CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the fiscal year ended January 2, 1999
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 24, 1999:
$13,376,077, based on a closing price of $3.375 of the registrant's
common stock on the NASDAQ NMS.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of March 24, 1999:
Homeland Holding Corporation
Common Stock: 4,906,910 shares
Documents incorporated by reference: None.
HOMELAND HOLDING CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS................................................... 1
General.................................................... 1
Background................................................. 1
AWG Transaction............................................ 1
Restructuring.............................................. 2
Business Strategy.......................................... 3
Homeland Supermarkets...................................... 4
Merchandising Strategy and Pricing......................... 6
Customer Services.......................................... 6
Advertising and Promotion.................................. 6
Products................................................... 7
Supply Arrangements........................................ 7
Employees and Labor Relations.............................. 8
Computer and Management Information Systems................ 9
Competition................................................ 10
Trademarks and Service Marks............................... 10
Regulatory Matters......................................... 10
ITEM 2. PROPERTIES................................................. 11
ITEM 3. LEGAL PROCEEDINGS.......................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS........................................ 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDERS MATTERS........................... 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA....................... 12
i
Page
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.............................................. 16
Results of Operations...................................... 16
Liquidity and Capital Resources............................ 20
Year 2000.................................................. 24
Inflation/Deflation........................................ 24
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA......................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................... 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.......................................... 26
Section 16(a) Beneficial Ownership Reporting
Compliance................................................. 29
ITEM 11. EXECUTIVE COMPENSATION..................................... 30
Summary of Cash and Certain Other
Compensation.............................................. 30
Compensation of Directors.................................. 32
Employment Agreements...................................... 33
Management Incentive Plan.................................. 36
Retirement Plan............................................ 36
Management Stock Option Plan............................... 36
Compensation Committee Report.............................. 37
Performance Graph.......................................... 38
Compensation Committee Interlocks and
Insider Participation..................................... 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT........................... 39
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS....................................... 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K.......................... 42
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 2, 1999
ITEM 1. BUSINESS
General
Homeland Holding Corporation ("Holding"), through its wholly-owned
subsidiary, Homeland Stores, Inc. ("Homeland") and Homeland's wholly-owned
subsidiary, SLB Marketing, Inc., (collectively referred to herin 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 March 12, 1999, the
Company operates 69 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 has more than 800 member stores
located in a ten-state region with approximately $3.2 billion in revenues in
1998.
The AWG Transaction enabled the Company: (a) to reduce the Company's
borrowed money indebtedness by approximately $37.2 million in the aggregate;
(b) to have AWG assume, or provide certain undertakings with respect to,
certain contracts and leases and certain pension liabilities of the Company;
(c) to sell the Company's warehouse and distribution center, which eliminated
the high fixed overhead costs associated with the operation of the warehouse
and distribution center and thereby permitted the Company to close marginal
and unprofitable stores; and (d) to obtain the benefits of becoming a member
of the AWG cooperative, including increased purchases of private label
products, special product purchases, dedicated support programs and access to
AWG's store systems and participation in the membership rebate and patronage
programs.
Restructuring
On May 13, 1996, Holding and Homeland filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
Simultaneously with such filings, the Company submitted a "pre-arranged" plan
of reorganization which set forth the terms of the restructuring of the
Company (the "Restructuring"). The purpose of the Restructuring was to
substantially reduce the Company's debt service obligations and labor costs
and to create a capital and cost structure that would allow the Company to
maintain and enhance the competitive position of its business and operations.
The Restructuring was negotiated with, and supported by, the lenders under
the Company's then existing revolving credit facility, an ad hoc committee
(the "Noteholders Committee") representing approximately 80% of the Company's
outstanding Old Notes (as defined in Note 2 - Reorganization in Notes to
Consolidated Financial Statements) and the Company's labor unions. The
Bankruptcy Court confirmed the Company's First Amended Joint Plan of
Reorganization, as modified (the "Plan of Reorganization") on July 19, 1996,
and the Plan of Reorganization became effective on August 2, 1996 (the
"Effective Date").
Pursuant to the Restructuring, the $95 million of the Company's
Old Notes plus accrued interest were cancelled, and the holders of the Old
Notes received in the aggregate, $60 million face amount of newly-issued 10%
Senior Subordinated Notes Due 2003 of the Company (the "New Notes") and $1.5
million in cash. In addition, the Noteholders and the Company's general
unsecured creditors received approximately 60% and 35%, respectively, of
the equity of reorganized Holding (assuming total unsecured claims of
approximately $63 million, including Noteholder unsecured claims). Holding's
existing equity holders received the remaining 5% of the new equity,
together with five-year warrants to purchase an additional 5% of such equity.
2
In connection with the Restructuring, the Company negotiated an
agreement with its labor unions to modify certain elements of the Company's
existing collective bargaining agreements. These modifications include,
among other things, wage and benefit modifications, the buyout of certain
employees and the issuance to and purchase of new equity by a trust acting
on behalf of the unionized employees. The modified collective bargaining
agreements became effective on the Effective Date. See "Business -- Employees
and Labor Relations."
On the Effective Date, the Company entered into a loan agreement
(the "Old Loan Agreement") with National Bank of Canada ("NBC"), as agent and
lender, and two other lenders, Heller Financial, Inc. and IBJ Schroder Bank
and Trust Company, under which the lenders provided a working capital and
letter of credit facility and a term loan. On December 17, 1998, the Company
executed a New Loan Agreement in exchange for the Old Loan Agreement in order
to extend the maturity date, to provide additional borrowing capacity for
acquisitions, lower interest rates, and other technical changes. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for a description of the
New Loan Agreement. Consistent with the Old Loan Agreement, as amended, the
New Loan Agreement permits the Company to borrow, under the working capital
and letter of credit facility, up to the lesser of: (a) $32.0 million and (b)
the applicable borrowing base. Funds borrowed under such facility are available
for general corporate purposes of the Company. The Old Loan Agreement also
provided the Company a $10.0 million term loan, which was used to fund certain
obligations of the Company under the Plan of Reorganization, including an
employee buyout offer and a health and welfare plan required by the modified
collective bargaining agreements, professional fees and "cure amounts" relating
to executory contracts, secured financing and unexpired leases.
Business Strategy
The Company's general business strategy is to continue to build and
improve on its current strengths which consist of: (a) high quality perishable
departments; (b) market position and competitive pricing; (c) customer
service; (d) excellent locations; and (e) the "Homeland Savings Card," a
customer loyalty card program. The Company is also able to effectively reach
a large customer base with its weekly advertising inserts and radio and
television media advertisement. In addition, the Company is upgrading its
stores by focusing its capital expenditures on projects that will improve the
overall appeal of its stores to targeted customers.
Having been in its market for more than 66 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
3
participating in local community events and offering the "Apples for Students"
program, whereby schools can obtain computers and other educational products
by collecting Homeland receipts. The Company is also a major sponsor of the
Easter Seals program in its markets.
The Company is anticipating growth in home meal replacement business
through the development of hot and chilled meal solutions for lunch and
dinner. Capital investment is being made to support the growth of these products
and menus are being developed to match the quick meal and convenience needs
of its customers.
The Company's plan also involves reviewing marginal and unprofitable
stores for closing and reviewing new sites, independent stores or new markets
for growth in its market share. The Company closed 14 stores in 1995 and
closed 2 additional stores in 1996. The Company also sold its store in Ponca
City, Oklahoma in April 1996. In 1997, the Company acquired 4 stores, two in
Oklahoma City, Oklahoma, one in Shawnee, Oklahoma and the other in Lawton,
Oklahoma. The Company closed 1 store in 1998. In the second quarter of 1999,
the Company intends to complete the acquisition of 9 stores located in eastern
Oklahoma.
For additional information, see also "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Homeland Supermarkets
The Company's current network of stores features three basic store
formats. Homeland's conventional stores are primarily in the 25,000 total
square feet range and carry the traditional mix of grocery, meat, produce and
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 $125,000 per week. Homeland's
superstores are in the 35,000 total square feet range and offer, in addition to
the traditional departments, two or more specialty departments. Sales volumes of
superstores range from $90,000 to $265,000 per week. Homeland's combo store
format includes stores of approximately 45,000 total square feet and larger and
was designed to enable the Company to expand shelf space devoted to general
merchandise. Sales volumes of combo stores range from $150,000 to $280,000
per week. The Company's new stores and certain remodeled locations have
incorporated Homeland's new, larger superstore and combo formats.
Of the 69 stores operated by the Company as of March 24, 1999, 10
are conventional stores, 47 are superstores and 12 are combo stores.
4
The chart below summarizes Homeland's store development over the
last three fiscal years:
Fiscal Year Ended
1/2/99 1/3/98 (1) 12/28/96
Average sales per store
(in millions)............................. $ 7.6 $ 7.9 $ 7.9
Average total square feet
per store................................. 37,473 37,232 37,295
Average sales per
square foot............................... $204 $212 $212
Number of stores:
Stores at start of period................. 70 66 68
Stores remodeled.......................... 8 7 4
New stores opened......................... 0 4 1
Stores sold or closed..................... 1 0 3
Stores at end of period................... 69 70 66
Size of stores:
Less than 25,000 sq. ft................... 7 7 7
25,000 to 35,000 sq. ft................... 25 28 24
35,000 sq. ft. or greater................. 37 35 35
Store formats:
Conventional.............................. 10 10 10
SuperStore................................ 47 49 45
Combo..................................... 12 11 11
(1) 53 weeks' data.
The Company's network of stores is managed by district managers on
a geographical basis through four districts. Each district manager oversees
store operations for approximately 17 stores. Store managers are responsible
for determining staffing levels, managing store inventories (within the
confines of certain parameters set by the Company's corporate headquarters)
and purchasing products. Store managers have significant flexibility with
respect to the quantities of items carried while the Company's corporate
headquarters is directly responsible for merchandising, advertising, pricing
and capital expenditure decisions.
5
Merchandising Strategy and Pricing
The Company's merchandising strategy emphasizes a competitive
pricing structure, as well as leadership in quality products and service,
selection, convenient store locations, specialty departments and perishable
products (i.e., meat, produce, bakery and seafood). The Company's strategy
is to price competitively with targeted supermarket operator in each market
area. 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 and 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.
6
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 1998, approximately 83% of the Company's stores
had service delicatessens and/or bakeries and approximately 63% had in-store
pharmacies. In addition, some stores provide additional specialty departments
that offer ethnic food, fresh and frozen seafood, floral services and salad
bars.
As a result of the Company's supply relationship with AWG, the
Company's stores also offer AWG private label goods, including Best Choice
and Always Save.
Private label products generally represent quality and value to
customers and typically contribute to a higher gross profit margin than
national brands. The promotion of private label products is an integral part
of the Company's merchandising philosophy of building customer loyalty as
well as improving the Company's "pricing image." The Company intends to use
Best Choice 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.
7
The Company purchases goods from AWG on an open account basis.
AWG requires that each member's account be secured by a letter of credit or
certain other collateral in an amount based on such member's estimated weekly
purchases through the AWG distribution center. The Company's open account
with AWG, as of March 24, 1999, is secured by a $3.3 million letter of credit
(the "AWG Letter of Credit") issued in favor of AWG by NBC. In addition, the
Company's obligations to AWG are secured by a first lien on all "AWG Equity"
owned from time to time by the Company, which includes, among other things,
AWG membership stock, the Company's right to receive monthly payments and
certain other rebates, refunds and other credits owed to the Company by AWG
(including patronage refund certificates, direct patronage or year-end
patronage and concentrated purchase allowances).
The amount of the AWG Letter of Credit may be decreased on a
biannual basis upon the request of the Company based on the Company's
then-current average weekly volume of purchases and by an amount equal to the
face amount of the Company's issued and outstanding AWG patronage refund
certificates. In the event that the Company's open account with AWG exceeds
the amount of the AWG Letter of Credit plus any other AWG Equity held as
collateral for the Company's open account, AWG is not required to accept
orders from, or deliver goods to, the Company until the amount of the AWG
Letter of Credit has been increased to make up for any such deficiency.
The Supply Agreement with AWG contains certain "Volume Protection
Rights," including: (a) the right of first offer (the "First Offer Rights")
with respect to any proposed sales of stores supplied under the Supply
Agreement (the "Supplied Stores") and a sale of more than 50% of the
outstanding stock of Holding or Homeland to an entity primarily engaged in
the retail or wholesale grocery business; (b) the Company's agreement not to
compete with AWG as a wholesaler of grocery products during the term of the
Supply Agreement; and (c) the Company's agreement to dedicate the Supplied
Stores to the exclusive use of a retail grocery facility owned by a retail
member of AWG (the "Use Restrictions"). The Company's agreement not to
compete and the Use Restrictions contained in the Supply Agreement are
terminable with respect to a Supplied Store upon the occurrence of certain
events, including the Company's compliance with AWG's First Offer Rights with
respect to any proposed sale of such store. In addition, the Supply Agreement
provides AWG with certain purchase rights in the event the Company closes 90%
or more of the Supplied Stores.
Employees and Labor Relations
At March 12, 1999, the Company had a total of 4,340 employees, of
whom 3,002, or approximately 69%, were employed on a part-time basis. The
Company employs 4,238 in its supermarket operations. The remaining employees
are corporate and administrative personnel.
The Company is the only unionized grocery chain in its market areas.
Approximately 91% of the Company's employees are union members, represented
primarily by the United Food and Commercial Workers of North America
("UFCWNA").
8
In March and April of 1996, prior to the Restructuring, the
Company entered into new collective bargaining agreements with the UFCWNA
and the local union chapter of the Bakery, Confectionery and Tobacco Workers
International Union (collectively, the "Modified Union Agreements").
The Modified Union Agreements have a term of five years commencing
on the Effective Date. The Modified Union Agreements consist of five basic
elements: (a) wage rate and benefit contribution reductions and work rule
changes; (b) the Employee Buyout Offer, pursuant to which the Company made up
to $6.4 million available for the buyout of certain unionized employees;
(c) the establishment of an employee stock option trust (acting on behalf of
the Company's unionized employees), which will receive, or be entitled to
purchase, up to 522,222 shares of New Common Stock, or 10% of the New Common
Stock, pursuant to the terms of the Modified Union Agreements; (d) the UFCWNA's
right to designate one member of the Boards of Directors of Homeland and
Holding following the Restructuring; and (e) the elimination of certain "snap
back" provisions, incentive plans and "maintenance of benefits" provisions.
Upon the consummation date of the Employee Buyout Offer, 833 of
the Company's unionized employees accepted the Employee Buyout Offer. The
Company paid approximately $6.0 million in the aggregate (which excludes the
Company's portion of payroll taxes) with each employee receiving an amount
that ranged from $4,500 to $11,000 (depending on job classification, date of
hire and full- or part-time status). The Employee Buyout Offer payment was
funded through borrowings under the Loan Agreement.
Computer and Management Information Systems
During 1995, the Company installed new client/server systems in
order to enhance its information management capabilities, improve its
competitive position and enable the Company to terminate its outsourcing
arrangement. The new systems include the following features: time and
attendance, human resource, accounting and budget tracking, and scan support
and merchandising systems. In 1997, the Company installed a direct store
delivery system and a check verification and credit card system. The Company
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 69 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."
9
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 25 stores and 17 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
areas including 3 new Wal-Mart's and 2 new Albertson's. In 1998, there were
7 additional competitive openings, including 4 new Wal-Mart's and 3 new
independent stores. Based on information publicly available, the Company
expects that, during 1999, Albertson's will open 3 new stores, Wal-Mart will
open 4 new stores, regional chains will open 2 stores and independents will
open 3 additional 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" in early 1994.
Regulatory Matters
Homeland is subject to regulation by a variety of local, state and
federal governmental agencies, including the United States Department of
10
Agriculture, state and federal pharmacy regulatory agencies and state and
local alcoholic beverage and health regulatory agencies. By virtue of this
regulation, Homeland is obligated to observe certain rules and regulations,
the violation of which could result in suspension or revocation of various
licenses or permits held by Homeland. In addition, most of Homeland's
licenses and permits require periodic renewals. To date, Homeland has
experienced no material difficulties in obtaining or renewing its licenses
and permits.
ITEM 2. PROPERTIES
Of the 69 supermarkets operated by the Company, 13 are owned by
Homeland and the balance are held under leases which expire at various times
between 1999 and 2013. Most of the leases are subject up to six (6) five-year
renewal options. Out of 56 leased stores, only 7 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 securing the borrowings under the Loan Agreement (see "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources").
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to ordinary routine litigation incidental
to its business.
Homeland and Holding were debtors in cases styled In re Homeland
Holding Corporation, Debtor, Case No. 96-748 (PJW), and In re Homeland Stores,
Inc., Debtor, Case No. 96-747 (PJW), initiated with the Bankruptcy Court on
May 13, 1996. While the Plan of Reorganization was confirmed on July 19, 1996,
and became effective on August 2, 1996, the Company is still involved in the
resolution of claims filed in these proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by Holding to a vote of Holding's
security holders during the quarter ended January 2, 1999.
11
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 1997 and 1998 are listed below:
High Low
June 14, 1997 $9.000 $6.250
September 6, 1997 $8.813 $7.500
January 3, 1998 $9.000 $6.500
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
On March 12, 1999, there were 708 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.
Holding is restricted from paying dividends by the New 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 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, and the 52 weeks ended December 30, 1995,
and December 31, 1994 (Predecessor Company), respectively. See "Notes to
Selected Consolidated Financial Data" for additional information.
As discussed in "Business -- Restructuring," the Company emerged
from Chapter 11 proceedings effective August 2, 1996. For financial reporting
purposes, the Company accounted for the consummation of the Restructuring
effective as of August 10, 1996. The Company has adopted "fresh-start"
reporting pursuant to SOP No. 90-7. The periods prior to the Restructuring
have been designated "Predecessor Company" and the periods subsequent to the
Restructuring have been designated "Successor Company."
12
The selected consolidated financial data should be read in
conjunction with the respective consolidated financial statements and notes
thereto which are contained elsewhere herein.
13
(In thousands, except per share amounts)
Successor Company Predecessor Company
52 weeks 53 weeks 20 weeks 32 weeks 52 weeks 52 weeks
ended ended ended ended ended ended
1/2/99 1/3/98 12/28/96 8/10/96 12/30/95 12/31/94
Summary of Operating Data:
Sales, net $ 529,576 $ 527,993 $ 204,026 $ 323,747 $ 630,275 $ 785,121
Cost of sales 402,261 401,691 154,099 244,423 479,119 588,405
Gross profit 127,315 126,302 49,927 79,324 151,156 196,716
Selling and administrative expense 114,335 112,590 43,995 73,183 144,052 193,643
Operational restructuring costs (1) - - - - 12,639 23,205
Amortization of excess reorganization
value (2) 13,672 14,527 5,819 - - -
Operating profit (loss) (692) (815) 113 6,141 (5,535) (20,132)
Gain(loss) on disposal of assets 34 (117) (90) 114 (8,349) -
Interest income 426 385 56 69 416 -
Interest expense (8,484) (8,408) (3,199) (5,639) (15,992) (18,067)
Income (loss) before reorganization
items, income taxes and
extraordinary items (8,716) (8,955) (3,120) 685 (29,460) (38,199)
Reorganization items (3) - - - (25,996) - -
Income tax provision (1,875) (1,689) - - - (2,446)
Loss before extraordinary items (10,591) (10,644) (3,120) (25,311) (29,460) (40,645)
Extraordinary items (4)(5) - - - 63,118 (2,330) -
Net income (loss) (10,591) (10,644) (3,120) 37,807 (31,790) (40,645)
Reduction in redemption value -
redeemable common stock - - - - 940 7,284
Net income (loss) available to common
stockholders $ (10,591) $ (10,644) $ (3,120) $ 37,807 $ (30,850) $ (33,361)
Basic and diluted net income (loss) per
common share (6) $ (2.18) $ (2.23) $ (0.66) $ 1.16 $ (0.93) $ (0.96)
Consolidated Balance Sheet Data: 1/2/99 1/3/98 12/28/96 8/10/96 12/30/95 12/31/94
Total assets $ 159,204 $ 166,041 $ 168,486 $ 129,679 $ 137,582 $ 239,134
Long-term obligations, including current
portion of long-term debt obligations $ 89,979 $ 86,002 $ 80,568 $ 124,411 $ 124,242 $ 176,731
Redeemable common stock $ - $ - $ - $ 17 $ 17 $ 1,235
Stockholders' equity (deficit) $ 31,868 $ 42,324 $ 52,941 $ (38,057) $ (28,106) $ 4,071
14
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
(1) Operational restructuring costs during 1995 included the write-off of
software no longer utilized by the Company, the write-off of goodwill
in connection with the Restructuring and a termination charge resulting
from the cancellation of the Company's computer outsourcing agreement.
Operational restructuring costs during 1994 included the estimated
losses to be incurred on the AWG Transaction and associated expenses and
the estimated losses and expenses in connection with the anticipated
closing of 15 stores during 1995.
(2) The Company's reorganization value in excess of amounts allocable to
identifiable assets, established in accordance with "fresh-start"
reporting, of $45,389 is being amortized on a straight-line basis over
three years.
(3) As a result of the Company's Restructuring, the Company recorded certain
reorganization expenses separately in accordance to SOP 90-7.
Reorganization items for 1996 consist of: (a) $7,200 of allowed claims
in excess of liabilities; (b) $4,250 in professional fees; (c) $6,386 in
employee buyout expenses; and (d) $8,160 in adjusting certain assets and
liabilities to estimated fair value.
(4) Extraordinary items during 1996 consist of obligations of the Company
that were discharged by the Bankruptcy Court pursuant to the Company's
Plan of Reorganization.
(5) Extraordinary items during 1995 included the payment of $906 in premiums
and consent fees on the redemption of $15,600 of the Company's Old Notes
and the write-off of $1,424 in unamortized financing costs related to
the Old Notes so redeemed and the prior revolving credit facility.
(6) Old Common Stock held by management investors are presented as redeemable
common stock and excluded from stockholder's equity since the Company
had agreed to repurchase such shares under certain defined conditions,
such as death, retirement or permanent disability. In addition, net
income (loss) per common share reflects the accretion in/reduction to
redemption value as a reduction/increase in income available to all
common stockholders.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General
As discussed in Note 2 to the accompanying Consolidated
Financial Statements of Holding and Subsidiaries, the Company's Plan of
Reorganization became effective on August 2, 1996. For financial reporting
purposes, the Company accounted for the consummation of the Restructuring
effective as of August 10, 1996. The Company has adopted "fresh-start"
reporting pursuant to SOP No. 90-7. The periods prior to the Restructuring
have been designated "Predecessor Company" and the periods subsequent to the
Restructuring have been designated "Successor Company." For purposes of the
discussion of Results of Operations and Liquidity and Capital Resources for
the fifty-two weeks ended December 28, 1996, the results of the Predecessor
Company and Successor Company have been combined.
Because of the adjustments associated with the adoption of
"fresh-start" reporting pursuant to SOP No. 90-7, the periods prior to and
subsequent to the Effective Date for financial reporting purposes are not
necessarily comparable. In addition, it is difficult to identify trends
between periods which are not necessarily comparable, particularly to the
extent prior trends have been affected by the Restructuring.
16
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
1998 1997 1996
Sales, net.................................. 100.00% 100.00% 100.00%
Cost of sales............................... 75.96 76.08 75.51
Gross profit............................... 24.04 23.92 24.49
Selling and administrative.................. 21.59 21.32 22.20
Amortization of excess
reorganization value...................... 2.58 2.75 1.10
Operating profit (loss)..................... (0.13) (0.15) 1.19
Gain(loss) on disposal of assets............ 0.01 (0.02) -
Interest income............................. 0.08 0.07 0.02
Interest expense............................ (1.60) (1.59) (1.67)
Loss before reorganization
items, income taxes and
extraordinary items........................ (1.64) (1.69) (0.46)
Reorganization items........................ - - (4.93)
Loss before income
taxes and extraordinary items.............. (1.64) (1.69) (5.39)
Income tax provision........................ (0.36) (0.32) -
Loss before
extraordinary items........................ (2.00) (2.01) (5.39)
Extraordinary items......................... - - 11.96
Net income (loss)........................... (2.00)% (2.01)% 6.57%
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 $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
17
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. 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.
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. 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 is 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 combine a strong presentation of fresh products along with
meaningful values throughout the store on a wide variety of fresh and shelf
stable products eac 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 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 Company continues to review alternatives to reduce selling and
administrative expenses and cost of sales in order to provide apportunities to
pass additional savings along to its customers in the form of price reductions
in certain categories.
18
The amortization of the excess reorganization value amounted to
$13.7 million in 1998. The excess reorganization value is being amortized
over three years, on a straight line basis. The excess reorganization value
will be fully amortized by the third quarter of 1999 and the elimination
of such amortization should increase net income commencing in the fourth
quarter of 1999.
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.
During 1999, the Company anticipates that interest expense will increase
once the acquisition of nine stores has been completed. 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. In accordance with SOP 90-7,
the tax benefit realized from utilizing the pre-reorganization net operating
loss carryforwards is recorded as a reduction of the reorganization value in
excess of amounts allocable to identifiable assets rather than realized as
a benefit on the statement of operations. At January 2, 1999, the Company
had a tax net operating loss carryforward of approximately $37.4 million,
which may be utilized to offset future taxable income to the limited amount
of $3.3 million for 1999 and each year thereafter.
EBITDA (as defined hereinafter) increased $0.7 million from $22.2
million, or 4.2% of sales, to $22.9 million or 4.3% of sales in 1998. The
improvement in EBITDA resulted primarily from the increased sales and reduced
selling and administrative expenses included in EBITDA. The Company believes
that EBITDA is a useful supplemental disclosure for the investment community.
EBITDA, however, should not be construed as a substitue for earnings or cash
flow information required under generally accepted accounting principles.
Comparison of Fifty-Three Weeks Ended January 3, 1998, ("1997"),
with Fifty-Two Weeks Ended December 28, 1996 ("1996").
Net sales increased $0.2 million from $527.8 million for 1996 to
$528.0 million for 1997. Fiscal 1997 was a 53 week year for the Company.
Excluding the net sales for the 53rd week in 1997, net sales decreased $10.5
million, or 2.0%, from $527.8 million for 1996 to $517.3 million for 1997.
The decline in sales is attributable to a 3.2% decline in comparable store
sales partially offset by the sales of four stores acquired during 1997
(one on August 11, 1997, and the other three on October 15, 1997). The decline
in comparable store sales was attributable to the eight new competitive store
openings and lower food price inflation as well as lower sales to food stamp
recipients as a result of more stringent eligibility requirements. The decrease
was somewhat offset by grand opening events at certain of the Company's stores
plus the closing of five Food Lion stores in the Company's market area in
October 1997.
Gross profit as a percentage of sales decreased 0.6% from 24.5% in
1996 to 23.9% in 1997. The decrease in gross profit margin was primarily a
result of increased promotional activities as the Company responded to certain
19
new competitive store openings and special advertisements at the grand openings
of six remodeled stores.
Selling and administrative expenses as a percentage of sales decreased
0.9% from 22.2% in 1996 to 21.3% in 1997. The decrease in selling and
administrative expense is primarily a result of lower labor costs associated
with the Modified Union Agreements and lower occupancy cost that resulted from
renegotiated leases. The labor savings from the Modified Union Agreements were
somewhat offset by the federally-mandated minimum wage increases.
The amortization of the excess reorganization value amounted to
$14.5 million in 1997.
Interest expense, net of interest income, decreased $0.7 million
from $8.7 million in 1996 to $8.0 million in 1997. The decrease is a result
of higher borrowings by the Predecessor Company during the 32 weeks ended
August 10, 1996, and to a lesser degree, a decline in interest rate.
The Company recorded $1.7 million of income tax expense for 1997,
of which $1.6 million was deferred income tax. In accordance with SOP 90-7,
the tax benefit realized from utilizing the pre-reorganization net operating
loss carryforwards is recorded as a reduction of the reorganization value
in excess of amounts allocable to identifiable assets rather than realized
as a benefit on the statement of operations.
EBITDA increased $2.7 million from $19.5 million, or 3.7% of sales,
to $22.2 million or 4.2% of sales in 1997. The improvement in EBITDA resulted
primarily from reduced selling and administrative expenses. The Company
believes that EBITDA is a useful supplemental disclosure for the investment
community. EBITDA, however, should not be construed as a substitute for
earnings or cash flow information required under generally accepted accounting
principles.
Liquidity and Capital Resources
Debt. The primary sources of liquidity for the Company's operations
have been borrowings under credit facilities and internally generated funds.
On the Effective Date, pursuant to the Plan of Reorganization, the Company
entered into the Old Loan Agreement with NBC, as agent and lender, and two other
lenders, Heller Financial, Inc. and IBJ Schroder Bank and Trust Company
(subsequently assigned its position to IBJ Schroder Business Credit
Corporation), under which those lenders provided a working capital and letter
of credit facility and a term loan. The Old Loan Agreement, as amended,
permitted the Company to borrow, under the working capital and letter of credit
facility, up to the lesser of (a) $32.0 million or (b) the applicable borrowing
base. Funds borrowed under such facility are available for general corporate
purposes of the Company.
20
The Old Loan Agreement also provided the Company a $10.0 million term
loan (the "Term Loan"), which was used to fund certain obligations of the
Company under the Plan of Reorganization, including the Employee Buyout Offer
and a new health and welfare plan required by the Modified Union Agreements,
professional fees and "cure amounts" which were required to be paid under the
Plan of Reorganization in connection with executory contracts, secured
financing and unexpired leases.
On December 17, 1998, the Company executed a New Loan Agreement in
exchange for the Old Loan Agreement in order to extend the maturity to August
2, 2002, to provide additional term loan borrowing capacity of $10.0 million
for acquisitions ("Acquisition Term Loan"), to reduce interest rates, and
to incorporate other technical changes. As of January 2, 1999, there were no
borrowings outstanding under the Acquisition Term Loan facility. As of March
24, 1999, the original Term Loan has an outstanding balance of $7.5 million,
and the Company is required to make quarterly principal paydowns of
approximately $0.4 million.
The interest rate payable quarterly under the New 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 New 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 New 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 New
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 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.
21
Working Capital and Capital Expenditures. The Company's primary
sources of capital have been borrowing availability under the revolving
credit facility and cash flow from operations, to the extent available. The
Company uses the available capital resources for working capital needs,
capital expenditures and repayment of debt obligations.
The Company's EBITDA (earnings before net interest expense, taxes,
depreciation and amortization, 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 53 Weeks Ended 52 Weeks Ended
January 2, January 3, December 28,
1999 1998 1996
Loss before reorganization
items, income taxes and
extraordinary items $ (8,716) $ (8,955) $ (2,435)
Interest income (426) (385) (125)
Interest expense 8,484 8,408 8,838
(Gain) loss on disposal of
assets (34) 117 (24)
Amortization of excess
reorganization value 13,672 14,527 5,819
Depreciation and amortization 9,923 8,525 7,243
EBITDA $ 22,903 $ 22,237 $ 19,316
As a percentage of sales 4.32% 4.21% 3.66%
As a multiple of interest
expense, net of interest
income 2.84x 2.77x 2.22x
Net cash provided by operating activities decreased $1.9 million,
from $12.4 million in 1997 to $10.5 million in 1998. The decrease principally
reflects a reduction in other current liabilities in 1998 which is primarily
attributable to reductions in other accrued expenses during 1998.
Net cash used in investing activities decreased $2.4 million from
$14.0 million in 1997 to $11.6 million in 1998. The Company invested $12.4
million, $14.0 million and $6.9 million in capital expenditures for 1998,
1997 and 1996, respectively. In August 1997, the Company acquired a Pratt
22
Discount Food store and in October 1997, the Company acquired three Food Lion
stores. The acquisitions amounted to approximately $3.6 million. The capital
expenditures for 1998 were funded by internally-generated cash flows from
operations and the revolving credit facility under the Old Loan Agreement.
Net cash provided by financing activities decreased $0.7 million from
$4.9 million in 1997 to $4.2 million in 1998. The decrease reflects additional
principal payments under its Term Loan.
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 1999 are expected to be at approximately $10.5
million. The New Loan Agreement limits the Company's capital expenditures for
1999 to $13.0 million in cash capital expenditures and $12.0 million for
capital expenditures which are financed through capital leases or equipment
loans. The estimated 1999 capital expenditues of $10.5 million 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 New Loan Agreement. As of March 24,
1999, the Company had $16.6 million of borrowings, $3.3 million of letters of
credit outstanding and $10.8 million of availability under its revolving credit
facility.
On February 15, 1999, the Company signed a letter of intent with
AWG for the purchase of nine Apple Market supermarkets currently operated
by Horner Foods, Inc. in eastern Oklahoma. Consummation of the transaction,
which is expected during the second quarter of 1999, is subject to, among
other things, the execution of a definitive purchase agreement, completion
of due dilligence, and certain customary closing conditions. The financing
for this acquisition is likely to be a combination of loans through AWG, the
Acquisition Term Loans and/or availability under the revolving credit facility.
The Company's ability to meet its working capital needs, meet its
debt and interest obligations and capital expenditure requirements is
dependent on its future operating performance. There can be no assurance that
future operating performance will provide positive net cash and if the
Company is not able to generate positive cash flow from its operations,
management believes that this could have a material adverse effect on the
Company's business.
Information discussed herein includes statements that are forward-
looking in nature, as defined in the Private Securities Litigation Reform Act.
As with any forward-looking statements, these statements are subject to a
number of factors and assumptions, including competitive activities, economic
conditions in the market area and results of its future capital expenditures.
In reviewing such information, it should be kept in mind that actual results
may differ materially from those projected or suggested in such forward-
looking statements.
23
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 approaches, systems using such programs may be unable to accurately
process certain date-based information. Like many other companies, the
Company is continuing to assess and modify its computer applications and
business processes to provide for their continued functionality. 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 continuing assessment
has been implemented on a system-by-system basis and includes the readiness of
external entities, such as vendors, which interface with the Company. Such
program has included and will continue to include both consultation by
Homeland with the vendors who provided its computer systems and internal
testing by Homeland of those computer systems. The Company has completed its
evaluation of systems and its detailed planning for remediating or replacing
non-compliant systems. Remediation / replacement efforts are approximately
80% complete and testing procedures are approximately 75% complete. Testing
procedure have included tests of certain systems for which remediation /
replacement efforts were ultimately deemed unnecessary based on the positive
results of such tests.
The Company has assessed its vendors' Year 2000 readiness, principally
through the review of questionnaires which the Company has circulated to its
vendors. AWG, which supplies approximately 70% of the goods sold in the
Company's stores, believes that it will be Year 2000 compliant. Although not
all of the responses from other vendors have been conclusive, management does
not presently expect that it will be adversely affected by its vendors' Year
2000 readiness.
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 has been the point of sale ("POS") computers
used in the operation of the stores. Internal tests conducted by Homeland
generally reflect that its POS software is already Year 2000 compliant,
however, the Company was unable to obtain reasonable assurance and support
from the software provider to corroborate the conclusions of its POS testing
of the current software. As a result, the Company has elected to upgrade its
POS software to the Year 2000 version which the vendor states is compliant.
The incremental cost is approximately $0.4 million and will be installed
during the second quarter of 1999. Additionally, the Company will further
test the software upon full installation. The Company is also replacing older
power management systems which operate various systems in the stores. The
new systems are currently being installed and it is anticipated that the
conversion will be completed by the end of the third quarter of 1999. the
estimated capital investment is $1.3 million.
The cost of the program is not expected to exceed $2.0 million, the
majority of which is described above for power management systems and upgrades
to POS software. Approximately $0.2 million has been incurred as of January 2,
1999. Homeland is funding these costs under its working capital facility.
Based on its assessment, its progress to date, and its expectation
of continued testing of systems, the Company believes that its efforts will
result in Year 2000 compliance by the end of the third quarter of 1999. If
circumstances arise indicating the Company's and / or vendor's efforts will
not be succesful in achieving Year 2000 compliance, the Company believes it
can develop and implement effective contingency plans in a timely manner.
Due to the general uncertainty inherent in the Year 2000 process,
primarily due to issues surrounding the Year 2000 readiness of third-party
suppliers and vendors, a reasonable worst case scenario is difficult to
determine at this time. The Company does not anticipate more than temporary
isolated disruptions attributed to Year 2000 issues to affect either the
Company or its primary vendors. The measurement of Year 2000 compliance
is necessarily fluid and management will continue to monitor the extent
of such compliance and its 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.
24
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.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, present positions and years of
service (in the case of members of management) of the directors and
management of Homeland:
Years with the
Company and/or
Age Position Safeway
John A. Shields* 55 Chairman of the --
Board, Director
David B. Clark* 46 President, Chief Executive 1
Officer and Director
Wayne S. Peterson* 41 Senior Vice President --
Finance, Chief Financial
Officer and Secretary
John C. Rocker 44 Vice President - Operations --
Steven M. Mason 44 Vice President - Marketing 28
Deborah A. Brown* 38 Vice President, Corporate 3
Controller, Treasurer and
Assistant Secretary
Prentess E. Alletag, Jr. 51 Vice President - Human 30
Resources
Robert E. (Gene) Burris 51 Director --
Edward B. Krekeler, Jr. 54 Director --
Laurie M. Shahon 47 Director --
William B. Snow 67 Director --
David N. Weinstein 39 Director --
* Holding's Board of Directors is identical to that of Homeland. Mr.
Shields serves as Holding's Chairman of the Board, Mr. Clark as
President and Chief Executive Officer, Mr. Peterson as Senior Vice
President - Finance, Chief Financial Officer and Secretary and Ms.
Brown as Vice President, Corporate Controller, Treasurer and
Assistant Secretary.
26
John A. Shields became a director of the Company in May 1993, Acting
Chairman of the Board in September 1997 and Chairman of the Board on July 9,
1998. From 1994 to 1997, Mr. Shields was the Chairman and Chief Executive
Officer of Delray Farms Fresh Markets. From 1983 to 1993, he was President
and Chief Executive Officer of First National Super Markets, Inc., a retail
grocery store chain. He is currently Chairman of the Board of Wild Oats
Markets, Inc., a publicly reporting health food supermarket and Director of
D.I.Y. Home Warehouse, Inc. and Shore Bank Corp., a publicly reporting bank.
David B. Clark became President, Chief Executive Officer and a
director of the Company in February 1998. From 1996 to February 1998, Mr.
Clark was Executive Vice President, Merchandising and Distribution, for
Bruno's, Inc., a $2.8 billion sales company with over 200 stores, having
joined in 1995 as Senior Vice President, Operations and Distribution. Bruno's
Inc. filed Chapter 11 bankruptcy on February 2, 1998. From 1992 through 1995,
Mr. Clark was Vice President, Operations and subsequently Executive Vice
President, Merchandising and Operations for the Cub Foods Division of Super
Valu, Inc., responsible for stores producing sales volume of $1.7 billion.
Mr. Clark is a director of Associated Wholesale Grocers, Inc.
Wayne S. Peterson joined the Company in October 1998 as Senior Vice
President - Finance, Chief Financial Officer, and Secretary. From October 1990
to October 1998, Mr. Peterson served as Director and Senior Vice President,
Chief Financial Officer and Secretary of Buttrey Food and Drug Stores Company.
John C. Rocker joined the Company in September 1998 as Vice President-
Operations. From October 1980 to September 1998, Mr. Rocker was with the
Kroger Company, most recently as Director of Human Resources, Labor Relations
and Safety.
Steven M. Mason joined Safeway in 1970 and the Oklahoma Division in
1986. At the time of the acquisition of the Oklahoma division of Safeway by
Homeland, he was serving as Special Projects Coordinator for the Oklahoma
Division. In November 1987, he joined Homeland and in October 1988, he was
appointed to the position of Vice President - Retail Operations. In October
1993, Mr. Mason was appointed to the position of Vice President - Marketing.
Deborah A. Brown joined the Company in November 1995 and became
Vice President, Corporate Controller, Treasurer and Assistant Secretary as
of June 1998. From October 1985 to January 1995, Ms. Brown served as
Consolidation Manager of Scrivner, Inc., the nations third larges grocery
wholesaler, prior to its acquisition by Fleming Co., Inc.
Prentess E. Alletag, Jr. joined the Oklahoma Division in October
1969, where, at the time of the acquisition of the Oklahoma division of
Safeway by Homeland, he was serving as Human Resources and Public Affairs
Manager. In November 1987, Mr. Alletag joined Homeland as Vice President -
Human Resources.
27
Robert E. (Gene) Burris became a director of the Company on August
2, 1996. Since 1988, Mr. Burris has been President of the UFCW Local No.
1000, which represents approximately 65% of the Company's unionized employees.
Pursuant to the Modified Union Agreements, the UFCW has the right to
designate one member of the Boards of Directors of Holding and Homeland. Mr.
Burris is the designee of the UFCW. Since February 1995, Mr. Burris has been
the Chief Executive Officer and owner of G&E Railroad, a retail store.
Edward B. Krekeler, Jr. became a director of the Company on August
2, 1996. Mr. Krekeler has been a senior product manager of First National
Bank of North Dakota since September 1997. From 1994 to August 1997, he was
the President of Krekeler Enterprises, Ltd., a corporate financial consulting
firm. From 1984 to 1994, he served in various positions as an officer of
Washington Square Capital, Inc., including Vice-President, Special
Investments, Vice-President, Administration, Private Placements, Vice-
President, Portfolio Manager, Private Placements, and Chief Investment Analyst.
From 1970 to 1984, Mr. Krekeler was Director, Fixed Income Investments, of
The Ohio National Life Insurance Company, Inc. He was Chairman of the Board
of Directors of Convenient Food Marts, Inc. from 1990 to 1994.
Laurie M. Shahon became a director of the Company on August 2, 1996.
Ms. Shahon has been President of Wilton Capital Group, a private direct
investment firm since January 1994. Ms. Shahon previously served as Vice
Chairman and Chief Operating Officer of Color Tile, Inc. in 1989. From 1988
to 1993, she served as Managing Director of 21 International Holdings, Inc.,
a private holding company. From 1980 to 1988, she was Vice President of
Salomon Brothers Inc, where she was founder and head of the retailing and
consumer products group. Ms. Shahon is a director of One Price Clothing
Stores, Inc. and Ames Department Stores, Inc.
William B. Snow became a director of the Company on August 2, 1996.
Mr. Snow previously served as Vice Chairman of Movie Gallery, Inc., the
second largest video specialty retailer in the United States from 1994 to
1997. From 1985 to 1994, he was Executive Vice President and a director of
Consolidated Stores Corporation. From 1980 to 1985, Mr. Snow was Chairman,
President and Chief Executive Officer of Amerimark, Inc., a diversified
supermarket retailer and institutional food service distributor. From 1974
to 1980, he was President of Continental Foodservice, Inc. From 1966 to 1974,
Mr. Snow was Senior Vice President of Hartmarx, Inc. Mr. Snow is a director
of Movie Gallery, Inc. and Action Industries, Inc.
David N. Weinstein became a director of the Company on August 2,
1996. He is a Managing Director of the High Yield Capital Markets group at
BancBoston Securities, Inc. From 1993 to March 1996, he served as a Managing
Director in the High Yield Capital Markets Group at Chase Securities, Inc.
Mr. Weinstein is also a director of Ithaca Industries, Inc.
28
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the 1934 Act requires directors, executive
officers and persons who are the beneficial owners of more than 10% of any
equity security of the Company to file reports with the Securities and Exchange
Commission.
The following directors and executive officers failed to file
timely reports under Section 16(a) with respect to the year ended January 2,
1999:
On May 27, 1998, John A. Shields purchased 1,000 shares of Common
Stock at a purchase price of $7.375 and 500 shares of Common Stock at a
purchase price of $7.00, and filed his Form 4 on July 10, 1998. David B. Clark
was awarded stock options amounting to 100,000 on February 17, 1998, and filed
his Form 3 on April 2, 1998. John C. Rocker was awarded stock options amounting
to 25,000 on September 14, 1998, and reported such acquisition on September
25, 1998, one day after the Form 3 was required to be filed. Prentess E.
Alletag, Jr. was awarded stock options amounting to 9,000 on May 13, 1998,
and filed his Form 4 on March 29, 1999. Steven N. Mason was awarded stock
options amounting to 13,000 on May 13, 1998 and filed his Form 4 on March 29,
1999.
29
ITEM 11. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company to, or on behalf of, the Company's
Chief Executive Officer and each of the three other most highly compensated
executive officers of the Company (hereinafter referred to as the "Named
Executive Officers") for the fiscal years ended January 2, 1999, January 3,
1998 and December 28, 1996:
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Long-Term
Principal Compensation All Other
Position Year Salary Bonus Option Awards Compensation
John A. Shields (1)(2)1998 $100,000 - 5,000 $ 34,250
Chairman 1997 28,846 - 15,000 25,000
1996 - - - 9,710
David B. Clark (3)
(4)(5) 1998 $216,346 $153,374 130,000 $ 52,591
President, Chief
Executive Officer
and Director
Steven M. Mason(6) 1998 $130,500 $ 57,942 13,000 $ 7,106
(9)(10 Vice - 1997 135,519 24,469 12,000 2,865
President/Marketing 1996 130,500 130,500 - 2,620
Prentess E. Alletag, 1998 $ 73,558 $ 32,689 9,000 $ 4,165
Jr. (7)(9)(10) Vice - 1997 72,663 13,147 12,000 4,234
President/Human 1996 66,150 36,383 - 4,086
Resources
Larry W. Kordisch(8) 1998 $ 61,539 $ - - $165,960
Former Exec. Vice - 1997 166,154 150,000 - 2,387
Pres. Finance, Chief 1996 150,000 150,000 62,500 1,539
Financial Officer and
Secretary
- ---------------
(1) Mr. Shields was Acting Chairman until July 1998 at which time he was
appointed Chairman. In 1998, he was compensated $100,000 per annum as
Chairman, $25,000 for special services and $9,250 for meeting fees and
retainer. In 1999, his Board stipend will be reduced 25% in January and
by 25% in June.
(2) Mr. Shields was awarded stock options pursuant to the 1997 Non-Employee
Directors Stock Option Plan in May 1998 amounting to 5,000 shares. The
options are exercisable ratably over two years commencing July 10, 1999,
and will expire July 10, 2008. Additionally, Mr. Shields was awarded
15,000 options in July 1997. The options are exercisable ratably over
three years commencing on the grant date and will expire July 15, 2007.
30
(3) Mr. Clark joined the Company in February 1998.
(4) Other compensation during 1998 for Mr. Clark includes principal and
interest forgiveness under that certain promissory note dated February
17, 1998 of $35,255; reimbursement of a portion of relocation expenses
of $12,933; auto allowance of $2,600; reimbursement for private life
incurance premium of $1,377; and company-provided life insurance
premium of $426.
(5) Mr. Clark was awarded stock options pursuant to the 1996 Stock Option
Plan in February 1998 amounting to 100,000 shares. The options are
exercisable ratably over five years commencing February 17, 1999, and
will expire on February 17, 2008. Additionally, Mr. Clark was awarded
30,000 options in June 1998. The options are exercisable ratably over
five years commencing June 1, 1999, and will expire June 1, 2008.
(6) Other compensation during 1998 for Mr. Mason includes personal use of a
Company automobile of $4,226; reimbursement for private life insurance
premium of $2,705; and, company-provided life insurance premium of $175.
(7) Other compensation during 1998 for Mr. Alletag includes reimbursement for
private life insurance premium of $4,027 and company-provided life
insurance premium of $138.
(8) Mr. Kordisch resigned from the Company on May 15, 1998, and continued as
a consultant through December 31, 1998. Other compensation during 1998
for Mr. Kordisch includes a lump sum payment of $63,333 and consulting
fees of $98,462 pursuant to that certain agreement dated April 28, 1998,
reimbursement for private life insurance premium of $4,027 and company-
provided life insurance premium of $138.
(9) Mr. Mason and Mr. Alletag were awarded stock options pursuant to the
Stock Option Plan in May 1997 amounting to 12,000 shares each. The options
are exercisable as of January 1, 1998, and will expire on May 13, 2007.
(10) Mr. Mason and Mr. Alletag were awarded stock options pursuant to the
Stock Option Plan in July 1998 amounting to 13,000 and 9,000 shares
respectively. The options are exercisable ratably over five years
commencing July 9, 1999, and will expire on July 9, 2008.
31
The following table sets forth certain information with respect to grants of
options to the Named Executive Officers during 1998:
Option Grants in Last Fiscal Year
Potential Realized Value at
Assumed Rates of Stock
Appreciation for
Individual Grants Option Terms
_____________________________________________________ _________________
Number of
Securities % of Total
Underlying Options Granted
Options to Employees Exercise Expiration
Name Granted in Fiscal Year Price Date 5% 10%
John S. Shields 5,000 1.7% $7.50 July 10, 2008 $ 23,584 $ 59,766
David B. Clark 100,000 34.6% $5.50 Feb. 17, 2008 $345,892 $876,558
David B. Clark 30,000 10.4% $3.625 June 1, 2008 68,392 173,319
Steven M. Mason 13,000 4.50% $7.625 May 13, 2008 62,339 157,979
Prentess E. Alletag,
Jr. 9,000 3.1% $7.625 May 13, 2008 43,158 109,371
Compensation of Directors
Since July 10, 1998, Non-Employee Directors are paid annual retainers
of $20,000 and $1,000 for each meeting of the Board or any Committee meeting
attended in person, but not to exceed $1,000 if more than one meeting is held
on the same day and $500 for each meeting of the Board or any Committee meeting
attended by telephonic conference call. Prior to July 10, 1998, Directors were
paid annual retainers of $15,000 and meeting fees of $1,000 for each meeting
of the Board or any Committee attended in person and $250 for each meeting
attended by telephone. In 1998, Mr. Shields and Ms. Shahon received a payment
of $25,000 each for special services rendered with respect to strategic
planning matters. Beginning with the July 1998 Board of Directors meeting,
Mr. Shields will be compensated for his services as Chairman in the amount of
$100,000 per annum, retroactive to October, 1997, in lieu of his Board stipend.
Mr. Shields' compensation as Chairman will be reduced 25% in January 1999
and by 25% in June 1999.
In 1997, with the approval of the Company's stockholders, the
Company established the Homeland Holding Corporation 1997 Non-Employee
Directors Stock Option Plan ("Directors Plan"). The maximum number of shares
of Common Stock which may be subject to options is 200,000. The Directors
Plan is administered by a committee appointed by the Board of Directors.
Options granted under this Plan are "non-qualified options." Any option
32
granted will terminate and expire at the earlier of (a) 10 years from date of
grant; (b) termination of optionee's directorship for cause; and (c) 45 days
after termination of service as director for other than a result of removal
for cause. As of July 15, 1997, each of the non-employee directors was
granted the option to purchase up to 15,000 shares of Common Stock of Holding
at $7 5/8 per share. The options granted become exercisable ratably over
3 years commencing on the grant date. As of May 26, 1998, each of the non-
employee directors was granted additional options on an annual basis under
the Directors Option Plan at the rate of 5,000 shares per year, such options
to be granted as of the close of business on the business day immediately
following each annual stockholders' meeting, commencing with the 1998 annual
stockholders' meeting on July 10, 1998. The additional options granted become
exercisable ratably over two years commencing on July 10, 1999.
Employment Agreements
On February 17, 1998, the Company entered into an employment
agreement with David B. Clark, the Company's President and Chief Executive
Officer, for an indefinite period. The agreement provides a base annual
salary of $250,000 subject to increase from time to time at the discretion of
the Board of Directors. Mr. Clark is also entitled to participate in the
Company's incentive plan with a target annual bonus of 75% of his base annual
salary. The agreement also provides for (a) relocation expenses of up to
$45,000 as it relates to the sale and relocation of his residence, such amounts
to be grossed up for any applicable income taxes; (b) a company car; (c) a
temporary residence in Oklahoma City up to six months; (d) reimbursement of
travel expenses up to two round trips per month; and (e) a loan of $125,000.
Under the agreement, Mr. Clark is entitled to participate in the Company's
employee benefit plans and programs generally available to employees and
senior executives, if any. At the commencement of Mr. Clark's employment, he
was granted options to purchase 100,000 shares of Common Stock of Holding at
an exercise price of $5.50 per share and on June 1, 1998, Mr. Clark was
granted additional options to purchase 30,000 shares of Common Stock of Holding
at an exercise price of $8.00 which was equal to the fair market value of the
Common Stock as of such date. This option agreement terminated on December
8, 1998, and was replaced by an Amended & Restated Stock Option Agreement
dated December 8, 1998, granting options to purchase 30,000 shares of Common
Stock of Holding at an exercise price of $3.625 per share. If the Company
terminates Mr. Clark's employment for any reason other than cause or disability
or his employment is terminated by Mr. Clark after February 16, 1999, following
a change of control or certain trigger events (each as defined), Mr. Clark will
be paid (a) his annual base salary, (b) a pro rata amount of incentive
compensation for the portion of the incentive year that precedes the date of
termination, and (c) continuation of welfare benefit arrangements for a period
of one year after the date of termination. Mr. Clark's loan of $125,000 from the
Company shall be deemed to be cancelled with all accrued interest if he remains
in continuous employment until February 16, 2001 or upon his termination of
employment on or after February 16, 1999, following a change in control or
trigger event.
33
On July 6, 1998, the Company entered into an employment agreement
with Wayne S. Peterson, the Company's Senior Vice President, Chief Financial
Officer and Secretary. The agreement was contingent upon the completion of
Mr. Peterson's commitments to Buttrey Food and Drug Stores Company. The
agreement provides for a base salary of $150,000, subject to increase from
time to time at the discretion of the Board of Directors. Mr. Peterson is also
entitled to participate in the Company's incentive plan with a target annual
bonus of 50% of his base annual salary. The agreement also provides for (a)
relocation expenses of up to $45,000 related to the relocation to the
Oklahoma City area, such amounts to be grossed up for any applicable income
taxes; (b) a company car or car allowance; (c) temporary residence and rental
car in Great Falls, Montana for up to three months upon acquisition of the
Oklahoma City residence; (d) reimbursement of travel expenses up to two round
trips per month; and (e) an executive term life insurance policy in the face
amount of $500,000. At the commencement of Mr. Peterson's employment on
October 19, 1998, he was granted options to purchase 50,000 shares of Common
Stock of Holding at an exercise price of $3.50 which was equal to the fair
market value of the Common Stock as of such date. If the Company terminates
Mr. Peterson's employment for any reason other than cause or disability, Mr.
Peterson will be paid (i) his base salary for one year and (ii) a lump sum
payment of an amount equal to the product of (A) Mr. Peterson's target bonus
under the Company's incentive bonus plan for the year in which 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 termination of employment
and the denominator of which is 365.
On September 14, 1998, the Company entered into an employment
agreement with John C. Rocker, the Company's Vice President of Operations. The
agreement provides for a base salary of $125,000, subject to increase from
time to time at the discretion of the Board of Directors. Mr. Rocker is also
entitled to participate in the Company's incentive plan with a target annual
bonus of 50% of his annual salary. Any bonus payable for the 1998 fiscal year
will be prorated for the partial 1998 year. The agreement also provides for
(a) signing bonus of $25,333; (b) relocation expenses of up to $40,000 as it
relates to the direct moving expenses related to his relocation to the
Oklahoma City area, such amounts to be grossed up for any applicable income
taxes; and (c) a company car or a car allowance. At the commensement of Mr.
Rocker's employment, he was granted options to purchase 25,000 shares of
Common Stock of Holding at an exercise price of $4.75 per share. If the
Company terminates Mr. Rocker's employment for any reason prior to December
31, 1999, for any reason other than cause or disability, Mr. Rocker will be
paid (i) his base salary for one year and (ii) a lump sum payment of an amount
equal to the product of (A) Mr. Rocker's target bonus under the Company's
incentive bonus plan for the year in which 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 termination of employment and the denominator
of which is 365.
34
On December 8, 1998, the Company entered into a letter agreement
regarding severance arrangements with Deborah A. Brown, the Company's Vice
President - Accounting, Corporate Controller, Treasurer and Assistant Secretary.
The agreement provides that in the event her employment is terminated prior
to December 31, 1999, for any reason other than cause or disability, the
Company will contine to pay her base salary for a period of one year plus a
pro rata target amount of the incentive compensation for the portion of the
incentive year that precedes the date of termination. The pro rata incentive
compensation is payable only in the event that the results of the Company are
such that the criteria for paying bonus has been achieved pursuant to the
Management Incentive Plan. Ms. Brown was also granted options on June 22, 1998,
to purchase 13,000 shares of Common Stock of Holding at an exercise price of
$6.125 per share which was equal to the fair value of the Common Stock as of
such date.
On December 8, 1998, the Company entered into a letter agreement
regarding severance arrangements with Prentess E. Alletag, Jr., the Company's
Vice President of Human Resources. The agreement provides that in the event
his employment is terminated prior to December 31, 1999, for any reason other
than cause or disability. the Company will continue to pay his base salary
for a period of one year plus a pro rata target amount of the incentive
compensation for the portion of the incentive that precedes the date of
termination. The pro rata incentive compensation is payable only in the event
that the results of the Company are such that the criteria for paying bonus
has been achieved pursuant to the Management Incentive Plan. Mr. Alletag was
also granted options on May 13, 1998, to purchase 9,000 shares of Common
Stock of Holding at an exercise price of $7.625 per share which was equal
to the fair market value of the Common Stock as of such date.
On December 8, 1998, the Company entered into a letter agreement
regarding severance arrangements with Steven N. Mason, the Company's Vice
President of Marketing. The agreement provides that in the event his employment
is terminated prior to December 31, 1999, for any reason other than cause or
disability, the Company will continue to pay his base salary for a period of
one year plus a pro rata target amount of the incentive compensation for the
portion of the incentive year that precedes the date of termination. The pro
rata incentive compensation is payable only in the event that the results of
the Company are such that the criteria for paying bonus has been achieved
pursuant to the Management Incentive Plan. Mr. Mason was also granted options
on May 13, 1998, to purchase 13,000 shares of Common Stock of Holding at an
exercise price of $7.625 per share which was equal to the fair market value
of the Common Stock as of such date.
On April 28, 1998, the Company entered into a letter agreement with
Larry W. Kordisch, the Company's former Executive Vice President - Finance,
Chief Financial Officer and Secretary, in connection with his termination of
employment with the Company. Pursuant to the terms of the letter agreement,
the Company agreed to provide Mr. Kordisch with the following: (a) reimbursement
of health insurance benefits under his current plan through December 31, 1998;
(b) a lump sum payment of $63,333; and (c) his company car.
35
Management Incentive Plan
Homeland maintains a Management Incentive Plan to provide incentive
bonuses for members of its management and key employees. During 1998, bonuses
were determined according to a formula based on both corporate, store and
individual performance and accomplishments or other achievements and are paid
only if minimum performance and/or accomplishment targets are reached. At
minimum performance level, the bonus payout ranges from 25% to 50% of
salaries for officers (as set forth in the plan), including the Chief
Executive Officer. Maximum bonus payouts range from 100% to 200% of salary
for officers and up to 150% of salary for the Chief Executive Officer.
Performance levels must significantly exceed target levels before the maximum
bonuses will be paid. Under limited circumstances, individual bonus amounts
can exceed these levels if approved by the Compensation Committee of the
Board. Incentive bonuses paid to managers and supervisors vary according to
their reporting and responsibility levels. The plan is administered by a
committee consisting, unless otherwise determined by the Board of Directors,
of members of the Board who are ineligible to participate in the plan.
Incentive bonuses earned for Named Executive Officers under the plan for
performance during fiscal year 1998 are included in the Summary Compensation
Table.
Retirement Plan
Homeland maintains a retirement plan in which all non-union
employees, including members of management, participate. Under the plan,
employees who retire at or after age 65 and after completing five years of
vesting service (defined as calendar years in which employees complete at
least 1,000 hours of service) will be entitled to retirement benefits equal
to 1.50% of career average annual compensation (including basic, overtime and
incentive compensation) plus .50% of career average annual compensation in
excess of the social security covered compensation, such sum multiplied by
years of benefit service (not to exceed 35 years). Retirement benefits will
also be payable upon early retirement beginning at age 55, at rates
actuarially reduced from those payable at normal retirement. Benefits are paid
in annuity form over the life of the employee or the joint lives of the
employee and his or her spouse or other beneficiary.
Under the retirement plan, estimated annual benefits payable to the
Named Executive Officers of the Company upon retirement at age 65, assuming no
changes in covered compensation or the social security wage base, would be
as follows: David B. Clark, $53,002; Steven M. Mason, $88,392; and Prentess
E. Alletag, Jr., $38,793.
Management Stock Option Plan
In December 1996, pursuant to the Plan of Reorganization, the Board
of Directors adopted the Homeland Holding Corporation 1996 Stock Option Plan
(the "Stock Option Plan"). The Stock Option Plan, which is
36
administered by the Compensation Committee, provides for the granting of options
to purchase up to an aggregate of up to 432,222 shares of Common Stock. Options
granted under the Stock Option Plan are "non-qualified options." The option
price of each option must not be less than the fair market value as determined
by the Board or the Committee. Unless the Board or the Committee otherwise
determines, options shall become exercisable ratably over a five-year period or
immediately in the event of a "change of control" as defined in the Stock Option
Plan. Each option must be evidenced by a written agreement and must expire and
terminate on the earliest of (a) ten years from the date the option is granted
(b) termination for cause and (c) three months after termination for other than
cause.
Compensation Committee Report
The Compensation Committee is composed entirely of non-employee
directors. The Compensation Committee reviews and approves all compensation
arrangements for executive officers and in that regard, has developed
compensation policies for the executive which seek to enhance the profitability
of the Company and to assure the ability of the Company to attact and retain
executive employees with competitive compensation. Actions by the Compensation
Committee are reported to the Board of Directors and, in appropriate cases,
ratified by the Board of Directors prior to implementation.
The compensation program of the Company seeks specifically to motivate
the executives of the Company to achieve objectives which benefit the Company
within their respective areas of responsibility, with particular emphasis on
continued growth in revenues, expense control, operating efficiency, and the
ultimate realization of profits for the Company.
Base salary levels for the Company's executive officers, including
the Chief Executive Officer, are set so that the overall cash compensation
package for executive officers, including bonus opportunity, compares reasonably
to companies with which the Company competes for executive talent. In
determining salaries, the Compensation Committee also takes into account a
number of factors, which primarily include experience and performance, the
officer's level of responsibility, the cost of living and historical salary
levels. The measures of individual performance considered include, to the extent
applicable to an individual executive officer, a number of quantitative and
qualitative factors such as the Company's financial performance, the
individual's achievement of particular nonfinancial goals within his or her
responsibility and other contributions made by the officer to the Company's
success.
In addition to base salary, certain executives, including the Chief
Executive Officer, may earn an incentive of up to 150% of such executive's
base pay. The compensation policies of the Company are general and subjective
both as to salary and as to the other components of the compensation program.
The Company's compensation program also includes benefits typically offerred
to executives of similar businesses to promote management stability, consisting
of a retirement plan, stock option plan and employment agreements.
37
Performance Graph
Shown below is a line graph comparing cumulative total shareholder
return for the Company, the S&P Retail Stores (Food), and the S&P 500
since April 14, 1997.
Comparison of the Cumulative Total Return* -- Homeland Holding Corporation,
S&P 500 Retail Food Stores, and S&P 500
Homeland -- S&P 500 Retail -- S&P 500
[GRAPHS APPEARS HERE]
Date Homeland S&P 500 Retail S&P 500
04/97 $100.00 $100.00 $100.00
01/98 78.79 133.18 130.48
01/99 41.67 190.32 165.28
*Total return assumes reinvestment of dividends on quarterly basis.
Note: Companies comprising the S&P Retail Stores (Food) Index include:
Albertson's Inc.; American Stores Co.; Great Atlantic & Pacific Tea Co.;
Kroger Co.; Fred Meyer Inc.; Safeway Inc.; and Winn-Dixie Stores Inc.
Compensation Committee Interlocks and Insider Participation
None of the persons serving on the Compensation Committee during
fiscal year 1998 was an officer or an employee of the Company or Stores or
was formerly an officer or an employee of the Company or Stores. There are
no interlocks with respect to the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Under the Company's Plan of Reorganization, each holder of a general
unsecured claim against the Company, including $40.1 million of general
unsecured claims in respect of the Old Notes, will receive its ratable share
of 4,450,000 shares of Common Stock, based on the amount of such holder's
claim relative to all general unsecured claims. As of March 24, 1998, the
final amount of the general unsecured claims has not been determined.
38
Under the Plan of Reorganization, the Company has reserved for the
account of each creditor holding a disputed general unsecured claim the
Common Stock that would otherwise be distributable to such creditor on the
Effective Date if such disputed claim were allowed by the Bankruptcy Court.
If a disputed claim is disallowed in whole or in part, the Company will
distribute the Common Stock held in reserve ratably to holders of general
unsecured claims allowed by the Bankruptcy Court. Such distribution will be
made on June 30 and December 31 of each following year until the earlier of
(a) the date on which all disputed claims have been resolved or (b) less than
5,000 shares of Common Stock are on deposit in the disputed claims reserve.
If any time after the Effective Date, the number of shares of Common Stock in
the disputed claims reserve is less than 5,000, the remaining shares of
Common Stock held in such reserve will, at the Company's option, be cancelled
or treated as treasury shares.
The Company estimates that total general unsecured claims will be
approximately $63.1 million, consisting of approximately $40.1 million in
general unsecured claims in respect of the Old Notes and approximately $23.0
million of other general unsecured claims. Based on such estimate (a) holders
of the Old Notes received (in the aggregate) approximately 2,827,922
shares of Common Stock representing approximately 60.2% of the Common Stock
outstanding upon consummation of the Restructuring and (b) holders of the other
general unsecured claims received (in the aggregate) approximately 1,622,029
shares of Common Stock representing approximately 34.5% of the Common Stock
outstanding upon consummation of the Restructuring.
In addition, under the Plan of Reorganization, all of the Company's
issued and outstanding Class A Common Stock, par value $.01 per share (the
"Old Common Stock"), was exchanged for (a) an aggregate of 250,000 shares
of Common Stock, representing approximately 5.3% of the Common Stock
outstanding, and (b) warrants to purchase (in the aggregate) up to 263,158
shares of Common Stock (the "New Warrants") at an exercise price of $11.85
per share. Each holder of the Old Common Stock received 7.73 shares of
Common Stock and 8.14 New Warrants for each 1,000 shares of Old Common Stock
held by such holder.
39
Set forth below is certain information as of March 24, 1999,
regarding the beneficial ownership of Holding's Common Stock by: (a) any
person or group known to have beneficial ownership of more than 5% of the
Common Stock of Holding; (b) each of the Named Executive Officers; (c) each
director; (d) other officers of the Company and (e) all directors, Named
Executive Officers and officers as a group:
Shares
Beneficially Percent of
Name of Beneficial Owner Owned** Class
Soros Fund Management, LLC (1) 666,700 12.61%
888 Seventh Avenue, 33rd Floor
New York, NY 10106
Jeffrey D. Tannebaum (2) 562,195 10.63%
Fir Tree Partners
1211 Avenue of the Americas
New York, NY 10036
John A. Shields (3)(4) 63,961 1.21%
David B. Clark (5)(6) 22,700 *
Steve M. Mason (7)(8) 15,265 *
Prentess E. Alletag, Jr. (9)(10) 15,193 *
Robert E. (Gene) Burris (3) 10,000 *
Edward B. Krekeler, Jr. (3)(13) 10,270 *
Laurie M. Shahon (3)(11) 15,000 *
William B. Snow (3) 10,000 *
David N. Weinstein (3)(12) 11,000 *
Officers and directors as a group
(12 persons) 201,389 3.81%
______________________
* Less than 1%
** Shares benefically owned reflect common stock owned and vested options
including options that will vest within sixy days of the date hereof.
(1) Based on the Schedule 13G filed by Soros Fund Management LLC,
these shares are held for the accounts of Quantum Partners (as
defined below) and Quasar Partners (as defined below). Soros Fund
Management LLC, a Delaware limited liability company, serves as
principal investment manager to Quantum Partners LDC, a Cayman
Island exempted duration company ("Quantum Partners"), and Quasar
International Partners, C.V., a Netherlands Antilles limited
partnership ("Quasar Partners"), and as such, has been granted
investment discretion over the shares of Holding.
(2) Based on the Schedule 13F filed by Mr. Jeffrey Tannebaum and Fir
Tree Partners, these shares are for the accounts of Fir Tree Value
Fund, L.P., Fir Tree Institutional Value Fund, L.P. and Fir Tree
Value Partners LDC. Mr. Tannebaum is the sole shareholder, officer,
director and principal of Fir Tree Partners and he serves as
general partner of the Fir Tree Value Fund L.P. and the Fir Tree
Institutional Value Fund L.P. and as an investment advisor to the
Fir Tree Value Partners LDC.
40
(3) Stock options for 15,000 shares, of which 10,000 shares are
exercisable, were granted to each director under the Directors Plan in
1997. The options are exercisable ratably over three years commencing
July 15, 1997, and will expire on July 14, 2007. In July 1998,
additional stock options of 5,000 shares were granted to each
director under the Directors Plan. The options are exercisable
ratably over two years commencing July 10, 1999, and will expire on
July 10, 2008.
(4) Mr. Shields is the beneficial owner of 53,961 shares of Common Stock.
(5) Mr. Clark was awarded options to purchase 100,000 shares, of which
20,000 shares are exercisable under the Stock Option Plan as provided
for under his employment agreement with the Company. The options
become exercisable ratably over five years commencing February 17,
1999, and will expire on February 17, 2008. Mr. Clark was granted
additional stock options of 30,000 shares on June 1, 1998. This
option agreement terminated on December 8, 1998, and was replaced by
the Amended & Restated Stock Option Agreement dated December 8, 1998,
granting Mr. Clark options to purchase 30,000 shares of Common Stock
of Holding at an exercise price of $3.625 per share. The options
become exercisable ratably over five years commencing June 1, 1999,
and will expire on June 1, 2008.
(6) Mr. Clark is the beneficial owner of 2,700 shares of Common Stock.
(7) Mr. Mason was awarded options in May 1997 to purchase 12,000 shares
shares under the Stock Option Plan. The options are exercisable as of
January 1, 1998, and will expire on May 13, 2007. Mr. Mason was
awarded options in July 1998 to purchase 13,000 shares under the
Stock Option Plan. The options are exercisable as of May 13, 1999,
and will expire on July 9, 2008.
(8) Mr. Mason is the beneficial owner of 324 shares of Common Stock and
341 New Warrants.
(9) Mr. Alletag was awarded options in May 1997 to purchase 12,000 shares
under the Stock Option Plan. The options are exercisable as of
January 1, 1998, and will expire on May 13, 2007. Mr. Alletag was
awarded options in July 1998 to purchase 9,000 shares under the Stock
Option Plan. The options are exercisable as of May 13, 1999, and
will expire on July 9, 2008.
(10) Mr. Alletag is the beneficial owner of 986 shares of Common Stock
and 407 New Warrants.
(11) Ms. Shahon is the beneficial owner of 5,000 shares of Common Stock.
(12) Mr. Weinstein is the beneficial owner of 1,000 shares of Common Stock.
(13) Mr. Krekeler is the beneficial owner of 270 shares of Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Gene Burris, a director of the Company, is President of UFCW
Local No. 1000, which represents approximately 91% of the Company's unionized
employees. Pursuant to the Modified Union Agreements, the UFCW has the right
to designate one member of the Board of Directors of Holding and Homeland.
Mr. Burris is the designee of the UFCW.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this Report:
(a) Financial Statements and Exhibits.
1. Financial Statements. The Company's financial statements
are included in this report following the signature pages.
See Index to Financial Statements and Financial Statement
Schedules on page F-1.
2. Exhibits. See attached Exhibit Index on page E-1.
(b) Reports on Form 8-K. No reports on Form 8-K were filed
during the last quarter of the period
covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
HOMELAND HOLDING CORPORATION
Date: April 2, 1999 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 April 2, 1999
John A. Shields
/s/ David B. Clark President, Chief Executive April 2, 1999
David B. Clark Officer and Director
(Principal Executive Officer)
/s/ Wayne S. Peterson Senior Vice President/ April 2, 1999
Wayne S. Peterson Finance, C.F.O. and Secretary
(Principal Financial Officer)
/s/ Deborah A. Brown Vice President, Controller, April 2, 1999
Deborah A. Brown Treasurer and Asst. Secretary
(Principal Accounting Officer)
II-1
Signature Title Date
/s/ Robert E. (Gene) Burris Director April 2, 1999
Robert E. (Gene) Burris
/s/ Edward B. Krekeler, Jr. Director April 2, 1999
Edward B. Krekeler, Jr.
/s/ Laurie M. Shahon Director April 2, 1999
Laurie M. Shahon
/s/ William B. Snow Director April 2, 1999
William B. Snow
/s/ David N. Weinstein Director April 2, 1999
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 2, 1999,
and January 3, 1998 F-3
Consolidated Statements of Operations
for the 52 weeks ended January 2, 1999, and
53 weeks ended January 3, 1998, and the
20 weeks ended December 28, 1996
(Successor Company), and the 32 weeks ended
August 10, 1996, 1996 (Predecessor Company) F-5
Consolidated Statements of Stockholders' Equity
for the 52 weeks ended January 2, 1999, and 53 weeks
ended January 3, 1998, and the 20 weeks ended
December 28, 1996 (Predecessor Company), and the
32 weeks ended August 10, 1996 (Predecessor Company) F-6
Consolidated Statements of Cash Flows for the 52 weeks
ended January 2, 1999, and 53 weeks ended January 3,
1998, and the 20 weeks ended December 28, 1996
(Successor Company), and the 32 weeks ended
August 10, 1996 (Predecessor Company) F-7
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Homeland Holding Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Homeland
Holding Corporation and its subsidiaries, (the "Company") at January 2, 1999
and January 3, 1998, and the results of their operations and their cash flows
for the 52 weeks ended January 2, 1999, the 53 weeks ended January 3, 1998,
the 20 weeks ended December 28, 1996, and the 32 weeks ended August 10, 1996,
in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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
Oklahoma City, Oklahoma
March 3, 1999
F-2
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
January 2, January 3,
1999 1998
Current assets:
Cash and cash equivalents $ 7,856 $ 4,778
Receivables, net of allowance for uncollectible
accounts of $972 and $1,198 9,961 9,313
Inventories 46,280 45,946
Prepaid expenses and other current assets 2,527 2,581
Total current assets 66,624 62,618
Property, plant and equipment:
Land and land improvements 9,346 9,303
Buildings 20,216 19,995
Fixtures and equipment 28,466 22,267
Leasehold improvements 17,488 13,459
Software 5,396 4,991
Leased assets under capital leases 9,053 8,610
Construction in progress 3,278 2,769
93,243 81,394
Less, accumulated depreciation
and amortization 20,832 11,299
Net property, plant and equipment 72,411 70,095
Reorganization value in excess of amounts
allocable to identifiable assets, less
accumulated amortization of $34,018 and
$20,346 at January 2, 1999, and January 3,
1998, respectively 7,791 23,162
Other assets and deferred charges 12,378 10,166
Total assets $ 159,204 $ 166,041
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 2, January 3,
1999 1998
Current liabilities:
Accounts payable - trade $ 20,267 $ 18,941
Salaries and wages 2,827 2,508
Taxes 3,093 3,605
Accrued interest payable 2,622 2,619
Other current liabilities 8,548 10,042
Current portion of long-term debt 1,728 1,728
Current portion of obligations under capital
leases 1,235 1,286
Total current liabilities 40,320 40,729
Long-term obligations:
Long-term debt 83,852 78,353
Obligations under capital leases 1,700 2,608
Other noncurrent liabilities 1,464 2,027
Total long-term obligations 87,016 82,988
Commitments and contingencies - -
Stockholders' equity:
Common stock $0.01 par value, authorized
- 7,500,000 shares, issued 4,904,417 shares
and 4,820,637 shares at January 2, 1999, and
January 3, 1998, respectively 49 48
Additional paid-in capital 56,174 56,040
Accumulated deficit (24,355) (13,764)
Total stockholders' equity 31,868 42,324
Total liabilities and stockholders' equity $ 159,204 $ 166,041
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)
Successor Company Predecessor
Company
52 weeks 53 weeks 20 weeks 32 weeks
ended ended ended ended
January 2, January 3, December 28, August 10,
1999 1998 1996 1996
Sales, net $ 529,576 $ 527,993 $ 204,026 $ 323,747
Cost of sales 402,261 401,691 154,099 244,423
Gross profit 127,315 126,302 49,927 79,324
Selling and administrative expenses 114,335 112,590 43,995 73,183
Amortization of excess reorganization value 13,672 14,527 5,819 -
Operating profit (loss) (692) (815) 113 6,141
Gain(loss) on disposal of assets 34 (117) (90) 114
Interest income 426 385 56 69
Interest expense (8,484) (8,408) (3,199) (5,639)
Income (loss) before reorganization items,
income taxes and extraordinary items (8,716) (8,955) (3,120) 685
Reorganization items:
Allowed claims in excess of liabilities - - - 7,200
Professional fees - - - 4,250
Employee buyout expense - - - 6,386
Adjustments of accounts to estimated
fair value - - - 8,160
- - - 25,996
Income tax provision (1,875) (1,689) - -
Loss before extraordinary items (10,591) (10,644) (3,120) (25,311)
Extraordinary item - debt discharge - - - 63,118
Net income (loss) $ (10,591) $ (10,644) $ (3,120) $ 37,807
Basic and diluted earnings per share:
Loss before extraordinary items per
common share $ (2.18) $ (2.23) $ (0.66) $ (0.78)
Extraordinary items per common share - - - 1.94
Net income (loss) per common share $ (2.18) $ (2.23) $ (0.66) $ 1.16
Weighted average shares outstanding 4,857,130 4,782,938 4,758,025 32,599,707
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)
Common Stock Additional
Successor Predecessor Paid-In Accumulated
Shares Shares Amount Capital Deficit
Balance, December 30, 1995 - 33,748,482 $ 337 $ 55,886 $ (80,188)
Net income - - - - 37,807
Eliminate predecessor equity - (33,748,482) (337) (55,886) (2,637)
Issuance of successor's common stock 4,758,025 - 48 56,013 -
Adjustment to eliminate
minimum pension liability - - - - -
Record excess of
reorganization value - - - - 45,018
Balance, August 10, 1996 4,758,025 - 48 56,013 -
Net loss - - - - (3,120)
Balance, December 28, 1996 4,758,025 - 48 56,013 (3,120)
Net loss - - - - (10,644)
Issuance of common stock 62,612 - - 27 -
Balance, January 3, 1998 4,820,637 - $ 48 $ 56,040 $ (13,764)
Net loss - - - - (10,591)
Issuance of common stock 83,780 - 1 134 -
Balance, January 2, 1999 4,904,417 - $ 49 $ 56,174 $ (24,355)
Continued
HOMELAND HOLDING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
Minimum
Pension Total
Liability Treasury Stock Stockholders'
Adjustment Shares Amount Equity(Deficit)
Balance, December 30, 1995 $ (1,327) 2,869,493 $ (2,814) $ (28,106)
Net income - - - 37,807
Eliminate predecessor equity - (2,869,493) 2,814 (56,046)
Issuance of successor's common stock - - - 56,061
Adjustment to eliminate
minimum pension liability 1,327 - - 1,327
Record excess of
reorganization value - - - 45,018
Balance, August 10, 1996 - - - 56,061
Net loss - - - (3,120)
Balance, December 28, 1996 - - - 52,941
Net loss - - - (10,644)
Issuance of common stock - - - 27
Balance, January 3, 1998 - - - 42,324
Net loss - - - (10,591)
Issuance of common stock - - - 135
Balance, January 2, 1999 $ - - $ - $ 31,868
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)
Successor Company Predecessor
Company
52 weeks 53 weeks 20 weeks 32 weeks
ended ended ended ended
January 2, January 3, December 28, August 10,
1999 1998 1996 1996
Cash flows from operating activities:
Net income (loss) $ (10,591) $ (10,644) $ (3,120) $ 37,807
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 9,802 8,404 2,954 4,163
Amortization of beneficial interest
in operating leases 121 121 51 75
Amortization of excess reorganization
value 13,672 14,527 5,819 -
Amortization of financing costs 120 64 24 359
Reorganization items - - - 15,360
Extraordinary gain on debt discharged - - - (63,118)
Loss (gain) on disposal of assets (34) 117 90 (114)
Deferred income taxes 1,699 1,589 - -
Change in assets and liabilities:
Increase in receivables (648) (791) (439) (32)
(Increase) decrease in inventories (334) (937) (6,225) 3,754
(Increase) decrease in prepaid ex-
penses and other current assets 54 179 531 (83)
Increase in other assets
and deferred charges (2,487) (2,722) (3,110) (649)
Increase in accounts
payable - trade 1,326 1,525 2,460 298
Increase (decrease) in salaries
and wages 319 (991) 846 105
Increase (decrease) in taxes (512) 702 (2,198) 226
Increase (decrease) in accrued
interest payable 3 (70) 2,672 3,823
Increase (decrease) in other current
liabilities (1,494) 1,572 (1,181) (2,656)
Decrease in restructuring reserve - - - (1,396)
Increase (decrease) in other non-
current liabilities (531) (283) 122 (886)
Net cash provided by (used in)
operating activities 10,485 12,362 (704) (2,964)
Continued
The accompanying notes are and 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)
Successor Company Predecessor
Company
52 weeks 53 weeks 20 weeks 32 weeks
ended ended ended ended
January 2, January 3, December 28, August 10,
1999 1998 1996 1996
Cash flows from investing activities:
Capital expenditures (12,404) (14,021) (5,085) (1,860)
Cash received from sale of assets 775 70 5 1,738
Net cash used in in investing
activities (11,629) (13,951) (5,080) (122)
Cash flows from financing activities:
Borrowings under term loan - - - 10,000
Payments under term loan (1,667) (833) - -
Borrowings under revolving credit loans 129,567 141,463 42,349 74,250
Payments under revolving credit loans (122,340) (134,106) (39,080) (79,718)
Principal payments under notes payable (61) (61) - -
Principal payments under capital
lease obligations (1,412) (1,615) (700) (1,596)
Payment of obligations to noteholders - - - (1,500)
Proceeds from issuance of common stock 135 27 - -
Net cash provided by financing
activities 4,222 4,875 2,569 1,436
Net increase (decrease) in cash and
cash equivalents 3,078 3,286 (3,215) (1,650)
Cash and cash equivalents at beginning
of period 4,778 1,492 4,707 6,357
Cash and cash equivalents at end of period $ 7,856 $ 4,778 $ 1,492 $ 4,707
Supplemental information:
Cash paid during the period for
interest $ 8,419 $ 8,414 $ 524 $ 1,566
Cash paid during the period for
income taxes $ 100 $ 100 $ - $ -
Supplemental schedule of
non-cash investing activities:
Capital lease obligations assumed $ 453 $ 1,161 $ - $ -
The accompanying notes are an integral part
of these consolidated financial statements
F-8
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. Organization:
Homeland Holding Corporation ("Holding"), a Delaware corporation, was
incorporated on November 6, 1987, but had no operations prior to November
25, 1987. Effective November 25, 1987, Homeland Stores, Inc. ("Homeland"),
a wholly-owned subsidiary of Holding, acquired substantially all of the
net assets of the Oklahoma Division of Safeway Inc. Holding, its
consolidated subsidiary, Homeland, and Homeland's wholly-owned subsidiary,
SLB Marketing, Inc. are collectively referred to herein as the "Company."
The Company is a leading supermarket chain in the Oklahoma, southern Kansas
and Texas Panhandle retion. 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 2, January 3,
1999 1998
Homeland stockholder's equity:
Common stock, $.01 par value,
authorized, issued and
outstanding 100 shares $ 1 $ 1
Additional paid-in capital 56,222 56,087
Accumulated deficit (24,355) (13,764)
Total Homeland stockholder's
equity $ 31,868 $ 42,324
2. Reorganization:
On May 13, 1996, the Company filed Chapter 11 petitions with the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). Simultaneous with the filing of such petitions, the Company
filed a plan of reorganization and a disclosure statement, which set
forth the terms of the Company's restructuring (the "Restructuring").
On June 13, 1996, the Company filed a first amended plan of
reorganization and disclosure statement. The Company's
F-9
2. Reorganization, continued:
first amended plan of reorganization, as modified (the "Plan"), was
confirmed by the Bankruptcy Court on July 19, 1996 and became effective
on August 2, 1996 (the "Effective Date").
On the Effective Date, each of Holding and Homeland adopted amended and
restated certificates of incorporation, the principal effects of which
were: (a) eliminate the old common stock (the "Old Common Stock") and old
class B common stock of Holding, (b) authorize 7,500,000 shares of new
common stock of Holding (the "New Common Stock") and (c) include a
provision to prohibit the issuance of non-voting securities as and to the
extent required by Section 1123 (a) (6) of the Bankruptcy Code for both
Homeland and Holding.
As of the Effective Date, the outstanding $59,375 of Series C Senior
Secured Fixed Rate Notes due 1999, $26,126 of Series D Senior Secured
Floating Rate Notes due 1997 and $9,499 of Series A Senior Secured
Floating Rate Notes due 1997, (collectively, the "Old Notes"),
($95,000 in aggregate face amount plus accrued interest), were cancelled
and such holders received (in the aggregate) $60,000 face amount of
newly-issued 10% Senior Subordinated Notes due 2003 (the "New Notes"),
$1,500 in cash and approximately 60% of the New Common Stock. The New
Notes are unsecured and bear interest at 10% per annum and mature in 2003.
As of the Effective Date, all of the outstanding Old Common Stock of
Holding was canceled and the holders received their ratable share of (a)
250,000 shares of New Common Stock and (b) warrants to purchase up to
263,158 shares of New Common Stock at an exercise price of $11.85. Each
warrant entitles the holder to purchase one share of New Common Stock at
any time up to August 2, 2001. Holders of general unsecured claims
(including certain trade creditors for unpaid prepetition trade claims
and the allowed unsecured noteholders' claims) are entitled to receive
their ratable share of 4,450,000 shares of New Common Stock.
As of the Effective Date, the Company entered into a bank credit agreement
with a group of lenders (the "Old Loan Agreement") consisting of a
revolving credit facility of up to $27,500 (subject to a borrowing base
requirement) and a term loan facility of $10,000.
F-10
2. Reorganization, continued:
On the Effective Date, the modified union agreements negotiated with the
Company's labor unions (the "Modified Union Agreements") became
effective. The Modified Union Agreements, which are effective for a
term of five years, consist of five basic elements: (a) wage rate and
benefit contribution reductions and work rule changes, (b) an employee
buyout offer, (c) the establishment of an employee stock bonus plan
which will entitle plan participants to receive/purchase up to 522,222
shares of New Common Stock, (d) the right to designate one member of
the Board of Directors, and (e) the elimination of certain wage
reinstatement provisions, incentive plans and "maintenance of benefits."
The Company's Restructuring was accounted for in accordance with the
American Institute of Certified Public Accountants Statement of Position
No. 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP No. 90-7"). The accounting under SOP No. 90-7
resulted in "fresh-start" reporting for the Company in which a new entity
was created for financial reporting purposes. The Company applied the
provisions of SOP No. 90-7 as the holders of the Old Common Stock
received less than 50% of the New Common Stock and the reorganized value
of the assets of the reorganized Company is less than the total of all
post-petition liabilities and allowed claims.
For financial reporting purposes, the Company accounted for the
consummation of the Restructuring effective August 10, 1996, which is the
Company's normal four week period ending date. The periods prior to the
Effective Date have been designated "Predecessor Company" and the periods
subsequent to the Effective Date have been designated "Successor
Company." As a result of the adoption of the "fresh-start" reporting,
the Successor Company's financial statements are not comparable to the
Predecessor Company's financial statements.
In accordance with SOP No. 90-7, the Company valued its assets and
liabilities at their estimated fair value and eliminated its accumulated
deficits on the Effective Date. The total reorganization value of the
reorganized Company was determined by analyzing market cash flow
multiples as applied to the Company's projected annual cash flows as
well as comparing the reorganization value to a discounted projected
cash flow calculation. Based on analyses prepared by the Company's
financial advisor and by the financial advisor to the ad hoc committee
of noteholders, the total reorganization value was agreed to by the
parties and confirmed by the Bankruptcy Court. The total reorganization
value as of the Effective Date was estimated to be $167.4 million,
which was $45.4 million in excess of the Company's tangible and
identifiable assets. The excess of the reorganization value over the
value of the identifiable assets is reported as "Reorganization value
in excess of amounts allocable to identifiable assets" and is being
amortized on a straight-line basis over a three year period.
F-11
2. Reorganization, continued:
The components of reorganization items and gain recognized on debt
discharged resulting from the Restructuring are as follows:
(i) Reorganization items:
Fresh-start reporting
Allowed claims in excess of recorded
liabilities $ 7,200
Revaluation of property, plant and
equipment, net 4,004
Other adjustments to estimated fair value 4,156
Total fresh-start 15,360
Employee buyout expense 6,386
Professional fees incurred with
the Restructuring 4,250
Total reorganization items $ 25,996
(ii) Gain on debt discharged:
Elimination of Old Notes and accrued interest $ 101,697
Elimination of other liabilities 22,921
Cash payment to holders of Old Notes (1,500)
Issuance of New Notes (60,000)
Gain on debt discharged $ 63,118
3. Summary of Significant Accounting Policies:
Fiscal year - The Company has adopted a fiscal year which ends on the
Saturday nearest December 31. Fiscal 1996 includes the 32 weeks prior to
the Effective Date which has been designated "Predecessor Company" and
the 20 weeks subsequent to the Effective Date which has been designated
"Successor Company."
Basis of consolidation - The consolidated financial statements include
the accounts of Homeland Holding Corporation and its wholly-owned
subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.
Revenue recognition - The Company recognizes revenue at the "point of
sale," which occurs when groceries and related merchandise are sold to
its customers.
F-12
3. Summary of Significant Accounting Policies, continued:
Concentrations of credit and business risk - Financial instruments which
potentially subject the Company to concentrations of credit risk consist
principally of temporary cash investments and receivables. The Company
places its temporary cash investments with high quality financial
institutions. Concentrations of credit risk with respect to receivables
are limited due to the diverse nature of those receivables, including a
large number of retail customers within the region and receivables from
vendors throughout the country. The Company purchases approximately 70%
of its products from Associated Wholesale Grocers, Inc. ("AWG").
Although there are similar wholesalers that could supply the Company
with merchandise, if AWG were to discontinue shipments, this could have
a material adverse effect on the Company's financial condition.
Inventories - Inventories are stated at the lower of cost or market,
with cost being determined primarily using the gross margin method.
Property, plant and equipment - As discussed in Note 2, in conjunction
with the emergence from Chapter 11 proceedings, the Company implemented
"fresh-start" reporting and, accordingly, all property, plant and
equipment was restated to reflect reorganization value, which
approximates fair value in continued use. 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-13
3. Summary of Significant Accounting Policies, continued:
Reorganization value in excess of amounts allocable to identifiable assets
- The Company's reorganization value in excess of amounts allocable to
identifiable assets, established in accordance with "fresh start"
reporting (see Note 2), is being amortized on a straight-line basis over
three years.
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 lease-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 excess reorganization value, are reviewed for impairment and
written down to fair value whenever events or changes in circumstances
indicate that the carrying value may not be recovable.
Other assets and deferred charges - Other assets and deferred charges
consist primarily of patronage refund certificates issued by AWG as part
of its year-end distribution of income from AWG's cooperative operations
and beneficial interests in operating leases amortized on a straight-line
basis over the remaining terms of the leases, including all available
renewal option periods. The AWG patronage refund certificates bear annual
interest of 6% and are redeemable for cash seven years from the date of
issuance. The carrying value of certificates, including those earned not
yet received, at 1998 and 1997 was $9,119, and $6,669, 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). Earnings (loss) per
share data is not meaningful for periods prior to the Effective Date due
to the significant change in the Company's capital structure.
Cash and cash equivalents - For purposes of the statements of cash flows,
the Company considers all short-term investments with an original
maturity of three months or less when purchased to be cash equivalents.
Advertising costs - Costs of advertising are expensed as incurred. Gross
advertising costs for 1998, 1997 and 1996, were $8,349, $7,906 and
$8,453, respectively.
Income taxes - The Company provides for income taxes based on enacted
tax laws and statutory tax rates at which items of income and expense
are expected to be settled in the Company's income tax return. Certain
items of revenue and expense are reported for Federal income tax purposes
in different periods than for financial reporting purposes, thereby
F-14
resulting in deferred income taxes. Deferred taxes also are recognized
for operating losses that are available to offset future taxable income
and tax credits that are available to offset future Federal income taxes.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized.
3. Summary of Significant Accounting Policies, continued:
Self-insurance reserves - The Company is self-insured for property loss,
general liability and automotive liability coverage subject to specific
retention levels. Estimated costs of these self-insurance programs are
accrued based on projected settlements for claims using actuarially
determined loss development factors based on the Company's prior
experience with similar claims. Any resulting adjustments to previously
recorded reserves are reflected in current operating results. As a result
of the Company's filing of Chapter 11 petitions with the Bankruptcy Court
on May 13, 1996, all outstanding claims under the self-insured programs,
as of that date, will be settled under the terms of the Plan.
Pre-opening costs - Store pre-opening costs are charged to expense as
incurred.
Use of estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. The most significant
assumptions and estimates relate to the reserve for self-insurance
programs, the deferred income tax valuation allowance, the accumulated
benefit obligation relating to the employee retirement plan and the
allowance for bad debts. It is reasonably possible that the Company's
estimates for such items could change in the near term.
Comprehensive Income - In January 1998, the Company adopted the provisions
of SFAS No. 130, "Reporting Comprehensive Income," which is required
for fiscal years beginning after December 15, 1997. The statement
establishes standards for reporting comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive income is the change in equity of a business enterprise
during a period from net income and other events, except activity resulting
from investments by owners and distributions to owners. There was no
impact on adoption of this statement to the Successor Company.
Reclassifications - Certain reclassifications have been made to prior
years' statements of operations to conform with the current presentation.
F-15
4. Store Acquisitions.
The Company acquired one store from Pratt Discount Foods, Inc. and three
stores from Food Lion, Inc. on August 11, 1997, and October 15, 1997,
respectively. The result of operations from these stores from the
acquisition date through fiscal year-end are included in the fiscal 1997
Consolidated Statements of Operations.
On February 15, 1999, the Company signed a letter of intent with AWG for
the purchase of nine Apple Market supermarkets currently operated by
Horner Foods, Inc. in eastern Oklahoma. Consummation of the transaction,
which is expected during the second quarter of 1999, 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 is likely to be a combination of loans through AWG,
the Acquisition Term Loans and/or availability under the revolving credit
facility.
5. Long-Term Debt:
Long-term debt at year-end consists of:
January 2, January 3,
1999 1998
New Notes $ 60,000 $ 60,000
Term Loan 7,500 9,167
Revolving Credit Loans 17,887 10,626
Note Payable 193 288
85,580 80,081
Less current portion 1,728 1,728
Long-term debt due after one year $ 83,852 $ 78,353
The New Notes bear an interest rate of 10%, which is payable semi-
annually each February 1 and August 1. The New Notes are uncollaterized
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-16
Long-Term Debt, continued:
On December 17, 1998, the Company executed a New Loan Agreement in exchange
for the Old Loan Agreement in order to extend the maturity to August 2,
2002, to reflect additional term loan borrowing capacity of $10,000 for
acquisitions ("Acquisition Term Loans"), to reduce interest rates, and to
incorporate other technical changes. Consistent with the Old Loan
Agreement, as amended, the New Loan Agreement also consists of a $32,000
revolving facility for working capital and letters of credit (The
"Revolving Facility") and a $10,000 term loan (the "Term Loan"). The
Revolving Facility permits the Company to borrow up to the lesser of
$32,000 or the applicable borrowing base. As of January 2, 1999, there
were no borrowinngs outstanding under the Acquisition Term Loan facility.
The interest rate, payable quarterly, under the New 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 2, 1999, the interest
rate on borrowings on the Revolving Facility was 7.90% (weighted average)
and the Term Loan was 7.98%.
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 New 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 New 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.
F-17
Long-Term Debt, continued:
At January 2, 1999, the aggregate annual debt maturities were as follows:
1999 $ 1,728
2000 1,728
2001 1,728
2002 20,396
2003 60,000
$ 85,580
The Company has outstanding at January 2, 1999, $3,349 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 $43, $146, and $259 in 1998, 1997 and 1996,
respectively.
6. 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 at their fair values.
Based on borrowing rates currently available to the Company for bank
borrowings with similar terms and maturities, the Company believes the
carrying amount of borrowings under the New Loan Agreement approximates
fair value. The fair valud of publicly-traded debt is valued based on
quoted market values. At January 2, 1999, the carrying amount and the fair
value of the New Notes were $60,000 and $55,200, respectively.
F-18
7. Income Taxes:
The components of the income tax provision for 1998, 1997, the 20
weeks ended December 28, 1996, and the 32 weeks ended August 10,
1996, were as follows:
Predecessor
Successor Company Company
20 Weeks 32 Weeks
Ended Ended
December 28, August 10,
1998 1997 1996 1996
Federal and State:
Current $ (176) $ ( 100) $ - $ -
Deferred (1,699) (1,589) - -
Total income tax
provision (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:
Predecessor
Successor Company Company
20 Weeks 32 Weeks
Ended Ended
December 28, August 10,
1998 1997 1996 1996
Federal income tax at
statutory rate $ 3,051 $ 3,134 $ 1,092 $ (13,232)
Benefit of non-taxable
forgiveness of debt - - 945 14,720
Non-deductible
reorganization
expenses - - - (1,488)
Amortization of
intangibles (4,785) (5,084) (2,037) -
Change in valuation
allowance (141) 261 - -
Total income tax
provision $ (1,875) $ (1,689) $ - $ -
F-19
7. Income Taxes, continued:
The components of deferred tax assets and deferred tax liabilities are
as follows:
January 2, January 3,
1999 1998
Current assets (liabilities):
Allowance for uncollectible
receivables $ 340 $ 419
Prepaid pension (347) (393)
Other, net 19 18
Net current deferred tax assets 12 44
Noncurrent assets (liabilities):
Property, plant and equipment 1,402 855
Employee compensation and benefits 262 262
Self-insurance reserves 574 673
Net operating loss carryforwards 13,096 14,315
AMT credit carryforwards 299 737
Capital leases 5 104
Other, net (177) 185
Net noncurrent deferred tax
assets 15,461 17,131
Total net deferred assets 15,473 17,175
Valuation allowance (15,473) (17,175)
Net deferred tax assets $ - $ -
F-20
Income taxes, continued:
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 2, 1999 and January 3, 1998. If the
Company's current trend toward profitability continues, then deferred tax
assets of up to approximately $15.5 million could be recognized. At
January 2, 1999 and January 3, 1998, the Company had the following
operating loss and tax credit carryforwards available for tax purposes:
Expiration
Amount Dates
Federal regular tax net
operating loss carryforwards $37,417 2002-2010
Federal AMT credit carryforwards
against regular tax $ 299 indefinite
The net operating loss carryforwards are subject to utilization limitations
due to ownership changes. The net operating loss carryforwards may be
utilized to offset future taxable income as follows: $3,251 in each of
years 1999 through 2009 and $1,656 in 2010. Loss carryforwards not utilized
in any year that they are available may be carried over and utilized in
subsequent years, subject to their expiration provisions.
In accordance with SOP 90-7, the tax benefit realized from utilizing the
pre-reorganization net operating loss carryforwards is recorded as a
reduction of the reorganization value in excess of amounts allocable to
identifiable assets rather than realized as a benefit in the statement
of operations. The Company recorded $1,699 and $1,589 of such reductions
in 1998 and 1997, respectively.
8. Incentive Compensation Plans:
The Company has bonus arrangements for store management and other key
management personnel. During 1998, 1997, and 1996, approximately $1,480
$981, and $2,273 respectively, were charged to costs and expenses for
such bonuses.
In December 1996, the Board of Directors of the Company, pursuant to the
Plan, adopted the Homeland Holding Corporation 1996 Stock Option Plan
(the "Stock Option Plan"). In 1997, the Company established the 1997
Non-Employee Directors Stock Option Plan (the "Directors Stock Option
Plan"). The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for these
F-21
Incentive Compensation Plan, continued:
plans. SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") was issued by the FASB in 1995 and, if fully adopted, changes the
methods for recognition of expense on plans similar to the Company's.
Adoption of SFAS 123 is optional; however, pro forma disclosures as if
the Company adopted the cost recognition requirements under SFAS 123 in
1998, 1997 and 1996 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 New Common
Stock, respectively. Options granted under the plans must be "non-
qualified options." The option price of each option is determined by the
Board or the Committee and it must be not less than the fair market
value at the date of grant. Unless the Board or the Committee otherwise
determines, options must become exercisable ratably over a five-year
period or immediately in the event of a "change of control" as defined in
each of the plans. Each option must be evidenced by a written agreement
and must expire and terminate on the earliest of: (a) ten years from the
date the option is granted; (b) termination for cause; or (c) three
months after termination for other than cause.
Options granted under the Company's stock option plans have exercise
prices ranging from $3.50 to $7.63 per share and have a weighted average
contractual life of 9.2 years. A summary of the status of the Company's
outstanding stock options as of January 2, 1999, January 3, 1998 and
December 28, 1996, and changes during the years ended on those dates is
as follows:
1998 1997 1996
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Shares Exer. Price Shares Exer. Price Shares Exer. Price
Outstanding at
beginning of
year 198,500 $7.45 197,500 $8.00 - $ -
Granted 319,000 6.05 136,000 7.20 197,500 8.00
Exercised 13,200 6.50 - - - -
Forfeited 75,300 7.80 135,000 8.00 - -
Outstanding at
end of year 429,000 6.39 198,500 7.45 197,500 8.00
Options
exercisable as
of year end 84,000 7.30 138,500 7.42 197,500 8.00
F-22
Incentive Compensation Plan, continued:
The weighted average fair value of options granted during 1998, 1997 and
1996 was $2.83, $3.53 and $4.02, respectively. No compensation was charged
against income in 1998, 1997 and 1996.
The fair value of the options granted was estimated on the date of the
grant using the Black-Scholes option-pricing model with the following
assumptions used:
1998 1997 1996
Expected dividend yield 0% 0% 0%
Expected stock price volatility 37% 39% 30%
Weighted average risk-free
interest rate 5.3% 6.4% 6.4%
Weighted average expected
life of options 6 years 6 years 8 years
Had compensation cost of the Company's option plans been determined using
the fair value at the grant date of awards consistent with the method of
SFAS 123, the Company's net loss and net loss per common share for the
Successor Company would have been reduced to the pro forma amounts
indicated in the table below:
Successor Company
20 weeks
Ended
December 28,
1998 1997 1996
Net loss - as reported $(10,591) $(10,644) $(3,120)
Net loss - pro forma $(10,722) $(10,846) $(3,914)
Basic EPS - as reported $(2.18) $(2.23) $(0.66)
Basic EPS - pro forma $(2.21) $(2.27) $(0.82)
Diluted EPS - as reported $(2.18) $(2.23) $(0.66)
Diluted EPS - pro forma $(2.21) $(2.27) $(0.82)
F-23
8. Incentive Compensation Plans, continued:
All options and warrants outstanding at January 2, 1999, January 3, 1998
and December 28, 1996, were not included in the computation of diluted
earnings per share because the effect would be antidilutive to applicable
periods.
Pursuant to the terms of the Modified Union Agreements, the Company
established an employee stock bonus plan for the benefit of the unionized
employees (the "Stock Bonus Plan"). The Stock Bonus Plan consists of
three separate elements: (a) the issuance of 58,025 shares of New Common
Stock each year for three years; (b) up to 58,025 shares of the New
Common Stock may be purchased by the plan participants during each of the
second, third and fourth years of the Modified Union Agreements (the
"Stock Purchase") and (c) the granting of 58,025 shares of New Common
Stock for each of the first, second and third anniversaries of the
Modified Union Agreements upon the Company's achievement of certain
escalating EBITDA-based performance goals (see Note 2). The purchase
price of the shares under the Stock Purchase element shall be equal to
the appraised value or at fair value if the shares are readily tradable
on a securities market. For each share of New Common Stock purchased by
a participant under the Stock Purchase element, the Company will match
33 1/3% of such purchase in the form of stock. The Stock Bonus Plan does
not fall under the provisions of SFAS 123.
9. Retirement Plans:
Effective January 1, 1988, the Company adopted a non-contributory,
defined benefit retirement plan for all executive and administrative
personnel. Benefits are based on length of service and career average
pay with the Company. The Company's funding policy is to contribute an
amount equal to or greater than the minimum funding requirement of the
Employee Retirement Income Security Act of 1974, but not in excess of
the maximum deductible limit. Plan assets were invested in mutual funds
during 1998, 1997 and 1996.
F-24
Information regarding the plan follows:
1998 1997
Change in benefit obligation:
Benefit obligation at beginning
of year $ 9,911 $ 7,694
Service Cost 514 449
Interest Cost 725 630
Actuarial loss 513 1,344
Benefits paid (231) (206)
Benefit obligation at end
of year $11,432 $ 9,911
Change in plan assets:
Fair value of plan assets at
beginning of year $ 9,673 $ 8,436
Actual return on plan assets 1,075 1,418
Employer contributions 175 24
Benefits paid (231) (205)
Fair value of plan assets at $10,692 $ 9,673
end of year
Reconciliation of funded status:
Funded status $ (739) $ (238)
Unrecognized net actuarial loss 1,793 1,533
Unrecognized prior service loss (62) (73)
Prepaid benefit cost $ 992 $ 1,222
Weighted-average assumptions as of
end of year:
Discount rate 6.75% 7.00%
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: 1998 1997 1996
Service Cost $ 514 $ 449 $ 503
Interest Cost 725 630 574
Expected return on plan assets (868) (748) (651)
Amortization of prior service cost (11) (11) (11)
Recognized net actuarial cost 46 7 89
Net periodic pension cost $ 406 $ 327 $ 504
F-25
The Company also contributes to various union-sponsored, multi-employer
defined benefit plans in accordance with collective bargaining agreements.
The Company could, under certain circumstances, be liable for the
Company's unfunded vested benefits or other costs of these multi-employer
plans. The allocation to participating employers of the actuarial
present 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
1998, 1997, and 1996 were $1,235, $1,188, and $1,412, 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 1998, 1997 or 1996.
10. Leases:
The Company leases 56 of its retail store locations under noncancellable
agreements, which expire at various times between 1999 and 2013. These
leases, which include both capital leases and operating leases, generally
are subject to six five-year renewal options. Most leases also require
the payment of taxes, insurance and maintenance costs and many of the
leases covering retail store properties provide for additional contingent
rentals based on sales in excess of certain stipulated amounts.
Leased assets under capital leases consists of the following:
January 2, January 3,
1999 1998
Buildings $ 2,706 $ 2,706
Equipment 3,174 2,731
Beneficial interest in capital leases 3,173 3,173
9,053 8,610
Accumulated amortization 3,204 1,984
Net leased assets $ 5,849 $ 6,626
F-26
10. Leases, continued:
Future minimum lease payments under capital leases and noncancellable
operating leases as of January 2, 1999, are as follows:
Capital Operating
Fiscal Year Leases Leases
1999 1,503 6,452
2000 653 5,990
2001 276 4,957
2002 182 3,814
2003 182 3,333
Thereafter 1,288 19,349
Total minimum obligations 4,084 $ 43,895
Less estimated interest 1,149
Present value of net minimum
obligations 2,935
Less current portion 1,235
Long-term obligations under
capital leases $ 1,700
Rent expenses for 1998, 1997 and 1996 are as follows:
1998 1997 1996
Minimum rents $ 6,680 $ 6,067 $ 6,039
Contingent rents 115 105 105
$ 6,795 $ 6,172 $ 6,144
F-27
11. 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 4 - Concentrations of credit and business risk). The terms of the
Supply Agreement allow the Company to purchase products at the lowest
prices and best terms available to AWG members and also entitle the
Company to participate in its store cost savings programs and receive
member rebates and refunds on purchases. 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 Restructuring
and also in the normal course of business. Management believes that the
ultimate outcome of these matters will not have a material effect on
the Company's consolidated financial position, results of operations and
cash flows.
F-28
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 Homeland Stores, Inc.
("Homeland"), dated July 19, 1996. (Incorporated by
reference to Exhibit 2b to Form 10-Q for the quarterly
period ended June 15, 1996.)
3a Restated Certificate of Incorporation of Holding,
dated August 2, 1996. (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 the fiscal year ended December 30,
1995.)
10d.2 1 1996 Homeland Management Incentive Plan.
(Incorporated by reference to Exhibit 10.d3 to
Form 10-K for the fiscal year ended December 28,
1996.)
10d.3 1 1997 Homeland Management Incentive Plan.
10e 1 Form of Homeland Employees' Retirement Plan,
effective as of January 1, 1988. (Incorporated
by reference to Exhibit 10t to Form S-1
Registration Statement, Registration No. 33-22829.)
10e.1 1 Amendment No. 1 to Homeland Employees' Retirement
Plan effective January 1, 1989. (Incorporated
by reference to Form 10-K for the fiscal year ended
December 30, 1989.)
10e.2 1 Amendment No. 2 to Homeland Employees' Retirement
Plan effective January 1, 1989. (Incorporated
herein by reference to Form 10-K for the fiscal
year ended December 30, 1989.)
10e.3 1 Third Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1988. (Incorporated
by reference to Exhibit 10t.3 to Form 10-K for
the fiscal year ended December 29, 1990.)
10e.4 1 Fourth Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1989. (Incorporated
by reference to Exhibit 10t.4 to Form 10-K for
the fiscal year ended December 28, 1991.)
10e.5 1 Fifth Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1989. (Incorporated
by reference to Form 10-Q for the quarterly period
ended September 9, 1995.)
10f 1 Executive Officers Medical/Life Insurance Benefit
Plan effective as of December 9, 1993. (Incorporated
by reference to Exhibit 10kk to Form 10-K for
the fiscal year ended January 1, 1994.)
10g Asset Purchase Agreement, dated as of February 6,
1995, between Homeland and Associated Wholesale
Grocers, Inc. (Incorporated by reference to Exhibit
10pp.1 to Form 10-K for the fiscal year ended
December 30, 1995.)
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Exhibit No. Description
10h Amended and Restated Revolving Credit Agreement,
dated as of April 21, 1995, among Homeland,
Holding, National Bank of Canada, as Agent and
lender, Heller Financial, Inc. and any other lenders
thereafter parties thereto. (Incorporated by
reference to Exhibit 10uu to Form 8-K dated
March 14, 1996.)
10h.1 Waiver Agreement, dated as of December 29, 1995,
among Homeland, Holding, National Bank of Canada and
Heller Financial, Inc. (Incorporated by reference
to Exhibit 10uu.1 to Form 8-K dated March 14, 1996.)
10h.2 Second Waiver Agreement, dated as of March 1, 1996,
among Homeland, Holding, National Bank of Canada and
Heller Financial, Inc. (Incorporated by reference
to Exhibit 10uu.2 to Form 8-K dated March 14, 1996.)
10h.3 Ratification and Amendment Agreement to the
$27,000,000 Amended and Restated Revolving Credit
Agreement, dated as of May 10, 1996, among
Homeland, Holding, National Bank of Canada, as
Agent and lender, Heller Financial, Inc. and
any other lenders thereafter parties thereto.
(Incorporated by reference to Exhibit 10uu.3 to
Form 10-Q for quarterly period ended March 23, 1996.)
10i 1 Employment Agreement dated as of July 10, 1995 and
as amended September 26, 1995, between Homeland and
Larry W. Kordisch. (Incorporated by reference to
Exhibit 10pp to Form 10 Form 10-K dated September
9, 1995.)
10i.1 1 Amendment to Employment Agreement between Homeland
and Larry W. Kordisch, dated as of April 29, 1996.
(Incorporated by reference to Exhibit 10vv.1 to
Form 10-K for the fiscal year ended December 30,
1995.)
10i.2 1 Second Amendment to Employment Agreement between
Homeland and Larry W. Kordisch, dated as of
September 19, 1997.
10j 1 Employment Agreement dated as of February 25,
1998, between Homeland and Steven M. Mason.
10k 1 Employment Agreement dated as of February 25, 1998,
between Homeland and Terry Marczewski.
10l 1 Employment Agreement dated as of February 17, 1998,
between Homeland and David B. Clark.
10m Indenture, dated as of August 2, 1996, among
Homeland, Fleet National Bank, as Trustee, and
Holding, as Guarantor. (Incorporated by reference
to Exhibit 10aaa to Form 8-K dated September 30,
1996.)
10n Loan Agreement, dated as of August 2, 1996, among
IBJ Schroder Bank & Trust Company, Heller Financial,
Inc., National Bank of Canada, Homeland and Holding.
(Incorporated by reference to Exhibit 10q to Form
10-K for the fiscal year ended December 28, 1996.)
E-3
Exhibit No. Description
10n.1 First Amendmant to the Loan Agreement dated as of
November 24, 1997, among IBJ Schroder Bank & Trust
Company, Heller Financial, Inc., National Bank of
Canada, Homeland and Holding.
10o Subsidiaries. (Incorporated by reference to Exhibit
22 to Form S-1 Registration Statement, Registration
No. 33-22829.) Amended
10p 1 Employee Stock Bonus Plan for union employees
effective as of August 2, 1996. (Incorporated by
reference to Exhibit 10s to Form 10-K for the fiscal
year ended December 28, 1996.)
10q 1 Management Stock Option Plan effective as of
December 11, 1996. (Incorporated by reference to
Exhibit 10t to Form 10-K for the fiscal year ended
December 28, 1996.)
10r* 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.
10s*1 1998 Homeland Management Incentive Plan.
10t*1 Letter agreement regarding severance arrangements
dated as of April 28, 1998, between Homeland and
Larry W. Kordisch.
10u*1 Employment agreement dated as of July 6, 1998,
between Homeland and Wayne S. Peterson.
10v*1 Employment agreement dated as of September 14, 1998,
between Homeland and John C. Rocker.
10w*1 Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland
and Steven M. Mason.
10x*1 Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland
and Prentess E. Alletag, Jr.
10y*1 Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland
and Deborah A. Brown
10z*1 Stock Option Agreement dated as of October 21, 1998,
between Homeland and Wayne S. Peterson.
11a*1 Stock Option Agreement dated as of September 14,
1998, between Homeland and John C. Rocker.
21* Subsidiaries
23* Consent of PricewaterhouseCoopers LLP
27 * Financial Data Schedule.
E-4