UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to Section 13 or 15(d) of the Securities
[X] Exchange Act of 1934 [No Fee Required]
For the fiscal year ended December 29, 2001
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
Debtor-in-Possession as of August 1, 2001
(Exact name of registrant as specified in its charter)
Delaware 73-1311075
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2601 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 April 5, 2002:
$246,294, based on a closing price of $0.05 of the registrant's
common stock on the NASDAQ/OTCBB.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of April 5, 2002:
Homeland Holding Corporation
Common Stock: 4,925,871 shares
HOMELAND HOLDING CORPORATION
Debtor-in-Possession as of August 1, 2001
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
PART I
ITEM 1. BUSINESS....................................................................... 1
General........................................................................ 1
Background..................................................................... 1
AWG Transaction................................................................ 1
1996 Restructuring............................................................. 2
2001 Voluntary Bankruptcy Filing............................................... 2
Business Strategy.............................................................. 3
Homeland Supermarkets.......................................................... 4
Merchandising Strategy and Pricing............................................. 5
Customer Services.............................................................. 5
Advertising and Promotion...................................................... 5
Products....................................................................... 6
Supply Arrangements............................................................ 6
Employees and Labor Relations.................................................. 7
Computer and Management Information Systems.................................... 7
Competition.................................................................... 7
Trademarks and Service Marks................................................... 8
Regulatory Matters............................................................. 8
ITEM 2. PROPERTIES..................................................................... 8
ITEM 3. LEGAL PROCEEDINGS.............................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS............................................................ 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDERS MATTERS............................................... 9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................................... 10
</Table>
i
<Table>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.................................................................. 13
Critical Accounting Policies and Estimates..................................... 13
Results of Operations.......................................................... 15
Liquidity and Capital Resources................................................ 20
Inflation/Deflation............................................................ 24
Recent Accounting Pronouncements............................................... 25
Item 7a. QUANTITATIVE AND QUALITATIVE DISCUSSIONS
ABOUT MARKET RISK.............................................................. 26
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA............................................................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................................... 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.............................................................. 27
ITEM 11. EXECUTIVE COMPENSATION......................................................... 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ............................................. 40
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS........................................................... 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS
AND REPORTS ON FORM 8-K........................................................ 44
SIGNATURES................................................................................ II-1
INDEX TO FINANCIAL STATEMENTS AND EXHIBITS................................................ F-1
EXHIBIT INDEX............................................................................. E-1
</Table>
ii
HOMELAND HOLDING CORPORATION
Debtors-in-Possession as of August 1, 2001
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 29, 2001
ITEM 1. BUSINESS
General
Homeland Holding Corporation ("Holding"), through its
wholly-owned subsidiary, Homeland Stores, Inc. ("Homeland") and Homeland's
wholly-owned subsidiary, JCH Beverage, Inc. ("JCH"), and JCH's wholly-owned
subsidiary, SLB Marketing, Inc. (collectively referred to herein as the
"Company"), is a supermarket chain in the Oklahoma, southern Kansas and Texas
Panhandle region. During the year ended December 29, 2001 the Company operated
in four distinct market places: Oklahoma City, Oklahoma; Tulsa, Oklahoma;
Amarillo, Texas; and certain rural areas of Oklahoma, Kansas and Texas. As of
December 29, 2001, the Company operated 54 stores in 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
("1995 Supply Agreement"), whereby the Company became a retail member of the AWG
cooperative and AWG became the Company's primary supplier. The Company has
purchased 15 shares of AWG Class A Common Stock, representing an equity position
of 0.3%, in order to be a member of AWG. The transactions between the Company
and AWG are referred to herein as the "AWG Transaction."
AWG is a buying cooperative which sells groceries on a
wholesale basis to its retail member stores. AWG serves more than 750 member
stores located in a ten-state region with approximately $3.1 billion in revenues
in 2001.
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
1
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.
1996 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 "Delaware Bankruptcy
Court"). Simultaneously with such filings, the Company submitted a
"pre-arranged" plan of reorganization, which set forth the terms of the
restructuring of the Company (the "Restructuring"). The purpose of the
Restructuring was to substantially reduce the Company's debt service obligations
and labor costs and to create a capital and cost structure that would allow the
Company to maintain and enhance the competitive position of its business and
operations. The Restructuring was negotiated with, and supported by, the lenders
under the Company's then existing revolving credit facility, an ad hoc committee
(the "Noteholders Committee") representing approximately 80% of the Company's
outstanding Old Notes and the Company's labor unions. The Delaware 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").
2001 Voluntary Bankruptcy Filing
On August 1, 2001, Holding and Homeland filed voluntary
petitions (the "Filing") under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code") with the United States Bankruptcy Court for the Western
District of Oklahoma ("Bankruptcy Court"). The cases filed by Holding and
Homeland are In re Homeland Holding Corporation, Debtor, Case No. 01-17869TS,
and In re Homeland Stores, Inc., Debtor, Case No. 01-17870TS (collectively, the
"Chapter 11 Cases"). Holding and Homeland continue in possession of their
properties and the management of their businesses as debtors-in-possession
pursuant to Section 1107 and Section 1108 of the Bankruptcy Code. Holding and
Homeland continue to be managed by their respective directors and officers,
subject in each case to the supervision of the Bankruptcy Court.
JCH and SLB did not file voluntary petitions under the
Bankruptcy Code as part of the Filing. Assets and results of operations of those
entities are less than 1% of consolidated totals.
The Filing was made in response to increasing liquidity
difficulties encountered during the second quarter of 2001, particularly
following amendments to the Loan Agreement in the second quarter reducing
available credit, on which National Bank of Canada ("NBC") and the other lenders
under the then effective NBC Loan Agreement (as defined below) insisted. While
trade creditors generally continued to provide credit to the Company on
customary credit terms during that quarter, some trade creditors had imposed
tighter credit terms, further reducing the liquidity of the Company.
Under the Indenture with Fleet National Bank (predecessor to
State Bank and Trust Company), Homeland was required to make an interest payment
on August 1, 2001 on its $60.0 million principal amount in 10% Senior
Subordinated Notes ("Notes"). Homeland failed to make the required $3.0 million
interest payment, which constituted a default under the Indenture.
On August 15, 2001, in connection with the Chapter 11 Cases,
the Company entered into New Loan Agreements (as defined below) with Fleet
Retail Finance Inc. ("Fleet"), Back Bay
2
Capital Funding L.L.C. ("Back Bay") and Associated Wholesale Grocers, Inc.
("AWG") for debtor-in-possession financing ("DIP Financing") and paid amounts
outstanding under the existing NBC Loan Agreement with NBC and certain other
lenders. Under the DIP Financing, Fleet and Back Bay provide a revolving credit
facility ("Revolver") under which the Company may borrow the lesser of (a) $25.0
million or (b) the applicable borrowing base ($12.0 million at December 29,
2001), and a $10.0 million term loan for a maximum aggregate principal amount of
$35.0 million. Funds borrowed under the Revolver were used to repay borrowings
under the NBC Loan Agreement, pay certain pre-petition indebtedness whose
payment was approved by the Bankruptcy Court and for general corporate purposes
of the Company. An additional $29.0 million of DIP Financing was provided by AWG
which included a new $16.5 million term loan (used to repay borrowings under the
NBC Loan Agreement), a restated term loan totaling $9.4 million replacing
previously outstanding acquisition-related loans, and a $3.1 million term loan
representing an advance of rebate amounts expected to be earned by the Company
under the 1995 Supply Agreement. The DIP Financing loans are secured by liens
on, or security interests in, all of the assets of the Company and have a
super-priority administrative status under the Bankruptcy Code. In conjunction
with the AWG loans described above, the Company entered into a new 10-year
supply agreement ("2001 Supply Agreement") with AWG, which contains volume
protection rights, right of first refusal and non-compete agreements similar to
those in the 1995 Supply Agreement with AWG. For additional information, see
also "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
With the exception of the $9.4 million and $3.1 million term
loans from AWG, the DIP Financing matures on the earlier of (a) August 1, 2003,
(b) emergence through a confirmed plan of reorganization approved by the
Bankruptcy Court or (c) other events as defined in the New Loan Agreements. The
$9.4 million AWG term loan matures in February 2007 and requires weekly
principal and interest payments. The $3.1 million AWG term loan matures in May
2002 and requires principal payments every four weeks and interest payments
weekly.
The Company has received approval from the Bankruptcy Court to
pay or otherwise honor certain of their pre-petition obligations in the ordinary
course of business, including critical trade creditors, employee wages and
benefits and customer programs.
As provided by the Bankruptcy Code, the Company initially has
the exclusive right to propose a plan of reorganization ("Plan"). The Company's
exclusive right expires April 30, 2002. The Company expects to file its proposed
Plan in the second quarter of 2002 Nevertheless, the Company is currently
executing a strategy to close unprofitable locations and to divest selected
locations and markets. The Company began the year with 85 stores, it had 54
stores as of December 29, 2001 and it intends to emerge from bankruptcy with a
total of 44 stores.
An Unsecured Creditors Committee has been appointed in the
Chapter 11 Cases. In accordance with the provisions of the Bankruptcy Code, this
committee will have the right to be heard on all matters that come before the
Bankruptcy Court in the Chapter 11 Cases. The Company is required to bear
certain of the committee's costs and expenses, including those of their counsel
and other advisors.
Business Strategy
The Company's general business strategy is to improve the
sales and profitability of its 44 store core business through a consumer
marketing strategy which positions the Company as a faster, fresher, better
alternative to other food outlets. Usage of the Homeland Savings Card as a
relationship marketing tool, as well as strong weekly promotions communicated
through extensive use of print, and
3
other media are intended to help the Company achieve this business strategy. The
Company is committed to high quality perishable departments and quick and
friendly checkout.
Having been in its market for more than 69 years (through its
predecessor Safeway), the Company enjoys a high recognition with its customers.
The Company continues to build this rapport with its customers by participating
in local community events and offering the "Apples for Students" program,
whereby schools can obtain computers and other educational products by
collecting Homeland receipts. The Company is also a major sponsor of the Easter
Seals program in its markets.
Homeland Supermarkets
As of December 29, 2001, the Company's 54 operating stores
feature three basic store formats. The Company's 15 conventional stores are
primarily in the 21,000 total square feet range and carry the traditional mix of
grocery, meat, produce and general merchandise products. These stores contain
more than 20,000 stock keeping units, including food and general merchandise.
Sales volumes of conventional stores range from $50,000 to $115,000 per week.
The Company's 30 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 $80,000 to $285,000 per
week. The Company's 9 combo store format includes stores of approximately 55,000
total square feet were designed to enable the Company to expand shelf space
devoted to general merchandise. Sales volumes of combo stores range from
$150,000 to $265,000 per week. The Company's new stores and certain remodeled
locations have incorporated the Company's new, larger superstore and combo
formats. Of the 10 stores to be divested or closed as of December 29, 2001, 4
are conventional stores, 5 are superstores, and 1 is a combo store.
The chart below summarizes Homeland's store development over
the last three fiscal years:
<Table>
<Caption>
Fiscal Year Ended
-------------------------------
12/29/01 12/30/00 1/1/00
-------- -------- -------
Average sales per store(1)
(in millions) ............................ $ 7.2 $ 7.1 $ 7.8
Average total square feet
per store ................................ 34,558 37,765 35,786
Average sales per
square foot(1) ........................... $ 207 $ 197 $ 206
Number of stores:
Stores at start of period ................ 85 80 69
Stores remodeled ......................... 0 0 5
New stores opened ........................ 0 7 13
Stores sold or closed .................... 31 2 2
Stores at end of period .................. 54 85 80
Size of stores:
Less than 25,000 sq. ft .................. 12 13 13
25,000 to 35,000 sq. ft .................. 20 28 28
35,000 sq. ft. or greater ................ 22 44 39
Store formats:
Conventional ............................. 15 18 18
SuperStore ............................... 30 48 49
Combo .................................... 9 19 13
</Table>
(1) For those stores open entire fiscal year.
4
The Company's network of stores is managed by district managers on a
geographical basis through three districts. Store managers are responsible for
determining staffing levels, managing store inventories (within the confines of
certain parameters set by the Company's corporate headquarters) and purchasing
products. Store managers have significant flexibility with respect to the
quantities of items carried while the Company's corporate headquarters is
directly responsible for merchandising, advertising, pricing and capital
expenditure decisions.
Merchandising Strategy and Pricing
The Company's merchandising strategy emphasizes a competitive pricing
structure, as well as quality products and service, selection, convenient store
locations, specialty departments and perishable products (i.e., meat, produce,
bakery and seafood). The Company's strategy is to price competitively with
targeted supermarket operators in each market area. The Company also offers
double coupons, with some limitations, in all areas in which it operates.
The in-store merchandising strategy combines a strong presentation of
fresh products along with meaningful values throughout the store on a wide
variety of fresh and shelf stable products each week. The Company's main vehicle
of value delivery is its "Homeland Savings Card" which allows customers with the
card the opportunity to purchase over 2,000 items at a reduced cost each week.
Customer Services
The Company's stores provide a variety of customer services including,
among other things, carry-out services, facsimile services, automated teller
machines, pharmacies, check cashing, utility payments, money transfers and money
orders. The Company believes it is able to attract new customers and retain its
existing customers because of its level of customer service and convenience.
Advertising and Promotion
All advertising and promotion decisions are made by the Company's
corporate merchandising and advertising staff. The Company's advertising
strategy is designed to enhance its value-oriented merchandising concept and
emphasize its reputation for variety and quality. Accordingly, the Company is
focused on presenting itself as a competitively-priced, promotions-oriented
operator that offers value to its customers and an extensive selection of high
quality merchandise in clean, attractive stores. This strategy allows the
Company to accomplish its marketing goals of attracting new customers and
building loyalty with existing customers. In addition, signage in the stores
calls attention to various in-store specials thereby creating a friendlier and
more stimulating shopping experience.
The Company currently utilizes a broad range of print advertising in
the markets it serves, including newspaper advertisements, advertising inserts
and circulars and promotional campaigns that cover substantially all of the
Company's markets. The Company receives cooperative and performance advertising
reimbursements from vendors, which reduce its advertising costs.
5
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 2001, approximately 80% of the
Company's stores had service delicatessens and/or bakeries and approximately 56%
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(R)
and Always Save(R).
Private label products generally represent quality and value
to customers and typically contribute to a higher gross profit margin than
national brands. The promotion of private label products is an integral part of
the Company's merchandising philosophy of building customer loyalty as well as
improving the Company's "pricing image." The Company intends to use the Best
Choice(R) line of products as the main vehicle to accomplish these goals.
Supply Arrangements
The Company is a party to the 1995 Supply Agreement with AWG,
pursuant to which the Company became a member of the AWG cooperative, and to the
2001 Supply Agreement (together "Supply Agreements"). AWG is the Company's
primary supplier and currently supplies approximately 70% of the goods sold in
the Company's stores. See "Business -- AWG Transaction."
Pursuant to the Supply Agreements, 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; and
(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.
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 no longer requires a letter of credit, however, the open account is 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). In the
event that the Company's open account with AWG exceeds the amount of the
required collateral for the Company's open account, AWG is not required to
accept orders from, or deliver goods to, the Company until a letter of credit
has been established for any such deficiency.
The Supply Agreements 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
Agreements (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
Agreements; 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
6
"Use Restrictions"). The Company's agreement not to compete and the Use
Restrictions contained in the Supply Agreements 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 Agreements provide AWG with certain purchase
rights in the event the Company closes 90% or more of the Supplied Stores.
In conjunction with the Company's April 2000 acquisition of
three Baker's Supermarkets, the Company recorded a $1.6 million liability
related to an unfavorable supply contract with Fleming Companies Inc.
("Fleming"). This 5-year supply contract requires the Company to purchase a
minimum annual amount of merchandise or remit a payment to Fleming in the amount
of 3% of purchase volume shortfall, estimated by the Company at the date of
acquisition to be $1.6 million over the life of the contract. During 2001, the
Company remitted a payment of $0.4 million related to the purchase volume
shortfall in 2000. In the fourth quarter of 2001, the Company determined that it
would likely reject the supply contract. As a result, the Company recorded a
charge to reorganization claims expense in the amount of $2.1 million. Combined
with the remaining liability established at the time of acquisition, the Company
has recorded an aggregate liability of $3.3 million related to this contract.
Fleming has submitted an unsecured claim to the Bankruptcy Court in the amount
of $3.7 million, which represents the maximum liability for all remaining years
under the contract. The Company believes that the claim is more accurately
stated at $3.3 million reflecting a reduction, pursuant to the contract,
attributable to the closing of one of the acquired stores.
Employees and Labor Relations
At December 29, 2001, the Company had a total of 2,898
employees, of whom 1,758, or approximately 61%, were employed on a part-time
basis. The Company employs 2,809 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 88% of the Company's employees are union members,
represented primarily by the United Food and Commercial Workers of North America
("UFCWNA").
Computer and Management Information Systems
The Company utilizes client/server systems in order to enhance
its information management capabilities and improve its competitive position.
The systems include the following features: time and attendance, human resource,
accounting and budget tracking, scan support and merchandising systems, direct
store delivery system and a check verification and credit card system.
The Company has scanning checkout systems in all of its 54
stores. As a result of store acquisitions, the Company currently utilizes three
separate scanning systems. The Company will continue to evaluate a common system
for all stores and to evaluate the need to invest and upgrade its scanning and
point-of-sale systems to improve efficiency. The Company also collects
information on the purchases made by its "Homeland Savings Card" holders with
the intent to target its promotional activities on this market segment. See
"Business -- Advertising and Promotion."
Competition
The supermarket business in the Company's market areas is
highly competitive, but very fragmented, and includes numerous independent
operators. The Company estimates that these operators represent a substantial
percentage of its markets. The Company also competes with larger store chains
such as Albertson's and Wal-Mart, which operate 28 stores and 46 stores (36
Wal-Mart
7
Supercenters and 10 Wal-Mart Neighborhood Markets), respectively, in the State
of Oklahoma. The Company's market areas also include "price impact" stores such
as Crest, large independent store groups such as IGA, regional chains such as
United, and discount warehouse stores.
The Company's business has been adversely affected in recent
years by the entry of new competition into the Company's key markets, which
resulted in a decline in the Company's comparable store sales in 1997 and 1998.
In 1997, there were 8 competitive openings in the Company's market area,
including 3 new Wal-Mart Supercenters and 2 new Albertson's. In 1998, there were
7 additional competitive openings, including 4 new Wal-Mart Supercenters and 3
new independent stores. In 1999, the Company's comparable sales increased
despite 8 competitive openings, including 4 new Albertson's, 3 new Wal-Mart
Supercenters and one new independent store. In 2000 and 2001, the Company again
experienced a decline in comparable store sales. In 2000, there were 13
competitive openings including 4 new Wal-Mart Supercenters, 7 new Wal-Mart
Neighborhood Markets and 2 new independent stores. In 2001, there were 7
competitive openings including 1 new Wal-Mart Supercenter, 3 new Wal-Mart
Neighborhood Markets and 3 new independent stores. Based on information publicly
available, the Company expects that, during 2002, Wal-Mart will open 1 new
Supercenter and 1 new Neighborhood Market, Aldi will open 1 new store,
independents will open 2 new stores, and Target Supercenter will open 3 new
stores in the Company's markets.
Trademarks and Service Marks
During the transition from "Safeway" to "Homeland," the
Company was able to generate a substantial amount of familiarity with the
"Homeland" name. The Company continues to build and enhance this name
recognition through promotional advertising campaigns. The "Homeland" name is
considered material to the Company's business and is registered for use as a
service mark and trademark. The Company has received federal and certain state
registrations of the "Homeland" mark as a service mark and a trademark for use
on certain products. The Company also received a federal registration of the
service mark "A Good Deal Better."
Regulatory Matters
Homeland is subject to regulation by a variety of local, state
and federal governmental agencies, including the United States Department of
Agriculture, state and federal pharmacy regulatory agencies and state and local
alcoholic beverage and health regulatory agencies. By virtue of this regulation,
Homeland is obligated to observe certain rules and regulations, the violation of
which could result in suspension or revocation of various licenses or permits
held by Homeland.
ITEM 2. PROPERTIES
At the beginning of 2001, the Company operated 85 supermarkets
and owned 3 undeveloped parcels of land for future development. During the year,
the Company closed 31 stores and currently is in the process of attempting to
sell owned real estate and to find assignments of leased locations. As of April
5, 2002, the Company has achieved lease assignments for 3 locations, rejected
the leases of 8 locations, and terminated 4 leases as a result of the expiration
of existing terms. Additionally, of the remaining 16 properties and 3
undeveloped parcels of land, there are 7 lease assignments and 2 real property
transactions pending. Although these pending transactions are anticipated to
close by the end of April 2002, there can be no assurances that the transactions
will be consummated.
Of the 54 supermarkets operated by the Company as of December
29, 2001, 11 are owned by Homeland and the balance are held under leases, which
expire at various times between 2002
8
and 2030. Most of the leases are subject to up to six (6) five-year renewal
options. Out of 43 leased stores, only 5 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. Of the 54
supermarkets, 10 locations have been identified as additional stores to be sold
or closed in 2002. These 10 stores include one owned and 9 leased locations. As
of April 5, 2002, the owned store and 3 leased locations have been sold,
pursuant to approval of the Bankruptcy Court, as going concerns to other
supermarket operators. Ultimate disposition of the remaining 6 stores is also
subject to approval of the Bankruptcy Court. Of these 6 stores, there are two
lease assignment transactions pending, and again, there can be no assurances
that the transactions will be consummated.
Substantially all of the Company's properties are subject to
mortgages and security agreements securing the borrowings under the DIP
Financing and a number of the stores acquired from AWG and its retail members
are subject to mortgages and security agreements in favor of AWG. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
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. The Plan of Reorganization was confirmed on July 19, 1996, and
became effective on August 2, 1996. These cases were closed pursuant to the
filing of the bankruptcy cases described in the following paragraph.
Holding and Homeland are debtors in cases styled In re
Homeland Holding Corporation, Debtor, Case No. 01-17869TS, and In re Homeland
Stores, Inc., Debtor, Case No. 01-17870TS, initiated with the Bankruptcy Court
on August 1, 2001. Holding and Homeland continue in possession of their
properties and the management of their businesses as debtors-in-possession
pursuant to Section 1107 and Section 1108 of the Bankruptcy Code. Holding and
Homeland continue to be managed by their respective directors and officers,
subject in each case to the supervision of the Bankruptcy Court.
The Company is a party to ordinary routine litigation
incidental to its business.
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 December 29, 2001.
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/OTCBB") on April 14, 1997. High and low
sales prices of the Common Stock as
9
reported by Nasdaq/NMS for each fiscal quarter of 2000 and 2001 are listed
below:
<Table>
<Caption>
High Low
------ ------
March 25, 2000 $4.531 $3.375
June 17, 2000 $4.500 $3.438
September 9, 2000 $4.375 $3.125
December 30, 2000 $3.375 $0.313
March 24, 2001 $0.688 $0.313
June 16, 2001 $0.510 $0.340
September 8, 2001 $0.340 $0.062
December 29, 2001 $0.090 $0.020
</Table>
On April 5, 2002, there were 866 stockholders of record.
The Company received notification on March 8, 2001 from NASDAQ
of a staff determination to delist the Company's Common Stock for failing to
maintain the required minimum market value of public float and received
notification on March 29, 2001, from NASDAQ of a staff determination to delist
the Company's Common Stock for failing to meet the minimum share price. NASDAQ's
Listing Qualifications Panel completed a review and concurred with the staff's
recommendation to delist the Company's stock. Trading of the Company's Common
Stock has moved to the OTC Bulletin Board.
No cash dividends were declared or paid since the Effective
Date of the Plan of Reorganization. Holding is restricted from paying dividends
by the NBC Loan Agreement, Indenture, and DIP Financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Equity Compensation Plan Information
<Table>
<Caption>
Number of securities to be issued Weighted average exercise Number of securities
upon exercise of outstanding price of outstanding remaining available
Plan category options, warrants and rights options, warrants and rights for future issuance
- ------------- --------------------------------- ---------------------------- ---------------------
Equity compensation plans 878,500 $4.07 140,522
approved by security holders
Equity compensation plans 75,000 3.92 -0-
not approved by security
holders
Total 953,500 $4.06 140,522
</Table>
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 December 29, 2001, the 52 weeks ended December
30, 2000, the 52 weeks ended January 1, 2000, the 52 weeks ended January 2,
1999, and the 53 weeks ended January 3, 1998. See "Notes to Selected
Consolidated Financial Data" for additional information.
10
The selected consolidated financial data should be read in
conjunction with the respective consolidated financial statements and notes
thereto which are contained elsewhere herein.
<Table>
<Caption>
(In thousands, except per share amounts)
52 weeks 52 weeks 52 weeks 52 weeks 53 weeks
ended ended ended ended ended
12/29/01 12/30/00 01/01/00 01/02/99 01/03/98
--------- --------- --------- --------- ---------
Summary of Operating Data:
Sales, net $ 511,591 $ 600,835 $ 559,554 $ 529,576 $ 527,993
Cost of sales 393,701 460,735 425,394 402,261 401,691
--------- --------- --------- --------- ---------
Gross profit 117,890 140,100 134,160 127,315 126,302
Selling and administrative expenses 119,864 133,244 120,594 114,335 112,590
Amortization of excess reorganization value(1) -- -- 6,890 13,672 14,527
Store closing charge(2) 50 2,823 -- -- --
Asset impairment(3) 1,702 -- 925 -- --
--------- --------- --------- --------- ---------
Operating profit (loss) (3,726) 4,033 5,751 (692) (815)
Gain (loss) on disposal of assets (30) (61) (15) 34 (117)
Interest income 853 751 569 426 385
Interest expense(4) (9,458) (10,612) (9,011) (8,484) (8,408)
--------- --------- --------- --------- ---------
Loss before reorganization expense
and income taxes (12,361) (5,889) (2,706) (8,716) (8,955)
Reorganization expense(4) (34,035) -- -- -- --
--------- --------- --------- --------- ---------
Loss before income taxes (46,396) (5,889) (2,706) (8,716) (8,955)
Income tax provision -- -- (1,588) (1,875) (1,689)
--------- --------- --------- --------- ---------
Net loss $ (46,396) $ (5,889) $ (4,294) $ (10,591) $ (10,644)
========= ========= ========= ========= =========
Basic and diluted net loss per common share $ (9.42) $ (1.20) $ (0.87) $ (2.18) $ (2.23)
========= ========= ========= ========= =========
</Table>
<Table>
<Caption>
Consolidated Balance Sheet Data: 12/29/01 12/30/00 01/01/00 01/02/99 01/03/98
--------- --------- --------- --------- ---------
Total Assets $ 122,738 $ 179,758 $ 175,630 $ 165,084 $ 172,768
========= ========= ========= ========= =========
Long-term obligations, including current
portion of long-term obligations $ 49,702 $ 114,247 $ 100,785 $ 89,979 $ 86,002
========= ========= ========= ========= =========
Liabilities subject to compromise(4) $ 72,718 $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Stockholders' equity (deficit) $ (27,875) $ 21,097 $ 27,654 $ 31,868 $ 42,324
========= ========= ========= ========= =========
</Table>
11
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands)
(1) The Company's reorganization value in excess of amounts allocable to
identifiable assets, established from the 1996 restructuring in
accordance with "fresh-start" reporting, of $40,908 was amortized on a
straight-line basis over three years. The excess reorganization value
was fully amortized during the Company's 1999 third quarter ended
September 11, 1999.
(2) For the 52 weeks ended December 30, 2000, the Company recorded a $2,823
store closing charge related to seven stores closed in January 2001.
The charge was recorded to write-off the fixed assets, to recognize
expenses attributable to closing the stores, and to accrue for the
remaining lease obligations. Additionally, a charge of $1,423 was
recorded in cost of sales to reflect a reduction to inventory
attributable to the closeout of the inventory. In the aggregate, the
Company recorded a $4,246 charge related to the closing of these seven
stores. For the 52 weeks ended December 29, 2001, the Company recorded
an additional $50 related to the remaining obligations for these seven
stores.
(3) During the second quarter of 2001, the Company recorded an asset
impairment charge of $1.7 million related to the portion of goodwill
which the Company believes will not be recoverable.
(4) On August 1, 2001, Holding and Homeland filed voluntary petitions (the
'Filing") under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code") with the United States Bankruptcy Court for the
Western District of Oklahoma ("Bankruptcy Court"). The cases filed by
Holding and Homeland are In re Homeland Holding Corporation, Debtor,
Case No. 01-17869TS, and In re Homeland Stores, Inc., Debtor, Case No.
01-17870TS (collectively, the "Chapter 11 Cases"). Holding and Homeland
continue in possession of their properties and the management of their
businesses as debtors-in-possession pursuant to Section 1107 and
Section 1108 of the Bankruptcy Code. Holding and Homeland continue to
be managed by their respective directors and officers, subject in each
case to the supervision of the Bankruptcy Court.
As a result of the bankruptcy filings discussed above, the consolidated
financial statements have been prepared in accordance with AICPA
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under Bankruptcy Code," on a going concern
basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of
business.
As provided by the Bankruptcy Code, the Company initially has the
exclusive right to propose a plan of reorganization ("Plan"). The
Company's exclusive right expires April 30, 2002. The Company expects
to file its proposed Plan in the second quarter of 2002. Nevertheless,
the Company is currently executing a strategy to close unprofitable
locations and to divest selected locations and markets. The Company
began the year with 85 stores, it had 54 stores as of December 29, 2001
and it intends to emerge from bankruptcy with a total of 44 stores.
12
Pursuant to SOP 90-7, Homeland's pre-petition liabilities that are
subject to compromise are reported separately on the balance sheet at
an estimate of the amount that will ultimately be allowed by the
Bankruptcy Court. As of December 29, 2001, the components of the
estimated pre-petition liabilities that are subject to compromise are
as follows:
<Table>
Debt, pre-petition plus accrued interest $63,000
Accounts payable 3,020
Other accrued liabilities 6,698
-------
Total $72,718
=======
</Table>
SOP 90-7 also requires separate reporting of certain expenses, realized
gains and losses, and provisions for losses related to the Filing as
reorganization items. As of December 29, 2001, the components of the
reorganization expense are as follows:
<Table>
Asset impairment $22,248
Store closing charge 5,272
Claims Expense 3,719
Fees 2,796
-------
Total: $34,035
=======
</Table>
In accordance with SOP 90-7, interest expense associated with unsecured
debt has not been reported subsequent to the date of the Filing. The
contractual amount of interest expense on those obligations exceeds the
amount reported by $2.6 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Critical Accounting Policies and Estimates.
The Company's discussion and analysis of its financial
condition and results of operations are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and judgements that
affect the reported amounts of assets, liabilities, revenues and expenses, and
their related disclosures. There can be no assurances that the actual results
will not differ from those estimates. Additionally, as a result of the
bankruptcy filings discussed above, the consolidated financial statements have
been prepared in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under Bankruptcy the Code,"
on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the voluntary bankruptcy filings, such
realization of certain of Company assets and liquidation of certain of Company
liabilities are subject to significant uncertainty. While operating as
debtors-in-possession, the Company may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a
13
plan of reorganization could materially change the amounts and classifications
reported in the consolidated financial statements, which do not give effect to
any adjustments to the carrying value or classification of assets or liabilities
that might be necessary as a consequence of a plan of reorganization. The
Company has identified the policies below as critical to our business operations
and the understanding of our results of operations. For a detailed discussion on
the application of these and other accounting policies, see Note 2 in the Notes
to Consolidated Financial Statements.
Revenue recognition. The Company recognizes revenue at the "point of sale" which
is the completion of each transaction with its customers. While most
transactions are completed by cash or cash equivalent payment, certain pharmacy
related transactions require the Company to seek a portion of the sale
transaction from a third party health care provider. A potential risk to the
Company is the adjudication of a third party pharmacy transaction in an amount
below what the Company expects to receive. The Company has established an
estimated allowance for doubtful accounts to provide for such contingency.
AWG and the concentrations of credit and business risk. As previously discussed,
the Company purchases approximately 70% of its products from AWG pursuant to
both the 1995 Supply Agreement and the 2001 Supply Agreement. In conjunction
with these supply agreements, the Company receives certain rebates and
allowances from AWG as well as an annual distribution from AWG's cooperative
arrangements. The annual distribution is a function of the profitability of the
AWG cooperative and is distributed to its members in the form of cash and
patronage refund certificates. Thus far during the Company's membership, the
annual distribution has been allocated 60% and 40% to cash and patronage
certificates, respectively. The patronage certificates are seven-year interest
bearing certificates. The Company will be eligible to redeem its first patronage
certificate from 1995 in January 2003. Receivables from AWG and the AWG
patronage certificates subject the Company to a concentration of credit risk.
Inventories. Inventories are stated at the lower of cost or market with cost
determined for the majority of the Company's inventories using the retail
method. Under the retail method the valuation of inventories at cost and the
resulting gross margins are calculated by applying a calculated cost-to-retail
ratio to the retail value of inventories. The Company uses the retail method,
for its grocery, health and beauty care and general merchandise inventories,
which represented approximately 75.5% of the Company's total inventory at
December 29, 2001. The remaining inventories are valued on a cost basis with
information provided by suppliers. The retail method is an averaging method that
is widely used in the grocery retail industry. Inherent in the retail method are
certain significant management judgements and estimates including, among others,
cost-to-retail ratios and shrink. These significant estimates, coupled with the
fact that the retail method is an averaging process, can, under certain
circumstances cause differences between the cost inventory recorded on the
Company's general ledger and actual physical inventory results. Each of the
Company's stores will have a minimum of three physical inventories for its
grocery and health and beauty care and general merchandise departments during
2002.
Store closings and asset impairment. The Company records a store closing charge
for the write-down of identified owned-store closings to their net realizable
value. For those locations which are leased, the leasehold improvements are
written down to their net realizable value and an expense is recorded if the
anticipated expenses are in excess of expected sublease rental income. The
Company also reviews its long-lived assets, including goodwill, for impairment.
In the event that changes in circumstances indicate that the carrying value of
assets may not be recoverable, the assets are written-down to fair
14
value and an asset impairment expense is recorded. For purposes of the review,
performed at the store level, allocated acquired goodwill and the other assets
of each store are combined to determine if impairment is appropriate.
Advertising costs. The Company records the costs of its advertising expenditures
as they are incurred.
Pre-opening costs. The Company records costs associated with the opening of new
stores during the period in which they are incurred.
Results of Operations
General
The table below sets forth selected items from the Company's
Consolidated Statements of Operations as a percentage of net sales for the
periods indicated:
<Table>
<Caption>
Fiscal Year
2001 2000 1999
------- ------- -------
Sales, net 100.00% 100.00% 100.00%
Cost of sales 76.96 76.68 76.02
Gross profit 23.04 23.32 23.98
Selling and administrative expenses 23.43 22.18 21.55
Amortization of excess reorganization value -- -- 1.23
Store closing charge 0.01 0.47 --
Asset impairment 0.33 -- 0.17
Operating profit (loss) (0.73) 0.67 1.03
Loss on disposal of assets (0.01) (0.01) --
Interest income 0.17 0.13 0.10
Interest expense (1.85) (1.77) (1.61)
Loss before reorganization expense
and income taxes (2.42) (0.98) (0.48)
Reorganization expense (6.65) -- --
Loss before income taxes (9.07) (0.98) (0.48)
Income tax provision -- -- (0.28)
------- ------- -------
Net loss (9.07)% (0.98)% (0.76)%
======= ======= =======
</Table>
COMPARISON OF FIFTY-TWO WEEKS ENDED DECEMBER 29, 2001 ("2001"), WITH FIFTY-TWO
WEEKS ENDED DECEMBER 30, 2000 ("2000").
Net sales decreased $89.2 million, or 14.9%, from $600.8
million for 2000 to $511.6 million for 2001. The decrease in sales is
attributable to the closing of 31 stores and a decline in comparable store sales
of 7.8%. The Company closed seven stores in January 2001, eight stores in
September 2001, and 16 stores in December 2001. The decrease in comparable store
sales is the result of fiscal year 2001 competitive openings; the impact of
fiscal year 2000 competitive openings, which had yet to anniversary; the
Company's inability to effectively promote during the liquidity challenges of
the third quarter (i.e. inability to purchase necessary
15
quantities of promotional merchandise given vendor credit restrictions); the
impact of the Company's own inventory liquidation sale in the stores which were
closed; and, the disruption caused by the August 1, 2001 bankruptcy filing.
There were 13 significant competitive openings during 2000,
consisting of 4 new Wal-Mart Supercenters, 7 new Wal-Mart Neighborhood Markets
and 2 new independent stores. In 2001, there were 7 competitive openings
including 1 new Wal-Mart Supercenter, 3 new Wal-Mart Neighborhood Markets and 3
new independent stores. Based on information publicly available, the Company
expects that, during 2002, Wal-Mart will open 1 new Supercenter and 1 new
Neighborhood Market, Aldi will open 1 new store, independents will open 2 new
stores, and Target Supercenter will open 3 new stores in the Company's markets.
The Company began the year with 85 stores, it had 54 stores in
operation as of December 29, 2001 and it intends to emerge from bankruptcy with
a total of 44 stores. Net sales for the 44 stores decreased $18.8 million, or
5.3%, from $355.0 million for 2000 to $336.2 million for 2001. Based in part on
the anticipated impact of proposed and recent new store openings and remodelings
by competitors, management believes that market conditions will remain highly
competitive, placing continued pressure on these 44 comparable store sales and
net sales. Management believes that comparable store sales for these 44 stores
will decline approximately 0.1%, during the first quarter of 2002. In response
to this highly competitive environment, the Company intends to utilize its
merchandising strategy to emphasize a competitive pricing structure, as well as
emphasizing quality products and services, selection and convenient store
locations. The in-store merchandising strategy combines a strong presentation of
fresh products along with meaningful values throughout the store on a wide
variety of fresh and shelf stable products each week.
Gross profit as a percentage of sales decreased 0.3% from
23.3% for 2000, to 23.0% for 2001. The decrease in gross profit margin is
attributable to the one-time inventory write-down associated with the closing of
eight stores in September 2001 and the inventory liquidation of 16 stores in
December 2001, partially offset by the inventory write-down recorded in 2000
attributable to the closing of seven stores in January 2001. Excluding the
inventory write-downs described above, gross profit as a percentage of sales
increased 0.3% from 23.6% for 2000, to 23.9% for 2001. The increase in gross
profit margin reflects an increase in the AWG patronage rebate accrual, which
was lower in 2000 as a result of the AWG strike, and a reduced level of
promotional spending versus the prior year as the prior year included more
competitive openings and the grand opening of the Company's acquired stores. The
increase in gross margin was partially offset by continued pressure on pharmacy
and health and beauty care margins and reduced promotional funding dollars from
vendors.
Selling and administrative expenses as a percentage of sales
increased 1.2% from 22.2% for 2000, to 23.4% for 2001. The increase in the
expense ratio is attributable to increased occupancy costs, as a result of
higher utility costs, increased expenses associated with the acquired stores,
increased labor and employee benefits costs, including retention bonuses for
senior executives and Company management, and an unfavorable impact to the
expense ratio as a result of lower sales and the fixed nature of certain
expenses, such as rent expense. The increase in the expense ratio was partially
offset by a reduction in advertising expenditures, lower supply costs and the
absence of start-up expenses of stores acquired in 2000. Additionally, during
2000, the Company's expense ratio was lower as a result of a reduction in the
reserves for doubtful
16
accounts due to a collection of a fully reserved receivable of $0.6 million and
improved collections experience and a reduction in general liability reserves
due to improved claims experience.
The Company recorded a store closing charge of $2.8 million in
2000 related to the closing of seven stores in January 2001. The store closing
charge relates to expenses incurred to close the stores, to write-off fixed
assets and to accrue for remaining lease obligations. In 2001, the Company
recorded an additional $50,000 related to the remaining obligation for these
seven stores.
During 2001, the Company recorded an asset impairment
provision in the amount of $1.7 million related to goodwill that the Company
believes will not be recoverable.
Operating profit decreased $7.7 million from an operating
profit of $4.0 million for 2000, to an operating loss of $3.7 million for 2001.
Excluding the $4.6 million inventory write-down, the $50,000 store closing costs
and the $1.7 million asset impairment from the 2001 results and the $4.2 million
store closing costs from the 2000 results, operating profit decreased $5.6
million from $8.2 million for 2000, to $2.6 million for 2001. The decline in
operating profit reflects the decline in sales and the corresponding decrease in
gross profit dollars partially offset by a decrease in selling and
administrative expense dollars.
Interest expense, net of interest income, decreased $1.3
million from $9.9 million for 2000, to $8.6 for 2001. The decrease reflects a
reduction in accrued interest since August 1, 2001 for the Notes (See Notes to
Consolidated Financial Statements), a reduction in the variable interest rates
and additional interest income from the interest bearing certificates of AWG,
partially offset by the amortization of fees attributable to obtaining the DIP
Financing, additional interest expense attributable to the acquired stores and
increased borrowings under the New Loan Agreement. In accordance with SOP 90-7,
interest expense associated with the Notes has not been reported subsequent to
the date of the Filing. The contractual amount of interest expense on those
obligations exceeds the amount reported by $2.6 million. See "Liquidity and
Capital Resources."
During 2001, the Company recorded reorganization charges,
which included store closing charges and asset impairment charges (See Notes to
Consolidated Financial Statements). The store closing charge of $23.3 million
(excluding inventory write-down) included the write-down of property, plant and
equipment and other assets of $18.0 million and holding costs of $5.3 million.
Holding costs primarily consist of obligations under operating leases and
related expenses expected to be paid over the remaining lease terms, which range
from 2001 to 2010. Additionally, the Company has recorded an asset impairment
charge of $4.2 million related to one unprofitable operating store for the
write-down of goodwill and property, plant and equipment and related to other
assets which the Company believes will not be recoverable. The reorganization
charge also includes an estimated $3.7 million in accrued liabilities related to
potential bankruptcy claims and $2.8 million in fees attributable to bankruptcy
expenses. The potential bankruptcy claims include claims attributable to
rejected leases and other executory contracts, certain trade payables, and other
third party claims. The Company has received a listing of all submitted claims
and currently is in the process of evaluating the nature and amounts of each of
these claims. Management believes that the current amount of claims expense is a
reasonable estimation, however, until there is a concluded review of all the
claims by the
17
Company and a final adjudication of these claims by the Bankruptcy Court, the
estimated claims expense is subject to change. Finally, the Company is in the
process of selling and or closing 10 additional stores. However, disposition of
these stores is subject to the approval of the Bankruptcy Court and, therefore,
no store closing charge was recorded in 2001. The Company believes that a store
closing charge will be incurred during the first quarter of 2002, in the
approximate range of $2.0 million to $2.5 million, related to these stores.
The Company did not generate income tax expense or benefit for
2001. In accordance with SOP 90-7, the tax benefit realized from utilizing
pre-reorganization net operating loss carryforwards is recorded as a reduction
of the reorganization value in excess of amounts allocable to identifiable
assets rather than realized as a benefit on the statement of operations.
Additionally, upon the completion of the amortization of reorganization value in
excess of amounts allocable to identifiable assets, the tax benefit realized
from utilizing pre-reorganization net operating loss carryforwards is recorded
as a reduction of other intangibles existing at the reorganization date until
reduced to zero and then as an increase to stockholder's equity. At December 29,
2001, the Company had a tax net operating loss carryforward of approximately
$45.3 million, which may be utilized to offset future taxable income to the
limited amount of $27.4 million in 2002 and $3.3 million per year thereafter. If
the Company successfully emerges under a confirmed Plan, further restrictions of
net operating loss carryforwards could result. Due to the uncertainty of
realizing future tax benefits, a full valuation allowance was deemed necessary
to offset entirely the net deferred tax assets as of December 29, 2001.
Net loss increased $40.5 million from net loss of $5.9
million, or net loss per diluted share of $1.20, for 2000 to net loss of $46.4
million, or net loss per diluted share of $9.42, for 2001.
EBITDA decreased $6.9 million from $20.1 million, or 3.4% of
sales, for 2000 to $13.2 million, or 2.6% of sales for 2001. The Company
believes that EBITDA is a useful supplemental disclosure for the investment
community. EBITDA, however, should not be construed as a substitute for earnings
or cash flow information required under generally accepted accounting
principles.
COMPARISON OF FIFTY-TWO WEEKS ENDED DECEMBER 30, 2000 ("2000"), WITH FIFTY-TWO
WEEKS ENDED JANUARY 1, 2000 ("1999").
Net sales increased $41.2 million, or 7.4%, from $559.6
million for 1999 to $600.8 million for 2000. The increase in sales was
attributable to the acquisition of nine stores in April 1999, the acquisition of
four stores in November 1999, the acquisition of three stores in February 2000,
and the acquisition of three stores in April 2000, partially offset by a 4.4%
decrease in comparable store sales and the closing of one store in 1999. The
decrease in comparable store sales was the result of competitive openings during
fiscal year 2000, the advancement of purchases by customers into the final week
of 1999 due to uncertainty with the year 2000 year-end transition, a labor
dispute at AWG, and the cycling of strong promotions in 1999.
The AWG labor dispute involved AWG's warehousing and
transportation employees and impacted the Company's sales through informational
leaflets dissuading customers from patronizing Company stores, inaccurate store
order fulfillment, and late deliveries.
18
Although the labor dispute was resolved in mid-June 2000, management believes
that the impact of the dispute continued into the beginning of the third
quarter. The most significant impact of the labor dispute is the reduced annual
AWG patronage rebate which had an estimated $1.6 million negative impact on the
Company's results.
During the fourth quarter of 2000, the Company made the
decision to close seven stores that had become unprofitable and in which the
Company saw limited potential. These seven stores in the aggregate had sales of
$32.5 million, and were closed by the end of January 2001. In the fourth quarter
of 2000, the Company recorded closed store expenses in the amount of $4.2
million. These expenses include a $1.4 million charge relating to the closeout
of inventory, which is included in cost of sales, and a $2.8 million charge
relating to expenses incurred to close the stores, to write-off fixed assets and
to accrue remaining lease obligations.
Gross profit as a percentage of sales decreased 0.7% from
24.0% for 1999, to 23.3% for 2000. The decrease in gross profit margin was
primarily attributable to the reduction in the annual AWG patronage rebate due
to the AWG labor dispute and the one-time charge for the seven closed stores,
both issues which have been previously discussed. Excluding these two events,
gross profit as a percentage of sales decreased 0.2% from 24.0% for the 52 weeks
ended January 1, 2000, to 23.8% for the 52 weeks ended December 30, 2000. The
remaining decrease in gross margin reflects the impact of specific promotional
activities as the Company responded to certain new competitive store openings;
special advertisements for the grand openings of the Company's acquired stores;
and, the increased cost of goods for pharmaceutical products.
Selling and administrative expenses as a percentage of sales
increased 0.6% from 21.6% for 1999, to 22.2% for 2000. The increase in the
expense ratio was attributable to increased occupancy costs associated with the
acquired stores; to increased depreciation costs attributable to the Company's
capital expenditure program for store remodels and maintenance and
modernization; to increased labor costs; to increases in the cost of store
supplies; to increases in utility costs; to start-up expenses related to the
Company's February and April 2000 acquisitions as well as the opening of the
Company's new store in September, partially offset by a reduction in the
reserves for doubtful accounts due to a collection of a fully reserved
receivable of $0.6 million and improved collections experience and a reduction
in general liability reserves due to improved claims experience. The Company
continues to review alternatives to reduce selling and administrative expenses
and cost of sales in order to provide opportunities to pass additional savings
along to its customers in the form of price reductions in certain categories.
The Company recorded a store closing charge of $2.8 million in
2000 related to the closing of seven stores in January 2001. The store closing
charge relates to expenses incurred to close the stores, to write-off fixed
assets and to accrue remaining lease obligations. Additionally, the Company
recorded, as a charge to cost of sales in 2000, a $1.4 million expense related
to the closeout of merchandise for these stores. Combining these two elements,
the total estimated cost of closing these stores was $4.2 million.
The amortization of the excess reorganization value amounted
to $6.9 million in 1999. The excess reorganization value was amortized over
three years, on a straight-line basis, and became fully amortized in the third
quarter of 1999.
19
The Company recorded an asset impairment provision in 1999 in
the amount of $0.9 million related to a previously closed store. The provision
reduced the carrying value of the real property to a current estimate of fair
value.
Operating profit decreased $1.8 million from $5.8 million for
1999, to $4.0 million for 2000. Excluding the $4.2 million store closing costs
from the 2000 results and the amortization of excess reorganization value and
asset impairment from the 1999 results, operating profit decreased $5.3 million
from $13.6 million for 1999, to $8.2 million for 2000. The decline in operating
profit reflects the decline in gross profit as a percentage of sales combined
with the increase in selling and administrative expenses.
Interest expense, net of interest income, increased $1.5
million from $8.4 million in 1999 to $9.9 million in 2000. The increase reflects
additional interest expense attributable to the acquired stores and increases in
variable interest rates, partially offset by additional interest income from the
interest bearing certificates of AWG. During 2001, the Company anticipates that
interest expense will increase primarily due to the increased debt. See
"Liquidity and Capital Resources."
The Company did not generate income tax expense or benefit for
2000.
Net loss increased $1.6 million from a net loss of $4.3
million, $0.87 per share for 1999, to a net loss of $5.9 million, or $1.20 per
share for 2000. Excluding the $4.2 million store closing costs from the 2000
results, the amortization of excess reorganization value and asset impairment
from the 1999 results, and the loss on disposal of assets from both years, net
income declined $4.8 million from net income of $3.5 million, or $0.71 per share
in 1999, to a net loss of $1.6 million or $0.32 per share for 2000.
EBITDA decreased $4.2 million from $24.3 million, or 4.3% of
sales, in 1999 to $20.1 million, or 3.3% of sales in 2000. The Company believes
that EBITDA is a useful supplemental disclosure for the investment community.
EBITDA, however, should not be construed as a substitute for earnings or cash
flow information required under generally accepted accounting principles.
Liquidity and Capital Resources
Debt. The primary sources of liquidity for the Company's
operations have been borrowings under credit facilities and internally generated
funds.
On December 17, 1998, the Company entered into a Loan
Agreement, as subsequently amended, with National Bank of Canada ("NBC"), as
agent and lender, and two other lenders, Heller Financial, Inc. and IBJ
Whitehall Business Credit, Inc., under which these lenders provided a working
capital and letter of credit facility, and a term loan facility ("NBC Loan
Agreement"). On August 1, 2001, the Bankruptcy Court approved the provision by
the lenders led by NBC, of continued financing under the NBC Loan Agreement. The
financing provided by NBC and the other lenders was provided on substantially
the same terms as NBC and the lenders provided financing prior to August 1,
2001, with two notable exceptions; the maturity date was shortened to August 18,
2001, from August 2, 2002, and the maximum amount available under the Revolving
Facility was reduced to $33.0 million from $37.0 million. Additionally, the
20
Bankruptcy Court approved the provision by Associated Wholesale Grocers, Inc.
("AWG"), the primary supplier to the Company, of an advance of $3.1 million
under a supply agreement between AWG and the Company. The advance provided by
AWG bears interest at the prime rate plus 200 basis points per annum, has a
maturity date of May 2002 and is secured by liens on, and security interest in,
the equity of the Company in AWG, as well as the other assets which secured the
pre-petition obligations of the Company to AWG.
On August 15, 2001, in connection with the Chapter 11 Cases,
the Company entered into New Loan Agreements with Fleet Retail Finance Inc.
("Fleet"), Back Bay Capital Funding L.L.C. ("Back Bay") and Associated Wholesale
Grocers, Inc. ("AWG") for debtor-in-possession financing ("DIP Financing") and
paid amounts outstanding under the existing Loan Agreement with NBC and certain
other lenders. Under the DIP Financing, Fleet and Back Bay provide a revolving
credit facility ("Revolver") under which the Company may borrow the lesser of
(a) $25.0 million or (b) the applicable borrowing base ($6.7 million at April 5,
2002), and a $10.0 million term loan for a maximum aggregate principal amount of
$35.0 million. Funds borrowed under the Revolver were used to repay borrowings
under the NBC Loan Agreement, pay certain pre-petition indebtedness approved by
the Bankruptcy Court and for general corporate purposes of the Company. An
additional $29.0 million of DIP financing was provided by AWG which included a
new $16.5 million term loan (used to repay borrowings under the NBC Loan
Agreement), a restated term loan totaling $9.4 million replacing previously
outstanding acquisition-related loans, and a $3.1 million term loan representing
an advance of rebate amounts expected to be earned by the Company under the 1995
Supply Agreement. The DIP Financing loans are secured by liens on, or security
interests in, all of the assets of the Company and would have a super-priority
administrative status under the Bankruptcy Code. In conjunction with the AWG
loans described above, the Company entered into a new 10-year supply agreement
("2001 Supply Agreement") with AWG, which contains volume protection rights,
right of first refusal and non-compete agreements similar to those in the 1995
Supply Agreement with AWG. For additional information, see also "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
With the exception of the $9.4 million and $3.1 million term
loans from AWG, the DIP Financing matures on the earlier of (a) August 1, 2003,
(b) emergence through a confirmed plan of reorganization approved by the
Bankruptcy Court or (c) other events as defined in the New Loan Agreements. The
$9.4 million AWG term loan matures in February 2007 and the $3.1 million AWG
term loan matures in May 2002.
The interest rate payable on the Revolver can be characterized
as either a London Interbank Offered Rate ("LIBOR") Loans, or base rate loan
based on the prime rate publicly announced by Fleet National Bank plus a
percentage which varies based on a number of factors, including: (a) excess
availability under the Revolver; (b) the time period; and (c) whether the
Company elects to use LIBOR. The current interest rate pricing under the
Revolver is either the base rate plus 50 basis points or LIBOR plus 250 basis
points. As of December 29, 2001, the Company had $7.2 million of borrowings
under the Revolver at a weighted average rate of 4.65% and $4.8 million of
excess availability. As of April 5, 2002, the Company had no borrowings under
the Revolver and $7.7 million of excess availability ($6.7 million attributable
to the borrowing base and $1.0 million of cash). The $10.0 million Back Bay term
loan, which was fully funded on August 15, 2001, bears interest at an annual
fixed rate of 16.50%. The $16.5 million AWG term loan, which was fully funded on
August 15, 2001, bears interest at the prime
21
rate plus 200 basis points (8.00% at December 29, 2001). There are no scheduled
principal payments on either of the term loans; however, the Company is required
to make certain mandatory prepayments as a result of asset sales or events of
default as further defined in the New Loan Agreements. The application of the
mandatory prepayments to the outstanding principal balances of the term loans is
subject to an Inter-Creditor Agreement between Fleet/Back Bay and AWG. The AWG
restated term loan has an outstanding balance as of December 29, 2001 of $8.8
million and bears interest at the prime rate plus 100 basis points (7.00% at
December 29, 2001), subject to minimum limitations. Principal payments are
required weekly. The AWG Supply Agreement term loan has an outstanding balance
as of December 29, 2001 of $1.5 million and bears interest at the prime rate
plus 200 basis points (8.00% at December 29, 2001). Principal payments are
required each four-week period.
The New Loan Agreements include certain customary
restrictions on acquisitions, asset dispositions, capital expenditures,
consolidations and mergers, distributions, divestitures, indebtedness, liens and
security interests and transactions with affiliates and payment of dividends.
The New Loan Agreement also provides for acceleration of principal and interest
payments in the event of certain material adverse changes, as determined by the
lenders.
As of August 2, 1996, the Company entered into an Indenture
with Fleet National Bank (predecessor to State Bank and Trust Company), as
trustee, under which the Company issued $60.0 million principal amount of 10%
Senior Subordinated Notes due 2003 ("Notes"). Homeland failed to make the
required $3.0 million interest payment on August 1, 2001, which constituted a
default under the Indenture; enforcement by the holders of the Notes of their
remedies is stayed by the Bankruptcy Code.
During the second quarter of 2001, the Company began to
experience increasing liquidity difficulties, particularly following amendments
to the then effective NBC Loan Agreement in the second quarter reducing
available credit on which NBC and the other lenders under the then effective NBC
Loan Agreement insisted. While trade creditors generally continued to provide
credit to the Company on customary credit terms during that quarter, some trade
creditors imposed tighter credit terms, further reducing the liquidity of the
Company. Since the August 1, 2001 filing, the Company has been in negotiations
with its critical vendors and has been encouraged by the support received
relative to the return to trade terms received by the Company prior to the
filing. The Company believes that the availability of funds sufficient to permit
the Company to pay its trade creditors in accordance with their customary credit
terms is critical to the continued willingness of the trade creditors to supply
the Company.
Working Capital and Capital Expenditures. The Company's
primary sources of capital have been borrowing availability under revolving
facilities and cash flow from operations, to the extent available. The Company
uses the available capital resources for working capital needs, capital
expenditures and repayment of debt obligations.
22
The Company's EBITDA (earnings before net interest expense,
taxes, depreciation and amortization, inventory write-down, store closing
charges, asset impairment, reorganization items 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:
<Table>
<Caption>
52 weeks ended 52 weeks ended 52 weeks ended
December 29, 2001 December 30, 2000 January 1, 2000
----------------- ----------------- ---------------
Loss before income taxes $(46,396) $ (5,889) $ (2,706)
Inventory write-down 4,594 1,423 --
Store closing charges 50 2,823 --
Amortization of excess
reorganization value -- -- 6,890
Asset impairment 1,702 -- 925
Reorganization expense 34,035 -- --
Interest income (853) (751) (569)
Interest expense 9,458 10,612 9,011
Loss on disposal of assets 30 61 15
Depreciation and amortization 10,611 11,849 10,774
-------- -------- --------
EBITDA $ 13,231 $ 20,128 $ 24,340
======== ======== ========
As a percentage of sales 2.59% 3.35% 4.35%
======== ======== ========
As a multiple of interest expense,
net of interest income 1.54x 2.04x 2.88x
======== ======== ========
</Table>
Net cash provided by operating activities increased $2.4
million from $2.5 million in 2000, to $4.9 million in 2001. The increase versus
the prior year principally reflects the liquidation of inventory, as a result of
31 store closings, and favorable reductions in receivables, partially offset by
the unfavorable decreases in trade payables, the payment of fees related to the
bankruptcy, and the decline in EBITDA. The decrease in trade payables is
attributable to reduced trade credit by selected vendors, the decline in sales
and the closing of the 31 stores.
23
Net cash used in investing activities decreased $7.8 million,
from $9.1 million in 2000 to $1.3 million in 2001. Capital expenditures
decreased $4.2 million from $5.5 million for the 52 weeks ended December 30,
2000 to $1.3 million for the 52 weeks ended December 29, 2001.The Company
invested $1.3 million, $5.5 million, and $9.0 million in capital expenditures
for 2001, 2000, and 1999, respectively.
Net cash used in financing activities decreased $14.7 million
from net cash provided by financing activities of $6.5 million in 2000 to net
cash used in financing activities of $8.2 million in 2001. The decrease
primarily reflects book overdrafts, additional principal payments of the
obligations during 2001, the changes resulting from the DIP Financing, and
payment of financing costs.
The Company considers its capital expenditure program a
strategic part of the overall plan to support its market competitiveness. Cash
capital expenditures for 2002 are expected to be at approximately $4.7 million,
assuming an emergence from the Bankruptcy during the 3rd quarter of 2002. The
estimated 2002 capital expenditures, of $4.7 million, is expected to be invested
primarily in the on-going maintenance and modernization of certain stores and in
information technology.
The markets in which the Company operates remain increasingly
competitive, negatively affecting the Company's liquidity. The Company's near
and long-term operating strategies focus on improving sales, improving
operational efficiencies, and the productivity of assets. The Company intends to
pursue its merchandising strategy in an attempt to increase its sales and the
Company has devised plans to improve its gross margin and expense performance.
The Company believes that cash on hand, net cash flow from
operations, proceeds from certain expected asset sales and borrowings under the
DIP Financing will be sufficient to fund its cash requirements through fiscal
year 2002 or, if earlier, through the confirmed date of a plan of reorganization
which will be contingent, in part, upon securing financing on acceptable terms.
Cash requirements will consist primarily of payment of principal and interest on
outstanding indebtedness, working capital requirements and capital expenditures.
The Company's future operating performance and ability to service or refinance
its current indebtedness will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control.
Information discussed herein includes statements that are
forward-looking in nature, as defined in the Private Securities Litigation
Reform Act. As with any forward-looking statements, these statements are subject
to a number of factors and assumptions, including competitive activities,
economic conditions in the market area and results of its future capital
expenditures. In reviewing such information, it should be kept in mind that
actual results may differ materially from those projected or suggested in such
forward-looking statements.
Inflation/Deflation
Although the Company does not expect inflation or deflation to
have a material impact in the future, there can be no assurance that the
Company's business will not be affected by inflation or deflation in future
periods.
24
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No 141 prohibits the use of the
pooling-of-interest method in accounting for business combinations and further
clarifies the criteria to recognize intangible assets separately from goodwill.
SFAS No. 141 is effective for business combinations initiated after June 30,
2001. SFAS No. 142 changes the accounting for goodwill and intangible assets
with indefinite lives to no longer require amortization, but requires an annual
review for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001 for goodwill and intangible
assets acquired prior to July 1, 2001, and applies to all goodwill and other
intangible assets recognized in an entity's financial statements as of that
date. Goodwill and intangible assets acquired after June 30, 2001 will be
immediately subject to the non-amortization and amortization provisions of SFAS
No. 142. Amortization expense for 2001 includes $567 related to the amortization
of goodwill and intangible assets that will not be required for fiscal years
beginning after December 15, 2001.
In June 2001, the FASB also issued SFAS No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143, effective for fiscal years
beginning after June 15, 2002, addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. In August 2001, the FASB issued SFAS No. 144,
"Accounting for Impairment of Long-lived Assets and Long-lived Assets to be
Disposed Of." SFAS No. 144, effective for fiscal years beginning after December
15, 2001, supercedes existing pronouncements related to impairment and disposal
of long-lived assets. The Company is currently assessing the impact of these
pronouncements on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 established a new
model for accounting for derivatives and hedging activities. The Company adopted
SFAS No. 133, as amended, beginning January 1, 2001. The adoption of this
standard did not have a material effect on the Company's financial statements.
25
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
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.
26
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 case of members of management) of the directors and
management of the Company.
<Table>
<Caption>
Years with the
Company and/or
Age Position Safeway
--- -------- --------------
John A. Shields 58 Chairman of the Board, Director --
David B. Clark 49 President, Chief Executive 4
Officer and Director
Wayne S. Peterson 44 Senior Vice President 3
Finance, Chief Financial
Officer and Secretary
John C. Rocker* 47 Vice President - Operations 3
Steven M. Mason* 47 Vice President - Marketing 31
Deborah A. Brown 41 Vice President, Corporate 6
Controller, Treasurer and
Assistant Secretary
Prentess E. Alletag, Jr.* 55 Vice President - Human 32
Resources
Robert E. (Gene) Burris 54 Director --
Edward B. Krekeler, Jr. 58 Director --
Laurie M. Shahon 50 Director --
William B. Snow 70 Director --
</Table>
* Messrs. Mason, Rocker and Alletag only serve as officers for Homeland.
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
27
Oats Markets, Inc., a publicly reporting health food supermarket, and a director
of 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., a retail buying cooperative of which
Homeland is a member.
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 nation's third largest grocery
wholesaler, prior to its acquisition by Fleming Companies, 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 became Vice President - Human Resources.
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 96% of the Store's unionized employees.
Pursuant to the present collective bargaining 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 Managing Director and Portfolio Manager
at Investors Management
28
Group since September 1999. From September 1997 to April 1999, he was a senior
product manager of First National Bank North Dakota. 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 Reliastar Investment Research, Inc. (formerly known as 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
Safelite Glass Corp.
William B. Snow became a director of the Company on August 2,
1996. Since 1994, Mr. Snow has served as Vice Chairman of Movie Gallery, Inc.,
the second largest video specialty retailer in the United States. 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.
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 four other most highly
compensated executive officers of the Company during the fiscal year ended
December 29, 2001 (hereinafter referred to as the "Named Executive Officers")
and for the fiscal years ended December 30, 2000 and January 1, 2000:
SUMMARY COMPENSATION TABLE
Annual Compensation
<Table>
<Caption>
Long-Term
Name and Compensation All Other
Principal Position Year Salary Bonus Option Awards Compensation
------------------ ---- -------- -------- ------------- ------------
David B. Clark(1)(2)(3) 2001 $265,000 $ 50,000 -- $192,053
President, Chief 2000 265,000 -- 110,000 55,069
Executive Officer and 1999 262,403 192,617 20,000 24,671
Director
Wayne S. Peterson(1)(4)(5) 2001 $157,500 $ 35,000 -- $ 8,817
Senior Vice President 2000 155,192 -- 150,000 8,956
Finance, Chief Financial 1999 150,000 73,350 20,000 8,887
Officer and Secretary
Steven M. Mason(6)(7) 2001 $137,100 $ 20,000 -- $ 10,821
Vice President/Marketing 2000 136,274 -- 25,000 10,831
1999 133,737 65,423 15,000 10,749
John C. Rocker(1)(8)(9) 2001 $131,250 $ 20,000 -- $ 9,646
Vice President/Operations 2000 129,327 -- 25,000 9,705
1999 125,000 61,125 15,000 13,785
Deborah A. Brown(10)(11) 2001 $ 90,000 $ 30,000 -- $ 8,421
Vice President, Corporate 2000 85,385 -- 25,000 8,446
Controller, Treasurer and 1999 75,000 41,675 9,000 7,124
Assistant Secretary
</Table>
- -------------
(1) Mr. Clark joined the Company in February 1998, Mr. Peterson joined
the Company in October 1998 and Mr. Rocker joined the Company in
September 1998.
(2) Other compensation during 2001 for Mr. Clark includes the
forgiveness of promissory notes and accrued interest of $182,630; auto
allowance of $7,800; reimbursement for private life insurance premium
of $1,281; and Company-provided life insurance premium of $342.
30
(3) Mr. Clark was granted options to purchase 100,000 shares of Common
Stock at an exercise price of $5.50 per share, under the Stock Option
Plan as provided for under his employment agreement with the Company.
This option agreement terminated on December 6, 2000, and was replaced
by the Amended & Restated Stock Option Agreement dated December 6,
2000, granting Mr. Clark options to purchase 100,000 shares of Common
Stock, of which 80,000 shares are exercisable, at an exercise price of
$2.00 per share. The options become exercisable ratably over five years
commencing February 17, 1999, and will expire on February 17, 2008. Mr.
Clark was granted stock options to purchase 30,000 shares of Common
Stock 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 which 24,000 shares are exercisable, 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. Mr. Clark was granted options to purchase 20,000 shares
of Common Stock, of which 8,000 are exercisable, on June 30, 1999, at
an exercise price of $3.00 per share. The options become exercisable
ratably over five years commencing June 30, 2000, and will expire on
June 30, 2009. Mr. Clark was granted options to purchase 60,000 shares
of Common Stock, of which 24,000 are exercisable, on June 1, 2000, at
an exercise price of $4.00 per share. The options become exercisable
ratably over five years commencing June 1, 2001, and will expire on
June 1, 2010. Mr. Clark was granted options to purchase 50,000 shares
of Common Stock, of which 10,000 are exercisable, on December 6, 2000,
at an exercise price of $2.00 per share. The options become exercisable
ratably over five years commencing December 6, 2001, and will expire on
December 6, 2010.
(4) Other compensation during 2001 for Mr. Peterson includes auto
allowance of $7,800; reimbursement for private life insurance premium
of $855; and Company-provided life insurance premium of $162.
(5) Mr. Peterson was granted options to purchase 50,000 shares of
Common Stock, of which 30,000 are exercisable at an exercise price of
$3.50 per share outside the Stock Option Plan as provided for under his
employment agreement with the Company. The options become exercisable
ratably over five years commencing October 19, 1999, and will expire on
October 19, 2008. Mr. Peterson was granted options to purchase 20,000
shares of Common Stock, of which 8,000 are exercisable, on June 30,
1999 at an exercise price of $3.00 per share. The options become
exercisable ratably over five years commencing June 30, 2000, and will
expire on June 30, 2009. Mr. Peterson was granted options to purchase
50,000 shares of Common Stock, of which 20,000 are exercisable, on June
1, 2000, at an exercise price of $4.00 per share. The options become
exercisable ratably over five years commencing June 1, 2001, and will
expire on June 1, 2010. Mr. Peterson was granted options to purchase
100,000 shares of Common Stock, of which 20,000 are exercisable, on
December 6, 2000, at an exercise price of $2.00 per share. The options
become exercisable ratably over five years commencing December 6, 2001,
and will expire on December 6, 2010.
(6) Other compensation during 2001 for Mr. Mason includes auto
allowance of $7,800; reimbursement for private life insurance premium
of $2,844; and Company-provided life insurance premium of $177.
31
(7) On May 13, 1997, Mr. Mason was granted options to purchase 12,000
shares of Common Stock, all of which are exercisable at an exercise
price of $6.50 per share. The options will expire on May 13, 2007. Mr.
Mason was granted options in July 1998 to purchase 13,000 shares of
Common Stock, of which 10,400 are exercisable at an exercise price of
$7.625 per share. The options are exercisable ratably over five years
commencing May 13, 1999, and will expire on July 10, 2008. Mr. Mason
was granted options to purchase 15,000 shares of Common Stock, of which
6,000 are exercisable, on June 30, 1999 at an exercise price of $3.00
per share. The options become exercisable ratably over five years
commencing June 30, 2000, and will expire on June 30, 2009. Mr. Mason
was granted options to purchase 25,000 shares of Common Stock, of which
10,000 are exercisable, on June 1, 2000, at an exercise price of $4.00
per share. The options become exercisable ratably over five years
commencing June 1, 2001, and will expire on June 1, 2010.
(8) Other compensation during 2001 for Mr. Rocker includes auto
allowance of $7,800; reimbursement for private life insurance premium
of $1,684; and Company-provided life insurance premium of $162.
(9) Mr. Rocker was granted options to purchase 25,000 shares of Common
Stock, of which options with respect to 15,000 shares are presently
exercisable at an exercise price of $4.75 per share outside the Stock
Option Plan as provided for under his employment agreement with the
Company. The options become exercisable ratably over five years
commencing September 14, 1999, and will expire on September 14, 2008.
Mr. Rocker was granted options to purchase 15,000 shares of Common
Stock, of which 6,000 are exercisable, on June 30, 1999 at an exercise
price of $3.00 per share. The options become exercisable ratably over
five years commencing June 30, 2000, and will expire on June 30, 2009.
Mr. Rocker was granted options to purchase 25,000 shares of Common
Stock, of which 10,000 are exercisable, on June 1, 2000, at an exercise
price of $4.00 per share. The options become exercisable ratably over
five years commencing June 1, 2001, and will expire on June 1, 2010.
(10) Other compensation during 2000 for Ms. Brown includes auto
allowance of $7,800; reimbursement for private life insurance premium
of $568; and Company-provided life insurance premium of $53.
(11) On June 22, 1998, Ms. Brown was granted options to purchase 13,000
shares of Common Stock, of which 10,400 are exercisable at an exercise
price of $6.125 per share. The options become exercisable ratably over
five years commencing June 22, 1999, and will expire on June 22, 2008.
Ms. Brown was granted options to purchase 9,000 shares of Common Stock,
of which 3,600 are exercisable, on June 30, 1999 at an exercise price
of $3.00 per share. The options become exercisable ratably over five
years commencing June 30, 2000, and will expire on June 30, 2009. Ms.
Brown was granted options to purchase 25,000 shares of Common Stock, of
which 10,000 are exercisable, on June 1, 2000, at an exercise price of
$4.00 per share. The options become exercisable ratably over five years
commencing June 1, 2001, and will expire on June 1, 2010.
There were no grants of options to the Named Executive Officers during
2001.
32
EMPLOYMENT CONTRACTS WITH NAMED EXECUTIVE OFFICERS
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, including a temporary
residence; (b) a company car; and (c) 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. If the
Company terminates Mr. Clark's employment for any reason other than cause or
disability or his employment is terminated by Mr. Clark following a change of
control or certain trigger events (each as defined), Mr. Clark will receive (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. Pursuant to the employment agreement, Mr. Clark's loan of
$125,000 plus all accrued interest was deemed cancelled on February 16, 2001.
The loan had an annual interest rate of 5.50%, and the total amount of
indebtedness cancelled was $146,780. On June 1, 2000, the Company entered into a
letter agreement with Mr. Clark whereby the Company agreed to loan Mr. Clark
$90,000 as a result of the loss Mr. Clark incurred on the sale of his
Birmingham, Alabama home. Mr. Clark agreed to use the proceeds of the loan to
purchase a minimum of 15,000 shares Company stock in open market purchases.
Payments due on the loan are payable in equal principal amounts of $30,000, plus
accrued interest, on the anniversary date of the loan. So long as Mr. Clark
remains employed by the Company on an anniversary date, such date's payment of
principal and interest will be forgiven. As per the agreement, $35,850 was
forgiven on June 1, 2001. Additionally, if Mr. Clark terminates his employment
following a Trigger Event (as defined in his employment agreement), the
outstanding principal balance and accrued interest will be forgiven. This loan
has an annual interest rate of 6.50%, and the total amount of indebtedness as of
December 29, 2001 was $62,275. On December 26, 2000, the Company entered into a
letter agreement with Mr. Clark. The letter agreement provides that, in the
event of a change of control of Holding or Homeland, the Company will pay to Mr.
Clark an amount equal to his target amount of incentive compensation. Such
amount is not dependent on achievement of the criteria under the Management
Incentive Plan or subject to pro ration. On May 18, 2001, the Company entered
into a Supplemental Compensation Agreement which provides for a retention
payment, less any amounts payable under the fiscal 2001 management incentive
plan, and a payment upon the successful restructuring of the Company. The
retention payment of $198,750 is payable on April 15, 2002 and the success
incentive payment of $596,250 is payable 120 days after the restructuring. On
October 25, 2001, Mr. Clark entered into a Retention and Severance Agreement.
This agreement amended the employment agreement of February 17, 1998, terminated
the change of control agreement of December 26, 2000, and terminated the
Supplemental Compensation Agreement of May 18, 2001. The retention payment is
$458,450 of which 40% was paid on January 15, 2002, and the balance is payable
upon emergence from bankruptcy. If the Company terminates Mr. Clark's employment
for any reason other than cause, Mr. Clark will receive 200% of his annual base
salary.
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 provides for a base salary of
$150,000, subject to increase from time
33
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, including a temporary residence; (b) a company car or car
allowance; and (c) an executive term life insurance policy in the face amount of
$500,000. If the Company terminates Mr. Peterson's employment for any reason
other than cause or disability, Mr. Peterson will be paid (a) his base salary
for one year and (b) a lump sum payment of an amount equal to the product of (i)
Mr. Peterson's target bonus under the Company's incentive bonus plan for the
year in which employment terminates and (ii) 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 December 26,
2000, the Company entered into a letter agreement with Mr. Peterson. The letter
agreement provides that, in the event of a change of control of Holding or
Homeland, the Company will pay to Mr. Peterson an amount equal to his target
amount of incentive compensation. Such amount is not dependent on achievement of
the criteria under the Management Incentive Plan or subject to pro ration. On
May 18, 2001, the Company entered into a Supplemental Compensation Agreement
which provides for a retention payment, less any amounts payable under the
fiscal 2001 management incentive plan, and a payment upon the successful
restructuring of the Company. The retention payment of $118,125 is payable on
April 15, 2002 and the success incentive payment of $354,375 is payable 120 days
after the restructuring. On October 25, 2001, Mr. Peterson entered into a
Retention and Severance Agreement. This agreement amended the employment
agreement of July 6, 1998, terminated the change of control agreement of
December 26, 2000, and terminated the Supplemental Compensation Agreement of May
18, 2001. The retention payment is $189,000 of which 40% was paid on January 15,
2002, and the balance is payable upon emergence from bankruptcy. If the Company
terminates Mr. Peterson's employment for any reason other than cause, Mr.
Peterson will receive 100% of his annual base salary.
On December 15, 2000, the Company entered into a letter
agreement regarding severance arrangements with Steven M. Mason, the Company's
Vice President of Marketing. The agreement provides that in the event his
employment is terminated prior to December 31, 2001, 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. On December 26, 2000, the Company
entered into a letter agreement with Mr. Mason. The letter agreement provides
that, in the event of a change of control of Holding or Homeland, the Company
will pay to Mr. Mason an amount equal to his target amount of incentive
compensation. Such amount is not dependent on achievement of the criteria under
the Management Incentive Plan or subject to pro ration. On May 18, 2001, the
Company entered into a Supplemental Compensation Agreement which provides for a
retention payment, less any amounts payable under the fiscal 2001 management
incentive plan, and a payment upon the successful restructuring of the Company.
The retention payment of $102,825 is payable on April 15, 2002 and the success
incentive payment of $205,650 is payable 120 days after the restructuring. On
October 25, 2001, Mr. Mason entered into a Retention and Severance Agreement.
This agreement terminated the Severance Agreement of December 15, 2000,
terminated the change of control agreement of December 26, 2000, and terminated
the Supplemental Compensation Agreement of May 18, 2001. he retention payment is
$164,520 of which 40% was paid on January 15, 2002, and the balance is payable
upon emergence from
34
bankruptcy. If the Company terminates Mr. Mason's employment for any reason
other than cause, Mr. Mason will receive 100% of his annual base salary.
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 base annual salary. The agreement also provides for (a) signing bonus of
$25,333; (b) relocation expenses and (c) a company car or a car allowance. On
December 15, 2000, the Company entered into a letter agreement regarding
severance arrangements with Mr. Rocker. The agreement provides that in the event
his employment is terminated prior to December 31, 2001, 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. On December 26, 2000, the Company
entered into a letter agreement with Mr. Rocker. The letter agreement provides
that, in the event of a change of control of Holding or Homeland, the Company
will pay to Mr. Rocker an amount equal to his target amount of incentive
compensation. Such amount is not dependent on achievement of the criteria under
the Management Incentive Plan or subject to pro ration. On May 18, 2001, the
Company entered into a Supplemental Compensation Agreement which provides for a
retention payment, less any amounts payable under the fiscal 2001 management
incentive plan, and a payment upon the successful restructuring of the Company.
The retention payment of $98,438 is payable on April 15, 2002 and the success
incentive payment of $196,875 is payable 120 days after the restructuring. On
October 25, 2001, Mr. Rocker entered into a Retention and Severance Agreement.
This agreement terminated the Severance Agreement of December 15, 2000,
terminated the change of control agreement of December 26, 2000, and terminated
the Supplemental Compensation Agreement of May 18, 2001. The retention payment
is $157,500 of which 40% was paid on January 15, 2002, and the balance is
payable upon emergence from bankruptcy. If the Company terminates Mr. Rocker's
employment for any reason other than cause, Mr. Rocker will receive 100% of his
annual base salary.
On December 15, 2000, 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, 2001, for any reason other than cause or disability, the
Company will continue 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. On December 26, 2000, the Company entered into a
letter agreement with Ms. Brown. The letter agreement provides that, in the
event of a change of control of Holding or Homeland, the Company will pay to Ms.
Brown an amount equal to her target amount of incentive compensation. Such
amount is not dependent on achievement of the criteria under the Management
Incentive Plan or subject to pro ration. On May 18, 2001, the Company entered
into a Supplemental Compensation Agreement which provides for a retention
payment, less any amounts payable under the fiscal 2001 management incentive
plan, and a payment
35
upon the successful restructuring of the Company. The retention payment of
$67,500 is payable on April 15, 2002 and the success incentive payment of
$135,000 is payable 120 days after the restructuring. On October 25, 2001, Ms.
Brown entered into a Retention and Severance Agreement. This agreement
terminated the Severance Agreement of December 15, 2000, terminated the change
of control agreement of December 26, 2000, and terminated the Supplemental
Compensation Agreement of May 18, 2001. The retention payment is $108,000 of
which 40% was paid on January 15, 2002, and the balance is payable upon
emergence from bankruptcy. If the Company terminates Ms. Brown's employment for
any reason other than cause, Ms. Brown will receive 100% of her annual base
salary.
MANAGEMENT INCENTIVE PLAN
The Company maintains a Management Incentive Plan to provide
incentive bonuses for members of its management and key employees. During 2001,
bonuses were determined according to a formula based on both corporate and store
performance and accomplishments or other achievements and were paid only if
minimum performance and/or accomplishment targets were reached. At minimum
performance level, the bonus payout ranges from 25% to 75% 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 are paid. Under
limited circumstances, individual bonus amounts can exceed these levels if
approved by the Compensation Committee. Incentive bonuses paid to managers and
supervisors vary according to their reporting and responsibility levels. The
plan is administered by the Compensation Committee, all of whom are ineligible
to participate in the plan. Incentive bonuses were not earned for the Named
Executive Officers under the plan for performance during fiscal year 2001.
However, the Bankruptcy Court did approve a separate plan for the last eight
weeks of the year based upon achieving a certain level of EBITDA. The
Compensation Committee and the Unsecured Creditors Committee approved the bonus
pay-out for the Named Executive Officers in the amounts referenced in the above
table.
RETIREMENT PLAN
The Company 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) are entitled to retirement benefits equal to the product
of (a) 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 multiplied by (b) 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.
On February 4, 2002, the Company provided notice under ERISA
Section 204(h) and Internal Revenue Code Section 4980F that the Company had
adopted an amendment to freeze the retirement plan. The retirement plan
amendment provides that no additional benefits
36
will accrue to participants under the plan from and after March 1, 2002, and
when the plan freeze becomes effective, participants who are active employees of
Homeland will be 100% vested in their benefits that accrued under the plan prior
to March 1, 2002.
Under the amended retirement plan, estimated annual benefits
payable to the Named Executive Officers of the Company at age 65, would be as
follows: David B. Clark, $11,811; Wayne S. Peterson, $7,858; Steven M. Mason,
$37,804; John C. Rocker, $7,033; and Deborah A. Brown, $8,001.
MANAGEMENT STOCK OPTION PLAN
In December 1996, the Board of Directors adopted the Homeland
Holding Corporation 1996 Stock Option Plan ("Stock Option Plan"). The Stock
Option Plan, which is administered by the Compensation Committee, provides for
the granting of options to purchase up to an aggregate of 832,222 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 Compensation Committee. Unless the Compensation
Committee otherwise determines, options 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 executives which seek to enhance the
profitability of the Company and to assure the ability of the Company to attract
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 opportunities,
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 individual 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
37
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 offered to
executives of similar businesses to promote management stability, consisting of
a retirement plan, stock option plan and employment agreements.
Laurie M. Shahon, Chairman
John A. Shields
William B. Snow
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Shields, none of the persons serving on the
Compensation Committee during fiscal year 2001 was an officer or an employee of
the Company or was formerly an officer or an employee of the Company. There are
no interlocks with respect to the Compensation Committee.
38
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 Cumulative Total Return* -- Homeland Holding Corporation, S&P 500
Retail Food Stores, and S & P 500
[GRAPH]
<Table>
<Caption>
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
01/00 43.94 110.16 197.55
12/00 6.06 145.94 177.52
12/01 .73 116.83 156.11
</Table>
*Total return assumes reinvestment of dividends on a quarterly basis.
Note: Companies comprising the S & P Retail Stores (Food) Index include:
Albertson's, Inc.; Kroger Co.; Safeway Inc.; and Winn-Dixie Stores Inc.
39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is certain information as of March 29, 2002,
regarding the beneficial ownership of the Common Stock: (a) by each person known
by the Company to have beneficial ownership of more than 5% of the Common Stock
of the Company; (b) by each director and each Named Executive Officer,
individually; and (c) by all directors and officers as a group:
<Table>
<Caption>
Shares
Beneficially Percent of
Name of Beneficial Owner Owned** Class
- ------------------------ ------------ ----------
Soros Fund Management(1) 640,541 11.80%
888 Seventh Avenue, 33rd Floor
New York, NY 10106
Ironwood Capital Management, LLC(2) 424,700 7.83%
21 Custom House Street
Boston, MA 02109
Jeffrey D. Tannebaum(3) 371,195 6.84%
Fir Tree Partners
1211 Avenue of the Americas
New York, NY 10036
John A. Shields(4)(5) 101,111 1.86%
David B. Clark(6)(7) 163,700 3.02%
Wayne S. Peterson(8)(9) 108,000 1.99%
Steven M. Mason(10)(11) 38,508 *
John C. Rocker(12) 31,000 *
Deborah A. Brown(13)(14) 26,000 *
Robert E. (Gene) Burris(4) 30,000 *
Edward B. Krekeler, Jr.(4)(17) 30,475 *
Laurie M. Shahon(4)(15) 35,500 *
William B. Snow(4)(16) 31,000 *
Officers and directors as
a group (11 persons) 629,080 11.59%
</Table>
- ---------------------
* Less than 1%
** Shares beneficially owned reflect Common Stock owned and exercisable
options including options that will become exercisable within sixty
days of the date hereof.
40
(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 as
such, has been granted investment discretion over the shares of Common Stock.
(2) Based on the Schedule 13G filed on behalf of Ironwood Capital Management,
LLC, Warren J. Isabelle, Richard L. Droster, and Donald Collins.
(3) 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.
(4) Stock options for 15,000 shares, all of which are exercisable at an exercise
price of $7.625 per share, were granted to each director under the Directors
Plan (as defined below) in 1997, and will expire on July 14, 2007. In July 1998,
stock options for 5,000 shares, all of which are exercisable at an exercise
price of $7.50 per share, were granted to each director under the Directors
Plan, and will expire on July 10, 2008. In June 1999, stock options for 5,000
shares, all of which are exercisable at an exercise price of $3.00 per share,
were granted to each director under the Directors Plan in 1997, and will expire
on June 30, 2009. On June 1, 2000, stock options for 5,000 shares, all of which
are exercisable at an exercise price of $4.00 per share, were granted to each
director under the Directors Plan.
(5) Mr. Shields is the beneficial owner of 71,111 shares of Common Stock.
(6) Mr. Clark was granted options to purchase 100,000 shares of Common Stock at
an exercise price of $5.50 per share, under the Stock Option Plan as provided
for under his employment agreement with the Company. This option agreement
terminated on December 6, 2000, and was replaced by the Amended & Restated Stock
Option Agreement dated December 6, 2000, granting Mr. Clark options to purchase
100,000 shares of Common Stock, of which 80,000 shares are exercisable, at an
exercise price of $2.00 per share. The options become exercisable ratably over
five years commencing February 17, 1999, and will expire on February 17, 2008.
Mr. Clark was granted stock options to purchase 30,000 shares of Common Stock 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
which 24,000 shares are exercisable, 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. Mr. Clark was granted options to purchase
20,000 shares of Common Stock, of which 8,000 are exercisable, on June 30, 1999,
at an exercise price of $3.00 per share. The options become exercisable ratably
over five years commencing June 30, 2000, and will expire on June 30, 2009. Mr.
Clark was granted options to purchase 60,000 shares of Common Stock, of which
24,000 are exercisable, on June 1, 2000, at an exercise price of $4.00 per
share. The options become exercisable ratably over five years commencing June 1,
2001, and will expire on June 1, 2010. Mr. Clark was granted options to
41
purchase 50,000 shares of Common Stock, of which 10,000 are exercisable, on
December 6, 2000, at an exercise price of $2.00 per share. The options become
exercisable ratably over five years commencing December 6, 2001, and will expire
on December 6, 2010.
(7) Mr. Clark is the beneficial owner of 17,700 shares of Common Stock.
(8) Mr. Peterson was granted options to purchase 50,000 shares of Common Stock,
of which 30,000 are exercisable at an exercise price of $3.50 per share outside
the Stock Option Plan as provided for under his employment agreement with the
Company. The options become exercisable ratably over five years commencing
October 19, 1999, and will expire on October 19, 2008. Mr. Peterson was granted
options to purchase 20,000 shares of Common Stock, of which 8,000 are
exercisable, on June 30, 1999 at an exercise price of $3.00 per share. The
options become exercisable ratably over five years commencing June 30, 2000, and
will expire on June 30, 2009. Mr. Peterson was granted options to purchase
50,000 shares of Common Stock, of which 20,000 are exercisable, on June 1, 2000,
at an exercise price of $4.00 per share. The options become exercisable ratably
over five years commencing June 1, 2001, and will expire on June 1, 2010. Mr.
Peterson was granted options to purchase 100,000 shares of Common Stock, of
which 20,000 are exercisable, on December 6, 2000, at an exercise price of $2.00
per share. The options become exercisable ratably over five years commencing
December 6, 2001, and will expire on December 6, 2010.
(9) Mr. Peterson is the beneficial owner of 30,000 shares of Common Stock.
(10) On May 13, 1997, Mr. Mason was granted options to purchase 12,000 shares of
Common Stock, all of which are exercisable at an exercise price of $6.50 per
share. The options will expire on May 13, 2007. Mr. Mason was granted options in
July 1998 to purchase 13,000 shares of Common Stock, of which 10,400 are
exercisable at an exercise price of $7.625 per share. The options are
exercisable ratably over five years commencing May 13, 1999, and will expire on
July 10, 2008. Mr. Mason was granted options to purchase 15,000 shares of Common
Stock, of which 6,000 are exercisable, on June 30, 1999 at an exercise price of
$3.00 per share. The options become exercisable ratably over five years
commencing June 30, 2000, and will expire on June 30, 2009. Mr. Mason was
granted options to purchase 25,000 shares of Common Stock, of which 10,000 are
exercisable, on June 1, 2000, at an exercise price of $4.00 per share. The
options become exercisable ratably over five years commencing June 1, 2001, and
will expire on June 1, 2010.
(11) Mr. Mason is the beneficial owner of 108 shares of Common Stock and 341
warrants to purchase shares of Common Stock.
(12) Mr. Rocker was granted options to purchase 25,000 shares of Common Stock,
of which options with respect to 15,000 shares are presently exercisable at an
exercise price of $4.75 per share outside the Stock Option Plan as provided for
under his employment agreement with the Company. The options become exercisable
ratably over five years commencing September 14, 1999, and will expire on
September 14, 2008. Mr. Rocker was granted options to purchase 15,000 shares of
Common Stock, of which 6,000 are exercisable, on June 30, 1999 at an exercise
price of $3.00 per share. The options become exercisable ratably over five years
commencing June 30, 2000, and will expire on June 30, 2009. Mr. Rocker was
granted options to purchase 25,000 shares of Common Stock, of which 10,000 are
exercisable, on June 1, 2000,
42
at an exercise price of $4.00 per share. The options become exercisable ratably
over five years commencing June 1, 2001, and will expire on June 1, 2010.
(13) On June 22, 1998, Ms. Brown was granted options to purchase 13,000 shares
of Common Stock, of which 10,400 are exercisable at an exercise price of $6.125
per share. The options become exercisable ratably over five years commencing
June 22, 1999, and will expire on June 22, 2008. Ms. Brown was granted options
to purchase 9,000 shares of Common Stock, of which 3,600 are exercisable, on
June 30, 1999 at an exercise price of $3.00 per share. The options become
exercisable ratably over five years commencing June 30, 2000, and will expire on
June 30, 2009. Ms. Brown was granted options to purchase 25,000 shares of Common
Stock, of which 10,000 are exercisable, on June 1, 2000, at an exercise price of
$4.00 per share. The options become exercisable ratably over five years
commencing June 1, 2001, and will expire on June 1, 2010.
(14) Ms. Brown is the beneficial owner of 2,000 shares of Common Stock.
(15) Ms. Shahon is the beneficial owner of 5,500 shares of Common Stock.
(16) Mr. Snow is the beneficial owner of 1,000 shares of Common Stock.
(17) Mr. Krekeler is the beneficial owner of 475 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 all of Store's unionized
employees. Pursuant to the present collective bargaining agreements, the UFCW
has the right to designate one member of the Board of Directors of Company and
Stores. Mr. Burris is the designee of the UFCW.
43
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 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.
44
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 11, 2002 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.
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ John A. Shields Chairman of the Board April 11, 2002
- ---------------------------
John A. Shields
/s/ David B. Clark President, Chief Executive April 11, 2002
- ---------------------------- Officer and Director
David B. Clark (Principal Executive Officer)
/s/ Wayne S. Peterson Senior Vice President/ April 11, 2002
- ---------------------------- Finance, C.F.O. and Secretary
Wayne S. Peterson (Principal Financial Officer)
/s/ Deborah A. Brown Vice President, Controller, April 11, 2002
- ---------------------------- Treasurer and Asst. Secretary
Deborah A. Brown (Principal Accounting Officer)
</Table>
II-1
<Table>
<Caption>
Signature Title Date
--------- ----- ----
/s/ Robert E. (Gene) Burris Director April 11, 2002
- ----------------------------------
Robert E. (Gene) Burris
/s/ Edward B. Krekeler, Jr. Director April 11, 2002
- ----------------------------------
Edward B. Krekeler, Jr.
/s/ Laurie M. Shahon Director April 11, 2002
- ----------------------------------
Laurie M. Shahon
/s/ William B. Snow Director April 11, 2002
- ----------------------------------
William B. Snow
</Table>
II-2
INDEX TO FINANCIAL STATEMENTS
HOMELAND HOLDING CORPORATION
Debtor-in-Possession as of August 1, 2001
Consolidated Financial Statements
<Table>
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 29, 2001,
and December 30, 2000 F-3
Consolidated Statements of Operations and
Comprehensive Income for the 52 weeks
ended December 29, 2001, December 30, 2000,
and January 1, 2000 F-5
Consolidated Statements of Stockholders' Equity/Deficit
for the 52 weeks ended December 29, 2001,
December 30, 2000, and January 1, 2000 F-6
Consolidated Statements of Cash Flows
for the 52 weeks ended December 29, 2001,
December 30, 2000, and January 1, 2000 F-7
Notes to Consolidated Financial Statements F-9
</Table>
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 and comprehensive income, stockholders'
equity/deficit and cash flows present fairly, in all material respects, the
financial position of Homeland Holding Corporation and its subsidiaries (the
"Company") at December 29, 2001 and December 30, 2000, and the results of their
operations and their cash flows for the 52 weeks ended December 29, 2001,
December 30, 2000, and January 1, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company filed voluntary petitions under Chapter 11 of
the United States Bankruptcy Code on August 1, 2001. The Company is in the
process of developing a plan of reorganization which, if filed, will ultimately
require approval of the Unsecured Creditors Committee and confirmation by the
Bankruptcy Court before the Company can successfully emerge from bankruptcy.
This raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
April 5, 2002
F-2
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 5,602 $ 10,198
Receivables, net of allowance for
uncollectible accounts of $244 and $331 12,006 14,079
Inventories 34,965 54,707
Prepaid expenses and other current assets 2,292 1,610
-------- --------
Total current assets 54,865 80,594
Property, plant and equipment:
Land and land improvements 7,573 8,797
Buildings 20,123 21,691
Fixtures and equipment 35,317 43,305
Leasehold improvements 15,130 21,202
Software 7,371 7,760
Leased assets under capital leases 7,102 9,886
Construction in progress 301 165
-------- --------
92,917 112,806
Less accumulated depreciation and amortization 48,203 41,036
-------- --------
Net property, plant and equipment 44,714 71,770
Other assets and deferred charges 23,159 27,394
-------- --------
Total assets $122,738 $179,758
======== ========
</Table>
Continued
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED BALANCE SHEETS, Continued
(In thousands, except share and per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY/DEFICIT
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
Current liabilities:
Accounts payable - trade $ 15,285 $ 28,869
Salaries and wages 2,799 2,107
Taxes 1,655 3,606
Accrued interest payable 185 2,819
Other current liabilities 8,269 7,013
Current portion of long-term debt 44,152 3,860
Current portion of obligations under
capital leases 452 564
--------- ---------
Total current liabilities 72,797 48,838
Long-term obligations:
Long-term debt -- 104,592
Obligations under capital leases 519 1,996
Other noncurrent liabilities 4,579 3,235
--------- ---------
Total long-term obligations 5,098 109,823
Liabilities subject to compromise 72,718 --
Stockholders' equity (deficit):
Common stock $0.01 par value, authorized -
7,500,000 shares, issued 4,925,871 shares
at December 29, 2001, and
December 30, 2000, respectively 49 49
Additional paid-in capital 56,274 56,274
Accumulated deficit (80,934) (34,538)
Accumulated other comprehensive income (3,264) (688)
--------- ---------
Total stockholders' equity (deficit) (27,875) 21,097
--------- ---------
Total liabilities and stockholders' equity/deficit $ 122,738 $ 179,758
========= =========
</Table>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(In thousands, except share and per share amounts)
<Table>
<Caption>
52 weeks 52 weeks 52 weeks
ended ended ended
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ -----------
Sales, net $ 511,591 $ 600,835 $ 559,554
Cost of sales 393,701 460,735 425,394
----------- ----------- -----------
Gross profit 117,890 140,100 134,160
Selling and administrative expenses 119,864 133,244 120,594
Amortization of excess reorganization value -- -- 6,890
Store closing charge 50 2,823 --
Asset impairment 1,702 -- 925
----------- ----------- -----------
Operating profit (loss) (3,726) 4,033 5,751
Loss on disposal of assets (30) (61) (15)
Interest income 853 751 569
Interest expense (9,458) (10,612) (9,011)
----------- ----------- -----------
Loss before reorganization expense
and income taxes (12,361) (5,889) (2,706)
Reorganization expense (34,035) -- --
----------- ----------- -----------
Loss before income taxes (46,396) (5,889) (2,706)
Income tax provision -- -- (1,588)
----------- ----------- -----------
Net loss (46,396) (5,889) (4,294)
Other comprehensive loss:
Minimum pension liability adjustment (2,576) (688) --
----------- ----------- -----------
Comprehensive loss $ (48,972) $ (6,577) $ (4,294)
=========== =========== ===========
Basic and diluted earnings per share:
Net loss per share $ (9.42) $ (1.20) $ (0.87)
=========== =========== ===========
Weighted average shares outstanding 4,925,871 4,923,236 4,911,958
=========== =========== ===========
</Table>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/DEFICIT
(In thousands, except share and per share amounts)
<Table>
<Caption>
Accumulated
Common Stock Additional Other Total
--------------------- Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit Income Equity (Deficit)
--------- --------- ---------- ----------- ------------- -----------------
Balance, January 2, 1999 4,904,417 49 56,174 (24,355) -- 31,868
Net loss -- -- -- (4,294) -- (4,294)
Issuance of common stock 13,443 -- 80 -- -- 80
--------- --------- --------- --------- --------- ---------
Balance, January 1, 2000 4,917,860 49 56,254 (28,649) -- 27,654
Net loss -- -- -- (5,889) -- (5,889)
Other comprehensive loss:
Minimum pension liability adjustment -- -- -- -- (688) (688)
Issuance of common stock 8,011 -- 20 -- -- 20
--------- --------- --------- --------- --------- ---------
Balance, December 30, 2000 4,925,871 49 56,274 (34,538) (688) 21,097
Net loss -- -- -- (46,396) -- (46,396)
Other comprehensive loss:
Minimum pension liability adjustment -- -- -- -- (2,576) (2,576)
--------- --------- --------- --------- --------- ---------
Balance, December 29, 2001 4,925,871 $ 49 $ 56,274 $ (80,934) $ (3,264) $ (27,875)
========= ========= ========= ========= ========= =========
</Table>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share and per share amounts)
<Table>
<Caption>
52 weeks 52 weeks 52 weeks
ended ended ended
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
Cash flows from operating activities:
Loss before reorganization expense and income taxes $(12,361) $ (5,889) $ (2,706)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 9,937 11,008 10,427
Amortization of beneficial interest in operating leases 118 121 121
Amortization of excess reorganization value -- -- 6,890
Amortization of goodwill 556 720 226
Amortization of financing costs 597 62 42
Loss on disposal of assets 30 61 15
Store closing costs 4,644 4,246 --
Asset impairment 1,702 -- 925
Change in assets and liabilities:
(Increase) decrease in receivables 2,073 949 (1,858)
(Increase) decrease in inventories 15,148 55 (2,355)
(Increase) decrease in prepaid
expenses and other current assets (682) 400 458
Increase in other assets and deferred charges (2,214) (2,478) (2,498)
Increase (decrease) in accounts payable-trade (8,336) (4,135) 3,785
Increase (decrease) in salaries and wages 692 (1,061) 293
Increase (decrease) in taxes (1,804) 77 399
Increase in accrued interest payable 454 148 49
Increase (decrease) in other current liabilities 186 (1,397) (1,813)
Increase (decrease) in other noncurrent liabilities (2,707) (316) 69
-------- -------- --------
Total adjustments 20,394 8,460 15,175
-------- -------- --------
Net cash provided by operating activities
before reorganization items 8,033 2,571 12,469
Reorganization fees paid (3,090) -- --
Income taxes paid -- (30) (110)
-------- -------- --------
Net cash provided by operating activities 4,943 2,541 12,359
-------- -------- --------
</Table>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(In thousands, except share and per share amounts)
<Table>
<Caption>
52 weeks 52 weeks 52 weeks
ended ended ended
December 29, December 30, January 1,
2001 2000 2000
------------ ------------ ----------
Cash flows from investing activities:
Capital expenditures (1,337) (5,497) (8,980)
Store acquisitions -- (4,224) (2,374)
Cash received from sale of assets 42 659 750
--------- --------- ---------
Net cash used in investing activities (1,295) (9,062) (10,604)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under DIP term loans 39,000 -- --
Payments under DIP term loans (2,205) -- --
Borrowings under DIP revolving credit loans 52,943 -- --
Payments under DIP revolving credit loans (45,717) -- --
Borrowings under term loans -- 5,000 --
Payments under NBC term loan (8,814) (2,019) (1,667)
Payments under AWG loans (10,295) (4,278) (5,294)
Borrowings under NBC revolving credit loans 92,385 160,126 142,707
Payments under NBC revolving credit loans (121,631) (154,075) (137,400)
Payments on tax notes (54) (50) (46)
Principal payments under capital lease obligations (564) (502) (1,237)
Book overdrafts recorded in accounts payable (2,228) 2,260 812
Payment of financing costs (1,064) -- --
Proceeds from issuance of common stock -- 20 80
--------- --------- ---------
Net cash provided by (used in) financing activities (8,244) 6,482 (2,045)
--------- --------- ---------
Net decrease in cash and cash equivalents (4,596) (39) (290)
Cash and cash equivalents at beginning of period 10,198 10,237 10,527
--------- --------- ---------
Cash and cash equivalents at end of period $ 5,602 $ 10,198 $ 10,237
========= ========= =========
Supplemental information:
Cash paid during the period for interest $ 6,185 $ 10,442 $ 8,993
========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations assumed $ -- $ 1,363 $ --
========= ========= =========
Debt assumed in acquisitions $ -- $ 6,162 $ 13,706
========= ========= =========
</Table>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
1. Organization:
Homeland Holding Corporation ("Holding"), a Delaware corporation, was
incorporated on November 6, 1987, but had no operations prior to
November 25, 1987. Effective November 25, 1987, Homeland Stores, Inc.
("Homeland"), a wholly-owned subsidiary of Holding, acquired
substantially all of the net assets of the Oklahoma Division of Safeway
Inc. Holding, its consolidated subsidiary, Homeland, Homeland's
wholly-owned subsidiary, SLB Marketing, Inc., and SLB's wholly-owned
subsidiary, JCH Beverage, Inc., are collectively referred to herein as
the "Company." The Company is a supermarket chain in the Oklahoma,
southern Kansas and Texas Panhandle regions. 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 December 29, 2001, the Company operated 54 stores in these
markets. Subsequent to yearend, the Company has sold or closed 10
stores and has exited all operations in the Kansas and Texas Panhandle
regions.
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/deficit which is as follows:
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
Homeland stockholder's equity (deficit):
Common stock, $.01 par value,
authorized, issued and
outstanding 100 shares $ 1 $ 1
Additional paid-in capital 56,322 56,322
Accumulated deficit (80,934) (34,538)
Accumulated other comprehensive
income (3,264) (688)
-------- --------
Total Homeland stockholder's
equity (deficit) $(27,875) $ 21,097
======== ========
</Table>
On August 1, 2001, Holding and Homeland filed voluntary petitions (the
"Filing") under Chapter 11 of the United States Bankruptcy Code
("Bankruptcy Code") with the United States Bankruptcy Court for the
Western District of Oklahoma ("Bankruptcy Court"). The cases filed by
Holding and Homeland are In re Homeland Holding Corporation, Debtor,
Case No. 01-17869TS, and In re Homeland Stores, Inc., Debtor, Case No.
01-17870TS (collectively, the "Chapter 11 Cases"). Holding and Homeland
continue in possession of their properties and the management of their
businesses as debtors-in-possession pursuant to Section 1107 and
Section 1108 of the Bankruptcy Code. Holding and Homeland continue to
be managed by their respective directors and officers, subject in each
case to the supervision of the Bankruptcy Court.
F-9
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
1. Organization, continued:
JCH and SLB did not file voluntary petitions under the Bankruptcy Code
as part of the Filing. Assets and results of operations of those
entities are less than 1% of consolidated totals.
The Filing was made in response to increasing liquidity difficulties
during the second quarter of 2001, particularly following amendments in
the second quarter to the Loan Agreement reducing available credit, on
which National Bank of Canada ("NBC") and the other lenders under the
then effective NBC Loan Agreement (as defined below) insisted. While
trade creditors generally continued to provide credit to the Company on
customary credit terms during that quarter, some trade creditors had
imposed tighter credit terms, further reducing the liquidity of the
Company.
As a result of the bankruptcy filings discussed above, the accompanying
consolidated financial statements have been prepared in accordance with
AICPA Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," on a going
concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the voluntary bankruptcy filings,
such realization of certain of Company assets and liquidation of
certain of Company liabilities are subject to significant uncertainty.
While operating as debtors-in-possession, the Company may sell or
otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the consolidated financial
statements. Further, a plan of reorganization could materially change
the amounts and classifications reported in the consolidated financial
statements, which do not give effect to any adjustments to the carrying
value or classification of assets or liabilities that might be
necessary as a consequence of a plan of reorganization.
The Debtors have received approval from the Bankruptcy Court to pay or
otherwise honor certain of their pre-petition obligations in the
ordinary course of business, including critical trade creditors,
employee wages and benefits and customer programs.
As provided by the Bankruptcy Code, the Company initially has the
exclusive right to propose a plan of reorganization ("Plan"). The
Company's exclusive right expires April 30, 2002. The Company expects
to file its proposed Plan in the second quarter of 2002. Nevertheless,
the Company is currently executing a strategy to close unprofitable
locations and to divest selected locations and markets. The Company
began the year with 85 stores, it had 54 stores as of December 29, 2001
and it intends to emerge from bankruptcy with a total of 44 stores.
An Unsecured Creditors Committee has been appointed in the Chapter 11
Cases. In accordance with the provisions of the Bankruptcy Code, this
committee will have the right to be heard on all matters that come
before the Bankruptcy Court in the Chapter 11 Cases.
F-10
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
1. Organization, continued:
Ultimately, the Unsecured Creditors Committee must approve and the
Bankruptcy Court must confirm a Plan, whether submitted by the Company
or a third party, before the Company can successfully emerge from
bankruptcy. As a part of its Plan, the Company will be required to
secure financing to pay the DIP Financing that will mature upon
emergence. There is no guarantee that the Company will be able to
secure such financing on acceptable terms. In addition, approval and
confirmation of the Plan is outside of the Company's control. Due to
these factors, the Company cannot be certain at this time that it will
successfully emerge as a going concern entity.
The Company is required to bear certain of the committee's costs and
expenses, including those of their counsel and other advisors.
Pursuant to SOP 90-7, liabilities that are subject to compromise are
reported separately on the balance sheet at an estimate of the amount
that will ultimately be allowed by the Bankruptcy Court. As of December
29, 2001, the components of the estimated liabilities that are subject
to compromise are as follows:
<Table>
Debt, pre-petition plus accrued interest $63,000
Accounts payable 3,020
Other accrued liabilities 6,698
-------
Total $72,718
=======
</Table>
SOP 90-7 also requires separate reporting of certain expenses, realized
gains and losses, and provisions for losses related to the Filing as
reorganization items. As of December 29, 2001, the components of the
reorganization items are as follows:
<Table>
Asset impairment $22,248
Store closing charge 5,272
Claims expense 3,719
Fees 2,796
-------
Total $34,035
=======
</Table>
Claims expense includes claims attributable to rejected leases and
other executory contracts, certain trade payables, and other third
party claims that management believes will be allowed by the Bankrupt
Court and therefore represent liabilities subject to compromise. The
Company has received a listing of all submitted claims and currently is
in the process of evaluating the nature and amounts of each of these
claims. Management believes that the current amount of claims expense
and liabilities subject to compromise are reasonable estimations,
however, until there is a concluded review of all the claims by the
Company and a final adjudication of these claims by the Bankruptcy
Court, the estimated claims expense and liabilities subject to
compromise may change and such changes could be material.
F-11
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies:
Fiscal year - The Company has adopted a fiscal year, which ends on the
Saturday nearest December 31.
Basis of consolidation - The consolidated financial statements include
the accounts of Homeland Holding Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
Revenue recognition - The Company recognizes revenue at the "point of
sale," which occurs when groceries and related merchandise are sold to
its customers.
Concentrations of credit and business risk - 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. The Company receives certain rebates and allowances from AWG
as well as an annual distribution from AWG's cooperative arrangements.
A portion of the annual distribution is in the form of cash, while the
remainder is in the form of patronage refund certificates. Receivables
from AWG and the AWG patronage refund certificates subject the Company
to a concentration of credit risk.
Other financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and non-AWG receivables. The Company places its temporary
cash investments with high quality financial institutions.
Concentration of credit risk with respect to non-AWG receivables are
limited due to the diverse nature of those receivables, including the
large number of retail customers within the region and receivables from
vendors throughout the country.
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. Book overdrafts of $4,133 and $6,361, as of December 29,
2001 and December 30, 2000, respectively, are included in accounts
payable.
Inventories - Inventories are stated at the lower of cost or market
with cost determined for the majority of the Company's inventories
using the retail method. Under the retail method, the valuation of
inventories at cost and the resulting gross margins are calculated by
applying a calculated cost-to-retail ratio to the retail value of
inventories. The Company uses the retail method, for its grocery,
health and beauty care and general merchandise inventories, which
represented approximately 75.5% of the Company's total inventory at
December 29, 2001. The remaining inventories are valued on a cost basis
F-12
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies:
with information provided by suppliers. The Company includes an
estimate of inventory shrink in its application of the retail method.
Property, plant and equipment - In conjunction with the emergence from
Chapter 11 proceedings in August, 1996, the Company implemented
"fresh-start" reporting and, accordingly, all property, plant and
equipment was restated to reflect reorganization value, which
approximates fair value in continued use. Depreciation and
amortization, including amortization of leased assets under capital
leases, are computed on a straight-line basis over the lesser of the
estimated useful life of the asset or the remaining term of the lease.
Property, plant and equipment acquired subsequent to "fresh start" are
stated at cost. Depreciation and amortization of newly acquired assets,
for financial reporting purposes, are based on the following estimated
lives:
<Table>
<Caption>
Estimated lives
---------------
Buildings 10 - 40
Fixtures and equipment 5 - 12.5
Leasehold improvements 15
Software 3 - 5
</Table>
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.
Reorganization value in excess of amounts allocable to identifiable
assets - The Company's reorganization value in excess of amounts
allocable to identifiable assets, established in accordance with "fresh
start" reporting, had been amortized on a straight-line basis over
three years and became fully amortized in the third quarter of 1999.
Store closings/asset impairment - Provision is made on a current
basis for the write-down of identified owned-store closings to their
net realizable value. For identified leased-store closings, leasehold
improvements are written down to their net realizable value and a
provision is made on a current basis if anticipated expenses are in
excess of expected sublease rental income. The Company's long-lived
assets, including goodwill, are reviewed for impairment and written
down to fair value whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Goodwill has primarily
been recorded in conjunction with the four separate store acquisitions.
For purposes of the review, performed at the store level, allocated
acquired goodwill and the other assets of each store are combined to
determine if impairment is appropriate.
Other assets and deferred charges - Other assets and deferred charges
consist primarily of patronage refund certificates issued by AWG (as
part of its year-end distribution of income from AWG's cooperative
operations), beneficial interests in operating leases, goodwill and
F-13
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies, continued:
intangibles acquired in the Company's 1999 and 2000 acquisitions, and
capitalized financing costs. The beneficial interest in operating
leases is being amortized on a straight-line basis over the remaining
terms of the leases, including all available renewal option periods,
and the goodwill is being amortized over a 15 year period. Beginning in
2002, the Company will no longer amortize goodwill pursuant to SFAS No.
142 (See Recent Accounting Pronouncements). During 2001, the Company
incurred approximately $1,262 in financing costs associated with the
DIP Financing. These costs are being amortized over a one-year period,
which is the estimated bankruptcy emergence timeframe, and reported as
a component of interest expense. The AWG patronage refund certificates,
which bear annual interest of 6%, are redeemable for cash seven years
from the date of issuance. Beginning in 2002, the annual interest on
the certificates has been lowered to 4%. The carrying value of
certificates, including those earned not yet received, at December 29,
2001 and December 30, 2000 was $16,080 and $13,884, respectively.
Goodwill, net of accumulated amortization, was $5,083 and $10,043 at
December 29, 2001 and December 30, 2000, respectively. During 2001,
$4,404 of goodwill was considered impaired (See Store Closings / Asset
Impairment).
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).
Advertising costs - Costs of advertising are expensed as incurred.
Gross advertising costs for 2001, 2000, and 1999, were $7,042, $9,743,
and $9,112, respectively.
Income taxes - The Company provides for income taxes based on enacted
tax laws and statutory tax rates at which items of income and expense
are expected to be settled in the Company's income tax return. Certain
items of revenue and expense are reported for Federal income tax
purposes in different periods than for financial reporting purposes,
thereby resulting in deferred income taxes. Deferred taxes also are
recognized for operating losses that are available to offset future
taxable income and tax credits that are available to offset future
Federal income taxes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be
realized.
Self-insurance reserves - The Company is self-insured for property
loss, general liability and employee medical 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.
F-14
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies, continued:
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, reserves for closed stores, the
determination of bankruptcy claims subject to compromise, the deferred
income tax valuation allowance, the accumulated benefit obligation
relating to the employee retirement plan, the allowance for bad debts
and inventory valuation. It is reasonably possible that the Company's
estimates for such items could change in the near term.
In the second quarter of 2000, the Company collected a receivable from
a vendor of approximately $600 that had been reserved for as of January
1, 2000.
Reclassifications - Certain amounts in the December 30, 2000 and
January 1, 2000 consolidated statements of cash flows have been
reclassified to conform with the December 29, 2001 presentation.
Recent Accounting Pronouncements - In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No 141 prohibits the use of the pooling-of-interest
method in accounting for business combinations and further clarifies
the criteria to recognize intangible assets separately from goodwill.
SFAS No. 141 is effective for business combinations initiated after
June 30, 2001. SFAS No. 142 changes the accounting for goodwill and
intangible assets with indefinite lives to no longer require
amortization, but requires an annual review for impairment (or more
frequently if impairment indicators arise). Separable intangible assets
that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001 for goodwill and intangible
assets acquired prior to July 1, 2001, and applies to all goodwill and
other intangible assets recognized in an entity's financial statements
as of that date. Goodwill and intangible assets acquired after June 30,
2001 will be immediately subject to the non-amortization and
amortization provisions of SFAS No. 142. Amortization expense for 2001
includes $567 related to the amortization of goodwill and intangible
assets that will not be required for fiscal years beginning after
December 15, 2001.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, effective for fiscal years
beginning after June 15, 2002, addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. In August
2001, the
F-15
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
2. Summary of Significant Accounting Policies, continued:
FASB issued SFAS No. 144, "Accounting for Impairment of Long-lived
Assets and Long-lived Assets to be Disposed Of." SFAS No. 144,
effective for fiscal years beginning after December 15, 2001,
supercedes existing pronouncements related to impairment and disposal
of long-lived assets. The Company is currently assessing the impact of
these pronouncements on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a new
model for accounting for derivatives and hedging activities. The
Company adopted SFAS No. 133, as amended, beginning January 1, 2001.
The adoption of this standard did not have a material effect on the
Company's financial statements.
3. Store Acquisitions:
In April 1999, the Company completed its acquisition of nine stores
from AWG, in eastern Oklahoma. The net purchase price was $1.3 million
which represents $5.6 million for real property, and fixtures and
equipment, plus $2.3 million for inventory, $0.2 million for
transaction costs, offset by $6.8 million in long-term debt assumed by
the Company. The Company acquired title to one store and leases the
remaining eight from AWG. The one store to which Homeland acquired
title in Pryor, Oklahoma, was closed (and subsequently sold to a
non-grocery user) as a result of the proximity to an existing Company
store. The Company financed this acquisition principally through the
assumption of $6.8 million in long-term debt, together with increased
borrowings under the then-existing NBC Loan Agreement. The debt
incurred by the Company to AWG is secured by liens on, and security
interest in, the assets associated with the nine stores. Subsequent to
the closing of the acquisition, the Company repaid a portion of its
indebtedness to AWG which related to inventory and the Pryor store
which was sold. Therefore, AWG released its security interest in the
inventory and the assets relating to the Pryor store.
In November 1999, the Company completed its acquisition of four stores
from Brattain Foods, Inc. ("BFI"), in Muskogee, Oklahoma. The net
purchase price was $1.1 million which represents $6.0 million for
fixtures and equipment, plus $1.9 million for inventory, $0.2 million
for transaction costs, offset by $7.0 million of long-term debt (BFI's
obligation to AWG) assumed by the Company. The Company leases three of
the stores from AWG and the fourth from a third party. The Company
financed this acquisition principally through the assumption of $7.0
million in long-term debt, together with increased borrowings under the
then-existing NBC Loan Agreement. The debt incurred by the Company to
AWG is secured by liens on, and security interest in, the assets
associated with the four stores. Subsequent to the closing of the
acquisition, the Company repaid a portion of its indebtedness to AWG,
which related to inventory and therefore, AWG released its security
interest in the inventory.
F-16
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
3. Store Acquisitions, continued:
In February 2000, the Company completed its acquisition of three stores
from Belton Food Center, Inc. ("BFC") in Oklahoma City. The net
purchase price, prior to the closed store reserve discussed below, was
$0.2 million which represents $4.2 million for fixtures and equipment,
and leasehold improvements, plus $2.0 million for inventory and $0.2
million for transaction costs, offset by $6.2 million of long-term debt
(BFC's obligation to AWG) assumed by the Company. The Company leases
all three of the stores from AWG. The Company financed this acquisition
principally through the assumption of $6.2 million in long-term debt,
together with increased borrowings under the then-existing NBC Loan
Agreement. The debt incurred by the Company to AWG is secured by liens
on, and security interest in, the assets associated with the three
stores. Subsequent to the closing of the acquisition, the Company
repaid a portion of its indebtedness to AWG, which related to inventory
and therefore, AWG released its security interest in the inventory. In
April 2000, the Company closed one of the acquired stores due to its
proximity to other Company stores and established a reserve, which
approximated $1.3 million, for future rent payments and other holding
costs. Establishment of the reserve increased the goodwill balance
associated with the acquisition. In October 2000, the lease on the
closed store was assigned resulting in a reduction in the reserve and
goodwill of $0.5 million. Substantially all other costs reserved were
paid in 2000.
In April 2000, the Company completed its acquisition of three Baker's
Supermarkets. The purchase price was approximately $4.2 million, which
represents $2.4 million for fixtures and equipment, leasehold
improvements, and a non-compete agreement, $1.6 million for inventory,
and approximately $0.2 million in transaction costs. In conjunction
with the transaction, the Company also recorded $1.6 million of
identified intangibles and $1.6 million in liabilities related to an
unfavorable supply contract with Fleming Companies Inc. ("Fleming").
The Company subleased the three stores from Fleming. On September 15,
2000, the Company subsequently leased a fourth location upon the
completion of its construction. Concurrent with the opening of the
acquired store, the Company closed an existing store resulting in a
charge to operations of approximately $0.3 million, which included
future rent payments, other holding costs, and the write-off of
property, plant and equipment. The lease for this closed store
terminated in May 2001 and therefore the Company will no longer incur
rent or other holding costs. The Company financed this acquisition
principally through increased borrowings under its working capital
facility.
The intangible asset associated with the unfavorable supply contract
was written off in the third quarter of 2001 after the Company
determined that the asset would no longer be recoverable. Prior to the
write off, the asset had been amortized on a straight-line basis over
the life of the contract.
The five-year supply contract with Fleming requires the Company to
purchase a minimum annual amount of merchandise or remit payment to
Fleming in the amount of 3% of purchase volume shortfall, estimated by
the Company at the date of acquisition to be $1.6
F-17
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
3. Store Acquisitions, continued:
million over the life of the contract. During 2001, the Company
remitted a payment of $0.4 million related to the shortfall in 2000. In
the fourth quarter of 2001, the Company determined that it would likely
reject the supply contract. As a result, the Company recorded a charge
to reorganization claims expense in the amount of $2.1 million.
Combined with the remaining liability established at the time of
acquisition, the Company has recorded an aggregate liability of $3.3
million related to this contract. Fleming has submitted an unsecured
claim to the Bankruptcy Court in the amount of $3.7 million, which
represents the maximum liability for all remaining years under the
contract. The Company believes that the claim is more accurately stated
at $3.3 million reflecting a reduction, pursuant to the contract,
attributable to the closing of one of the acquired stores.
All of the above acquisitions were accounted for using the purchase
method of accounting. The result of operations from these stores from
the acquisition dates through fiscal year-end are included in the
fiscal 1999 and 2000 Consolidated Statements of Operations and
Comprehensive Income.
4. Store Closings/Asset Impairment:
As a result of the Bankruptcy Filing, the Company planned to close or
divest 34 stores. Eight of these stores began closing in September
2001, 16 stores began an inventory liquidation in December 2001, and as
of December 29, 2001, the final 10 stores had preliminary interest from
potential buyers intending to purchase the stores as going concerns.
During 2001, the Company recorded reorganization charges associated
with these stores, which included store closing charges and holding
costs of $5,272 and asset impairment charges of $18,047. Holding costs
primarily consist of obligations under operating leases and related
expenses expected to be paid over the remaining lease terms, which
range from 2001 to 2010. Additionally, the Company recorded inventory
write-downs of $4,594 associated with the store closings and inventory
liquidation, which was reported as a part of cost of sales. As of
December 29, 2001, disposition of the final 10 stores was subject to
the approval of the Bankruptcy Court and, therefore, no store closing
charges, holding costs or inventory write-downs were recorded in 2001.
The Company believes that such charges related to these 10 stores to be
incurred during the first quarter of 2002 will be in the approximate
range of $2.0 million to $2.5 million.
In regards to the 26 stores closed or liquidated prior to December 29,
2001, the Company is in the process of attempting to sell owned real
estate or to find assignments of leased locations. As of April 5, 2002,
the Company has achieved lease assignments for 3 locations, rejected
the leases of 8 locations, and terminated 4 leases as a result of the
expiration of existing terms. Additionally, there are 7 lease
assignments and 2 real property transactions pending. Although these
pending transactions are anticipated to close by the end of April 2002,
there can be no assurances that the transactions will be
F-18
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
4. Store Closings/Asset Impairment, continued:
consummated. Additionally, as described above there are 10 locations,
which have been identified as additional stores to be sold or closed in
2002. These 10 stores include one owned and 9 leased locations. As of
April 5, 2002, the owned store and 3 leased locations have been sold as
going concerns to other supermarket operators. Furthermore, there are
two lease assignment transactions pending, and again, there can be no
assurances that the transactions will be consummated.
During the second quarter of 2001, prior to the Filing in the third
quarter, the Company recorded an asset impairment provision in the
amount of $1,702 related to goodwill that the Company believed would
not be recoverable. The stores associated with that goodwill were
subsequently closed. In the third and fourth quarters of 2001, the
Company also recorded asset impairment charges associated with its
reorganization activities of $4,201 related to one unprofitable
operating store for the write-down of goodwill and property, plant and
equipment and related to other assets which the Company believes will
not be recoverable.
In December 2000, the Company committed to a plan to close seven stores
in January 2001 and recorded a store closing charge of $4,246. The
charge included the write-down of property, plant and equipment and
other assets of $2,010, inventory write-downs of $1,423, which was
recorded as a part of cost of sales, and holding costs of $813. Holding
costs primarily consist of obligations under operating leases and
related expenses expected to be paid over the remaining lease terms,
which range from 2001 to 2004. The Company recorded an additional $50
in holding costs and an additional asset impairment charge of $140
during 2001.
During 1999, the Company made the decision to dispose of a previously
closed store and related assets. The Company decided to sell these
assets rather than continue the previous plan of leasing the assets.
The carrying value of the assets held for sale was reduced to a value
of $385, based on current estimates of selling value less costs to
dispose. The resulting adjustment of $925 was recorded. In 2000, the
assets were sold for an amount, which approximated the then carrying
value.
F-19
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
4. Store Closings/Asset Impairment, continued:
Reserves for closed stores consist of the following:
<Table>
<Caption>
Occupancy Other Reserve
Severance Costs Costs Total
--------- --------- ------- -------
Balance, January 1, 2000 $ -- $ -- $ -- $ --
January 2001 store closings -- 546 267 813
------- ------- ------- -------
Balance, December 30, 2000 -- 546 267 813
January 2001 store closings:
Payments charged against reserve -- (552) (139) (691)
Additional closed store charges (credits) -- 78 (28) 50
Bankruptcy related store closings:
Closed store charge 629 3,657 986 5,272
(Payments) credits charged against reserve (183) (1,015) 304 (894)
------- ------- ------- -------
Balance, December 29, 2001 $ 446 $ 2,714 $ 1,390 $ 4,550
======= ======= ======= =======
</Table>
5. Long-Term Debt:
Long-term debt at year-end consists of:
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
10% Notes due 2003 (the "Notes") $ 60,000 $ 60,000
Revolver 7,224 --
Term Loan 10,089 --
AWG loans 26,795 10,295
NBC Revolving Facility -- 29,245
NBC Term Loan -- 8,814
Note Payable 44 98
-------- --------
104,152 108,452
Less current portion 44,152 3,860
Less long-term debt included in
liabilities subject to compromise 60,000 --
-------- --------
Long-term debt due after one year $ -- $104,592
======== ========
</Table>
F-20
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
5. Long-Term Debt, continued:
The Notes bear an interest rate of 10%, which was scheduled to be paid
semi-annually each February 1 and August 1. The Notes are
uncollateralized and were to mature on August 1, 2003. The Company
failed to make the required $3,000 interest payment on August 1, 2001,
which constituted a default under the Indenture. Enforcement by the
holders of the Notes of their remedies is stayed by the Bankruptcy
Code. In accordance with SOP 90-7, interest expense associated with
unsecured debt has not been reported subsequent to the date of the
Filing. The contractual amount of interest expense on those obligations
exceeds the amount reported by $2.6 million.
On August 15, 2001, in connection with the Chapter 11 Cases, the
Company entered into New Loan Agreements (as defined below) with Fleet
Retail Finance Inc. ("Fleet"), Back Bay Capital Funding L.L.C. ("Back
Bay") and Associated Wholesale Grocers, Inc. ("AWG") for
debtor-in-possession financing ("DIP Financing") and paid amounts
outstanding under the existing NBC Loan Agreement with NBC and certain
other lenders. Under the DIP Financing, Fleet and Back Bay provide a
revolving credit facility ("Revolver") under which the Company may
borrow the lesser of (a) $25.0 million or (b) the applicable borrowing
base ($6.7 million at April 5, 2002), and a $10.0 million term loan
("Term Loan") for a maximum aggregate principal amount of $35.0
million. Funds borrowed under the Revolver were used to repay
borrowings under the NBC Loan Agreement, pay certain pre-petition
indebtedness approved by the Bankruptcy Court and for general corporate
purposes of the Company. An additional $29.0 million of DIP Financing
was provided by AWG which included a new $16.5 million term loan (used
to repay borrowings under the NBC Loan Agreement), a restated term loan
totaling $9.4 million replacing previously outstanding
acquisition-related loans, and a $3.1 million term loan representing an
advance of rebate amounts expected to be earned by the Company under
the 1995 Supply Agreement. The DIP Financing loans are secured by liens
on, or security interests in, all of the assets of the Company and
would have a super-priority administrative status under the Bankruptcy
Code. In conjunction with the AWG loans described above, the Company
entered into a new 10-year supply agreement ("2001 Supply Agreement")
with AWG, which contains volume protection rights, right of first
refusal and non-compete agreements similar to those in the 1995 Supply
Agreement with AWG.
With the exception of the $9.4 million and $3.1 million term loans from
AWG, the DIP Financing matures on the earlier of (a) August 1, 2003,
(b) emergence through a confirmed plan of reorganization approved by
the Bankruptcy Court or (c) other events as defined in the New Loan
Agreements. The $9.4 million AWG term loan matures in February 2007 and
the $3.1 million AWG term loan matures in May 2002.
The interest rate payable on the Revolver can be characterized as
either a London Interbank Offered Rate ("LIBOR") Loan, or base rate
loan based on the prime rate publicly announced by Fleet National Bank
plus a percentage which varies based on a number of factors, including:
(a) excess availability under the Revolver; (b) the time
F-21
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
5. Long-Term Debt, continued:
period; and (c) whether the Company elects to use LIBOR. The current
interest rate pricing under the Revolver is either the base rate plus
50 basis points or LIBOR plus 250 basis points. As of December 29,
2001, the Company had $7.2 million of borrowings under the Revolver at
a weighted average rate of 4.65% and $4.8 million of excess
availability. As of April 5, 2002, the Company had no borrowings under
the Revolver and $7.7 million of excess availability ($6.7 million
attributable to the borrowing base and $1.0 million of cash). The $10.0
million Back Bay term loan, which was fully funded on August 15, 2001,
bears interest at an annual fixed rate of 16.50%. The $16.5 million AWG
term loan, which was fully funded on August 15, 2001, bears interest at
the prime rate plus 200 basis points (8.00% at December 29, 2001).
There are no scheduled principal payments on either of the term loans;
however, the Company is required to make certain mandatory prepayments
as a result of asset sales or events of default as further defined in
the New Loan Agreements. The application of the mandatory prepayments
to the outstanding principal balances of the term loans is subject to
an Inter-Creditor Agreement between Fleet/Back Bay and AWG. The AWG
restated term loan has an outstanding balance as of December 29, 2001
of $8.8 million and bears interest at the prime rate plus 100 basis
points (7.00% at December 29, 2001), subject to minimum limitations.
Principal payments are required weekly. The AWG Supply Agreement term
loan has an outstanding balance as of December 29, 2001 of $1.5 million
and bears interest at the prime rate plus 200 basis points (8.00% at
December 29). Principal payments are required each four-week period.
The New Loan Agreements include certain customary restrictions on
acquisitions, asset dispositions, capital expenditures, consolidations
and mergers, distributions, divestitures, indebtedness, liens and
security interests, transactions with affiliates and payment of
dividends. The New Loan Agreement also provides for acceleration of
principal and interest payments in the event of certain material
adverse changes, as determined by the lenders.
The Company has classified all long-term debt as current with the
belief that the Company will emerge from bankruptcy protection during
the third quarter of 2002. As a part of its Plan, the Company will be
required to secure financing to pay the DIP Financing that will mature
upon emergence. There is no guarantee that the Company will be able to
secure such financing on acceptable terms in order to facilitate a
successful reorganization.
The Company has outstanding at December 29, 2001, $30 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 $1, $4, and $12, in
2001, 2000, and 1999, respectively.
F-22
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
6. Stockholders' Equity/Deficit:
At December 30, 2000, the Company had warrants outstanding to purchase
263,158 shares of common stock. Each warrant had entitled the holder to
purchase one share of common stock at an exercise price of $11.85 at
any time up to August 2, 2001. There were no warrants exercised and the
warrants subsequently expired on August 1, 2001.
7. Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, receivables, AWG
patronage refund certificates, accounts payable and accrued expenses
and other liabilities are reasonable estimates of their fair values at
December 29, 2001 and December 30, 2000. Based on borrowing rates
currently available to the Company for borrowings with similar terms
and maturities, the Company believes the carrying amount of borrowings
under the various revolving facilities, term loans and AWG Loans
approximate fair value at December 29, 2001 and December 30, 2000. The
fair value of publicly-traded debt is valued based on quoted market
values. At December 29, 2001, the carrying amount and the fair value of
the Notes were $60,000 and $6,900, respectively. At December 30, 2000,
the carrying amount and the fair value of the Notes were $60,000 and
$28,200, respectively.
8. Income Taxes:
The components of the income tax provision for 2001, 2000, and 1999
were as follows:
<Table>
<Caption>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 29, 2001 December 30, 2000 January 1, 2000
----------------- ----------------- ---------------
Federal and State:
Current - AMT $ -- $ -- $ (137)
Deferred -- -- (1,451)
------------ ------------ -------
Total income tax provision $ -- $ -- $(1,588)
============ ============ =======
</Table>
F-23
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
8. Income Taxes, continued:
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:
<Table>
<Caption>
52 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
December 29, 2001 December 30, 2000 January 1, 2000
----------------- ----------------- ---------------
Federal income tax
benefit at statutory rate $ 16,239 $ 2,061 $ 947
State income tax benefit,
net of federal income
tax impact 1,392 177 81
Non-deductible amortization
of intangibles -- -- (2,412)
Non-deductible reorganization
expenses and other (989) -- --
Change in valuation
allowance and other (16,642) (2,238) (204)
-------- -------- --------
Total income tax provision $ -- $ -- $ (1,588)
======== ======== ========
</Table>
The components of deferred tax assets and deferred tax liabilities are
as follows:
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
Current assets (liabilities):
Allowance for uncollectible
receivables $ 93 $ 126
Inventories -- 541
Prepaid pension (274) (108)
Other, net -- 131
----- -----
Net current deferred tax assets (181) 690
----- -----
</Table>
F-24
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
8. Income Taxes, continued:
<Table>
Noncurrent assets (liabilities):
Property, plant and equipment 11,602 3,029
Intangibles 2,291 --
Employee compensation and benefits 247 285
Self-insurance reserves 532 487
Closed store reserves 1,729 285
Net operating loss carryforwards 17,199 12,338
AMT credit carryforwards 959 959
Capital leases 120 (42)
Other, net 760 585
-------- --------
Net noncurrent deferred tax assets 35,439 17,926
-------- --------
Total net deferred tax assets 35,258 18,616
Valuation allowance (35,258) (18,616)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</Table>
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 December 29, 2001, and December 30, 2000. At
December 29, 2001, the Company had the following operating loss and tax
credit carryforwards available for tax purposes:
<Table>
<Caption>
Expiration
Amount Dates
------- ----------
Federal regular tax net
operating loss carryforwards $45,261 2002-2016
Federal AMT credit carryforwards
against regular tax $ 959 indefinite
</Table>
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: $27,411 in 2002, $3,251 in each of years 2003 through 2007 and
$1,595 in 2008. If the Company successfully emerges under a confirmed
Plan, further restrictions on utilization of net operating loss
carryforwards could result.
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.
F-25
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
8. Income Taxes, continued:
In accordance with SOP 90-7, any tax benefit realized from utilizing
the pre-reorganization net operating loss carryforwards is recorded
first as a reduction of the reorganization value in excess of amounts
allocable to identifiable assets, then as a reduction of noncurrent
intangible assets existing at the reorganization date, and finally as
an increase to stockholders' equity rather than realized as a benefit
in the statement of operations. The Company recorded a reduction to
reorganization value and/or intangible assets of $1,451 in 1999.
9. Incentive Compensation Plans:
The Company has bonus arrangements for store management and other key
management personnel. During 2001, 2000, and 1999, approximately
$1,505, $734, and $1,760, respectively, were charged to costs and
expenses for such bonuses.
In December 1996, the Board of Directors of the Company adopted the
Homeland Holding Corporation 1996 Stock Option Plan (the "Stock Option
Plan"). In 1997, the Company established the 1997 Non-Employee
Directors Stock Option Plan (the "Directors Stock Option Plan"). The
Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for these plans.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
was issued by the FASB in 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
2001, 2000, and 1999 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 832,222 and 200,000 shares of Common
Stock, respectively. Options granted under the plans must be
"non-qualified options." The option price of each option is determined
by the Board or the Committee and it must be not less than the fair
market value at the date of grant. Unless the Board or the Committee
otherwise determines, options must become exercisable ratably over a
five-year period, a two-year period in regards to the Directors Stock
Option Plan, 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 $2.00 to $7.63 per share and have a weighted
average remaining contractual life of 7.5 years. A summary of the
status of the Company's outstanding stock options as of December 29,
2001,
F-26
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
9. Incentive Compensation Plans, continued:
December 30, 2000, and January 1, 2000, and changes during the years
ended on those dates is as follows:
<Table>
<Caption>
2001 2000 1999
------------------------- ------------------------- -------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ---------- ------- ---------- ------- ----------
Outstanding as
of beginning
of year 962,000 $ 4.08 542,000 $ 5.38 429,000 $ 6.09
Granted -- -- 425,000 3.29 120,500 3.01
Exercised -- -- -- -- -- --
Forfeited 8,500 6.56 5,000 7.63 7,500 7.63
------- ------- -------
Outstanding at
end of year 953,500 $ 4.06 962,000 $ 4.08 542,000 $ 5.38
======= ======= =======
</Table>
Stock options outstanding and exercisable on December 29, 2001 are as
follows:
<Table>
<Caption>
Weighted average Weighted average
Range of exercise Shares under exercise price remaining contractual
prices per share option per share life in years
- ----------------- ------------ ---------------- ---------------------
Outstanding:
$2.00 - $4.00 723,000 $3.09 7.9
4.75 - 7.63 230,500 7.10 6.0
------------- ------- ----- ---
$2.00 - $7.63 953,500 $4.06 7.5
------------- ------- ----- ---
Exercisable:
$2.00 - $4.00 267,700 $3.00
4.75 - 7.63 195,900 7.19
------------- ------- -----
$2.00 - $7.63 463,600 $4.77
------------- ------- -----
</Table>
There were no stock options granted during 2001 and the weighted
average fair value of options granted during 2000 and 1999 was $1.36
and $1.46, respectively. No compensation was charged against income in
2001, 2000, and 1999.
F-27
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
9. Incentive Compensation Plans, continued:
The fair value of the options granted was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used:
<Table>
<Caption>
2001 2000 1999
---- ------- --------
Expected dividend yield n/a 0% 0%
Expected stock price volatility n/a 41% 40%
Weighted average risk-free
interest rate n/a 6.0% 5.8%
Weighted average expected
life of options n/a 6 years 6 years
</Table>
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 would have been reduced to the pro forma amounts indicated in the
table below:
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Net loss - as reported $ (46,396) $ (5,889) $ (4,294)
Net loss - pro forma $ (46,702) $ (6,165) $ (4,466)
Basic and diluted EPS -
as reported $ (9.42) $ (1.20) $ (0.87)
Basic and diluted EPS -
pro forma $ (9.48) $ (1.25) $ (0.91)
</Table>
No options or warrants outstanding at December 29, 2001, December 30,
2000, and January 1, 2000, were included in the computation of diluted
earnings per share because the effect would be antidilutive to
applicable periods.
Pursuant to the terms of the Union Agreements, the Company established
an employee stock bonus plan for the benefit of the unionized employees
(the "Stock Bonus Plan"). The Stock Bonus Plan consists of three
separate elements: (a) the issuance of 58,025 shares of Common Stock
each plan year of the three year period ended July 31, 1999; (b) up to
58,025 shares of Common Stock may be purchased by the plan participants
during each plan year of the three year period ended July 31, 2000 (the
"Stock Purchase") and (c) the granting of 58,025 shares of Common Stock
for each plan year of the three year period ended July 31, 1999 upon
the Company's achievement of certain escalating EBITDA-based
performance goals. The purchase price of the shares under the Stock
Purchase element shall be equal to their appraised value or at fair
value if the shares are readily tradable on a securities market. For
each share of
F-28
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
9. Incentive Compensation Plans, continued:
Common Stock purchased by a participant under the Stock Purchase
element, the Company will match 33 1/3% of such purchase in the form of
stock. The Stock Bonus Plan does not fall under the provisions of SFAS
123.
10. Retirement Plans:
Effective January 1, 1988, the Company adopted a non-contributory,
defined benefit retirement plan for all executive and administrative
personnel. Benefits are based on length of service and career average
pay with the Company. The Company's funding policy is to contribute an
amount equal to or greater than the minimum funding requirement of the
Employee Retirement Income Security Act of 1974, but not in excess of
the maximum deductible limit. Plan assets were invested in mutual funds
during 2001, 2000, and 1999.
On February 4, 2002, the Company provided notice under ERISA Section
204(h) and Internal Revenue Code Section 4980F that the Company had
adopted an amendment to freeze the retirement plan. The retirement plan
amendment provides that no additional benefits will accrue to
participants under the plan from and after March 1, 2002, and when the
plan freeze becomes effective, participants who are active employees of
Homeland will be 100% vested in their benefits that accrued under the
plan prior to March 1, 2002.
Information regarding the plan follows:
<Table>
<Caption>
2001 2000
-------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at
beginning of year $ 12,182 $ 10,528
Service cost 582 473
Interest cost 979 857
Actuarial (gain) loss 1,546 644
Benefits paid (325) (320)
-------- --------
Benefit obligation at end
of year $ 14,964 $ 12,182
======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $ 11,040 $ 11,234
Actual return on plan assets (418) 126
Employer contribution 1,026 --
Benefits paid (325) (320)
-------- --------
Fair value of plan assets at
end of year $ 11,323 $ 11,040
======== ========
</Table>
F-29
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
9. Retirement Plans, continued:
<Table>
RECONCILIATION OF FUNDED STATUS:
Funded status $(3,641) $(1,142)
Unrecognized actuarial
(gain) loss 4,392 1,465
Unrecognized prior service
cost (29) (40)
------- -------
Prepaid benefit cost $ 722 $ 283
======= =======
AMOUNTS RECOGNIZED IN THE
FINANCIAL STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ -- $ --
Accrued benefit liability (2,542) (405)
Accumulated other
comprehensive income 3,264 688
------- -------
Net amount recognized $ 722 $ 283
======= =======
WEIGHTED-AVERAGE ASSUMPTIONS AS
OF END OF YEAR:
Discount rate 7.00% 7.50%
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%
</Table>
<Table>
<Caption>
COMPONENTS OF NET PERIODIC
PENSION COST: 2001 2000 1999
------- ------- -------
Service cost $ 582 $ 473 $ 562
Interest cost 979 857 792
Expected return on plan
assets (1,016) (1,012) (953)
Amortization of prior
service cost (11) (11) (11)
Recognized net actuarial loss 52 -- 11
------- ------- -------
Net periodic pension cost $ 586 $ 307 $ 401
======= ======= =======
</Table>
The Company also contributes to various union-sponsored, multi-employer
defined benefit plans in accordance with collective bargaining
agreements. The Company could, under certain
F-30
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
10. Retirement Plans, continued:
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 2001, 2000, and 1999, were
$1,178, $1,226, and $1,271, 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 2001, 2000, or
1999.
11. Leases:
The Company leases 54 of its retail store locations under
noncancellable agreements, which expire at various times between 2002
and 2030. These leases, which include both capital leases and operating
leases, generally are subject to six five-year renewal options. Most
leases also require the payment of taxes, insurance and maintenance
costs and many of the leases covering retail store properties provide
for additional contingent rentals based on sales in excess of certain
stipulated amounts.
Leased assets under capital leases consists of the following:
<Table>
<Caption>
December 29, December 30,
2001 2000
------------ ------------
Buildings $1,130 $2,426
Equipment 3,781 4,494
Beneficial interest in capital
leases 1,713 2,966
------ ------
6,624 9,886
Less accumulated amortization 4,650 4,833
------ ------
Net leased assets $1,974 $5,053
====== ======
</Table>
F-31
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
11. Leases, continued:
Future minimum lease payments under capital leases and noncancellable
operating leases as of December 29, 2001, are as follows:
<Table>
<Caption>
Capital Operating
Fiscal Year Leases Leases
- ----------- ------- ---------
2002 $ 602 $ 7,324
2003 531 4,878
2004 -- 4,447
2005 -- 3,883
2006 -- 2,852
Thereafter -- 12,330
------- -------
Total minimum obligations 1,133 $35,715
=======
Less estimated interest 102
-------
Present value of net minimum
obligations 1,031
Less current portion 452
Less liabilities subject to compromise 60
-------
Long-term obligations under
capital leases $ 519
=======
</Table>
Leased assets under capital leases exclude a capital lease for a store
that the Company has determined it will reject in 2002. The net book
value associated with the leased assets is $676 at December 29, 2001.
Future minimum lease payments exclude $1,576 of payments that would
have been made had the Company not determined to reject the lease.
Also, future minimum payments under operating leases exclude $16,574 of
payments associated with leases that the Company has determined it will
reject in 2002.
Rent expense for 2001, 2000 and 1999 is as follows:
<Table>
<Caption>
2001 2000 1999
------ ------ ------
Minimum rents $8,198 $9,789 $7,200
Contingent rents 73 83 86
------ ------ ------
$8,271 $9,872 $7,286
====== ====== ======
</Table>
F-32
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
12. Commitments and Contingencies:
The Company is a party to the 1995 Supply Agreement with AWG, pursuant
to which the Company became a member of the AWG cooperative, and to the
2001 Supply Agreement (together "Supply Agreements"). AWG is the
Company's primary supplier and currently supplies approximately 70% of
the goods sold in the Company's stores. In conjunction with these
supply agreements, the Company receives certain rebates and allowances
from AWG as well as an annual distribution from AWG's cooperative
arrangements (see Note 2 - Concentrations of credit and business risk).
Pursuant to the Supply Agreements, 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; and (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.
The Supply Agreements with AWG contain 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 Agreements (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 Agreements; 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 Agreements 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
Agreements provide AWG with certain purchase rights in the event the
Company closes 90% or more of the Supplied Stores. The Company has
entered into employment contracts with certain key executives providing
for the payment of minimum salary, bonus amounts contingent upon
operating performance, certain other benefits in the event of
termination of the executives, and retention bonuses related to the
bankruptcy.
The Company is party to various lawsuits arising from the 1996 Chapter
11 procedings and also in the normal course of business. Lawsuits
associated with the 1996 Chapter 11 proceedings were closed pursuant to
the August 2001 Bankruptcy Filing. Management believes that the
ultimate outcome of matters arising in the normal course of business
will not have a material effect on the Company's consolidated financial
position, results of operations and cash flows.
Approximately 88% of the Company's employees are union members. A new
collective, bargaining agreement associated with the majority of these
employees, was entered into on
F-33
HOMELAND HOLDING CORPORATION AND SUBSIDIARIES
Debtor-in-Possession as of August 1, 2001
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands, except share and per share amounts)
12. Commitments and Contingencies, continued:
August 5, 2001. The new agreement provides for an increase in wages and
continued contributions to a health and welfare trust fund based upon
union employee hours worked. In addition, the new agreement contains a
maintenance of benefit provision which will require the Company to
remit additional health and welfare payments in the event the health
and welfare trust fund falls below the estimate of outstanding claims
liabilities, including incurred but not reported claims. In the fourth
quarter of 2001, the Company recorded an additional expense in the
amount of $533 related to the maintenance of benefit provisions based
upon estimated outstanding claims at December 29, 2001. The Company
believes that the maintenance of benefit obligation could have a
significant impact on the operating results of the Company.
F-34
EXHIBIT INDEX
<Table>
<Caption>
Exhibit No. Description
----------- -----------
2a Disclosure Statement for Joint Plan of Reorganization
of Homeland Stores, Inc. ("Homeland") and Homeland
Holding Corporation ("Holding") dated as of May
13,1996. (Incorporated by reference to Exhibit 2a to
Form 8-K dated May 31, 1996.)
2b First Amended Joint Plan of Reorganization, as
modified, of Homeland and Holding, dated July 19,
1996. (Incorporated by reference to Exhibit 2b to
Form 10-Q for the quarterly period ended June 15,
1996.)
3a Restated Certificate of Incorporation of Holding,
dated August 2, 1996. (Incorporated by reference to
Form 10 filed as of November 20, 1996.)
3b By-laws of Holding, as amended and restated on
November 14, 1989 and further amended on September
23, 1992. (Incorporated by reference to Exhibit 3b to
Form 10-Q for quarterly period ended June 19, 1993.)
3c Restated Certificate of Incorporation of Homeland,
dated August 2, 1996. (Incorporated by reference to
Form 10 filed as of November 20, 1996.)
3d By-laws of Homeland, as amended and restated on
November 14, 1989, and further amended on September
23, 1992. (Incorporated by reference to Exhibit 3d to
Form 10-Q for quarterly period ended June 19, 1993.)
4a Indenture, dated as of August 2, 1996, among
Homeland, Fleet National Bank, as Trustee, and
Holding, as Guarantor. (Incorporated by reference to
Exhibit T3C to Form T-3 of Homeland, SEC File No.
22-22239.)
4b Warrant Agreement, dated as of August 2, 1996,
between Holding and Liberty Bank and Trust Company of
Oklahoma City, N.A., as Warrant Agent. (Incorporated
by reference to Exhibit 4h to Amendment No. 1 to Form
10.)
4c Equity Registration Rights Agreement, dated as of
August 2, 1996, by Holding for the benefit of holders
of Old Common Stock. (Incorporated by reference to
Exhibit 4i to Amendment No. 1 to Form 10.)
4d Noteholder Registration Rights Agreement, dated as of
August 2, 1996, by Holding for the benefit of holders
of Old Notes. (Incorporated by reference to Exhibit
4j to Amendment No. 1 to Form 10.)
10a(1) Homeland Profit Plus Plan, effective as of January 1,
1988. (Incorporated by reference to Exhibit 10q to
Form S-1 Registration Statement, Registration No.
33-22829.)
10a.1(1) Homeland Profit Plus Plan, effective as of January 1,
1989. (Incorporated by reference to Exhibit 10q.1 to
Form 10-K for the fiscal year ended December 29,
1990.)
</Table>
E-1
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10b Homeland Profit Plus Trust, dated March 8, 1988,
between Homeland and the individuals named therein,
as Trustees. (Incorporated by reference to Exhibit
10r to Form S-1 Registration Statement, Registration
No. 33-22829.)
10c Homeland Profit Plus Trust, dated January 1, 1989,
between Homeland and Bank of Oklahoma, N.A., as
Trustee. (Incorporated by reference to Exhibit 10r.1
to Form 10-K for the fiscal year ended December 29,
1990.)
10d.1(1) 1995 Homeland Management Incentive Plan. (Incorporated
by reference to Exhibit 10s.7 to Form 10-K for fiscal
year ended December 30, 1995.)
10d.2(1) 1996 Homeland Management Incentive Plan. (Incorporated
by reference to Exhibit 10.d3 to Form 10-K for 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 herein
by reference to Form 10-K for fiscal year ended
December 30, 1989.)
10e.2(1) Amendment No. 2 to Homeland Employees' Retirement
Plan effective January 1, 1989. (Incorporated herein
by reference to Form 10-K for fiscal year ended
December 30, 1989.)
10e.3(1) Third Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1988. (Incorporated
herein by reference to Exhibit 10t.3 to Form 10-K for
fiscal year ended December 29, 1990.)
10e.4(1) Fourth Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1989. (Incorporated
herein by reference to Exhibit 10t.4 to Form 10-K for
the fiscal year ended December 28, 1991.)
10e.5(1) Fifth Amendment to Homeland Employees' Retirement
Plan effective as of January 1, 1989. (Incorporated
herein by reference to Form 10-Q for the quarterly
period ended September 9, 1995.)
10f(1) Executive Officers Medical/Life Insurance Benefit
Plan effective as of December 9, 1993. (Incorporated
by reference to Exhibit 10kk to Form 10-K for the
fiscal year ended January 1, 1994.)
10g Asset Purchase Agreement, dated as of February 6,
1995, between Homeland and Associated Wholesale
Grocers, Inc. (Incorporated by reference to Exhibit
10pp.1 to Form 10-K for fiscal year ended December
30, 1995.)
</Table>
E-2
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10h(1) Employment Agreement dated as of February 25, 1998,
between Homeland and Steven M. Mason.
10i(1) Employment Agreement dated as of February 17, 1998,
between Homeland and David B. Clark.
10j Indenture, dated as of August 2, 1996, among
Homeland, Fleet National Bank, as Trustee, and
Holding, as Guarantor. (Incorporated by reference to
Exhibit 10aaa to Form 8-K dated September 30, 1996.)
10k(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 fiscal year
ended December 28, 1996.)
10l(1) Management Stock Option Plan effective as of December
11, 1996. (Incorporated by reference to Exhibit 10t
to Form 10-K for fiscal year ended December 28,
1996.)
10m Loan Agreement dated as of December 17, 1998, among
IBJ Schroder Business Credit Corporation, Heller
Financial, Inc., and National Bank of Canada,
Homeland and Holding.
10n(1) 1998 Homeland Management Incentive Plan.
10o(1) Employment Agreement dated as of July 6, 1998,
between Homeland and Wayne S. Peterson.
10p(1) Employment Agreement dated as of September 14, 1998,
between Homeland and John C. Rocker.
10q(1) Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland and
Steven M. Mason.
10r(1) Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland and
Prentess E. Alletag, Jr.
10s(1) Letter agreement regarding severance arrangements
dated as of December 8, 1998, between Homeland and
Deborah A. Brown.
10t(1) Stock Option Agreement dated as of October 21, 1998,
between Homeland and Wayne S. Peterson.
10u(1) Stock Option Agreement dated as of September 14,
1998, between Homeland and John C. Rocker.
10v(1) Letter agreement regarding severance arrangements
dated as of December 8, 1999, between Homeland and
Prentess E. Alletag, Jr..
</Table>
E-3
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10w(1) Letter agreement regarding severance arrangements
dated as of December 8, 1999, between Homeland and
Deborah A. Brown.
10x*(1) Letter agreement regarding severance arrangements
dated as of December 8, 1999, between Homeland and
Steven M. Mason.
10y(1) Letter agreement regarding severance arrangements
dated as of December 8, 1999, between Homeland and
John C. Rocker.
10z First Amendment to Loan Agreement dated as of
December 17, 1998, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10aa Second Amendment to Loan Agreement dated as of
December 17, 1998, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10ab Third Amendment to Loan Agreement dated as of
December 17, 1998, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10ac Fourth Amendment to Loan Agreement dated as of
December 17, 1998, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10ad Fifth Amendment to Loan Agreement dated as of
December 17, 1998, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10ae Sixth Amendment to Loan Agreement dated as of April
25, 2000, among IBJ Whitehall Business Credit
Corporation, Heller Financial, Inc., and National
Bank of Canada, Homeland and Holding.
10af Letter Agreement and Promissory Note to David B.
Clark regarding relocation expenses.
10ag Seventh Amendment to Loan Agreement dated as of
December 22, 2000, among IBJ Whitehall Business
Credit Corporation, Heller Financial, Inc., and
National Bank of Canada, Homeland and Holding.
10ah Letter Agreement regarding severance arrangements
dated as of December 15, 2000, between Homeland and
Prentess E. Alletag, Jr.
10ai Letter Agreement regarding severance arrangements
dated as of December 15, 2000, between Homeland and
Deborah A. Brown.
10aj Letter Agreement regarding severance arrangements
dated as of December 15, 2000, between Homeland and
Steven M. Mason.
10ak Letter Agreement regarding severance arrangements
dated as of December 15, 2000, between Homeland and
John C. Rocker.
</Table>
E-4
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10al Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and Prentess E. Alletag, Jr.
10am Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and Deborah A. Brown.
10an Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and David B. Clark.
10ao Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and Steven M. Mason.
10ap Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and Wayne S. Peterson.
10aq Letter Agreement regarding change of control
arrangements dated as of December 26, 2000, between
Homeland and John C. Rocker.
10ar Eighth Amendment to Loan Agreement dated as of March
23, 2001, among IBJ Whitehall Business Credit
Corporation, Heller Financial, Inc., and National
Bank of Canada, Homeland and Holding.
10as Ninth Amendment to Loan Agreement dated as of April
24, 2001, among IBJ Whitehall Business Credit
Corporation, Heller Financial, Inc., and National
Bank of Canada, Homeland and Holding.
10at* Tenth Amendment to Loan Agreement dated as of July 6,
2001, among IBJ Whitehall Business Credit
Corporation, Heller Financial, Inc., and National
Bank of Canada, Homeland and Holding.
10au* Supplemental Compensation Agreement between David B.
Clark and the Company dated as of May 18, 2001.
10av* Supplemental Compensation Agreement between Wayne S.
Peterson and the Company dated as of May 18, 2001.
10aw* Supplemental Compensation Agreement between Deborah
A. Brown and the Company dated as of May 18, 2001.
10ax* Supplemental Compensation Agreement between Steven M.
Mason and the Company dated as of May 18, 2001.
10ay* Supplemental Compensation Agreement between John C.
Rocker and the Company dated as of May 18, 2001.
10az* Supplemental Compensation Agreement between Prentess
Alletag and the Company dated as of May 18, 2001.
10aaa Credit Agreement dated as of August 15, 2001 with
Associated Wholesale Grocers, Inc.
</Table>
E-5
<Table>
<Caption>
Exhibit No. Description
----------- -----------
10aab Supply Agreement dated as of August 15, 2001 with
Associated Wholesale Grocers, Inc
10aac Credit Agreement dated as of August 15, 2001 with
Fleet Retail Finance, Inc. and Back Bay Capital
Funding L.L.C.
10aad Retention and Severance Agreement dated as of October
25, 2001, between Homeland and Prentess E. Alletag,
Jr.
10aae Retention and Severance Agreement dated as of October
25, 2001, between Homeland and Deborah A. Brown.
10aaf Retention and Severance Agreement dated as of October
25, 2001, between Homeland and David B. Clark.
10aag Retention and Severance Agreement dated as of October
25, 2001, between Homeland and Wayne S. Peterson.
10aah Retention and Severance Agreement dated as of October
25, 2001, between Homeland and John C. Rocker.
10aai Retention and Severance Agreement dated as of October
25, 2001, between Homeland and Steve Mason.
10aaj First Amendment dated as of December 17, 2001 to the
Credit Agreement dated as of August 15, 2001 with
Fleet Retail Finance, Inc. and Back Bay Capital
Funding L.L.C.
11e Computation of Diluted Earnings Per Share.
21* Subsidiaries.
23* Consent of Independent Accountants.
</Table>
E-6