accrued thereon, shall be paid on the earliest to occur of (i) the Executive's termination of employment by the Company for Cause (as defined in the Agreement), (ii) the Executive's termination of employment by the Executive unless such termination by the Executive occurs on or after February 16, 1999 following a Trigger Event (as defined in the Agreement), or (iii) six months after the Executive's termination of employment without Cause by the Company or by reason of the Executive's death or Disability (as defined in the Agreement); provided, however, that in the event (a) the Executive remains in continuous employment with the Company until February 16, 2001, or (b) the Executive terminates his employment on or after February 16, 1999 following a Trigger Event, the Loan, including all interest accrued thereon, shall be forgiven in its entirety and this Promissory Note shall be deemed canceled and of no further force and effect. Default in payment when due and payable, upon acceleration or otherwise, of the principal of and interest on this Note shall constitute an "Event of Default" under the terms of this Note. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. Upon the occurrence of an Event of Default, all amounts then remaining unpaid on this Note shall become, or may be declared by the Company to be, immediately due and payable. The Executive hereby agrees that the Company, at its option, may withhold from time to time from compensation or other amounts payable by the Company to the Executive, any amounts required to make payments of principal of and interest on this Note. While any Default exists hereunder, the Company may set off all amounts herein promised to be paid against compensation or other amounts payable by the Company to the Executive. This Note is subject to optional prepayment in whole or in part at any time. All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest and all other notices of any kind. Such parties consent to any extension of time (whether one or more) of payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. The Executive agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the holder's rights hereunder, the Executive will pay to the holder its reasonable attorney's fees together with all court costs and other expenses of collection paid by such holder. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF OKLAHOMA. _________________________________ David B. Clark EX-10 7 FIRST AMENDMENT TO LOAN AGREEMENT This FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of November 24, 1997 by and among the following parties: (a) HOMELAND STORES, INC. ("Borrower"), a Delaware corporation, (b) HOMELAND HOLDING CORPORATION ("Parent"), a Delaware corporation (Borrower and Parent are sometimes hereinafter collectively referred to as the "Companies" and individually as a "Company"), (c) IBJ SCHRODER BUSINESS CREDIT CORPORATION ("IBJ"), the assignee of IBJ Schroder Bank & Trust Company, (d) HELLER FINANCIAL, INC. ("Heller"), (e) NATIONAL BANK OF CANADA ("NBC"), (such lenders and other financial institutions and their respective successors and assigns, individually, a "Lender" and collectively, the "Lenders"), and (f) NBC, as agent for the Lenders (in such capacity, the "Agent"). RECITALS: A. Pursuant to that certain Loan Agreement dated as of August 2, 1996, by and among Borrower, Parent, Lenders and Agent (as the same may be amended, renewed, extended, restated or otherwise modified from time to time, the "Loan Agreement"), Lenders agreed to provide to Borrower a senior secured revolving credit and letter of credit facility in the maximum aggregate principal amount of Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000). B. Borrower and Parent have requested that Agent and Lenders amend the Loan Agreement, as follows: (1) to increase the Revolving Loan Facility Commitment from Twenty-Seven Million Five Hundred Thousand Dollars ($27,500,000) to Thirty-Two Million Dollars ($32,000,000); (2) to include the Eligible Vendor Receivables in the calculation of the Borrowing Base, with an advance rate of sixty-five percent (65%); and (3) to authorize certain Permitted Acquisitions, including, without limitation, the acquisition of certain assets of Food Lion, Inc. pursuant to the terms of the Contract of Sale (the "Food Lion Agreement"), dated October 13, 1997, by and between Food Lion, Inc. and Borrower. AGREEMENTS: NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Terms Defined. Unless otherwise defined in this Amendment, each capitalized term used in this Amendment has the meaning given to such term in the Loan Agreement (as amended by this Amendment). 2. Additional Definitions. Section 1.1 of the Loan Agreement is hereby amended by adding thereto each of the following definitions in alphabetical order to read in their entirety as follows: "Eligible Vendor Receivables" shall mean only such Vendor Receivables of Borrower as the Agent, in its reasonable discretion, shall from time to time, (a) determine are free from off-set, counterclaim and any other method of reduction, and (b) otherwise elect to consider Eligible Vendor Receivables for purposes of this Agreement. The value of such Vendor Receivables (the "Net Amount of Eligible Vendor Receivables") shall be determined at any time by reference to the then most recent Borrowing Base Certificate delivered under Section 11.1(j) hereof, which Borrowing Base Certificate shall reflect the value of such Vendor Receivables at their book value determined in accordance with GAAP (on a basis consistent with the accounting method used by Borrower as of the First Amendment Closing Date). Criteria for eligibility may be fixed and revised from time to time by the Agent in its reasonable discretion. By way of example only, and without limiting the discretion of the Agent to consider any Vendor Receivables not to be Eligible Vendor Receivables, the Agent may consider any of the following classes of Vendor Receivables not to be Eligible Vendor Receivables: (i) Vendor Receivables subject to any Lien (whether or not any such Lien is permitted under this Agreement), other than those granted in favor of the Agent; (ii) Vendor Receivables for which there is (A) no executed Vendor Offset Agreement by the applicable vendor and (B) no waiver by the Agent of any requirement for a Vendor Offset Agreement with regard to a particular vendor; and (iii) Vendor Receivables in respect of which the relevant Security Agreement, after giving effect to the related filings of financing statements that have then been made, if any, does not or has ceased to create a valid and perfected first priority Lien in favor of the Lenders securing the Lender Debt. "First Amendment Closing Date" shall mean November 24, 1997. "Food Lion" shall mean Food Lion, Inc., a North Carolina corporation. "Net Amount of Eligible Vendor Receivables" shall have the meaning set forth in the definition of Eligible Vendor Receivables. "Permitted Acquisition" shall mean any Investment in assets or properties (exclusive of stock, securities or Indebtedness of a Person, other than Indebtedness incurred as the result of a Permitted Acquisition) that: (a) constitute a food retailing business that carries a mix of grocery, meat, produce, household goods, and variety products, and may contain specialty departments, such as a pharmacy; (b) constitute in purchase price, together with the aggregate purchase price of other Permitted Acquisitions made during the then current Fiscal Year, no more than either: (i) twenty percent (20%) of the indicated amount of Net Capital Expenditures as permitted under Section 12.1 hereof, without adjustment for Excess Cash Flow, as provided in Section 12.1; or (ii) twenty percent (20%) of the actual amount of Net Capital Expenditures made during the then current Fiscal Year; (c) would cause, after giving effect to the proposed terms hereof, no Default under this Agreement; (d) have a purchase price which does not exceed six (6) times the pro forma EBITDA attributable to the Investment under consideration for qualification as a Permitted Acquisition, as calculated for the thirteen (13) Calendar Months immediately following the proposed date of consummation of such Investment; and (e) with respect to Permitted Acquisitions involving a purchase price of $500,000 or more, would not cause the pro forma Borrowing Base Availability, as calculated on a monthly basis for the thirteen (13) Calendar Months immediately following the proposed date of the consummation of such Investment, after giving effect to such Investment, to be less than Four Million Dollars ($4,000,000). "Project Oklahoma" shall mean the acquisition by Borrower of certain assets of Food Lion under that certain Contract of Sale by and between Food Lion and Borrower, effective as of October 13, 1997, together with the Capital Expenditures more fully described on Schedule 1.1 (D) attached hereto. "Vendor Inventory" of any Person shall mean any and all Inventory and stock supplied by an independent, third-party vendor to Borrower or to a supplier (e.g., AWG) of Borrower, intended for sale or lease or to be furnished under contracts of service in the ordinary course of business of such Person, of every kind and description. "Vendor Offset Agreement" shall mean a vendor offset agreement substantially in the form of Exhibit 1.1 (a) hereto (with such modifications as are acceptable to the Agent and as amended, modified or supplemented from time to time). "Vendor Rebate Agreement" shall mean any written agreement or written commitment pursuant to which an independent, third-party vendor to Borrower or to a supplier (e.g., AWG) of Borrower becomes obligated to pay to Borrower funds in connection with product rebates, promotional discounts, advertising incentives and other marketing arrangements. "Vendor Receivables" shall mean and include all accounts, contract rights (including rebates, promotional discounts and incentives), instruments, documents, chattel paper and general intangibles, whether secured or unsecured, now existing and hereafter created, of the Credit Parties, whether or not specifically sold or assigned to the Agent or the Lenders, and arising from a sale or other disposition of Vendor Inventory by Borrower or from cooperative advertising services provided by the Borrower in the ordinary course of Borrower's business, which is payable to Borrower by an independent, third-party vendor to Borrower or to a supplier (e.g., AWG) of Borrower pursuant to the terms of a Vendor Rebate Agreement. 3. Amendments to Borrowing Base and Revolving Loan Facility Commitment. Section 1.1 of the Loan Agreement is hereby amended by amending each of the following definitions contained therein to read in their entirety as follows: "Borrowing Base" shall mean, as of any time, an amount equal to the sum of the following: (a) up to sixty-five percent (65%) of the Net Amount of Eligible Inventory, (b) up to sixty-five percent (65%) of the Net Amount of Eligible Pharmaceutical Inventory, (c) up to eighty-five percent (85%) of the Net Amount of Eligible Coupons, (d) up to fifty percent (50%) of the Net Amount of Eligible Pharmaceutical Receivables, and (e) up to sixty-five percent (65%) of the Net Amount of Eligible Vendor Receivables, as determined by reference to and as set forth in the last Borrowing Base Certificate required to be delivered to the Agent and each Lender prior to such time pursuant to Section 11.1(j) hereof. "Revolving Loan Facility Commitment" shall mean Thirty-Two Million Dollars ($32,000,000). 4. Amendment to Reporting Requirements. Section 11.1 of the Loan Agreement is hereby amended by adding the following Section 11.1(s): (s) with reasonable promptness, information regarding Vendor Receivables as Agent may from time to time reasonably request, including, without limitation, copies of Vendor Rebate Agreements. 5. Audits in Connection with Permitted Acquisitions. Section 11.14(b) of the Loan Agreement is hereby amended by adding the following sentence at the end of the existing Section 11.14(b): Further, each of Parent and Borrower shall allow, and shall cause each of Borrower's Subsidiaries to allow, the Agent or Lenders, in conjunction with the Agent, or their designees to enter any locations at which assets and properties that either are proposed to be transferred to Borrower or have been transferred to Borrower, as a result of a Permitted Acquisition, are located, at any reasonable time or times during regular business hours, to inspect such assets and properties and to inspect, audit and to make copies or extractions from the books, records, journals, orders, receipts, correspondence and other data relating to such assets and properties for the purpose of determining the eligibility of such assets and properties for inclusion in the Borrowing Base. 6. Compliance with Vendor Rebate Agreements. Section 11 of the Loan Agreement is hereby amended by adding the following Section 11.23: Sec. 11.23. COMPLIANCE WITH VENDOR REBATE AGREEMENTS. Each of Parent and Borrower shall comply, and shall cause each of Borrower's Subsidiaries to comply, in all material respects, with all Vendor Rebate Agreements; and each of Parent and Borrower shall duly observe, and cause each of Borrower's Subsidiaries to duly observe, in all material respects, all valid requirements of applicable Vendor Rebate Agreements, the non-observance of which could reasonably be expected to have a Material Adverse Effect. 7. Agreements Regarding Permitted Acquisitions. Section 11 of the Loan Agreement is hereby amended by adding the following Section 11.24: Sec. 11.24. AGREEMENTS REGARDING PERMITTED ACQUISITIONS. Borrower covenants as follows in connection with each Permitted Acquisition: (a) Prior to or simultaneously with consummation of any Permitted Acquisition, Borrower shall deliver to Agent all of the following, in form and substance satisfactory to Agent: (i) Security Documents And Instruments. All of the instruments and documents then required to be delivered pursuant to Section 7 of this Agreement or any other provision of this Agreement or pursuant to the instruments and documents referred to in Section 7 of this Loan Agreement with regard to the assets and properties being acquired by Borrower pursuant to the Permitted Acquisition; and the same shall be in full force and effect and shall grant, create or perfect the Liens, rights, powers, priorities, remedies and benefits contemplated herein or therein, as the case may be. (ii) Evidence Of Insurance. Evidence, in form, scope and substance and with such insurance carriers reasonably satisfactory to the Agent, of all insurance policies required pursuant to Section 11.3(a) of this Agreement with regard to the assets and properties being acquired by Borrower pursuant to the Permitted Acquisition. (iii) Additional Information. Such additional documents, instruments and information as Agent or its legal counsel, special counsel to the Agent, and all local counsel to the Agent, may reasonably request. (b) Litigation. As of the consummation of the Permitted Acquisition, there shall be no pending or, to the knowledge of any Company, threatened litigation with respect to the Permitted Acquisition, which challenges or relates to the Permitted Acquisition, which pending or threatened litigation could be expected to have a Material Adverse Effect. There shall exist no judgment, order, injunction or other similar restraint prohibiting any transaction contemplated by the Permitted Acquisition. (c) Landlord's Liens. None of the assets or properties to be acquired pursuant to the Permitted Acquisition shall be subject to any contractual or statutory Lien or Liens in favor of any lessor under any Lease, except such Liens as the Agent, in its sole discretion, shall deem not material, and except such Liens that have been waived or subordinated to the Liens in favor of Agent and the Lenders in a manner satisfactory to the Agent, in its sole discretion. (d) Collection Account. If applicable, Borrower shall have established one or more Collection Accounts into which the cash receipts for each store, if any, to be acquired pursuant to the Permitted Acquisition (to the extent such cash receipts constitute proceeds of any Collateral) shall be deposited. (e) No Default. No Default or Event of Default shall have occurred and be continuing. (f) Representations and Warranties. The representations and warranties contained herein and in all other Loan Documents shall be true and correct as of the date hereof as if made on the date of the Permitted Acquisition. (g) Delivery of Documents. All agreements, documents and instruments executed and/or delivered pursuant hereto, and all legal matters incident thereto, shall be satisfactory to Agent and its legal counsel. (h) Permitted Acquisition Certificate. Borrower shall have delivered to Agent a certificate pertaining to the Permitted Acquisition, in the form as set forth in Exhibit 11.24 attached hereto. 8. Amendment to Permitted Investments. Section 12.4 (p) of the Loan Agreement is hereby amended and restated to read in its entirety as follows: (p) Investments that are Permitted Acquisitions. 9. Validity of Vendor Receivables. Section 14 of the Loan Agreement is hereby amended by adding the following Section 14.21: Sec. 14.21. VALIDITY OF VENDOR RECEIVABLES. (a) Except with respect to Vendor Receivables, the aggregate amount of which would not constitute a material percentage of all Vendor Receivables at any given time and Vendor Receivables the failure of which to satisfy the following requirements, would not have a material adverse effect on the value of the Collateral, each Vendor Receivable existing on the First Amendment Closing Date is, and each future Vendor Receivable will be, at the time of its creation, a genuine obligation enforceable against the Vendor who is the account debtor thereof in accordance with the terms of the Vendor Rebate Agreement applicable to such Vendor Receivable, and represents an undisputed and bona fide indebtedness owing to Borrower by the Vendor identified as being so indebted to Borrower in the applicable Vendor Rebate Agreement, without defense, setoff or counterclaim, free and clear of all Liens other than the security interest in favor of the Agent under the Security Documents; and no payment has been received with respect to any Vendor Receivable and no Vendor Receivable is subject to any credit or extension or agreement therefor. (b) No Vendor Receivable is evidenced by any note, draft, trade acceptance or other instrument for the payment of money. 10. Amendments to Exhibits. The Loan Agreement is hereby amended as follows: (a) Form of Vendor Offset Agreement. Exhibit 1.1(a) is added in its entirety as set forth on Exhibit 1.1(a) attached hereto; (b) Form of Borrowing Base Certificate. Exhibit 11.1(j) is amended and restated to read in its entirety as set forth on Exhibit 11.1(j) attached hereto; and (c) Form of Permitted Acquisition Certificate. Exhibit 11.23 is added in its entirety as set forth on Exhibit 11.23 attached hereto. 11. Amendments to Schedules. The Loan Agreement is hereby amended as follows: (a) Lenders and Commitments. Schedule 1.1(A) is amended and restated to read in its entirety as set forth on Schedule 1.1(A) attached hereto; (b) Special Account Stores. Schedule 11.17(c) is amended by supplementing the existing Schedule 11.17(c) with Schedule 11.17(c) attached hereto; (c) Environmental Report Stores. Schedule 11.18 is amended by supplementing the existing Schedule 11.18 with Schedule 11.18 attached hereto; (d) Existing Indebtedness for Borrowed Money and Contingent Obligations. Schedule 12.3(c) is amended by supplementing the existing Schedule 12.3(c) with Schedule 12.3(c) attached hereto; (e) Real Property. Schedule 14.5(a) is amended by supplementing the existing Schedule 14.5(a) with Schedule 14.5(a) attached hereto; and (f) Environmental Information. Schedule 14.15 is amended by supplementing the existing Schedule 14.15 with Schedule 14.15 attached hereto. 12. Waivers Regarding Project Oklahoma. Lenders hereby waive the following in regards to Project Oklahoma: (a) Section (b) of the definition of Permitted Acquisition as defined in Section 1.1 of the Loan Agreement: (b) Section 10(a) of the Loan Agreement; (c) the inclusion of the Capital Expenditures incurred by Borrower as a result of Project Oklahoma in the calculation of the Maximum Net Capital Expenditures for Fiscal Years 1997 and 1998 in Section 12.1(a) of the Loan Agreement; and (d) in regards to that leasehold estate to be evidenced by that certain Lease Agreement by and between Food Lion and Borrower, whereby Food Lion will lease to Borrower and Borrower will rent from Food Lion, certain premises located at 11241 West Reno, Yukon, Oklahoma, Section 7.2(a) of the Loan Agreement. Lenders' waivers in this Section 12 are limited to Project Oklahoma, and do not constitute a waiver of either any other section of the Loan Agreement, or any other section of this Amendment. 13. Conditions Precedent. The effectiveness of this Amendment is subject to the satisfaction of each of the following conditions precedent: (a) Agent shall have received all of the following, each dated (unless otherwise indicated) the date of this Amendment, in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment and any other instrument, document or certificate required by Agent or Lenders to be executed or delivered by Borrower, Parent or any other party in connection with this Amendment, duly executed by the parties thereto (the "Amendment Documents"). (ii) Security Documents And Instruments. All the instruments and documents then required to be delivered pursuant to Section 7 of the Loan Agreement or any other provision of the Loan Agreement or pursuant to the instruments and documents referred to in Section 7 of the Loan Agreement with regard to the assets of Food Lion being acquired by Borrower pursuant to the Food Lion Agreement; and the same shall be in full force and effect and shall grant, create or perfect the Liens, rights, powers, priorities, remedies and benefits contemplated herein or therein, as the case may be. (iii) Notes. A Note for each Lender, each duly completed, executed and delivered in accordance with Section 2.3 of the Loan Agreement. (iv) Evidence Of Insurance. Evidence, in form, scope and substance and with such insurance carriers reasonably satisfactory to the Agent, of all insurance policies required pursuant to Section 11.3(a) of the Loan Agreement with regard to the assets of Food Lion being acquired by Borrower pursuant to the Food Lion Agreement. (v) Disbursement Authorization. A disbursement authorization letter, substantially in the form of Exhibit 8.12 of the Loan Agreement, duly executed and delivered by Borrower as to the disbursement on the First Amendment Closing Date of the proceeds of the Advance on such date. (vi) Other Fees And Expenses. Evidence that the costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred by Agent incident to this Amendment or required to be paid in accordance with Section 15.5 of the Loan Agreement, to the extent incurred and submitted to Borrower, shall have been paid in full by Borrower. (vii) Additional Information. Such additional documents, instruments and information as Agent or its legal counsel, Hughes & Luce, L.L.P., special counsel to the Agent, and all local counsel to the Agent, may reasonably request to effect the transactions contemplated hereby. (b) Closing Fee. Borrower shall pay to the Agent for the account of Lenders a closing fee in the amount of Twenty-Two Thousand Five Hundred Dollars ($22,500), which shall be distributed by Agent to Lenders on a pro rata basis of their Commitments. (c) Qualification. Each Company shall be duly qualified and in good standing in each jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify, except where the failure to so qualify could not reasonably be expected to have a Material Adverse Effect. (d) Food Lion Agreement. The Agent and all Lenders shall have had the opportunity to examine the Food Lion Agreement and the related material contracts, properties, books of account, records, leases, contracts, insurance coverage and properties of each Company, and to perform such other due diligence regarding each Company as the Agent or any Lender shall have requested, the results of all of which shall have been satisfactory to the Agent and all Lenders in all material respects. (e) Litigation. There shall be no pending or, to the knowledge of any Company, threatened litigation with respect to any Company or any of its Subsidiaries or (relating to the transactions contemplated herein) with respect to the Agent or any of the Lenders, which challenges or relates to the financing arrangements to be provided hereunder, or to the business, operations, liabilities, assets, properties, prospects or condition (financial or otherwise) of any Company or its Subsidiaries, which pending or threatened litigation could, in the Agent's reasonable judgment, be expected to have a Material Adverse Effect. There shall exist no judgment, order, injunction or other similar restraint prohibiting any transaction contemplated hereby. (f) Compliance with Law. The Agent shall be satisfied that each Company (a) has obtained all authorizations and approvals of any governmental authority or regulatory body required for the due execution, delivery and performance by such Company of each Amendment Document to which it is or will be a party and for the perfection of or the exercise by the Agent and each Lender of their respective rights and remedies under the both the Amendment Documents and the Loan Documents, and (b) shall be in compliance with, and shall have obtained appropriate approvals pertaining to, all applicable laws, rules, regulations and orders, including, without limitation, all governmental, environmental, ERISA and other requirements, regulations and laws, the violation or failure to obtain approvals for which could reasonably be expected to have a Material Adverse Effect. (g) Proceedings; Receipt of Documents. All requisite corporate action and proceedings in connection with the borrowings and the execution and delivery of the Amendment Documents shall be satisfactory in form and substance to the Agent and the Agent shall have received, on or before the First Amendment Closing Date, all information and copies of all documents, including, without limitation, records of requisite corporate action and proceedings, which the Agent may have requested in connection therewith, such documents where requested by the Agent to be certified by appropriate corporate Persons or governmental authorities. Without limiting the generality of the foregoing, the Agent shall have received on or before the First Amendment Closing Date the following, each dated such day (unless otherwise specified), in form and substance satisfactory to the Agent (unless otherwise specified) and, except for the Notes, in sufficient copies for each Lender: (i) a copy of any amendments to the articles or certificate of incorporation, as the case may be, of each Company, to the extent such amendments have been effected subsequent to the Closing Date, in each case certified (as of a date reasonably near the First Amendment Closing Date), by the Secretary of State of Delaware as being a true and correct copy thereof; (ii) a copy of any amendments to the bylaws of each Company, to the extent such amendments have been effected subsequent to the Closing Date; (iii) certified copies of the resolutions of the Board of Directors of each Company approving this Amendment, the Notes, and each other Amendment Document to which it is a party or by which it is bound, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement, the Notes, and each other Amendment Document; (iv) a copy of a certificate of the Secretary of State of each State listed on Schedule 8.15 of the Loan Agreement, dated a date reasonably near the date of the First Amendment Closing Date, stating that Borrower and each Company, as the case may be, is duly qualified and in good standing as a foreign entity in such State; (v) a certificate of each Company signed on behalf of such Person by an appropriate officer of such Person, certifying as to the absence of any amendments to the charter and the bylaws of such Person since the Closing Date; and (vi) a certificate of the Secretary or an Assistant Secretary of each Company certifying the names and true signatures of the officers of such Person authorized to sign, on behalf of such Person, this Amendment, the Notes and each other Loan Document, to which such Person is a party or by which it is bound. (h) No Market Disruption. There shall have occurred no disruption or adverse change in the financial or capital markets generally which the Agent, in its reasonable discretion, deems material. (i) Landlord's Liens. None of the Collateral shall be subject to any contractual or statutory Lien or Liens in favor of any lessor under any Lease, except such Liens as the Agent, in its sole discretion, shall deem not material, and except such Liens that have been waived or subordinated to the Liens in favor of Agent and the Lenders in a manner satisfactory to the Agent, in its sole discretion. (j) Collection Account. Prior to the First Amendment Closing Date, except as otherwise permitted by the Loan Agreement, Borrower shall have established one or more Collection Accounts into which the cash receipts for each store operated by Borrower or a Subsidiary of Borrower (to the extent such cash receipts constitute proceeds of any Collateral) shall be deposited. (k) No Default. No Default or Event of Default shall have occurred and be continuing (after giving effect to Paragraphs 2 through 11 of this Amendment). (l) Representations and Warranties. The representations and warranties contained herein and in all other Loan Documents, as amended hereby, shall be true and correct as of the date hereof as if made on the date hereof. (m) Delivery of Documents. All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all other agreements, documents and instruments executed and/or delivered pursuant hereto, and all legal matters incident thereto, shall be satisfactory to Agent and its legal counsel, Hughes & Luce, L.L.P. 14. Conditions Subsequent to Amendment. Notwithstanding anything to the contrary contained in paragraph 12(a)(i), Borrower, and Parent agree to execute and deliver (as applicable) any other agreements, documents or instruments related to the attachment, creation or perfection of Lender's Liens on any of the Collateral, including, without limitation, UCC-3 amendments to financing statements previously filed in favor of Agent, in form and substance reasonably satisfactory to Agent, within 30 days of the date of this Amendment. Borrower, and Parent further agree that failure to execute and deliver the Amendment Documents referred to in this paragraph 13 shall constitute an Event of Default under the Loan Agreement and that such Loan Documents shall be included within the definition of Amendment Documents contained herein. 15. Representations and Warranties. Each Company hereby represents and warrants to Agent and Lenders that, as of the date of and after giving effect to this Amendment, (a) the execution, delivery and performance of this Amendment and any and all other Amendment Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of each Company and will not violate the corporate charter or bylaws any Company, (b) all representations and warranties set forth in the Loan Agreement and in any other Loan Documents are true and correct, in all material respects, as if made again on and as of such date (including, without limitation, the representations and warranties previously made as of the Closing Date in the Loan Agreement), (c) no Default or Event of Default has occurred and is continuing (after giving effect to Paragraphs 2 through 11 of this Amendment), and (d) the Loan Agreement (as amended by this Amendment), the Notes and the other Loan Documents are and remain legal, valid, binding and enforceable obligations of each Company, as applicable. 16. Amendment Documents as Loan Documents. The term Loan Documents as defined in the Loan Agreement and as used in any of the Loan Documents includes, without limitation, this Amendment and each of the other Amendment Documents executed in connection herewith. 17. Governing Law. THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 18. Counterparts. This Amendment may be executed in any number of counterparts, all of which when taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart. 19. No Oral Agreements. THIS AMENDMENT, TOGETHER WITH THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BETWEEN AND AMONG THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN (A) BORROWER, OR PARENT, AND (B) AGENT OR ANY LENDER. 20. Loan Agreement Remains in Effect: No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other the Loan Documents shall remain unchanged and in full force and effect and are hereby ratified and confirmed. No waiver by Agent or any Lender of any Default or Event of Default shall be deemed to be a waiver of any other Default or Event of Default. No delay or omission by Agent or any Lender in exercising any power, right or remedy shall impair such power, right or remedy or be construed as a waiver thereof or an acquiescence therein, and no single or partial exercise of any such power, right or remedy shall preclude other or further exercise thereof or the exercise of any other power, right or remedy under the Loan Agreement, the Loan Documents or otherwise. 21. Ratification of Guaranty. Parent reaffirms Parent's obligations under the Guaranty, agrees that the Guaranty shall remain in full force and effect not withstanding execution of this Amendment and the Amendment Documents, and agrees that the Guaranty and the Loan Agreement shall continue to be legal, valid and binding obligations of the Guarantor, enforceable in accordance with the terms therein with regard to the Indebtedness, as increased pursuant to this Amendment. 22. Survival of Representations and Warranties. All representations and warranties made in this Amendment or any other Amendment Document shall survive the execution and delivery of this Amendment and the other Amendment Documents, and no investigation by Lender or any closing shall affect the representations and warranties or the right of Lender to rely upon them. 23. Reference to Loan Agreement. Each of the Loan Documents, including the Loan Agreement, the Amendment Documents and any and all other agreements, documents or instruments now or hereafter executed and/or delivered pursuant to the terms hereof or pursuant to the terms of the Loan Agreement as amended hereby, are hereby amended so that any reference in such Loan Documents to the Loan Agreement shall mean a reference to the Loan Agreement as amended hereby. 24. Severability. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 25. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Agent, Lenders, Borrower, and Parent and their respective successors and assigns, except Borrower, and Parent may not assign or transfer any of their rights or obligations hereunder without the prior written consent of Lenders. 26. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. [This space intentionally left blank]. IN WITNESS WHEREOF, Borrower, Parent, Agent and Lenders have caused this Amendment to be executed and delivered by their duly authorized officers effective as of the date first above written. BORROWER: HOMELAND STORES, INC. By: ___________________________________ Larry W. Kordisch Acting Chief Executive Officer PARENT: HOMELAND HOLDING CORPORATION By: ___________________________________ Larry W. Kordisch Acting Chief Executive Officer AGENT AND A LENDER: NATIONAL BANK OF CANADA By: ___________________________________ Larry L. Sears, Group Vice President By: ___________________________________ Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ SCHRODER BUSINESS CREDIT CORPORATION By: Name: Title: HELLER FINANCIAL, INC. By: Name: Title: EX-99 8 HMLD Reports Fourth Quarter Results Page 2 March 6, 1998 -MORE- FOR IMMEDIATE RELEASE Contact: Larry Kordisch Executive Vice President and Chief Financial Officer (405) 879-6600 HOMELAND STORES ANNOUNCES 8.8% INCREASE IN FOURTH QUARTER EBITDA TO $8,055,000 EBITDA EXCLUDING NONRECURRING ITEMS INCREASES 15.6% FOR 1997 Oklahoma City, Oklahoma (March 6, 1998) David B. Clark, President and Chief Executive Officer of Homeland Holding Corporation (Nasdaq/NM: HMLD), today announced financial results for the fourth quarter and year ended January 3, 1998. For the fourth quarter, a 17-week period, sales were $176,744,000, up 7.4% from $164,490,000 for the fourth quarter of 1996, a 16-week period ended December 28, 1996. EBITDA (earnings before interest, taxes and depreciation and amortization) increased 8.8% to $8,055,000 from $7,406,000. Net income, excluding amortization of reorganization value, was $2,048,000, or $0.43 per diluted share, for the latest quarter, compared with $2,427,000, or $0.51 per diluted share, for the fourth quarter of 1996. Sales for the 53-week period ended January 3, 1998 were $527,993,000 compared with $527,773,000 for 1996, a 52-week period. EBITDA grew 15.6% to $22,505,000 from $19,465,000, excluding nonrecurring reorganization items for 1996. Net income, excluding amortization of reorganization value, was $3,883,000, or $0.81 per diluted share, for 1997, up from $3,384,000, excluding nonrecurring gains and reorganization items, for 1996. Mr. Clark commented, "While we were pleased with the significant growth in EBITDA for the fourth quarter, Homeland's financial results continued to be affected by soft industry conditions that have had an impact throughout most of 1997 on supermarket companies across the nation. In addition to lower food price inflation and more stringent food stamp eligibility requirements, both of which reduced the potential for sales growth, Homeland has faced increased competition, necessitating greater promotional expenditures. As a result, the Company's sales growth was primarily attributable to the extra week in the latest quarter and to the four stores acquired during the year. Same-store sales for the quarter increased 1.6% from the fourth quarter of the previous year. Excluding the extra week for the latest quarter, they declined 4.5%. "Despite sales pressures evident during the year, Homeland accomplished a number of goals during its first full year since its August 1996 reorganization. The Company was solidly profitable for the year, excluding amortization of reorganization value, and its EBITDA margin rose to 4.3% of sales for the year from 3.7% for 1996. We also invested more than $15 million in upgrading the Company's base of stores in operation, including 20 major and minor remodeling projects to existing stores and the four acquisitions, which raised our base to 70 stores in operation at the end of the year. "As we have moved into 1998, we have continued to focus on managing Homeland's costs in the face of the ongoing industry softness expected in the early months of the year. During the year, we intend to invest nearly $13 million in our store ongoing program to refurbish the Company's stores and the expansion of at least two locations. We also will continue to review further opportunities to consolidate our markets through acquisition. Having established the largest presence in our core markets, we believe Homeland is well positioned to benefit from additional acquisition activity." Homeland Stores, Inc. is the leading supermarket chain in Oklahoma, southern Kansas, and the Texas panhandle region, operating a total of 70 stores. The Company operates in four distinct marketplaces: Oklahoma City, Oklahoma; Tulsa, Oklahoma; Amarillo, Texas; and certain rural areas of Oklahoma, Kansas and Texas. HOMELAND HOLDING CORPORATION Unaudited Financial Highlights (In thousands, except per share data) 17 Weeks 16 Weeks 53 Weeks 52 Weeks Ended Ended Ended Ended January 3, December 28, January 3, December 28, 1998 1996 1998 1996 Sales $ 176,744 $ 164,490 $ 527,993 $ 527,773 Earnings before interest, taxes, depreciation and amortization $ 8,055 $ 7,406 $ 22,505 $ 19,465(1) Net income (loss) $ (2,384)(2) $ (2,238)(3) $ (10,644)(2) $ 34,687(4) Earnings (loss) per share: Basic $ (0.49)(2) $ (0.47)(3) $ (2.23)(2) n.a. (5) Diluted $ (0.49)(2) $ (0.47)(3) $ (2.23)(2) n.a. (5) Weighted average shares outstanding: Basic 4,819 4,758 4,783 n.a. (5) Diluted 4,819 4,758 4,783 n.a. (5) (1) Excludes nonrecurring reorganization items of $25,996. (2) Includes amortization of excess reorganization value of $4,432, or $0.92 per diluted share, and $14,527, or $3.04 per diluted share, for the 17 weeks and 53 weeks ended January 3, 1998, respectively. (3) Includes amortization of excess reorganization value of $4,665, or $0.98 per diluted share. (4) Includes amortization of excess reorganization value of $5,819, nonrecurring reorganization items of $25,996 and an extraordinary gain of $63,118 related to discharged debt. (5) As a result of the reorganization that was consummated in August 1996, this period includes both successor company and predecessor company results. Therefore, earnings per share data are not comparable to 1997's results. -END- EX-27 9
5 YEAR JAN-03-1998 JAN-03-1998 4,778 0 10,511 1,198 45,946 62,618 81,394 11,299 166,041 40,729 0 0 0 48 42,324 166,041 527,993 527,993 401,691 401,691 126,849 0 8,408 (8,955) 1,689 (10,644) 0 0 0 (10,644) (2.23) (2.23)
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