-----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, LwwsHmO2A/hYWhbgs5TXOrWehnXdj6YzMbeFoh1WD1DqteZXqt0s/0OSt5B5uaB6 hP8aKR/G+V6bZKhAQJ9vyg== 0000835582-00-000008.txt : 20000331 0000835582-00-000008.hdr.sgml : 20000331 ACCESSION NUMBER: 0000835582-00-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20000101 FILED AS OF DATE: 20000330 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: 584057 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) Annual report pursuant to Section 13 or 15(d) of the Securities X Exchange Act of 1934 [No Fee Required] For the fiscal year ended January 1, 2000 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, 2000: $17,716,797, based on a closing price of $4.1875 of the registrant's common stock on the NASDAQNMS. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 27, 2000: Homeland Holding Corporation Common Stock: 4,920,608 shares Documents incorporated by reference: Portions of the definitive Proxy Statement for the 2000 Annual Stockholders Meeting are incorporated into Part III of this Form 10-K by reference. HOMELAND HOLDING CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 1, 2000 TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS................................................... 1 General.................................................... 1 Background................................................. 1 AWG Transaction............................................ 1 Restructuring.............................................. 2 Business Strategy.......................................... 2 Homeland Supermarkets...................................... 3 Merchandising Strategy and Pricing......................... 5 Customer Services.......................................... 5 Advertising and Promotion.................................. 5 Products................................................... 6 Supply Arrangements........................................ 6 Employees and Labor Relations.............................. 7 Computer and Management Information Systems................ 8 Competition................................................ 8 Trademarks and Service Marks............................... 9 Regulatory Matters......................................... 9 ITEM 2. PROPERTIES................................................. 9 ITEM 3. LEGAL PROCEEDINGS.......................................... 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS........................... 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 11 i Page ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 15 Results of Operations...................................... 15 Liquidity and Capital Resources............................ 18 Year 2000.................................................. 23 Inflation/Deflation........................................ 23 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 ITEM 11. EXECUTIVE COMPENSATION..................................... 25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 25 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.......................... 26 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 1, 2000 ITEM 1. BUSINESS General Homeland Holding Corporation ("Holding"), through its wholly-owned subsidiary, Homeland Stores, Inc. ("Homeland") and Homeland's wholly-owned subsidiary, JCH Beverage, Inc. ("JCH") and JCH's wholly-owned subsidiary, SLB Marketing, Inc. (collectively referred to herein as the "Company"), 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 January 1, 2000, the Company operates 80 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." 1 AWG is a buying cooperative which sells groceries on a wholesale basis to its retail member stores. AWG serves more than 800 member stores located in a ten state region with approximately $3.4 billion in revenues in 1999. 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 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"). Business Strategy The Company's general business strategy is to improve the sales and profitability of its core business through a consumer marketing strategy which positions the Company as a faster, fresher, better alternative to other food outlets. Usage of the Homeland Savings Card as a relationship marketing tool, as well as strong weekly promotions communicated through extensive use of print, television and radio are intended to help the Company achieve this business strategy. The Company is committed to high quality perishable departments and quick and friendly checkout. 2 In addition to improving its current base of stores, the Company seeks to leverage its costs and buying power through acquisitions that will improve market share, sales and earnings. Having been in its market for more than 67 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'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. In 1997, the Company acquired 4 stores, two in Oklahoma City, Oklahoma, one in Shawnee, Oklahoma and one in Lawton, Oklahoma. The Company closed 1 store in Amarillo, Texas in 1998. During 1999, the Company completed the acquisition of 9 stores located in eastern Oklahoma, one of which was subsequently closed, completed the acquisition of 4 stores in Muskogee, Oklahoma, and closed 1 store in Yukon, Oklahoma. In the first quarter of 2000, the Company completed the acquisition of 3 stores located in Oklahoma City, Oklahoma, and signed a letter of intent for the purchase of 4 stores, 3 of which are in Oklahoma City, and one 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. The Company's conventional stores are primarily in the 21,000 total square feet range and carry the traditional mix of grocery, meat, produce and general merchandise 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 $110,000 per week. The Company's superstores are in the 36,000 total square feet range and offer, in addition to the traditional departments, two or more specialty departments. Sales volumes of superstores range from $80,000 to $270,000 per week. The Company'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 $150,000 to $270,000 per week. The Company's new stores and certain remodeled locations have incorporated the Company's new, larger superstore and combo formats. Of the 80 stores operated by the Company as of January 1, 2000, 18 are conventional stores, 49 are superstores and 13 are combo stores. 3 The chart below summarizes Homeland's store development over the last three fiscal years: Fiscal Year Ended 1/1/00 1/2/99 1/3/98 (1) Average sales per store (2) (in millions) $ 7.8 $ 7.6 $ 7.9 Average total square feet per store 35,786 37,473 37,232 Average sales per square foot (2) $206 $206 $212 Number of stores: Stores at start of period 69 70 66 Stores remodeled 5 8 7 New stores opened 13 0 4 Stores sold or closed 2 1 0 Stores at end of period 80 69 70 Size of stores: Less than 25,000 sq. ft. 13 7 7 25,000 to 35,000 sq. ft. 28 25 28 35,000 sq. ft. or greater 39 37 35 Store formats: Conventional 18 10 10 SuperStore 49 47 49 Combo 13 12 11 (1) 53 weeks' data. (2) For those stores open entire fiscal year. The Company's network of stores is managed by district managers on a geographical basis through four districts. 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. 4 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 operators in each market area. The Company also offers double coupons, with some limitations, in all areas in which it operates. The in-store merchandising strategy combines a strong presentation of fresh products along with meaningful values throughout the store on a wide variety of fresh and shelf stable products each week. The Company's main vehicle of value delivery is its "Homeland Savings Card" which allows customers with the card, the opportunity to purchase over 2,000 items at a reduced cost each week. Customer Services 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, signage in the stores calls attention to various in-store specials thereby 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. 5 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 has not only used the card as a promotional tool but has begun to use the data gained from card users to target product and service offerings in order to increase the levels of loyalty among targeted customers. 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 care and selected general merchandise. As of the close of fiscal year 1999, approximately 81% of the Company's stores had service delicatessens and/or bakeries and approximately 59% 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. As a result of the Company's supply relationship with AWG, the Company's stores also offer AWG private label goods, including Best Choicer and Always Saver. 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." The Company intends to use the Best Choicer line of products as the main vehicle to accomplish these goals. 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. 6 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 January 1, 2000, is secured by a $0.9 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 January 1, 2000, the Company had a total of 5,452 employees, of whom 3,943, or approximately 72%, were employed on a part-time basis. The Company employs 5,354 in its supermarket operations. The remaining employees are corporate and administrative personnel. 7 The Company is the only unionized grocery chain in its market areas. Approximately 92% of the Company's employees are union members, represented primarily by the United Food and Commercial Workers of North America ("UFCWNA"). Computer and Management Information Systems The Company utilizes client/server systems in order to enhance its information management capabilities and improve its competitive position. The 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 installed a centralized scale and pricing system for its meat, deli and bakery departments in 1998. The Company has scanning checkout systems in all of its 80 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" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000." 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 28 stores and 20 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 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 1997 and 1998. In 1997, there were 8 competitive openings in the Company's market area, including 3 new Wal-Mart Supercenters and 2 new Albertson's. In 1998, there were 7 additional competitive openings, including 4 new Wal-Mart Supercenters and 3 new independent stores. In 1999, the Company's comparable sales increased despite 8 8 competitive openings, including 4 new Albertson's, 3 new Wal-Mart Supercenters and one new independent store. Based on information publicly available, the Company expects that, during 2000, Wal-Mart will open 5 new Supercenters and 6 Neighborhood Markets, and independents will open 4 new stores in the Company's markets. 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." 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. ITEM 2. PROPERTIES Of the 80 supermarkets operated by the Company, 15 are owned by Homeland and the balance are held under leases which expire at various times between 2000 and 2030. Most of the leases are subject to up to six (6) five-year renewal options. Out of 65 leased stores, only 6 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. Substantially all of the Company's properties are subject to mortgages and security agreements securing the borrowings under the Loan Agreement and a number of the stores acquired from AWG and its retail members are subject to mortgages and security agreements in favor of AWG. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." 9 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 1, 2000. 10 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. High and low sales prices of the Common Stock as reported by Nasdaq/NMS for each fiscal quarter of 1998 and 1999 are listed below: High Low March 28, 1998 $8.250 $5.375 June 20, 1998 $8.063 $6.250 September 12, 1998 $7.563 $4.188 January 2, 1999 $5.000 $3.000 March 27, 1999 $4.000 $3.000 June 19, 1999 $3.625 $2.875 September 11, 1999 $4.125 $3.000 January 1, 2000 $3.938 $3.281 On March 27, 2000, there were 922 stockholders of record. 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 since the effective date of the Plan of Reorganization. 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 52 weeks ended January 1, 2000, the 52 weeks ended January 2, 1999, the 53 weeks ended January 3, 1998, and the 20 weeks ended December 28, 1996 (Successor Company), the 32 weeks ended August 10, 1996 (Predecessor Company), and the 52 weeks ended December 30, 1995 (Predecessor Company), respectively. See "Notes to Selected Consolidated Financial Data" for additional information. 11 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." Because of the adjustments associated with the adoption of "fresh-start" reporting, historical financial data of the Predecessor Company and Sucessor Company is not necessarily comparable. 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 52 weeks 52 weeks 53 weeks 20 weeks ended ended ended ended 1/1/00 1/2/99 1/3/98 12/28/96 Summary of Operating Data: Sales, net $ 559,554 $ 529,576 $ 527,993 $ 204,026 Cost of sales 425,394 402,261 401,691 154,099 Gross profit 134,160 127,315 126,302 49,927 Selling and administrative expenses 120,594 114,335 112,590 43,995 Operational restructuring costs (1) - - - - Amortization of excess reorganization value (2) 6,890 13,672 14,527 5,819 Asset impairment 925 - - - Operating profit (loss) 5,751 (692) (815) 113 Gain (loss) on disposal of assets (15) 34 (117) (90) Interest income 569 426 385 56 Interest expense (9,011) (8,484) (8,408) (3,199) Income (loss) before reorganization items, income taxes and extraordinary items (2,706) (8,716) (8,955) (3,120) Reorganization items (3) - - - - Income tax provision (1,588) (1,875) (1,689) - Loss before extraordinary items (4,294) (10,591) (10,644) (3,120) Extraordinary items (4) (5) - - - - Net income (loss) (4,294) (10,591) (10,644) (3,120) Reduction in redemption value - redeemable common stock - - - - Net income (loss) available to common stockholders $ (4,294) $ (10,591) $ (10,644) $ (3,120) Basic and diluted net income (loss) per common share (6) $ (0.87) $ (2.18) $ (2.23) $ (0.66) Consolidated Balance Sheet Data: 1/1/00 1/2/99 1/3/98 12/28/96 Total assets $ 167,854 $ 159,204 $ 166,041 $ 168,486 Long-term obligations, including current portion of long-term obligations $ 100,785 $ 89,979 $ 86,002 $ 80,568 Redeemable common stock $ - $ - $ - $ - Stockholders' equity (deficit) $ 27,654 $ 31,868 $ 42,324 $ 52,941 continued
Predecessor Company 32 weeks 52 weeks ended ended 8/10/96 12/30/95 Summary of Operating Data:continued Sales, net $ 323,747 $ 630,275 Cost of sales 244,423 479,119 Gross profit 79,324 151,156 Selling and administrative expenses 73,183 144,052 Operational restructuring costs (1) - 12,639 Amortization of excess reorganization value (2) - - Asset impairment - - Operating profit (loss) 6,141 (5,535) Gain (loss) on disposal of assets 114 (8,349) Interest income 69 416 Interest expense (5,639) (15,992) Income (loss) before reorganization items, income taxes and extraordinary items 685 (29,460) Reorganization items (3) (25,996) - Income tax provision - - Loss before extraordinary items (25,311) (29,460) Extraordinary items (4)(5) 63,118 (2,330) Net income (loss) 37,807 (31,790) Reduction in redemption value - redeemable common stock - 940 Net income (loss) available to common stockholders $ 37,807 $ (30,850) Basic and diluted net income (loss) per common share (6) $ 1.16 $ (0.93) Consolidated Balance Sheet Data: 8/10/96 12/30/95 Total assets $ 129,679 $ 137,582 Long-term obligations, including current portion of long-term obligations $ 124,411 $ 124,242 Redeemable common stock $ 17 $ 17 Stockholders' equity (deficit) $ (38,057) $ (28,106) 13
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. (2) The Company's reorganization value in excess of amounts allocable to identifiable assets, established in accordance with "fresh-start" reporting, of $40,908 was amortized on a straight-line basis over three years. The excess reorganization value was fully amortized during the Company's third quarter ended September 11, 1999. (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 previous secured notes and the write-off of $1,424 in unamortized financing costs related to the previous secured notes so redeemed and the prior revolving credit facility. (6) Common Stock held by management investors prior to the Effective Date is 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. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations General The table below sets forth selected items from the Company's Consolidated Statements of Operations as a percentage of net sales for the periods indicated: Fiscal Year 1999 1998 1997 Sales, net 100.00% 100.00% 100.00% Cost of sales 76.02 75.96 76.08 Gross profit 23.98 24.04 23.92 Selling and administrative expenses 21.55 21.59 21.32 Amortization of excess reorganization value 1.23 2.58 2.75 Asset impairment 0.17 - - Operating profit (loss) 1.03 (0.13) (0.15) Gain (loss) on disposal of assets - 0.01 (0.02) Interest income 0.10 0.08 0.07 Interest expense (1.61) (1.60) (1.59) Loss before income taxes (0.48) (1.64) (1.69) Income tax provision (0.28) (0.36) (0.32) Net loss (0.76)% (2.00)% (2.01)% Comparison of Fifty-Two Weeks Ended January 1, 2000 ("1999"), with Fifty-Two Weeks Ended January 2, 1999 ("1998"). Net sales increased $30.0 million, or 5.7%, from $529.6 million for 1998 to $559.6 million for 1999. The increase in sales is attributable to the acquisition of nine stores in April 1999, the acquisition of four stores in November 1999, and a 1.2% increase in comparable store sales, partially offset by the closing of one store in 1999. The increase in comparable store sales during 1999 was achieved despite 8 competitive openings, including 4 new Albertson's, 3 new Wal-Mart Supercenters and 1 new independent store, the loss of sales during the remodeling of Company stores, and limited inflation in selected food categories. The Company is conducting an ongoing store development and remodeling program, and believes that it will continue to experience temporary disruptions and lost sales during store remodelings in the future. Sales in comparable stores were positively impacted by grand opening events at certain of the Company's stores, incremental improvements from 15 continued usage of frequency card based promotions and direct marketing efforts, and additional sales in the final week of the year attributable to year 2000 events. Based in part on the anticipated impact of proposed and recent new store openings and remodelings by competitors, management believes that market conditions will remain highly competitive, placing continued pressure on comparable store sales and net sales. As a result of competitive openings during the first quarter of fiscal year 2000, the advancement of purchases by customers into the final week of 1999 due to uncertainty with the year 2000 year - -end transition, the cycling of strong promotions in the first quarter of 1999, and the mild winter weather in the Company's trade areas, management believes that comparable store sales will decline approximately 2.0% to 3.0%, during the first quarter of 2000. In response to this highly competitive environment, the Company intends to build on its strengths which consist of: (a) high quality perishable departments; (b) market position and competitive pricing; (c) customer service; (d) excellent locations; and (e) the "Homeland Savings Card," a customer loyalty card program. The Company is upgrading its stores by focusing its capital expenditures on projects that will improve the overall appeal of its stores to targeted customers and is using its merchandising strategy to emphasize a competitive pricing structure, as well as leadership in quality products and services, selection and convenient store locations. Additionally, the in-store merchandising strategy combines a strong presentation of fresh products along with meaningful values throughout the store on a wide variety of fresh and shelf stable products each week. The Company's main vehicle of value delivery is its Homeland Savings Card which allows customers with the card the opportunity to purchase over 2,000 items at a reduced cost each week. Finally, the Company continues the use of market research in order to maintain a better understanding of customer behavior and trends in certain markets. Gross profit as a percentage of sales of 24.0% was the same as in 1998. Gross profit margin reflects the impact of specific promotional activities as the Company responded to certain new competitive store openings and special advertisements for the grand openings of the Company's remodeled and acquired stores; the increased cost of goods for pharmaceutical products; and, the increased shrink in certain perishable departments. The pressure on gross profit margin described above was offset by a general improvement in the management of promotional spending and the implementation of initiatives to lower cost of goods. Selling and administrative expenses as a percentage of sales of 21.6% was the same as in 1998. The expense ratio includes improvements in labor productivity; reductions in costs associated with advertising expenditures; increased sales which has allowed the Company to leverage certain fixed and administrative costs; the reduction in reserves for general liability expenses as a result of improved claims experience by the Company; and, the return of net premiums relating to the final settlement of pre-bankruptcy workers compensation claims. The improvements in the expense ratio described above were offset by an increase in expenses associated with the acquired stores, an increase in depreciation costs attributable to the Company's capital expenditure program for store remodels and maintenance and modernization, and an increase in the reserve for doubtful accounts relating to the uncertainty of an accounts receivable from one of the Company's vendors. The Company continues to review alternatives to reduce selling and administrative expenses and cost of sales in order 16 to provide opportunities to pass additional savings along to its customers in the form of price reductions in certain categories. The amortization of the excess reorganization value amounted to $6.9 million in 1999. The excess reorganization value was amortized over three years, on a straight-line basis, and became fully amortized in the third quarter of 1999. The Company recorded an asset impairment provision in the amount of $0.9 million related to a previously closed store. The provision reduced the carrying value of the real property to a current estimate of fair value. Interest expense, net of interest income, increased $0.3 million from $8.1 million in 1998 to $8.4 million in 1999. The increase reflects additional interest expense attributable to the acquired stores and increases in variable interest rates, partially offset by additional interest income from the interest bearing certificates of AWG. During 2000, the Company anticipates that interest expense will increase due to the increased debt and additional increases in variable interest rates. See "Liquidity and Capital Resources." The Company recorded $1.6 million of income tax expense for 1999, of which $1.5 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. Additionally, upon the completion of the amortization of reorganization value in excess of amounts allocable to identifiable assets, the tax benefit realized from utilizing the pre- reorganization net operating loss carryforwards is recorded as a reduction of other intangibles existing at the reorganization date until reduced to zero and then as an increase to stockholder's equity. At January 1, 2000, the Company had a tax net operating loss carryforward of approximately $29.5 million, which may be utilized to offset future taxable income to the limited amount of $5.1 million for 2000 and $3.3 million each year thereafter. Due to the uncertainty of realizing future tax benefits, a full valuation allowance was deemed necessary to entirely offset the net deferred tax assets as of January 1, 2000. If the Company's current trend toward profitability continues, then net deferred tax assets of up to $16.2 million could be recognized. EBITDA (as defined hereinafter) increased $1.4 from $22.9 million, or 4.3% of sales, in 1998 to $24.3 million, or 4.4% of sales in 1999. 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 January 2, 1999 ("1998"), with Fifty-Three Weeks Ended January 3, 1998 ("1997"). Net sales increased $1.6 million, or 0.3%, from $528.0 million for 1997 to $529.6 million for 1998. Fiscal 1997 was a 53-week year for the Company. Excluding the net sales for the 53rd week in 1997, net sales increased 17 $12.3 million, or 2.4%, from $517.3 million for 1997 to $529.6 million for 1998. The increase in sales is attributable to four stores which were acquired during 1997 and were first included for a full year in 1998 (one in August and three in October), partially offset by a 1.0% decline in comparable store sales and the closing of one store during 1998. The decline in comparable store sales during 1998 was attributable to the seven new competitive store openings (four Wal-Mart's and three independent stores), the loss of sales during the remodeling of Company stores, and limited inflation in selected food categories. The decline in comparable store sales was somewhat offset by grand opening events at certain of the Company's stores and incremental improvements from continued usage of frequency card based promotions and direct marketing efforts. Gross profit as a percentage of sales increased 0.1% from 23.9% in 1997 to 24.0% in 1998. The increase in gross profit margin reflects lower cost of goods in certain categories, additional incentive allowances in selected product categories and increased volume rebates, partially offset by increased promotional activities as the Company responded to certain new competitive store openings and special advertisements for the grand openings of the Company's remodeled stores. Selling and administrative expenses as a percentage of sales increased 0.3% from 21.3% in 1997 to 21.6% in 1998. The increase is attributable to an increase in occupancy costs associated with a full year of operation in 1998 for the four stores acquired in 1997; an increase in depreciation as a result of the capital expenditure program for store remodels and maintenance and modernization; and, an increase in administrative expenses. The increase in expenses was partially offset by a reduction in general liability insurance expenses as a result of improved claims experience by the Company. The amortization of the excess reorganization value amounted to $13.7 million in 1998. Interest expense, net of interest income, increased $0.1 million from $8.0 million in 1997 to $8.1 million in 1998. The increase reflects an additional amount of debt outstanding partially offset by lower interest rates. See "Liquidity and Capital Resources." The Company recorded $1.9 million of income tax expense for 1998, of which $1.7 million was deferred income tax. At January 2, 1999, the Company had a tax net operating loss carryforward of approximately $36.2 million. EBITDA increased $0.7 from $22.2 million, or 4.2% of sales, in 1997 to $22.9 million, or 4.3% of sales in 1998. 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. 18 On December 17, 1998, the Company entered into a Loan Agreement with NBC, as agent and lender, and two other lenders, Heller Financial, Inc. and IBJ Whitehall Business Credit, Inc., under which these lenders provide a working capital and letter of credit facility ("Revolving Facility"), a term loan ("Term Loan") and an acquisition term loan ("Acquisition Term Loan") through August 2, 2002. The Loan Agreement, as amended, permits the Company to borrow under the Revolving Facility up to the lesser of (a) $37.0 million or (b) the applicable borrowing base. Funds borrowed under the Revolving Facility are available for general corporate purposes of the Company. The Term Loan, which is presently $5.8 million, represents the balance of $10.0 million borrowed under the prior loan agreement to finance costs and expenses associated with the consummation of the Restructuring and the Company is required to make quarterly principal paydowns of approximately $0.4 million. The Acquisition Term Loan presently permits borrowings of up to $5.0 million (though no amount is presently outstanding) in connection with permitted acquisitions. The interest rate payable quarterly under the Loan Agreement is based on the prime rate publicly announced by National Bank of Canada from time to time in New York, New York plus a percentage which varies based on a number of factors, including: (a) whether it is the Revolving Facility or the Term Loan and the amount, if any, which is part of the Acquisition Term Loan; (b) the time period; and (c) whether the Company elects to use a London Interbank Offered Rate. The obligations of the Company under the Loan Agreement are secured by liens on, and security interests in, substantially all of the assets of Homeland and are guaranteed by Holding, with a pledge of its Homeland stock to secure its obligation. The Loan Agreement includes certain customary restrictions on acquisitions, asset dispositions, capital expenditures, consolidations and mergers, distributions, divestitures, indebtedness, liens and security interests and transactions with affiliates and payment of dividends. The Loan Agreement also requires the Company to comply with certain financial and other covenants. As of the Effective Date, the Company entered into an Indenture with Fleet National Bank (predecessor to State Bank and Trust Company), as trustee, under which the Company issued $60.0 million of 10% Senior Subordinated Notes due 2003 ("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. 19 Working Capital and Capital Expenditures. The Company's primary sources of capital have been borrowing availability under the Revolving Facility and cash flow from operations, to the extent available. The Company uses the available capital resources for working capital needs, capital expenditures and repayment of debt obligations. The Company's EBITDA (earnings before net interest expense, taxes, depreciation and amortization, asset impairment, and gain/loss on disposal of assets), as presented below, is the Company's measurement of internally- generated operating cash for working capital needs, capital expenditures and payment of debt obligations: 52 Weeks Ended 52 Weeks Ended 53 Weeks Ended January 1, 2000 January 2, 1999 January 3, 1998 Loss before income taxes $ (2,706) $ (8,716) $ (8,955) Interest income (569) (426) (385) Interest expense 9,011 8,484 8,408 (Gain) loss on disposal of assets 15 (34) 117 Amortization of excess reorganization value 6,890 13,672 14,527 Asset impairment 925 - - Depreciation and amortization 10,774 9,923 8,525 EBITDA $ 24,340 $ 22,903 $ 22,237 As a percentage of sales 4.35% 4.32% 4.21% As a multiple of interest expense, net of interest income 2.88x 2.84x 2.77x Net cash provided by operating activities increased $1.2 million, from $10.5 million in 1998 to $11.7 million in 1999. The increase principally reflects an increase in EBITDA and an increase in trade payables partially offset by an increase in inventory. Net cash used in investing activities decreased $1.0 million, from $11.6 million in 1998 to $10.6 million in 1999. The Company invested $9.0 million, $12.4 million, and $14.0 million in capital expenditures for 1999, 1998, and 1997, respectively. 20 In April 1999, the Company completed its acquisition of nine stores from AWG, in eastern Oklahoma. The net purchase price was $1.3 million which represents $5.6 million for real property, fixtures and equipment, goodwill and a non-compete agreement, plus $2.3 million for inventory, $0.2 million for transaction costs, offset by $6.8 million in long-term debt assumed by the Company. The Company acquired title to one store and leases the remaining eight from AWG. The one store to which Homeland acquired title in Pryor, Oklahoma, was closed (and subsequently sold to a non-grocery user) as a result of the proximity to an existing Company store. The Company financed this acquisition principally through the assumption of $6.8 million in long-term debt, together with increased borrowings under its Revolving Facility. The debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the nine stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG which related to inventory and the Pryor store which was sold. Therefore, AWG released its security interest in the assets relating to the Pryor store and the inventory. In November 1999, the Company completed its acquisition of four stores from Brattain Foods, Inc. ("BFI"), in Muskogee, Oklahoma. The net purchase price was $1.1 million which represents $6.0 million for fixtures and equipment, goodwill and a non-compete agreement, plus $1.9 million for inventory, $0.2 million for transaction costs, offset by $7.0 million of long- term debt (BFI's obligation to AWG) assumed by the Company. The Company will lease three of the stores from AWG and lease the fourth from a third party. The Company financed this acquisition principally through the assumption of $7.0 million in long-term debt, together with increased borrowings under its Revolving Facility. The debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the four stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG, which related to inventory and therefore, AWG released its security interest in the inventory. As of January 1, 2000, the Company had an outstanding balance on these assumed obligations to AWG of $8.4 million. The loans have a seven year term with principal and interest payments scheduled each week, and have a variable interest rate equal to the prime rate plus 100 basis points. Under the various agreements of both acquisitions, the individual markets where the stores are located are subject to non-compete, supply and right-of-first-refusal agreements with AWG. In addition to the other customary terms associated with a right-of-first refusal agreement, the right-of-first refusal agreement provides for the repurchase by AWG of the stores based upon the occurrence of certain exercise events. The exercise events include, among other events, a change in control of Homeland and a transfer of more than 20% of the ownership interest of Holding or Homeland. Net cash used in financing activities increased $7.1 million, from $4.2 million provided by financing activities in 1998 to $2.9 million used in financing activities in 1999. The increase primarily reflects the principal payments made to AWG under the terms of the obligations assumed by the Company in conjunction with the 1999 acquisitions. 21 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 2000 are expected to be at approximately $10.0 million. The Loan Agreement limits the Company's capital expenditures for 2000 to $13.0 million plus $2.6 million in carryover from the previous year, and $2.6 million for capital expenditures which are financed through capital leases or equipment loans. The estimated 2000 capital expenditures of $10.0 is expected to be invested primarily in remodeling and maintenance of certain stores and does not include provisions for acquisitions. The funds for the capital expenditures are expected to be provided by internally-generated cash flows from operations and borrowings under the Loan Agreement. As of January 1, 2000, the Company had $23.2 million of borrowings, $0.9 million of letters of credit outstanding and $9.8 million of availability under its Revolving Facility. On January 18, 2000, the Company entered into an agreement in principle to acquire three Price Chopper Stores, in Oklahoma City, operated by Belton Food Center, Inc. ("BFC"). On February 29, 2000, the Company completed its acquisition of these three stores from BFC. The net purchase price was $0.2 million which represents $4.2 million for fixtures and equipment, leasehold improvements, and goodwill, plus $2.0 million for inventory, $0.2 million for transaction costs, offset by $6.2 million of long-term debt (BFC's obligation to AWG) assumed by the Company. The Company will lease all three of the stores from AWG. The Company financed this acquisition principally through the assumption of $6.2 million in long-term debt, together with increased borrowings under its Revolving Facility. The debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the three stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG, which related to inventory and therefore, AWG released its security interest in the inventory. On February 18, 2000, the Company signed a letter of intent with Fleming Companies Inc. for the purchase of four Baker's Supermarkets, including one store which is under construction. Consummation of the transaction, which is expected during the second quarter of 2000, is subject to, among other things, the execution of a definitive purchase agreement, completion of due diligence, and certain customary closing conditions. The financing for this acquisition will be accomplished through the utilization of the Company's Revolving Facility. The Company's ability to meet its working capital needs, meet its debt and interest obligations and meet its 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. 22 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. Year 2000 The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. As the Year 2000 approached, systems using such programs were projected to be unable to accurately process certain date-based information. Commencing in October 1996, the Company implemented a program of evaluating its computer systems to identify areas of potential concern, both with respect to information technology and non- information technology systems (e.g., microcontrollers), remediating / replacing systems to address those potential areas of concern, and ultimately testing those changes for compliance. This assessment was implemented on a system-by- system basis and included the readiness of external entities, such as vendors, which interface with the Company. The Company assessed its vendors' Year 2000 readiness through the review of questionnaires circulated to its vendors, consultation by the Company with the vendors who provided its computer systems and internal testing by the Company of those computer systems. During 1999, the Company completed the evaluation of systems, the remediation / replacement efforts and the testing procedures. Through testing procedures, a significant portion of the Company's systems were found to be Year 2000 compliant without any remediation or replacement efforts. The area of most concern for management had been the point of sale ("POS") systems and power management systems which operate various systems in the stores. These systems were upgraded or replaced prior to January 1, 2000. The total cost of the program was approximately $2.0 million, the majority of which was for upgrades to POS software and replacement of power management systems described above. The Company has funded these costs under its Revolving Facility. The Company has not experienced any material disruptions to its business as a result of Year 2000 issues relating to Company systems or its primary vendors' Year 2000 readiness. Management will continue to monitor the extent of such compliance and the effects associated with any non-compliance. 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. 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In accordance with the provisions of General Instruction G (3), the information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held June 1, 2000, to be filed with the Securities and Exchange Commission within 120 days after January 1, 2000, and is incorporated herein by reference thereto. ITEM 11. EXECUTIVE COMPENSATION In accordance with the provisions of General Instruction G (3), the information required by this item will be contained in the Company's Proxy Statement for its Annual stockholders Meeting to be held June 1, 2000, to be filed with the Securities and Exchange Commission within 120 days after January 1, 2000, and is incorporated herein by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT In accordance with the provisions of General Instruction G (3), the information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held June 1, 2000, to be filed with the Securities and Exchange Commission within 120 days after January 1, 2000, and is incorporated herein by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In accordance with the provisions of General Instruction G (3), the information required by this item will be contained in the Company's Proxy Statement for its Annual Stockholders Meeting to be held June 1, 2000, to be filed with the Securities and Exchange Commission within 120 days after January 1, 2000, and is incorporated herein by reference thereto. 25 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. 26 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 28, 2000 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 Chairman of the Board March 28, 2000 John A. Shields / s / David B. Clark President, Chief Executive March 28, 2000 David B. Clark Officer and Director (Principal Executive Officer) / s / Wayne S. Peterson Senior Vice President/ March 28, 2000 Wayne S. Peterson Finance, C.F.O. and Secretary (Principal Financial Officer) / s / Deborah A. Brown Vice President, Controller, March 28, 2000 Deborah A. Brown Treasurer and Asst. Secretary (Principal Accounting Officer) II-1 Signature Title Date / s / Robert E. (Gene) Burris Director March 28, 2000 Robert E. (Gene) Burris / s / Edward B. Krekeler, Jr. Director March 28, 2000 Edward B. Krekeler, Jr. / s / Laurie M. Shahon Director March 28, 2000 Laurie M. Shahon / s / William B. Snow Director March 28, 2000 William B. Snow / s / David N. Weinstein Director March 28, 2000 David N. Weinstein II-2 INDEX TO FINANCIAL STATEMENTS HOMELAND HOLDING CORPORATION Consolidated Financial Statements Report of Independent Accountants F-2 Consolidated Balance Sheets as of January 1, 2000, and January 2, 1999 F-3 Consolidated Statements of Operations for the 52 weeks ended January 1, 2000, and January 2, 1999, and the 53 weeks ended January 3, 1998 F-5 Consolidated Statements of Stockholders' Equity for the 52 weeks ended January 1, 2000, and January 2, 1999, and the 53 weeks ended January 3, 1998 F-6 Consolidated Statements of Cash Flows for the 52 weeks ended January 1, 2000, and January 2, 1999, and the 53 weeks ended January 3, 1998 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 In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Homeland Holding Corporation and its subsidiaries, (the "Company") at January 1, 2000 and January 2, 1999, and the results of their operations and their cash flows for the 52 weeks ended January 1, 2000, the 52 weeks ended January 2, 1999, and the 53 weeks ended January 3, 1998, in conformity with accounting principles generally accepted in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP February 29, 2000, except for Note14, as to which the date is March 9, 2000 F-2 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts) ASSETS January 1, January 2, 2000 1999 Current assets: Cash and cash equivalents $ 6,136 $ 7,856 Receivables, net of allowance for uncollectible accounts of $1,361 and $972 11,353 9,961 Inventories 52,663 46,280 Prepaid expenses and other current assets 2,176 2,527 Total current assets 72,328 66,624 Property, plant and equipment: Land and land improvements 9,046 9,346 Buildings 21,962 20,216 Fixtures and equipment 36,818 28,466 Leasehold improvements 20,446 17,488 Software 7,181 5,396 Leased assets under capital leases 8,737 9,053 Construction in progress 19 3,278 104,209 93,243 Less, accumulated depreciation and amortization 30,728 20,832 Net property, plant and equipment 73,481 72,411 Reorganization value in excess of amounts allocable to identifiable assets, less accumulated amortization of $40,908 and $34,018 at January 1, 2000, and January 2, 1999, respectively - 7,791 Other assets and deferred charges 22,045 12,378 Total assets $ 167,854 $ 159,204 Continued The accompanying notes are an integral part of these consolidated financial statements. F-3 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, Continued (In thousands, except share and per share amounts) LIABILITIES AND STOCKHOLDERS' EQUITY January 1, January 2, 2000 1999 Current liabilities: Accounts payable - trade $ 22,968 $ 20,267 Salaries and wages 3,168 2,827 Taxes 3,616 3,093 Accrued interest payable 2,671 2,622 Other current liabilities 6,992 8,548 Current portion of long-term debt 2,918 1,728 Current portion of obligations under capital leases 501 1,235 Total current liabilities 42,834 40,320 Long-term obligations: Long-term debt 94,668 83,852 Obligations under capital leases 1,197 1,700 Other noncurrent liabilities 1,501 1,464 Total long-term obligations 97,366 87,016 Commitments and contingencies - - Stockholders' equity: Common stock $0.01 par value, authorized - 7,500,000 shares, issued 4,917,860 shares and 4,904,417 shares at January 1, 2000, and January 2, 1999, respectively 49 49 Additional paid-in capital 56,254 56,174 Accumulated deficit (28,649) (24,355) Total stockholders' equity 27,654 31,868 Total liabilities and stockholders' equity $ 167,854 $ 159,204 The accompanying notes are an integral part of these consolidated financial statements. F-4 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts) 52 weeks 52 weeks 53 weeks ended ended ended January 1, January 2, January 3, 2000 1999 1998 Sales, net $ 559,554 $ 529,576 $ 527,993 Cost of sales 425,394 402,261 401,691 Gross profit 134,160 127,315 126,302 Selling and administrative expenses 120,594 114,335 112,590 Amortization of excess reorganization value 6,890 13,672 14,527 Asset Impairment 925 - - Operating profit (loss) 5,751 (692) (815) Gain (loss) on disposal of assets (15) 34 (117) Interest income 569 426 385 Interest expense (9,011) (8,484) (8,408) Loss before income taxes (2,706) (8,716) (8,955) Income tax provision (1,588) (1,875) (1,689) Net loss $ (4,294) $ (10,591) $ (10,644) Basic and diluted earnings per share: Net loss per share $ (0.87) $ (2.18) $ (2.23) Weighted average shares outstanding 4,911,958 4,857,130 4,782,938 The accompanying notes are an integral part of these consolidated financial statements. F-5 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share and per share amounts)
Additional Total Common Stock Paid-In Accumulated Stockholders' Shares Amount Capital Deficit Equity Balance, December 28, 1996 4,758,025 $ 48 $ 56,013 $ (3,120) $ 52,941 Net loss - - - (10,644) (10,644) Issuance of common stock 62,612 - 27 - 27 Balance, January 3, 1998 4,820,637 48 56,040 (13,764) 42,324 Net loss - - - (10,591) (10,591) Issuance of common stock 83,780 1 134 - 135 Balance, January 2, 1999 4,904,417 49 56,174 (24,355) 31,868 Net Loss - - - (4,294) (4,294) Issuance of common stock 13,443 - 80 - 80 Balance, January 1, 2000 4,917,860 $ 49 $ 56,254 $ (28,649) $ 27,654
The accompanying notes are an integral part of these consolidated financial statements. F-6 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except share and per share amounts)
52 weeks 52 weeks 53 weeks ended ended ended January 1, January 2, January 3, 2000 1999 1998 Cash flows from operating activities: Net loss $ (4,294) $ (10,591) $ (10,644) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 10,427 9,802 8,404 Amortization of beneficial interest in operating leases 121 121 121 Amortization of excess reorganization value 6,890 13,672 14,527 Amortization of goodwill 226 - - Amortization of financing costs 42 120 64 Loss (gain) on disposal of assets 15 (34) 117 Asset impairment 925 - - Deferred income taxes 1,451 1,699 1,589 Change in assets and liabilities: Increase in receivables (1,392) (648) (791) Increase in inventories (2,355) (334) (937) Decrease in prepaid expenses and other current assets 458 54 179 Increase in other assets and deferred charges (2,498) (2,487) (2,722) Increase in accounts payable - trade 2,701 1,326 1,525 Increase (decrease) in salaries and wages 293 319 (991) Increase (decrease) in taxes 426 (512) 702 Increase (decrease) in accrued interest payable 49 3 (70) Increase (decrease) in other current liabilities (1,813) (1,494) 1,572 Increase (decrease) in other non-current liabilities 69 (531) (283) Net cash provided by operating activities 11,741 10,485 12,362 Continued
The accompanying notes are an integral part of these consolidated financial statements. F-7 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued (In thousands, except share and per share amounts)
52 weeks 52 weeks 53 weeks ended ended ended January 1, January 2, January 3, 2000 1999 1998 Cash flows from investing activities: Capital expenditures (8,980) (12,404) (14,021) Store acquisitions (2,374) - - Cash received from sale of assets 750 775 70 Net cash used in investing activities (10,604) (11,629) (13,951) Cash flows from financing activities: Payments under term loan (1,667) (1,667) (833) Borrowings under revolving credit loans 142,707 129,567 141,463 Payments under revolving credit loans (137,400) (122,340) (134,106) Principal payments under notes payable (46) (61) (61) Principal payments under AWG notes (5,294) - - Principal payments under capital lease obligations (1,237) (1,412) (1,615) Proceeds from issuance of common stock 80 135 27 Net cash provided by (used in) financing activities (2,857) 4,222 4,875 Net increase (decrease) in cash and cash equivalents (1,720) 3,078 3,286 Cash and cash equivalents at beginning of period 7,856 4,778 1,492 Cash and cash equivalents at end of period $ 6,136 $ 7,856 $ 4,778 Supplemental information: Cash paid during the period for interest $ 8,993 $ 8,419 $ 8,414 Cash paid during the period for income taxes $ 110 $ 100 $ 100 Supplemental schedule of non-cash investing activities: Capital lease obligations assumed $ - $ 453 $ 1,161 Debt assumed in acquisitions $ 13,706 $ - $ -
The accompanying notes are an integral part of these consolidated financial statements. F-8 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (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, its consolidated subsidiary, Homeland, Homeland's wholly-owned subsidiary, SLB Marketing, Inc., and SLB's wholly-owed subsidiary, JCH Beverage, Inc., are collectively referred to herein as the "Company." 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. 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 1, January 2, 2000 1999 Homeland stockholder's equity: Common stock, $.01 par value, authorized, issued and outstanding 100 shares $ 1 $ 1 Additional paid-in capital 56,302 56,222 Accumulated deficit (28,649) (24,355) Total Homeland stockholder's equity $ 27,654 $ 31,868 2. Summary of Significant Accounting Policies: Fiscal year - The Company has adopted a fiscal year which ends on the Saturday nearest December 31. Basis of consolidation - The consolidated financial statements include the accounts of Homeland Holding Corporation and its wholly-owned subsidiaries. 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. F-10 2. 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 - In conjunction with the emergence from Chapter 11 proceedings in August, 1996, 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. 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. Property, plant and equipment acquired subsequent to "fresh start" are stated at cost. 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. F-11 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 2. 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, had been amortized on a straight-line basis over three years and became fully amortized in the third quarter of 1999. Store Closings / Asset Impairment - Provision is made on a current basis for the write-down of identified owned-store closings to their net realizable value. For identified leased-store closings, leasehold improvements are written down to their net realizable value and a provision is made on a current basis if anticipated expenses are in excess of expected sublease rental income. The Company's long-lived assets, including goodwill, are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 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), beneficial interests in operating leases, and goodwill acquired in the Company's 1999 acquisitions. The beneficial interest in operating leases is being amortized on a straight-line basis over the remaining terms of the leases, including all available renewal option periods, and the goodwill is being amortized over a 15 year period. The AWG patronage refund certificates bear annual interest of 6% and are redeemable for cash seven years from the date of issuance. The carrying value of certificates, including those earned not yet received, at January 1, 2000 and January 2, 1999 was $11,726 and $9,118, respectively. 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). 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 1999, 1998 and 1997, were $9,112, $8,349 and $7,906, respectively. F-12 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 2. Summary of Significant Accounting Policies, continued: 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. 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. 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. It is reasonably possible that the Company's estimates for such items could change in the near term. Comprehensive Income - There were no components of other comprehensive income during the three year period ended January 1, 2000. 3. Store Acquisitions: In April 1999, the Company completed its acquisition of nine stores from AWG, in eastern Oklahoma. The net purchase price was $1.3 million which represents $5.6 million for real property, fixtures and equipment and goodwill, plus $2.3 million for inventory, $0.2 million for transaction costs, offset by $6.8 million in long-term debt assumed by the Company. The F-13 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 3. Store Acquisitions, continued: Company acquired title to one store and leases the remaining eight from AWG. The one store to which Homeland acquired title in Pryor, Oklahoma, was closed (and subsequently sold to a non-grocery user) as a result of the proximity to an existing Company store. The Company financed this acquisition principally through the assumption of $6.8 million in long-term debt, together with increased borrowings under its Revolving Facility. The debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the nine stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG which related to inventory and the Pryor store which was sold. Therefore, AWG released its security interest in the inventory and the assets relating to the Pryor store. In November 1999, the Company completed its acquisition of four stores from Brattain Foods, Inc. ("BFI"), in Muskogee, Oklahoma. The net purchase price was $1.1 million which represents $6.0 million for fixtures and equipment and goodwill, plus $1.9 million for inventory, $0.2 million for transaction costs, offset by $7.0 million of long-term debt (BFI's obligation to AWG) assumed by the Company. The Company will lease three of the stores from AWG and lease the fourth from a third party. The Company financed this acquisition principally through the assumption of $7.0 million in long-term debt, together with increased borrowings under its Revolving Facility. The debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the four stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG, which related to inventory and therefore, AWG released its security interest in the inventory. The result of operations from these stores from the acquisition date through fiscal year-end are included in the fiscal 1999 Consolidated Statements of Operations. On January 18, 2000, the Company entered into an agreement in principle to acquire three Price Chopper Stores, in Oklahoma City, operated by Belton Food Center, Inc. ("BFC"). On February 29, 2000, the Company completed its acquisition of these three stores from BFC. The net purchase price was $0.2 million which represents $4.2 million for fixtures and equipment, leasehold improvements and goodwill, plus $2.0 million for inventory, $0.2 million for transaction costs, offset by $6.2 million of long-term debt (BFC's obligation to AWG) assumed by the Company. The Company will lease all three of the stores from AWG. The Company financed this acquisition principally through the assumption of $6.2 million in long-term debt, together with increased borrowings under its Revolving Facility. The F-14 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 3. Store Acquisitions, continued: debt incurred by the Company to AWG is secured by liens on, and security interest in, the assets associated with the three stores. Subsequent to the closing of the acquisition, the Company repaid a portion of its indebtedness to AWG, which related to inventory and therefore, AWG released its security interest in the inventory. On February 18, 2000, the Company signed a letter of intent with Fleming Companies Inc. for the purchase of four Baker's Supermarkets, including one store which is under construction. Consummation of the transaction, which is expected during the second quarter of 2000, is subject to, among other things, the execution of a definitive purchase agreement, completion of due diligence, and certain customary closing conditions. The financing for this acquisition will be accomplished through the utilization of the Company's Revolving Facility. 4. Asset Impairment: During 1999, the Company made the decision to dispose of a previously closed store and related assets. The Company decided to sell these assets rather than continue the previous plan of leasing the assets. The carrying value of the assets held for sale was reduced to a value of $385, based on current estimates of selling value less costs to dispose. The resulting adjustment of $925 was recorded. Subsequent to year end, the assets were sold for an amount which approximated the then carrying value. 5. Long-Term Debt: Long-term debt at year-end consists of: January 1, January 2, 2000 1999 10% Notes due 2003 (the "Notes") $ 60,000 $ 60,000 Term Loan 5,833 7,500 Revolving Credit Loans 23,194 17,887 AWG Loans 8,412 - Note Payable 147 193 97,586 85,580 Less current portion 2,918 1,728 Long-term debt due after one year $ 94,668 $ 83,852 The Notes bear an interest rate of 10%, which is payable semi-annually each February 1 and August 1. The Notes are uncollateralized 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. F-15 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 5. Long-Term Debt, continued: The Loan Agreement, as amended, consists of a $37,000 revolving facility for working capital and letters of credit (the "Revolving Facility"), a $10,000 term loan (the "Term Loan") and an additional term loan of $5,000 for acquisitions ("Acquisition Term Loan"). The Revolving Facility permits the Company to borrow up to the lesser of $37,000 or the applicable borrowing base. As of January 1, 2000, there were no borrowings outstanding under the Acquisition Term Loan facility. 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, and (c) whether the Company elects to use the London Interbank Offered Rate. At January 1, 2000, the interest rate on borrowings on the Revolving Facility was 8.73% (weighted average) and the Term Loan was 8.87%. 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 2, 2002. 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. The obligations of the Company as it relates to AWG Loans are secured by liens on, and security interest in, the fixtures and equipment associated with the stores acquired in 1999, as referenced in Note 3. Each of the AWG Loans is a seven-year note, which is amortized weekly, and has interest rates associated with it equal to the prime rate plus 1%. At January 1, 2000, the interest rate was 9.50%. At January 1, 2000, the aggregate annual debt maturities were as follows: 2000 $ 2,918 2001 2,907 2002 27,042 2003 61,420 2004 1,535 Thereafter 1,764 $ 97,586 F-16 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 5. Long-Term Debt, continued: The Company has outstanding at January 1, 2000, $912 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 $12, $43, and $146 in 1999, 1998 and 1997, respectively. 6. Stockholders' Equity: At January 1, 2000, the Company has warrants outstanding to purchase 263,158 shares of common stock. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $11.85 at any time up to August 2, 2001. 7. Fair Value of Financial Instruments: The carrying amounts of cash and cash equivalents, receivables, AWG patronage refund certificates, accounts payable and accrued expenses and other liabilities are reasonable estimates of their fair values. Based on borrowing rates currently available to the Company for borrowings with similar terms and maturities, the Company believes the carrying amount of borrowings under the Loan Agreement and the AWG Loans approximate fair value. The fair value of publicly-traded debt is valued based on quoted market values. At January 1, 2000, the carrying amount and the fair value of the Notes were $60,000 and $48,330, respectively. 8. Income Taxes: The components of the income tax provision for 1999, 1998 and 1997 were as follows: 52 Weeks 52 Weeks 53 Weeks Ended Ended Ended January 1, January 2, January 3, Federal and State: Current - AMT $ (137) $ (176) $ (100) Deferred (1,451) (1,699) (1,589) Total income tax provision $ (1,588) $ (1,875) $ (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: 52 Weeks 52 Weeks 53 Weeks Ended Ended Ended January 1, January 2, January 3, Federal income tax benefit at statutory rate $ 947 $ 3,051 $ 3,134 Amortization of intangibles (2,412) (4,785) (5,084) Change in valuation allowance (123) (141) 261 Total income tax provision $ (1,588) $ (1,875) $ (1,689) F-17 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 8. Income Taxes, continued: The components of deferred tax assets and deferred tax liabilities are as follows: January 1, January 2, 2000 1999 Current assets (liabilities): Allowance for uncollectible receivables $ 517 $ 340 Prepaid pension (224) (347) Other, net 22 19 Net current deferred tax assets 315 12 Noncurrent assets (liabilities): Property, plant and equipment 2,221 1,402 Employee compensation and benefits 285 262 Self-insurance reserves 606 574 Net operating loss carryforwards 11,210 12,668 AMT credit carryforwards 963 826 Capital leases (71) 5 Other, net 627 (177) Net noncurrent deferred tax assets 15,841 15,560 Total net deferred tax assets 16,156 15,572 Valuation allowance (16,156) (15,572) Net deferred tax assets $ - $ - Due to the uncertainty of realizing the future tax benefits, a full valuation allowance was deemed necessary to entirely offset the net deferred tax assets as of January 1, 2000, and January 2, 1999. If the Company's current trend toward profitability continues, then net deferred tax assets of up to $16.2 million could be recognized. At January 1, 2000, the Company had the following operating loss and tax credit carryforwards available for tax purposes: F-18 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 8. Income Taxes, continued: Expiration Amount Dates Federal regular tax net operating loss carryforwards $29,499 2002-2010 Federal AMT credit carryforwards against regular tax $963 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: $5,147 in 2000, $3,251 in each of years 2001 through 2007 and $1,595 in 2009. 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 first as a reduction of the reorganization value in excess of amounts allocable to identifiable assets, then as a reduction of noncurrent intangible assets existing at the reorganization date, and finally as an increase to stockholders' equity rather than realized as a benefit in the statement of operations. The Company recorded $1,451 and $1,699 of reductions to reorganization value and/or intangible assets in 1999 and 1998, respectively. 9. Incentive Compensation Plans: The Company has bonus arrangements for store management and other key management personnel. During 1999, 1998, and 1997, approximately $1,760, $1,480 and $981, respectively, were charged to costs and expenses for such bonuses. In December 1996, the Board of Directors of the Company 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 F-19 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands except share and per share amounts) 9. Incentive Compensation Plans, continued: 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 1999, 1998 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 200,000 shares of 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. Options granted under the Company's stock option plans have exercise prices ranging from $3.00 to $7.63 per share and have a weighted average remaining contractual life of 8.5 years. A summary of the status of the Company's outstanding stock options as of January 1, 2000, January 2, 1999, and January 3, 1998, and changes during the years ended on those dates is as follows: 1999 1998 1997 Wgtd. Avg. Wgtd. Avg. Wgtd. Avg. Exer. Exer. Exer. Shares Price Shares Price Shares Price Outstanding as of beginning of year 429,000 $ 6.09 198,500 $ 7.48 197,500 $ 8.00 Granted 120,500 3.01 319,000 5.64 136,000 7.24 Exercised - - 13,200 6.50 - - Forfeited 7,500 7.63 75,300 7.80 135,000 8.00 Outstanding at end of year 542,000 5.38 429,000 6.09 198,500 7.48 F-20 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 8. Incentive Compensation Plans, continued: Stock options outstanding and exercisable on January 1, 2000 are as follows: Shares Weighted average Weighted average Range of exercise under exercise price remaining contractual prices per share option per share life in years Outstanding: $3.00 - $3.63 200,500 $3.22 9.1 4.75 - 7.63 341,500 6.65 8.1 $3.00 - $7.63 542,000 $5.38 8.5 Exercisable: $3.00 - $3.63 46,000 $3.19 - 4.75 - 7.63 168,500 7.09 - $3.00 - $7.63 214,500 $6.26 - The weighted average fair value of options granted during 1999, 1998 and 1997 was $1.46, $2.83 and $3.53, respectively. No compensation was charged against income in 1999, 1998 and 1997. The fair value of the options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used: 1999 1998 1997 Expected dividend yield 0% 0% 0% Expected stock price volatility 40% 37% 39% Weighted average risk-free interest rate 5.8% 5.3% 6.4% Weighted average expected life of options 6 years 6 years 8 years Had compensation cost of the Company's option plans determined using the fair value at the grant date of awards consistent with the method of SFAS 123, the Company's net loss and F-21 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 9. Incentive Compensation Plans, continued: net loss per common share for the Successor Company would have been reduced to the pro forma amounts indicated in the table below: 1999 1998 1997 Net loss - as reported $ (4,294) $ (10,591) $ (10,644) Net loss - pro forma $ (4,466) $ (10,722) $ (10,846) Basic EPS - as reported $(0.87) $ (2.18) $ (2.23) Basic EPS - pro forma $(0.91) $ (2.21) $ (2.27) No options or warrants outstanding at January 1, 2000, January 2, 1999, and January 3, 1998, were included in the computation of diluted earnings per share because the effect would be antidilutive to applicable periods. Pursuant to the terms of the 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 Common Stock each plan year of the three year period ended July 31, 1999; (b) up to 58,025 shares of Common Stock may be purchased by the plan participants during each plan year of the three year period ending July 31, 2000 (the "Stock Purchase") and (c) the granting of 58,025 shares of Common Stock for each plan year of the three year period ended July 31, 1999 upon the Company's achievement of certain escalating EBITDA-based performance goals. The purchase price of the shares under the Stock Purchase element shall be equal to their appraised value or at fair value if the shares are readily tradable on a securities market. For each share of 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. 10. 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 invested in mutual funds during 1999, 1998 and 1997. F-22 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 10. Retirement Plans, continued: Information regarding the plan follows: 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 11,432 $ 9,911 Service cost 562 514 Interest cost 792 725 Actuarial (gain) loss (1,980) 513 Benefits paid (278) (231) Benefit obligation at end of year $ 10,528 $ 11,432 Change in plan assets: Fair value of plan assets at beginning of year $ 10,692 $ 9,673 Actual return on plan assets 820 1,075 Employer contribution - 175 Benefits paid (278) (231) Fair value of plan assets at end of year $ 11,234 $ 10,692 Reconciliation of funded status: Funded status $ 707 $ (739) Unrecognized net actuarial (gain) loss (66) 1,793 Unrecognized prior service cost (51) (62) Prepaid benefit cost $ 590 $ 992 Weighted-average assumptions as of end of year: Discount rate 7.75% 6.75% Expected return on plan assets 9.00% 9.00% Rate of compensation increase Before Age 35 5.50% 5.50% Ages 35 - 49 4.50% 4.50% After Age 49 3.50% 3.50% Components of net periodic pension cost: 1999 1998 1997 Service Cost $ 562 $ 514 $ 449 Interest Cost 792 725 630 Expected return on plan assets (953) (868) (748) Amortization of prior service cost (11) (11) (11) Recognized net actuarial loss 11 46 7 Net periodic pension cost $ 401 $ 406 $ 327 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 F-23 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 10. Retirement Plans, continued: present 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 1999, 1998, and 1997, were $1,271, $1,235 and $1,188, 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 1999, 1998 or 1997. 11. Leases: The Company leases 65 of its retail store locations under noncancellable agreements, which expire at various times between 2000 and 2030. 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 1, January 2, 2000 1999 Buildings $ 2,554 $ 2,706 Equipment 3,169 3,174 Beneficial interest in capital leases 3,014 3,173 8,737 9,053 Less accumulated amortization 4,163 3,204 Net leased assets $ 4,574 $ 5,849 F-24 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands, except share and per share amounts) 11. Leases, continued: Future minimum lease payments under capital leases and noncancellable operating leases as of January 1, 2000, are as follows: Capital Operating Fiscal Year Leases Leases 2000 $ 707 $ 8,164 2001 276 7,128 2002 182 5,687 2003 182 5,087 2004 182 4,475 Thereafter 1,107 21,385 Total minimum obligations 2,636 $ 51,926 Less estimated interest 938 Present value of net minimum obligations 1,698 Less current portion 501 Long-term obligations under capital leases $ 1,197 Rent expense for 1999, 1998 and 1997 is as follows: 1999 1998 1997 Minimum rents $ 7,200 $ 6,680 $ 6,067 Contingent rents 86 115 105 $ 7,286 $ 6,795 $ 6,172 12. Commitments and Contingencies: In 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 2 - 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 F-25 HOMELAND HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (In thousands except, share and per share amounts) 12 Commitments and Contingencies, continued: participate in its store savings programs and receive member rebates and refunds on purchases. In addition, the Supply Agreement includes certain Volume Protection Rights, as defined therein. 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 1996 Chapter 11 proceedings 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. 13. Fourth Quarter Items: In the fourth quarter of 1999, the Company received a return of net premiums totaling $1,332 related to the final settlement of pre-bankruptcy workers compensation claims. Also, the Company increased its reserves for doubtful accounts by approximately $600 related to the uncertainty of collection of accounts receivable from a vendor. Each of these amounts impacted selling and administrative expenses for the quarter. 14. Subsequent Event: On March 9, 2000, the Company received a letter from the U.S. Department of Labor alleging violations, applicable to a limited number of the Company's employees, of certain wage laws. The Company has engaged legal counsel and is currently investigating the allegations. At this time, it is not possible to reasonably estimate the amount, if any, of the financial impact. F-26 EXHIBIT INDEX Exhibit No. Description 2a Disclosure Statement for Joint Plan of Reorganization of Homeland Stores, Inc. ("Homeland") and Homeland Holding Corporation ("Holding") 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 and Holding, 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. (Incorporated by reference to Form 10 filed as of November 20, 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. (Incorporated by reference to Form 10 filed as of November 20, 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.) E-1 Exhibit No. Description 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 fiscal year ended December 30, 1995.) 10d.21 1996 Homeland Management Incentive Plan. (Incorporated by reference to Exhibit 10.d3 to Form 10-K for fiscal year ended December 28, 1996.) 10d.31 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 herein by reference to Form 10-K for 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 fiscal year ended December 30, 1989.) 10e.3 1 Third Amendment to Homeland Employees' Retirement Plan effective as of January 1, 1988. (Incorporated herein by reference to Exhibit 10t.3 to Form 10-K for fiscal year ended December 29, 1990.) 10e.4 1 Fourth Amendment to Homeland Employees' Retirement Plan effective as of January 1, 1989. (Incorporated herein 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 herein 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 fiscal year ended December 30, 1995.) E-2 Exhibit No. Description 10h1 Employment Agreement dated as of February 25, 1998, between Homeland and Steven M. Mason. 10i1 Employment Agreement dated as of February 17, 1998, between Homeland and David B. Clark. 10j 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.) 10k1 Employee Stock Bonus Plan for union employees effective as of August 2, 1996. (Incorporated by reference to Exhibit 10s to Form 10-K for fiscal year ended December 28, 1996.) 10l1 Management Stock Option Plan effective as of December 11, 1996. (Incorporated by reference to Exhibit 10t to Form 10-K for fiscal year ended December 28, 1996.) 10m Loan Agreement dated as of December 17, 1998, among IBJ Schroder Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 10n1 1998 Homeland Management Incentive Plan. 10o1 Employment Agreement dated as of July 6, 1998, between Homeland and Wayne S. Peterson. 10p1 Employment Agreement dated as of September 14, 1998, between Homeland and John C. Rocker. 10q1 Letter agreement regarding severance arrangements dated as of December 8, 1998, between Homeland and Steven M. Mason. 10r1 Letter agreement regarding severance arrangements dated as of December 8, 1998, between Homeland and Prentess E. Alletag, Jr. 10s1 Letter agreement regarding severance arrangements dated as of December 8, 1998, between Homeland and Deborah A. Brown. 10t1 Stock Option Agreement dated as of October 21, 1998, between Homeland and Wayne S. Peterson. 10u1 Stock Option Agreement dated as of September 14, 1998, between Homeland and John C. Rocker. 10v*1 Letter agreement regarding severance arrangements dated as of December 8, 1999, between Homeland and Prentess E. Alletag, Jr. 10w*1 Letter agreement regarding severance arrangements dated as of December 8, 1999, between Homeland and Deborah A. Brown. 10x*1 Letter agreement regarding severance arrangements dated as of December 8, 1999, between Homeland and Steven M. Mason. E-3 Exhibit No. Description 10y*1 Letter agreement regarding severance arrangements dated as of December 8, 1999, between Homeland and John C. Rocker. 10z First Amendment to Loan Agreement dated as of December 17, 1998, among IBJ Whitehall Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 11a Second Amendment to Loan Agreement dated as of December 17, 1998, among IBJ Whitehall Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 11b Third Amendment to Loan Agreement dated as of December 17, 1998, among IBJ Whitehall Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 11c Fourth Amendment to Loan Agreement dated as of December 17, 1998, among IBJ Whitehall Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 11d Fifth Amendment to Loan Agreement dated as of December 17, 1998, among IBJ Whitehall Business Credit Corporation, Heller Financial, Inc., and National Bank of Canada, Homeland and Holding. 21* Subsidiaries. 23* Consent of Independent Accountants. 27* Financial Data Schedule. E-4 EX-10 2 FIRST AMENDMENT TO LOAN AGREEMENT This FIRST AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of April 23, 1999 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 WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ"), formerly IBJ Schroder Business Credit Corporation, 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 December 17, 1998, 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 Thirty-Two Million Dollars ($32,000,000), a senior secured term loan facility in the maximum aggregate principal amount of Ten Million Dollars ($10,000,000) and two secured acquisition term loan facilities in the maximum aggregate principal amount of Ten Million Dollars ($10,000,000). B. Borrower and Parent have requested that Agent and Lenders amend the Loan Agreement, to reflect Borrower's acquisition of certain property and assets originally owned by Horner Foods, Inc. from Associated Wholesale Grocers, Inc. (the "Horner Acquisition"). 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. Amendment to Consolidated Tax Expense. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Consolidated Tax Expense" of any Person for any period shall mean the amount of taxes upon or determined by reference to such Person's net income, in each case, paid by such Person during such period. 3. Amendment to Supply Agreement. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Supply Agreement" shall mean (i) the Supply Agreement, dated as of April 21, 1995, by and between AWG and Borrower, as amended by that certain First Amendment to Supply Agreement, dated effective as of August 2, 1996, and (ii) the Supply Agreement, dated as of April 23, 1999, by and between AWG and Borrower. 4. Amendment to Schedules. The Loan Agreement is hereby amended as follows: (a) Environmental Report Stores. Schedule 12.18 is amended by supplementing the existing Schedule 12.18 with Schedule 12.18 attached hereto. (b) Existing Liens. Schedule 13.2(c) is amended by supplementing the existing Schedule 13.2(c) with Schedule 13.2(c) attached hereto. (c) Existing Indebtedness for Borrowed Money and Contingent Obligations. Schedule 13.3(c) is amended by supplementing the existing Schedule 13.3(c) with Schedule 13.3(c) attached hereto. (d) Real Property. Schedule 15.5(a) is amended by supplementing the existing Schedule 15.5(a) with Schedule 15.5(a) attached hereto. (e) Environmental Information. Schedule 15.15 is amended by supplementing the existing Schedule 15.15 with Schedule 15.15 attached hereto. 5. Amendment to Form of Borrowing Base Certificate. Exhibit 12.1(j) to the Loan Agreement is amended and restated to read in its entirety as set forth on Exhibit 12.1(j) attached hereto. 6. 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 has 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 Sections 2 and 3 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. 7. Liens. Each of Borrower and Parent hereby covenants and agrees that Section 13.2 of the Loan Agreement, which prohibits each of Borrower and Parent from incurring Liens upon any of its property or assets, other than the Liens permitted in such Section 13.2, shall apply to each of the stores acquired by Borrower in the Horner Acquisition. 8. Leasehold Mortgages. Borrower hereby covenants and agrees that upon the payment in full by Borrower of all debt owed by Borrower to Associated Wholesale Grocers, Inc. as a result of the Horner Acquisition, Borrower, to the extent permitted by the relevant sublease between AWG and Borrower and in accordance with Section 8.2 of the Loan Agreement, will execute a Mortgage for each property subleased by Borrower under the terms of the Horner Acquisition. 9. 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. 10. 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. 11. 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. 12. 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. 13. Loan Agreement Remains in Effect: No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other 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 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. 14. Ratification of Guaranties. Each of Parent and by its signature below SLB Marketing, Inc., a Texas corporation ("SLB") reaffirms their respective 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. 15. 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. 16. 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. 17. 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. 18. 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. 19. 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: Wayne S. Peterson, President PARENT: HOMELAND HOLDING CORPORATION By: Wayne S. Peterson, President AGENT AND A LENDER: NATIONAL BANK OF CANADA By: Larry L. Sears, Vice President and Manager By: Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: James M. Steffy, Vice President HELLER FINANCIAL, INC. By: Elizabeth Geannopulos, Vice President AGREED AND ACCEPTED: SLB MARKETING, INC. Wayne S. Peterson, President Schedule 12.18 (Supplemental) ENVIRONMENTAL REPORT STORES Store No. Address State County 850 316 East Main Oklahoma Osage Pawhuska, Oklahoma 852 305 South Broadway Street Oklahoma Pawnee Cleveland, Oklahoma Schedule 13.2(c) (Supplemental) EXISTING LIENS Liens granted to AWG pursuant to that certain Purchase and Sale Agreement, dated April 23, 1999 between AWG and the Borrower. Schedule 13.3(c) (Supplemental) EXISTING INDEBTEDNESS FOR BORROWED MONEY AND CONTINGENT OBLIGATIONS PRINCIPAL BALANCE ON CAPITAL LEASES AS OF 4/23/99 Principal Description Location Balance Real Property Sublease 850 $ 0.00 Real Property Sublease 851 $ 0.00 Real Property Sublease 852 $ 0.00 Real Property Sublease 853 $ 0.00 Real Property Sublease 854 $ 0.00 Real Property Sublease 855 $ 0.00 Real Property Sublease 856 $ 0.00 Real Property Sublease 857 $ 0.00 Schedule 15.5(a) (Supplemental) REAL PROPERTY I. Owned Real Property Store # and Location Comments 858 506 South Elliot Pryor, OK Mayes County II. Leased Real Property Store # and Location Comments 850 316 East Main Street Pawhuska, OK Osage County 851 702 Fir Street Perry, OK Noble County 852 305 South Broadway Street Cleveland, OK Pawnee County 853 Highway 59 Jay, Oklahoma Delaware County 854 310 South Main Blackwell, OK Kay County 855 108 South Division Okemah, OK Okfuskee County 856 813 East Cherokee Nowata, OK Nowata County 857 102 Haskell Boulevard Haskell, OK Muskogee County Schedule 15.15 (Supplemental) ENVIRONMENTAL INFORMATION Store No. 850 Environmental Site Assessment - Stanley Engineering, Inc. - March 24, 1999 852 Environmental Site Assessment - Stanley Engineering, Inc. - March 24, 1999 EX-11 3 SECOND AMENDMENT TO LOAN AGREEMENT This SECOND AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of October 22, 1999 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 referred to as the "Companies" and individually as a "Company"), (c) SLB MARKETING, INC. ("SLB"), a Texas corporation, as a Credit Party under the Loan Agreement, (d) IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ"), formerly IBJ Schroder Business Credit Corporation, the assignee of IBJ Schroder Bank & Trust Company, (e) HELLER FINANCIAL, INC. ("Heller"), (f) NATIONAL BANK OF CANADA ("NBC"), (such lenders and other financial institutions and their respective successors and assigns, individually, a "Lender" and together, the "Lenders"), and (g) NBC, as agent for the Lenders (in such capacity, the "Agent"). RECITALS: A. Pursuant to that certain Loan Agreement, dated as of December 17, 1998, by and among Borrower, Parent, Lenders and Agent, as amended by that certain First Amendment to Loan Agreement, dated as of April 23, 1999, 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, a senior secured term loan facility, and two secured acquisition term loan facilities. B. SLB is forming a subsidiary for the purpose of owning and holding certain liquor and alcoholic beverage licenses in the State of Texas, which subsidiary will be a Texas corporation and will be named JCH Beverage, Inc. ("JCH"). C. Section 13.4 of the Loan Agreement requires that Borrower and Parent obtain the written consent of Agent and Required Lenders prior to permitting the creation of a Subsidiary by any of Borrower's Subsidiaries. D. Borrower and Parent have requested that Agent and Required Lenders (1) consent to the formation of JCH, and (2) amend the Loan Agreement to permit the payment by Borrower of the reasonable and necessary operating costs and taxes incurred by JCH in the ordinary course of business. 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. JCH as Guarantor. The definition of Guarantor in Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as follows: "Guarantor" shall mean, at any time, the Parent, each of Borrower's present and future Subsidiaries, and each present and future Subsidiary of Borrower's present and future Subsidiaries. 3. Payments on behalf of JCH. The definition of "Permitted Transaction" in Section 1.1 of the Loan Agreement is hereby amended by restating the beginning of clause (a) to read as follows: (a) payments on behalf of Parent, SLB Marketing, Inc., and JCH Beverage, Inc.: 4. Guarantees by Subsidiaries of Subsidiaries of Borrower. Section 8.5(b) of the Loan Agreement is hereby amended to read in its entirety as follows: (b) Upon the formation or acquisition, after the Closing Date, of any Subsidiary of Borrower or of any Subsidiary of a Subsidiary of Borrower, such Subsidiary shall execute and deliver to Agent a guaranty, substantially in the form of Exhibit 8.5 hereto, of all then existing or thereafter incurred Lender Debt. Nothing contained in this Section 8.5 shall permit Borrower or any Subsidiary to form or acquire any Subsidiary which is otherwise prohibited by this Amendment. 5. Covenants Regarding Subsidiaries. Section 12 of the Loan Agreement is amended by adding the following covenant: SEC. 12.27 SUBSIDIARIES' OPERATIONS. Borrower covenants (a) that the business and operations of SLB Marketing, Inc., a Texas corporation and a wholly-owned Subsidiary of Borrower ("SLB"), will be limited to the ownership of the stock of JCH Beverage, Inc., a Texas corporation and wholly-owned Subsidiary of SLB ("JCH"), and (b) that the business and operations of JCH will be limited to the purchase and sale of alcoholic beverages conducted in and from stores operated by Borrower. 6. Consent of Formation of JCH. Subject to the satisfaction of and compliance with all other terms and conditions set forth in this Amendment, Agent and Required Lenders consent to the formation of JCH. 7. Conditions Precedent. The effectiveness of this Amendment is expressly conditioned upon the satisfaction of the following conditions precedent: (a) Agent shall have received all of the following, each dated (unless otherwise indicated) the date of this Consent, in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment and any other instrument, document or certificate required by Agent 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 8 of the Loan Agreement or any other provision of the Loan Agreement or pursuant to the instruments and documents referred to in Section 8 of the Loan Agreement with regard to the formation of JCH; 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) Legal Opinion. A legal opinion from Companies' counsel, Crowe & Dunlevy, a professional corporation, in form and substance satisfactory to Agent and dated as of the date of this Amendment. (iv) Additional Information. Such additional documents, instruments and information as Agent may reasonably request to effect the transactions contemplated hereby. (b) 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 Agent or any of the Lenders, which relates 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 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. (c) Compliance with Law. The Agent shall be satisfied that each Company, and JCH (i) 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 this Amendment and any document related to each of the Amendment Documents and the formation of JCH, to which it is or will be a party and for the perfection of or the exercise by Agent and each Lender of their respective rights and remedies under the Loan Documents, and (ii) 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. (d) 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. (e) No Default. No Default or Event of Default shall have occurred and be continuing after giving effect to the formation of JCH. (f) Expiration of Consent. All of the conditions precedent to the effectiveness of this Amendment must have been satisfied on or prior to 5 p.m., Dallas, Texas time, on October ___, 1999. 8. Amendment Fee. Borrower agrees to pay to Agent for the account of the Lenders, on or before the date of this Consent and in addition to any other amount due hereunder, an amendment fee equal to the sum of Fifteen Thousand and No/100 Dollars ($15,000.00). 9. 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 has been authorized by all requisite corporate action on the part of each Company, and will not violate the corporate charter or bylaws of 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, 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. 10. 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. 11. Governing Law. THIS AMENDMENT AND THE OTHER AMENDMENT 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. 12. 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. 13. No Oral Agreements. THIS AMENDMENT, TOGETHER WITH THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BY 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, PARENT OR SLB, AND (B) AGENT OR ANY LENDER. 14. Loan Agreement Remains in Effect; No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other 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 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. 15. Ratification of Guaranties. Each of Parent and SLB reaffirms their respective obligations under their respective Guaranty, agrees that their respective Guaranty shall remain in full force and effect notwithstanding execution of this Amendment and the Amendment Documents, and agrees that their respective Guaranty and the Loan Agreement shall continue to be legal, valid and binding obligations of such Guarantor, enforceable in accordance with the terms therein with regard to the Obligations (as defined in such Guaranty). 16. 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 Agent or any Lender or any closing shall affect the representations and warranties or the right of Agent or any Lender to rely upon them. 17. 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. 18. 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. 19. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Agent, Lenders, Borrower, Parent, and SLB and their respective successors and assigns, except that neither Borrower, Parent nor SLB may assign or transfer any of their rights or obligations hereunder without the prior written consent of Agent and Lenders. 20. 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, SLB, 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: Wayne S. Peterson, Senior Vice President - Finance, Chief Financial Officer and Secretary PARENT: HOMELAND HOLDING CORPORATION By: Wayne S. Peterson, Senior Vice President - Finance, Chief Financial Officer and Secretary CREDIT PARTY: SLB MARKETING, INC. By: Jack C. Hensley, President and Secretary AGENT AND A LENDER: NATIONAL BANK OF CANADA By: Larry L. Sears, Vice President and Manager By: Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: John C. Williams, Vice President HELLER FINANCIAL, INC. By: Thomas W. Bukowski, Senior Vice President EX-11 4 THIRD AMENDMENT TO LOAN AGREEMENT This THIRD AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of November 2, 1999 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 referred to as the "Companies" and individually as a "Company"), (c) IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ"), formerly IBJ Schroder Business Credit Corporation, 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 December 17, 1998, by and among Borrower, Parent, Lenders and Agent, as amended by that certain First Amendment to Loan Agreement, dated as of April 23, 1999, by and among Borrower, Parent, Lenders and Agent, and by that certain Second Amendment to Loan Agreement, dated as of October 22, 1999, by and among Borrower, Parent, Lenders, Agent and SLB Marketing, Inc., a Texas corporation ("SLB") (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, a senior secured term loan facility and two secured acquisition term loan facilities. B. Borrower and Parent have requested that Agent and Lenders amend the Loan Agreement to: (1) reflect Borrower's acquisition of certain property and assets from Brattain Foods, Inc. (the "Brattain Acquisition"); (2) reduce the Acquisition Term Loan B Facility Commitment from Five Million Dollars ($5,000,000) to Zero Dollars ($0); (3) increase the Revolving Credit Facility Commitment from Thirty-Two Million Dollars ($32,000,000) to Thirty-Seven Million Dollars ($37,000,000); and (4) increase the time allotted to Parent to furnish the monthly Borrowing Base Certificate from fifteen (15) days after the end of each calendar month to twenty (20) days after the end of each calendar month. 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. Amendment to Acquisition Term Loan B Facility Commitment. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Acquisition Term Loan B Facility Commitment" shall mean Zero Dollars ($0). 3. Amendment to Revolving Credit Facility Commitment. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Revolving Credit Facility Commitment" shall mean Thirty-Seven Million Dollars ($37,000,000). 4. Amendment to Supply Agreement. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Supply Agreement" shall mean (i) the Supply Agreement, dated as of April 21, 1995, by and between AWG and Borrower, as amended by that certain First Amendment to Supply Agreement, dated effective as of August 2, 1996, (ii) the Supply Agreement, dated as of April 23, 1999, by and between AWG and Borrower, and (iii) the Supply Agreement, dated as of November 2, 1999, by and between AWG and Borrower. 5. Amendment to Requirement to Furnish Monthly Borrowing Base Certificate. Section 12.1(j) of the Loan Agreement is hereby amended to read in its entirety as follows: (j) not later than twenty (20) calendar days after the end of each calendar month, a certificate dated the last day of such calendar month just ended, from Parent, in substantially the form of Exhibit 12.1(j) hereto and signed by the chief executive officer, chief financial officer or chief accounting officer of Parent (each such certificate, a "Borrowing Base Certificate"); 6. Amendment to Schedules. The Loan Agreement is hereby amended as follows: (a) Lenders and Commitments. Schedule 1.1(A) to the Loan Agreement is hereby amended by replacing the existing Schedule 1.1(A) in its entirety with Schedule 1.1(A) attached hereto. (b) Existing Liens. Schedule 13.2(c) to the Loan Agreement is hereby amended by supplementing the existing Schedule 13.2(c) with Schedule 13.2(c) attached hereto. (c) Real Property. Schedule 15.5(a) to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.5(a) with Schedule 15.5(a) attached hereto. (d) Environmental Information. Schedule 15.15 to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.15 with Schedule 15.15 attached hereto. (e) Medicare/Medicaid and Third Party Payor Agreements. Schedule 15.16 to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.16 with Schedule 15.16 attached hereto. 7. Conditions Precedent. The effectiveness of this Amendment is expressly conditioned upon the satisfaction of the following conditions precedent: (a) the 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 (including, document or certificate required by the Agent to be executed or delivered by the Borrower, the Parent or any other party in connection with this Amendment, duly executed by the parties thereto. (ii) Revolving Notes. Amended and Restated Revolving Notes, evidencing the cumulative total amount of the Revolving Commitment, as modified by this Amendment. (iii) Additional Information. Such additional documents, instruments and information as Agent or its legal counsel, may reasonably request to effect the transactions contemplated hereby. (b) all of the conditions precedent to the effectiveness of that certain Consent, dated as of the date hereof, by and among Borrower, Parent, Lenders and Agent, shall have been satisfied in accordance with the terms thereof. 8. 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 has been authorized by all requisite corporate action on the part of each Company and will not violate the corporate charter or bylaws of 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 Sections 2 through 6 of this Amendment), and (d) the Loan Agreement (as amended by this Amendment), the Notes (as the same may be amended and restated from time to time) and the other Loan Documents are and remain legal, valid, binding and enforceable obligations of each Company, as applicable. 9. Liens. Each of Borrower and Parent hereby covenants and agrees that Section 13.2 of the Loan Agreement, which prohibits each of Borrower and Parent from incurring Liens upon any of its property or assets, other than the Liens permitted in such Section 13.2, shall apply to each of the stores acquired by Borrower in the Brattain Acquisition. 10. Leasehold Mortgages. Borrower hereby covenants and agrees that upon the payment in full by Borrower of all debt owed by Borrower to Associated Wholesale Grocers, Inc. as a result of the Brattain Acquisition, Borrower, to the extent permitted by the relevant lease or sublease and in accordance with Section 8.2 of the Loan Agreement, will execute a Mortgage for each property leased or subleased by Borrower under the terms of the Brattain Acquisition. 11. 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. 12. 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. 13. 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. 14. 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. 15. Loan Agreement Remains in Effect: No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other 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 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. 16. Ratification of Guaranties. Each of Parent and by their signature below SLB and JCH Beverage, Inc., a Texas corporation, reaffirms its respective obligations under its respective Guaranty, agrees that its respective Guaranty shall remain in full force and effect not withstanding execution of this Amendment and the Amendment Documents, and agrees that its respective Guaranty and the Loan Agreement shall continue to be legal, valid and binding obligations of such Guarantor, enforceable in accordance with the terms therein with regard to the Indebtedness. 17. Fees and Expenses. Borrower agrees to pay all expenses paid or incurred by the Agent in connection with this Amendment and any related documents, including but not limited to recording fees, computer fees, duplication fees, telephone and telecopier fees, travel and transportation fees, search and filing fees, and the reasonable fees and expenses of Hughes & Luce, L.L.P., counsel to the Agent and the Lenders. 18. 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. 19. 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. 20. 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. 21. 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. 22. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 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: Wayne S. Peterson, Senior Vice President - Finance and Chief Financial Officer and Secretary PARENT: HOMELAND HOLDING CORPORATION By: Wayne S. Peterson, Senior Vice President - Finance and Chief Financial Officer and Secretary AGENT AND A LENDER: NATIONAL BANK OF CANADA By: Larry L. Sears, Vice President and Manager By: Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: John Williams, Vice President HELLER FINANCIAL, INC. By: Thomas W. Bukowski, Senior Vice President AGREED AND ACCEPTED: SLB MARKETING, INC. By: Jack C. Hensley, President and Secretary JCH BEVERAGE, INC. By: Jack C. Hensley, President and Secretary Schedule 1.1(A) LENDERS AND COMMITMENTS
Revolving Term Acquisition Term Acquisition Term Total Lender Lenders: Commitment Commitment* Loan A Commitment Loan B Commitment Commitments* National Bank of Canada $14,800,000.00 $2,500,000.00 $2,000,000.00 $0 $19,300,000.00 125 West 55th New York, New York 10019 Heller Financial, Inc. $10,508,000.00 $1,775,000.00 $1,420,000.00 $0 $13,703,000.00 500 West Monroe Street Chicago, Illinois 60661 IBJ Whitehall Business $11,692,000.00 $1,975,000.00 $1,580,000.00 $0 $15,247,000.00 Credit Corporation One State Street New York, New York 10004 ______________ _____________ _____________ ____________ ______________ Total Facility Commitment $37,000,000.00 $6,250,000.00 $5,000,000.00 $0 $48,250,000.00
* Effective as of the Third Amendment to Loan Agreement. Schedule 13.2(c) (Supplemental) EXISTING LIENS Liens granted to AWG pursuant to that certain Purchase and Sale Agreement, dated November 2, 1999 between AWG and the Borrower. Schedule 15.5(a) (Supplemental) REAL PROPERTY II. Leased Real Property Store # and Location Comments 880 3115 West Okmulgee None Muskogee, OK Muskogee County 881 1300 York None Muskogee, OK Muskogee County 882 800 East Okmulgee None Muskogee, OK Muskogee County 883 6 East Shawnee None Muskogee, OK Muskogee County Schedule 15.15 (Supplemental) ENVIRONMENTAL INFORMATION Store No. 880 Environmental Site Assessment - Stanley Engineering, Inc., October 13, 1999 881 Environmental Site Assessment - Stanley Engineering, Inc., October 13, 1999 882 Environmental Site Assessment - Stanley Engineering, Inc., October 11, 1999 883 Environmental Site Assessment - Stanley Engineering, Inc., October 11, 1999 Schedule 15.16 (Supplemental) MEDICARE/MEDICAID AND THIRD PARTY PAYOR AGREEMENTS S EX-11 5 FOURTH AMENDMENT TO LOAN AGREEMENT This FOURTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of November 19, 1999 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 referred to as the "Companies" and individually as a "Company"), (c) JCH BEVERAGE, INC. ("JCH"), a Texas corporation, as a Credit Party under the Loan Agreement, (d) SLB MARKETING, INC. ("SLB"), a Texas corporation, as a Credit Party under the Loan Agreement, (e) IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ"), formerly IBJ Schroder Business Credit Corporation, the assignee of IBJ Schroder Bank & Trust Company, (f) HELLER FINANCIAL, INC. ("Heller"), (g) NATIONAL BANK OF CANADA ("NBC"), (such lenders and other financial institutions and their respective successors and assigns, individually, a "Lender" and together, the "Lenders"), and (h) NBC, as agent for the Lenders (in such capacity, the "Agent"). RECITALS: A. Pursuant to that certain Loan Agreement, dated as of December 17, 1998, by and among Borrower, Parent, Lenders and Agent, as amended by that certain First Amendment to Loan Agreement, dated as of April 23, 1999, by and among Borrower, Parent, Lenders and Agent, that certain Second Amendment to Loan Agreement (the "Second Amendment"), dated as of October 22, 1999, by and among Borrower, Parent, Lenders, Agent and SLB, and that certain Third Amendment to Loan Agreement, dated as of November 2, 1999, 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, a senior secured term loan facility, and two secured acquisition term loan facilities. B. Pursuant to the Second Amendment, the Agent and the Required Lenders consented to the formation by SLB, a wholly-owned Subsidiary of Borrower, of JCH as a wholly-owned Subsidiary of SLB, for the purpose of owning and holding certain liquor and alcoholic beverage licenses in the State of Texas. C. Borrower and Parent wish to restructure the ownership interests in SLB and JCH, with such restructuring being effective as of October 14, 1999, thereby making JCH a wholly-owned Subsidiary of Borrower and SLB a wholly-owned Subsidiary of JCH. D. Section 13.4 of the Loan Agreement requires that Borrower and Parent obtain the written consent of Agent and Required Lenders prior to the acquisition by Borrower or any of Borrower's Subsidiaries of a Subsidiary. E. Section 13.5 of the Loan Agreement requires that Borrower and Parent obtain the written consent of Agent and Required Lenders prior to the sale or transfer by Borrower or any of Borrower's Subsidiaries of any stock of any of Borrower's Subsidiaries. F. Section 13.7 of the Loan Agreement requires that Borrower and Parent obtain the written consent of Agent and Required Lenders prior to any transaction between Borrower, Parent or any of Borrower's Subsidiaries, and any Affiliate of Borrower, Parent or any Subsidiary thereof, involving the sale of exchange of property or assets that is not specifically required or permitted by the terms of the Loan Agreement. G. Borrower and Parent have requested that Agent and Required Lenders consent to the restructure of the ownership interests in SLB and JCH. 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. Covenants Regarding Subsidiaries. Section 12.27 of the Loan Agreement is amended and restated to read in its entirety as follows: SEC. 12.27 SUBSIDIARIES' OPERATIONS. Borrower covenants (a) that the business and operations of JCH Beverage, Inc., a Texas corporation and a wholly-owned Subsidiary of Borrower ("JCH"), will be limited to the ownership of the stock of SLB Marketing, Inc., a Texas corporation and wholly-owned Subsidiary of JCH ("SLB"), and (b) that the business and operations of SLB will be limited to the purchase and sale of alcoholic beverages conducted in and from stores operated by Borrower. 3. Consent to Restructure of Ownership Interests in SLB and JCH. Subject to the satisfaction of and compliance with all other terms and conditions set forth in this Amendment, Agent and Required Lenders consent to: (a) the acquisition by Borrower from SLB of all of the issued and outstanding shares of common stock of JCH; and (b) the acquisition by JCH from Borrower of all of the issued and outstanding shares of common stock of SLB. 4. Termination of Stock Pledge Agreements. Subject to the satisfaction of and compliance with all other terms and conditions set forth in this Amendment, the following stock pledge agreements shall be terminated and void: (a) that certain Stock Pledge Agreement, dated December 17, 1998, made by Borrower in favor of Agent for the ratable benefit of Lenders; and (b) that certain Stock Pledge Agreement, dated October 22, 1999, made by SLB in favor of Agent for the ratable benefit of Lenders. 5. Conditions Precedent. The effectiveness of this Amendment is expressly conditioned upon the satisfaction of the following conditions precedent: (a) Agent shall have received all of the following, each dated (unless otherwise indicated) the date of this Consent, in form and substance satisfactory to Agent: (i) Amendment Documents. This Amendment and any other instrument, document or certificate required by Agent 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 8 of the Loan Agreement or any other provision of the Loan Agreement or pursuant to the instruments and documents referred to in Section 8 of the Loan Agreement with regard to the restructure of the ownership interests in SLB and JCH; 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) Legal Opinion. A legal opinion from Companies' counsel, Crowe & Dunlevy, a Professional Corporation, in form and substance satisfactory to Agent and dated as of the date of this Amendment. (iv) Additional Information. Such additional documents, instruments and information as Agent may reasonably request to effect the transactions contemplated hereby. (b) 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 Agent or any of the Lenders, which relates 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 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. (c) Compliance with Law. The Agent shall be satisfied that each Company, SLB and JCH (i) 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 this Amendment and any document related to each of the Amendment Documents and the restructuring of the ownership interests in SLB and JCH, to which it is or will be a party and for the perfection of or the exercise by Agent and each Lender of their respective rights and remedies under the Loan Documents, and (ii) 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. (d) 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. (e) No Default. No Default or Event of Default shall have occurred and be continuing after giving effect to the restructuring of the ownership interests in JCH and SLB contemplated hereby. (f) Expiration of Consent. All of the conditions precedent to the effectiveness of this Amendment must have been satisfied on or prior to 5 p.m., Dallas, Texas time, on November 30, 1999. 6. Representations and Warranties. Each Company, SLB and JCH 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 has been authorized by all requisite corporate action on the part of such company, and will not violate the corporate charter or bylaws of such 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, 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, SLB and JCH, as applicable. 7. 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. 8. Governing Law. THIS AMENDMENT AND THE OTHER AMENDMENT 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. 9. 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. 10. No Oral Agreements. THIS AMENDMENT, TOGETHER WITH THE LOAN AGREEMENT AND THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENT THE FINAL AGREEMENTS BY 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, PARENT, SLB OR JCH, AND (B) AGENT OR ANY LENDER. 11. Loan Agreement Remains in Effect; No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other 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 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. 12. Ratification of Guaranties. Each of Parent, SLB and JCH reaffirms their respective obligations under their respective Guaranty, agrees that their respective Guaranty shall remain in full force and effect notwithstanding execution of this Amendment and the Amendment Documents, and agrees that their respective Guaranty and the Loan Agreement shall continue to be legal, valid and binding obligations of such Guarantor, enforceable in accordance with the terms therein with regard to the Obligations (as defined in such Guaranty). 13. 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 Agent or any Lender or any closing shall affect the representations and warranties or the right of Agent or any Lender to rely upon them. 14. 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. 15. 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. 16. Successors and Assigns. This Amendment is binding upon and shall inure to the benefit of Agent, Lenders, Borrower, Parent, SLB and JCH and their respective successors and assigns, except that neither Borrower, Parent, SLB nor JCH may assign or transfer any of their rights or obligations hereunder without the prior written consent of Agent and Lenders. 17. 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, SLB, JCH, 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: Wayne S. Peterson, Senior Vice President - Finance, Chief Financial Officer and Secretary PARENT: HOMELAND HOLDING CORPORATION By: Wayne S. Peterson, Senior Vice President - Finance, Chief Financial Officer and Secretary CREDIT PARTIES: SLB MARKETING, INC. By: Jack C. Hensley, President and Secretary JCH BEVERAGE, INC. By: Jack C. Hensley, President and Secretary AGENT AND A LENDER: NATIONAL BANK OF CANADA By: Larry L. Sears, Vice President and Manager By: Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By: John C. Williams, Vice President HELLER FINANCIAL, INC. By: Thomas W. Bukowski, Senior Vice President EX-11 6 FIFTH AMENDMENT TO LOAN AGREEMENT This FIFTH AMENDMENT TO LOAN AGREEMENT (this "Amendment") is made and entered into effective as of February 29, 2000 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 referred to as the "Companies" and individually as a "Company"), (c) SLB MARKETING, INC. ("SLB"), a Texas corporation, as a Credit Party under the Loan Agreement, (d) JCH BEVERAGE, INC. ("JCH"), a Texas corporation, as a Credit Party under the Loan Agreement, (e) IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ"), formerly IBJ Schroder Business Credit Corporation, the assignee of IBJ Schroder Bank & Trust Company, (f) HELLER FINANCIAL, INC. ("Heller"), (g) 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 (h) NBC, as agent for Lenders (in such capacity, the "Agent"). RECITALS: A. Pursuant to that certain Loan Agreement, dated as of December 17, 1998, by and among Borrower, Parent, Lenders and Agent, as amended by that certain First Amendment to Loan Agreement, dated as of April 23, 1999, by and among Borrower, Parent, Lenders and Agent, by that certain Second Amendment to Loan Agreement, dated as of October 22, 1999, by and among Borrower, Parent, Lenders, Agent and SLB, by that certain Third Amendment to Loan Agreement, dated as of November 2, 1999, by and among Borrower, Parent, Lenders and Agent, and by that certain Fourth Amendment to Loan Agreement, dated as of November 19, 1999, by and among Borrower, Parent, Lenders, Agent, SLB and JCH (as the same may be amended, renewed, extended, restated or otherwise modified from time to time, the "Loan Loan Agreement"), Lenders agreed to provide to Borrower a senior secured revolving credit and letter of credit facility, a senior secured term loan facility, and two secured acquisition term loan facilities. B. Borrower and Parent have requested that Agent and Lenders amend the Loan Agreement to: (1) reflect Borrower's acquisition (the "Belton Acquisition") of certain property and assets from Belton Food Center, Inc., a Missouri corporation ("Belton Food"), pursuant to the terms of that certain Asset Purchase Agreement (the "Asset Purchase Agreement"), dated as of February 29, 2000, between Borrower and Belton Food; and (2) increase the maximum permitted principal amount of the aggregate Indebtedness for purchase money Liens under Subsection 13,2(d)(y) of the Loan Agreement from $12,000,000 in the aggregate to $14,000,000 in the aggregate. C. Borrower and Parent have requested that Agent and Lenders, pursuant to the terms of the Loan Agreement, consent to: (1) the assumption by Borrower of certain Liens and Indebtedness as contemplated in that certain Assignment, Assumption and Release Agreement (the "Assumption Agreement"), dated as of February 29, 2000, among Belton Food, Ronald M. Bowes, Susan L. Bowes and Ronald M. Bowes, Trustee of Trust, a Created by Trust Indenture, dated January 7, 1997, with Ronald M. Bowes, as Settlor, Borrower and Associated Wholesale Grocers, Inc., a Missouri corporation ("AWG"); (2) the acquisition by Borrower of a substantial portion of the assets of Belton Food under the terms of the Asset Purchase Agreement; (3) Overadvances during the period beginning on March 1, 2000 and ending on March 31, 2000 (the "Overadvance Period"), up to the maximum amount permitted under Section 2.2(c) of the Loan Agreement; and (4) the use by Borrower of proceeds of the Revolving Facility to purchase certain non-Inventory items in accordance with the terms of the Asset Purchase Agreement. 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. Amendment to Supply Agreement. Section 1.1 of the Loan Agreement is hereby amended by amending the following definition contained therein to read in its entirety as follows: "Supply Agreement" shall mean (i) the Supply Agreement, dated as of April 21, 1995, by and between AWG and Borrower, as amended by that certain First Amendment to Supply Agreement, dated effective as of August 2, 1996, by and between AWG and Borrower, (ii) the Supply Agreement, dated as of April 23, 1999, by and between AWG and Borrower, (iii) the Supply Agreement, dated as of November 2, 1999, by and between AWG and Borrower, and (iv) the Supply Agreement, dated as of February 29, 2000, by and between AWG and Borrower. 3. Amendment to Maximum Amount of Permitted Aggregate Indebtedness: Subsection 13,2(d)(y) of the Loan Agreement is hereby amended to read in its entirety as follows: (y) the principal amount of the aggregate Indebtedness incurred from and after the Closing Date and secured by all such purchase money Liens (including Capital Leases) does not exceed $14,000,000 in the aggregate; and 4. Amendment to Schedules. The Loan Agreement is hereby amended as follows: (a) Existing Liens. Schedule 13,2(c) to the Loan Agreement is hereby amended by supplementing the existing Schedule 13,2(c) with Schedule 13,2(c) attached hereto. (b) Real Property. Schedule 15.5(a) to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.5(a) with Schedule 15.5(a) attached hereto. (c) Environmental Information. Schedule 15.15 to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.15 with Schedule 15.15 attached hereto. (d) Medicate/Medicaid and Third Party Payor Agreements. Schedule 15.16 to the Loan Agreement is hereby amended by supplementing the existing Schedule 15.16 with Schedule 15.16 attached hereto. 5. Consent. Subject to satisfaction of and compliance with all terms and conditions set forth in this Amendment and in the Loan Agreement, Agent and Lenders consent to: (a) the assumption by Borrower of certain Liens and Indebtedness, in accordance with the terms and conditions of the Assumption Agreement; (b) the acquisition by Borrower of a substantial portion of the assets of Belton Food, in accordance with the terms and conditions of the Asset Purchase Agreement; (c) Overadvances during the Overadvance Period, up to the maximum amount permitted under Section 2.2(c) of the Loan Agreement; and (d) the use by Borrower of proceeds of the Revolving Credit Facility to purchase certain non-Inventory items, in accordance with the terms of the Asset Purchase Agreement. 6. Conditions Precedent. The effectiveness of this Amendment is expressly conditioned upon the satisfaction 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 (including, document or certificate required by Agent to be executed or delivered by Borrower, Parent or any other party in connection with this Amendment or any consent granted herein, duly executed by the parties thereto (collectively, the "Amendment Documents"). (ii) Security Documents and Instruments. All the instruments and documents then required to be delivered pursuant to Section 8 of the Loan Agreement or any other provision of the Loan Agreement or pursuant to the instruments and documents referred to in Section 8 of the Loan Agreement with regard to the assets being acquired by Borrower in the Belton 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. (iii) Financial Covenants. A pro forma statement for each Company detailing the financial covenants listed in Section 12.16 of the Loan Agreement after giving effect to the Belton Acquisition, for the Fiscal Year ending December 30, 2000. (iv) Revised Budget for Fiscal Year 2000. A budget of the financial condition and results of operations of each Company after giving effect to the Belton Acquisition, for the Fiscal Year ending December 30, 2000. (v) Sublease Payments. A statement listing the monthly rent payable by Borrower to AWG under each sublease executed by Borrower in connection with the Belton Acquisition. (vi) Sublandlord's Agreement. A Sublandlord's Agreement duly executed by AWG, Borrower, IBJ, Heller and Agent. (vii) Legal Opinion. A legal opinion from Companies' counsel, Crowe & Dunlevy, a professional corporation, in form and substance satisfactory to Agent, dated as of the date of the Belton Acquisition, stating, among other things, that the assumption of debt, the borrowings and all transactions contemplated by the Belton Acquisition, will not violate any term of the Indenture. (viii) Certificate of No Default. A Certificate executed by each of the Companies, in form and substance satisfactory to Agent and dated as of the date of the Belton Acquisition, stating that no Default or Event of Default shall have occurred and be continuing after giving effect to the Belton Acquisition. (ix) Subordination Agreending or threatened litigation could, in 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. (x) Evidence of Insurance. Within fourteen (14) days of the date of this Amendment, evidence, in form, scope and substance and with such insurance carriers reasonably satisfactory to Agent, of all insurance policies required pursuant to Section 12.3(a) of the Loan Agreement with regard to the assets being acquired by Borrower in the Belton Acquisition. (xi) Additional Information. Such additional documents, instruments and information as Agent or its legal counsel, Hughes & Luce, L.L.P., special counsel to Agent, and all local counsel to Agent, may reasonably request to effect the transactions contemplated hereby. (b) AWG Documents. Agent and Lenders shall have had the opportunity to examine all documents between Borrower and AWG relating to the Belton Acquisition 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 the Belton Acquisition and each Company as Agent or any Lender shall have requested, the results of all of which shall have been satisfactory to Agent and Lenders in all material respects. (c) 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 Agent or any of the Lenders, which challenges or relates to the financing arrangements to be provided to fund the Belton Acquisition 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 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. (d) Compliance with Law. Agent shall be satisfied that each Company (i) 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 this Amendment and any document related to each of the Amendment Documents and the Belton Acquisition, to which it is or will be a party and for the perfection of or the exercise by Agent and each Lender of their respective rights and remedies under the Loan Documents, and (ii) 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. (e) No Market Disruption. There shall have occurred no disruption or adverse change in the financial or capital markets generally which Agent, in its reasonable discretion, deems material. (f) 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 (i) such Liens as Agent, in its sole discretion, shall deem not material, (ii) such Liens that are created under the terms of the subleases between AWG and Borrower executed in connection with the Belton Acquisition, and (iii) such Liens that have been waived or subordinated to the Liens in favor of Agent and Lenders in a manner satisfactory to Agent, in its sole discretion. (g) 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. (h) No Default. No Default or Event of Default shall have occurred and be continuing after giving effect to the Belton Acquisition. 7. 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 has been authorized by all requisite corporate action on the part of each Company and will not violate the corporate charter or bylaws of 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 Sections 2 through 4 of this Amendment), and (d) the Loan Agreement (as amended by this Amendment), the Notes (as the same may be amended and restated from time to time) and the other Loan Documents are and remain legal, valid, binding and enforceable obligations of each Company, as applicable. 8. Liens. Each of Borrower and Parent hereby covenants and agrees that Section 13.2 of the Loan Agreement (as amended by this Amendment), which prohibits each of Borrower and Parent from incurring Liens upon any of its property or assets, other than the Liens permitted in such Section 13.2, shall apply to each of the stores acquired by Borrower in the Belton Acquisition. 9. Leasehold Mortgages. Borrower hereby covenants and agrees that upon the payment in full by Borrower of all debt owed by Borrower to AWG as a result of the Belton Acquisition, Borrower, to the extent permitted by the relevant lease or sublease and in accordance with Section 8.2 of the Loan Agreement, will execute a Mortgage for each property leased or subleased by Borrower under the terms of the Belton Acquisiton. 10. 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. 11. 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. 12. 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. 13. 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. 14. Loan Agreement Remains in Effect: No Waiver. Except as expressly provided herein, all terms and provisions of the Loan Agreement and the other 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 power, right or remedy under the Loan Agreement, the Loan Documents or otherwise. 15. Ratification of Guaranties. Each of Parent and by their signature below SLB and JCH, reaffirms its respective obligations under its respective Guarany, agrees that its respective Guaranty shall remain in full force and effect not withstanding execution of this Amendment and the Amendment Documents, and agrees that its respective Guaranty and the Loan Agreement shall continue to be legal, valid and binding obligations of such Guarantor, enforceable in accordance with the terms therein with regard to the Indebtedness. 16. Fees and Expenses. Borrower agrees to pay all expenses paid or incurred by Agent in connection with this Amendment and any related documents, including but not limited to recording fees, computer fees, duplication fees, telephone and telecopier fees, travel and transportation fees, search and filing fees, and the reasonable fees and expenses of Hughes & Luce, L.L.P., counsel to Agent and Lenders. 17. 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. 18. 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. 19. 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. 20. Successors and Assigns. This Amendment if binding upon and shall inure to the benefit of Agent, Lenders, Borrower, Parent, SLB and JCH and their respective successors and assigns, except Borrower, Parent, SLB and JCH may not assign or transfer any of their rights or obligations hereunder without the prior written consent of Lenders. 21. Headings. The headings, captions and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. [Signature Page Follows] IN WITNESS WHEREOF, Borrower, Parent, SLB, JCH, 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:_____________________________ Wayne S. Peterson Senior Vice President-Finance and Chief Financial Officer and Secretary PARENT: HOMELAND HOLDING CORPORATION By:_____________________________ Wayne S. Peterson Senior Vice President-Finance and Chief Financial Officer and Secretary CREDIT PARTIES: SLB MARKETING, INC. By:_____________________________ Jack C. Hensley, President and Secretary JCH BEVERAGE, INC. By:_____________________________ Jack C. Hensley, President and Secretary AGENT AND LENDER: NATIONAL BANK OF CANADA By:_____________________________ Larry L. Sears, Vice President and Manager By:_____________________________ Randall K. Wilhoit, Vice President ADDITIONAL LENDERS: IBJ WHITEHALL BUSINESS CREDIT CORPORATION By:_____________________________ John C. Williams, Vice President HELLER FINANCIAL, INC. By:_____________________________ Thomas W. Bukowski, Senior Vice President Schedule 13.2(c) (Supplemental) EXISTING LIENS Liens granted to AWG pursuant to (a) that certain Amended and Restated Security Agreement, dated February 29, 2000, between AWG and Belton Food Center, Inc., a Missouri Corporation ("Belton Food"), and (b) that certain Amended and Restated Pledge Agreement, dated February 29, 2000, between AWG and Belton Food; such Liens were assumed by Borrower under that certain Assignment, Assumption and Release Agreement, dated February 29, 2000, among AWG, Borrower, Belton Food Center, Inc., a Missouri corporation, Ronald M. Bowes, and Susan L. Bowes and Ronald M. Bowes, Trustee of a Trust Created by Trust Indenture, dated January 7, 1997, with Ronald M. Bowes, as Settlor. Schedule 15.5(a) (Supplemental) REAL PROPERTY II. Leased Real Property Store # and Location Comments 885 7012 Northwest Expressway None Oklahoma City, Oklahoma Oklahoma County 886 24 S.E. 33rd Street None Edmond, Oklahoma Oklahoma County 887 2213 S.W. 74th Street None Oklahoma City, Oklahoma Oklahoma County Schedule 15.15 (Supplemental) ENVIRONMENTAL INFORMATION Store No. 885 Phase I Environmental Site Assessment - Kingston Environmental Audit, July 10, 1998 886 Phase I Environmental Site Assessment - Kingston Environmental Audit, July 10, 1998 887 Phase I Environmental Site Assessment - Kingston Environmental Audit, July 10, 1998 Schedule 15.16 (Supplemental) MEDICARE/MEDICAID AND THIRD PARTY PAYOR AGREEMENTS STORE PHONE # HOMELAND PHARMACIES MM/NABP 885 7012 Northwest Expressway Oklahoma City, OK 73132 371-9032 886 24 East 33rd Edmond, OK 73013 372-0148 887 2213 S.W. 74th Oklahoma City, OK 73159 371-9359 EFFECTIVE PROVIDER ADDRESS CITY ST ZIP DATE 1 Advanced BC BS Tex 2 Advance BC BS 3 Allied National 4 Alpha Scrip Incorporated 5 Alta RX 6 Provantage Amer Med Secur 7 Advance RX Mang. 8 Adv Ark 9 Alpha Scrips 10 Automated RX Net 11 Prud. PLU AT&T Manual 12 BC/BS of Alabama 13 BC California (Proserv) 14 Bravell 15 Lincsrx BC/BS of Ok 16 BC/BS Illinois - Proserv 17 BCBS Utica - Watertown 18 Beniscript All Plans 19 BCBS Maryland 20 BCBS of Nebraska 21 Cash Sales 22 Community Care HMO 23 Choice RX 24 Cigna RX Prima & HMO 25 Claimspro Preferred EFFECTIVE PROVIDER ADDRESS CITY ST ZIP DATE 26 Champus OK 27 Columbia Pharmacy 28 Complete RX Network 29 Complete Pharmacy Network 30 Caremark Inc. 31 AIA 32 CPS 33 Dun and Bradstreet 34 Diversified Pharm Service 35 DPS Healthcare Oklahoma 36 Darden Restaurants, Inc. 37 Employers Health Option 38 Eckerd Health Care 39 Executive RX Admin 40 Fireman's Worker's Comp 41 FHS IPS (Sooercare) Foundation 42 Foundation Health HMO 43 Foundation 44 BC/BS Generic 45 Gold Net (Pharmacy Gold) 46 Healthcomp 47 Healthcare Oklahoma 48 Health Care Delivery System 49 Heartland Health Plan 50 Healthsource RX 51 Systemed 52 IPS 53 Lincsrx BC/BS of OK 54 Mature RX 55 Mede America 56 Medimet-Met Life 57 Mutually Preferred 58 Managed Pharmacy Benefits 59 Managed Presc Network 60 Managed RX Service 61 Medical Security Card 62 Mutual Preferred Omaha 63 Northwestern National Life EFFECTIVE PROVIDER ADDRESS CITY ST ZIP DATE 64 National Prescription Adm 65 Nat'l Pharmaceutical Serv 66 Plan Plus 67 Blue Cross Plan 65 Plan H 68 RX Solutions 69 Allied Health Presc. Solut 70 Pacificare of OK 71 Paid GM Health Care Program 72 Paid Management Care Pharmacy 73 Paid Occidental Pet Corp 74 Paid Samba RX Plan 75 PAI Pharmacy Assoc., Inc. 76 PCN 77 Prescription Card Services 78 PCS Managed Care Program 79 PCS Recap Network Plans 80 PCS MCP Fed Government Emp 81 PCS Recap Network Plans 82 Pharmacy Direct Network 83 Prescription D Service 84 Pod GM Strike 85 BC/BS Perform Cost Management 86 Perform Okla Farm Bureau 87 Pharmacare 88 PHS Caremark 89 Physicians, Inc. 90 Provider Medical Pharmacies 91 PPO-Argus 92 PPO Oklahoma 93 Polling 94 AT&T Claims 95 RX Providers of OK Send DEA 96 PPSI 97 Prescript (Stockton Group) 98 Prucare OKC Pru Plus & Ne - HMO EX-10 7 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 December 8, 1999 Mr. Prentess E. Alletag, Jr. Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, OK 73125 Dear Prentess: The purpose of this letter is to confirm our understanding with respect to a termination of your employment with Homeland Stores, Inc. (the "Company"). This letter agreement supersedes all prior agreements between you and the Company with respect to your employment with the Company, including, without limitation, the letter agreement dated December 8, 1998. The Company may terminate your employment at any time for any reason. If the Company terminates your employment prior to December 31, 2000 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; provided, however, that such prorated bonus amount under clause (ii) above shall only be payable if, as of the date of such termination, the Company's actual results of operations, on a year-to-date basis for the most recently completed and publicly released fiscal quarter, are within 90% of the target level under the Company's Management Incentive Bonus Program. 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, (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, or (v) any act of moral turpitude which has or may have an adverse effect on the Company, including, without limitation, commission of a felony or a misdemeanor involving moral turpitude. 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. /s/ David B. Clark David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 13th day of December, 1999. /s/ Prentess E. Allegag, Jr. Prentess E. Alletag, Jr. EX-10 8 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 December 8, 1999 Ms. Deborah A. Brown Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, OK 73125 Dear Debbie: The purpose of this letter is to confirm our understanding with respect to a termination of your employment with Homeland Stores, Inc. (the "Company"). This letter agreement supersedes all prior agreements between you and the Company with respect to your employment with the Company, including, without limitation, the letter agreement dated December 8, 1998. The Company may terminate your employment at any time for any reason. If the Company terminates your employment prior to December 31, 2000 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; provided, however, that such prorated bonus amount under clause (ii) above shall only be payable if, as of the date of such termination, the Company's actual results of operations, on a year-to-date basis for the most recently completed and publicly released fiscal quarter, are within 90% of the target level under the Company's Management Incentive Bonus Program. 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, (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, or (v) any act of moral turpitude which has or may have an adverse effect on the Company, including, without limitation, commission of a felony or a misdemeanor involving moral turpitude. 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. /s/ David B. Clark David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 16th day of December, 1999. /s/ Deborah A. Brown Deborah A. Brown EX-10 9 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 December 8, 1999 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"). This letter agreement supersedes all prior agreements between you and the Company with respect to your employment with the Company, including, without limitation, the letter agreement dated December 8, 1998. The Company may terminate your employment at any time for any reason. If the Company terminates your employment prior to December 31, 2000 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; provided, however, that such prorated bonus amount under clause (ii) above shall only be payable if, as of the date of such termination, the Company's actual results of operations, on a year-to-date basis for the most recently completed and publicly released fiscal quarter, are within 90% of the target level under the Company's Management Incentive Bonus Program. 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, (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, or (v) any act of moral turpitude which has or may have an adverse effect on the Company, including, without limitation, commission of a felony or a misdemeanor involving moral turpitude. 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. /s/ David B. Clark David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 13th day of December, 1999. /s/ Steven M. Mason Steven M. Mason EX-10 10 Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, Oklahoma 73125 December 8, 1999 Mr. John C. Rocker Homeland Stores, Inc. P.O. Box 25008 Oklahoma City, OK 73125 Dear John: The purpose of this letter is to confirm our understanding with respect to a termination of your employment with Homeland Stores, Inc. (the "Company"). This letter agreement supersedes all prior agreements between you and the Company with respect to your employment with the Company, including, without limitation, the letter agreement dated September 14, 1998. The Company may terminate your employment at any time for any reason. If the Company terminates your employment prior to December 31, 2000 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; provided, however, that such prorated bonus amount under clause (ii) above shall only be payable if, as of the date of such termination, the Company's actual results of operations, on a year-to-date basis for the most recently completed and publicly released fiscal quarter, are within 90% of the target level under the Company's Management Incentive Bonus Program. 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, (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, or (v) any act of moral turpitude which has or may have an adverse effect on the Company, including, without limitation, commission of a felony or a misdemeanor involving moral turpitude. 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. /s/ David B. Clark David B. Clark President and Chief Executive Officer ACCEPTED AND AGREED as of this 16th day of December, 1999. /s/ John C. Rocker John C. Rocker EX-21 11 EXHIBIT 21 HOMELAND HOLDING CORPORATION LIST OF SUBSIDIARIES Jurisdiction Name of Subsidiaries Where Incorporated Homeland Stores, Inc. Delaware SLB Marketing, Inc. Texas JCH Beverage, Inc. Texas EX-23 12 EXHIBIT 23 CONSENT OF INDEPEDENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Homeland Holding Corporation on Forms S-8 (File Nos. 333-78693, 333-52267, 333-56387, and 333-61203) of our report dated February 29, 2000, except for Note 14, as to which the date is March 9, 2000, on our audits of the consolidated financial statements of Homeland Holding Corporation and subsidiaries as of January 1, 2000 and January 2, 1999 and for the 52 weeks ended January 1, 2000, the 52 weeks ended January 2, 1999, and the 53 weeks ended January 3, 1998, which report is included in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP March 29, 2000 EX-27 13
5 12-MOS JAN-01-2000 JAN-01-2000 6,136 0 12,714 1,361 52,663 72,328 104,209 30,728 167,854 42,834 60,000 0 0 49 27,654 167,854 559,554 559,554 425,394 425,394 128,409 0 9,011 (2,706) 1,588 (4,294) 0 0 0 (4,294) (0.87) (0.87)
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