HOMELAND STORES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
HOMELAND STORES, INC. EMPLOYEE STOCK
OWNERSHIP PLAN
Index
Page
Report of Independent Accountants 1
Financial Statements:
Statements of Net Assets Available for Benefits
as of July 31, 2000 and 1999 2
Statements of Changes in Net Assets Available for
Benefits for the Years Ended July 31, 2000 and 1999 3
Notes to Financial Statements 4
Supplemental Schedules:
Schedule H, Line 4i - Schedule of Assets Held for
Investment Purposes at July 31, 2000
Schedule H, Line 4j -- Schedule of Reportable Transactions
for the Year Ended July 31, 2000
Report of Independent Accountants
To the Homeland Stores, Inc.
Employee Stock Ownership Plan Committee:
In our opinion, the accompanying statements of net assets available for
benefits and the related statements of changes in net assets available for
benefits present fairly, in all material respects, the net assets available
for benefits of the Homeland Stores, Inc. Employee Stock Ownership Plan (the
"Plan") at July 31, 2000 and 1999, and the changes in net assets available
for benefits for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Plan'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 the opinion expressed above.
As discussed in Note 2 to the financial statements, the fair value of the
Homeland Holding Corporation Common Stock has declined significantly since
July 31, 2000.
Our audits were performed for the purpose of forming an opinion on the
financial statements taken as a whole. The supplemental schedules of assets
held for investment purposes and reportable transactions are presented for
the purpose of additional analysis and are not a required part of the basic
financial statements, but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure
under the Employee Retirement Income Security Act of 1974. These supplemental
schedules are the responsibility of the Plan's management. The supplemental
schedules have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
The schedules of assets held for investment purposes and reportable
transactions that accompany the Plan's financial statements do not disclose
the historical cost of certain nonparticipant directed Plan assets held by
the Plan trustee. Disclosure of this information is required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure
under the Employee Retirement Income Security Act of 1974.
PricewaterhouseCoopers LLP
February 2, 2001
Homeland Stores, Inc. Employee Stock Ownership Plan Statements of
Net Assets Available for Benefits
As of July 31, 2000 and 1999
2000 1999
Assets
Investments:
Homeland Holding Corporation Common Stock,
at fair value
(142,154 and 101,906 shares, respectively) $ 515,308 $ 363,091
Interest-bearing cash 1,909 665
Receivables:
Employer required contribution - 206,743
Employer matching contributions 1,200 1,120
Employees' contributions 3,603 3,603
Due from brokers 3,458 3,313
Net assets Available for benefits $ 525,478 $ 578,535
The accompanying notes are an integral part of these financial statements.
2
Homeland Stores, Inc. Employee Stock Ownership Plan
Statements of Changes in Net Assets Available for Benefits
For the years ended July 31, 2000 and 1999
2000 1999
Additions to net assets attributed to:
Investment income:
Net appreciation (depreciation) in fair
value of Investments $ 6,831 $ (338,365)
Contributions:
Employer required contributions - 206,743
Employer matching contributions 11,512 13,519
Employees' contributions 34,571 40,598
Total additions 52,914 (77,505)
Deductions from net assets attributed to:
Distributions to participants 105,971 91,973
Net decrease (53,057) (169,478)
Net assets available for benefits:
Beginning of year 578,535 748,013
End of year $ 525,478 $ 578,535
The accompanying notes are an integral Part of these financial statements.
3
Homeland Stores, Inc. Employee Stock Ownership Plan
Notes to Financial Statements
1. Description of the Plan
General
Homeland Stores, Inc. (the "Company") established the Homeland Stores, Inc.
Employee Stock Ownership Plan (the "Plan") effective as of August 2, 1996
("Effective Date"). The Plan, which is maintained pursuant to collective
bargaining agreements entered into in August 1996, provides for employees
covered under the collective bargaining agreements an opportunity to
participate in the growth of the Company through ownership of common stock
of Homeland Holding Corporation (the "Common Stock"). The Plan is a defined
contribution plan and contributions made are held in each participant's
account in a trust. The benefit that a participant receives depends on the
amount of contribution made by each participant and the Company, and the
performance of the Common Stock. The Plan is subject to the provisions of
the Employee Retirement Income Security Act of 1974 ("ERISA").
Contributions
There are four ways that contributions may be made to the Plan by the
participant and/or the Company. They are:
(1) Required Company Contributions:
The Company was required to make a contribution to the Plan of
58,025 shares of Common Stock as soon as practical after the
Effective Date and in each of the two Plan years ending July 31,
1998 and 1999. Participants employed on a full-time basis for the
entire Plan year received a per capita allocation of shares. Part-
time participants employed on a continuous basis since February 1
of the respective Plan year and full-time participants employed
on a continuous basis since February 1, but after the beginning
of the respective Plan year, received one-half of the allocation
received by full-time employees employed the entire Plan year.
(2) Participant and Company Matching Contributions:
Beginning on the first anniversary of the Effective Date and for
the three year period ending August 2, 2000, participants may make
pre-tax contributions, subject to certain tax law limitations, in
an amount equal to their ratable share of the equivalent of the
fair value of 43,519 shares of Common Stock each year. The Company
will match 33 1/3% of each participant's pre-tax contribution in
the form of Common Stock. The matching contributions are credited
to each participant's account at the end of each month. All
employees covered by the collective bargaining agreements are
eligible to make participant contributions beginning February 1
and August 1 of each Plan year subsequent to the participant's
initial employment date as a union employee.
4
Homeland Stores, Inc. Employee Stock Ownership Plan
Notes to Financial Statements, continued
1. Description of the Plan, continued
Contributions, continued
(3) Contingent Company Contributions:
If the Company's earnings before the deductions of interest, taxes,
depreciation and amortization ("EBITDA") exceeds $25.0 million in
the first year ending on the anniversary of the collective
bargaining agreements, $27.5 million the second year ending on the
anniversary of the collective bargaining agreements, and $30.25
million in the third year ending on the anniversary of the
collective bargaining agreements, then the Company shall make
additional contributions to the Plan of 58,025 shares of Common
Stock in each of those years in which the targets are achieved.
The allocation of these shares is the same as described above for
Required Company Contributions.
(4) Discretionary Company Contributions:
The Company, at its sole discretion, may make additional
contributions of cash or Common Stock whenever it desires. The
allocation of such contributions is the same as described above
for Required Company Contributions.
Vesting
Each participant's account, including participant and allocated Company
contributions, is always 100% vested and non-forfeitable, including the
earnings thereon.
Distribution of Benefits
No distribution from the Plan will be made until a participant retires, dies
(in which case payment shall be made to the participant's beneficiary), or
otherwise terminates employment with the Company, or upon termination of the
Plan, except that distribution of the participant's account shall commence in
any event no later than April 1 following the end of the calendar year
in which the participant reaches 70 1/2, regardless of whether the
participant is employed on such date. Distributions are made in lump-sum
payments or installment payments made over a period of two years, unless the
participant is at least age 70 1/2, in which case the participant may elect
installment payments over their life expectancy.
Distributions are made in cash or, if the participant elects, in the form of
Common Stock plus cash for any fractional shares.
Voting Rights
Each participant is entitled to exercise voting rights with respect to
the Common Stock allocated to his or her account.
5
Homeland Stores, Inc. Employee Stock Ownership Plan
Notes to Financial Statements, continued
1. Description of the Plan, continued
Plan termination
Although the Company has not expressed any intent to do so, the Company
reserves the right, through its board of directors, to terminate the Plan
at any time. Upon termination of the Plan, the account of each participant
will be distributed as prescribed by the Plan.
Administration of the Plan
Certain administrative duties are performed by officers or employees of
the Company and none of the officers or employees receive compensation
from the Plan. The custodial bank agent processes distribution payments.
2. Summary of Significant Accounting Policies
Basis of Accounting
The financial statements of the plan are prepared using the accrual
method of accounting.
Investment Valuation and Income Recognition
The Common Stock is valued at fair value based on quoted market prices
obtained by the custodial bank agent from an independent pricing service.
Purchases and sales of securities are recorded on a trade-date basis.
Dividends are recorded on the ex-dividend date.
The Plan presents, in the statement of changes in net assets available
for benefits, the net appreciation (depreciation) in the fair value of
its investments which consists of the realized gains or losses and the
unrealized appreciation (depreciation) on those investments.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of net assets available for benefits at the date of the financial
statements and the reported amounts of changes in net assets available
for benefits during the reporting period. Actual results could differ
from those estimates.
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Homeland Stores, Inc. Employee Stock Ownership Plan
Notes to Financial Statements, continued
2. Summary of Significant Accounting Policies, continued
Risks and Uncertainties
The Plan provides for investment of assets in the Common Stock. As such,
those assets are exposed to various market risks. Due to the level of
uncertainty related to changes in the value of the Common Stock, it is at
least reasonably possible that changes in the near term would materially
affect participants' account balances and the amounts reported in the
statement of net assets available for benefits and the statement of
changes in net assets available for benefits.
The fair value of the Common Stock was $3.625 per share and $0.5625 per
share at July 31, 2000 and February 2, 2001, respectively.
Tax Status
The Internal Revenue Service ("IRS") has determined and informed the
Company by letter dated as of June 9, 1999, that the Plan, as amended, is
qualified and the trust established under the Plan is tax-exempt, under
the appropriate section of the IRS Code.
Administrative Expenses
All administrative expenses are paid by the Company. For the years ended
July 31, 2000 and 1999, the Company paid on behalf of the Plan
administrative expenses of $14,286 and $14,325, respectively.
Payment of Benefits
Benefit payments to participants are recorded upon distribution.
3. Employer Contributions
The Company did not achieve the EBITDA targets for any of the first three
Plan years pursuant to the Contingent Company Contributions component of
the Plan and no Discretionary Company Contributions have been made since
inception of the Plan. As of the end of the 1999 Plan year, the Company
had not contributed the Required Company Contribution for the 1999 Plan
year, which has been reported as an employer required contribution
receivable in the statement of net assets available for benefits as of
July 31, 1999. The receivable was valued based on the required number of
shares to be contributed at the fair value of the Common Stock, as
determined by the quoted market price on July 31, 1999. The Company made
the Required Company Contribution for the 1999 Plan year in October 2000.
7
Homeland Stores, Inc. Employee Stock Ownership Plan
Schedule H, Line 4i
Schedule of Assets Held for Investment Purposes at July 31, 2000
Number Current
Identity Of Issue And Description of of shares Cost Value
Investment
Homeland Holding Corporation Common Stock** 142,154 $ * $ 515,308
American Performance Cash Management Fund 1,909 $ 1,909 $ 1,909
* Custodial bank was unable to provide historical cost information
** Denotes party-in-interest
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Homeland Stores, Inc. Employee Stock Ownership Plan
Schedule H, Line 4j
Schedule of Reportable Transactions
For the year ended July 31, 2000
Series of 5 Percent Transactions
Total Total
Description Number of Number Purchase Selling Net Gain
Identity of Party Involved of Asset Purchases of Sales Price Price or (Loss)
Bank of Oklahoma Cash Management 27 - $ 108,206 $ - -
Fund - 26 - 106,962 -
Cantor Fitzgerald & Co., Inc. Homeland Holding
Corp. Common Stock - 3 - 22,374 *
Herzog Heine Geduld Inc. Homeland Holding 1 - 181 - -
Corp. Common Stock - 10 - 87,891 *
* Custodial bank was unable to provide historical cost information.
During the year ended July 31, 2000 the Company issued 70,466 shares of
Homeland Holding Corp. Common Stock with an aggregate cost of $252,746 to
Plan participants. The issuances of shares represent party-in-interest
transactions.
9