UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 19, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in charter)
Maryland 13-1890974
--------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
----------------------------------------
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. YES [X] NO [ ]
As of July 27, 2004 the Registrant had a total of 38,562,151 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
----------------------------------
June 14, 2003
(As Restated
June 19, 2004 See Note 3)
----------------- -----------------
Sales $ 3,286,223 $ 3,228,523
Cost of merchandise sold (2,356,569) (2,305,349)
--------------- ----------------
Gross margin 929,654 923,174
Store operating, general and administrative expense (938,274) (933,784)
--------------- ----------------
Loss from operations (8,620) (10,610)
Interest expense (26,850) (24,884)
Interest income 841 780
Minority interest in earnings of consolidated franchisees (1,376) (274)
---------------- ----------------
Loss from continuing operations before income taxes (36,005) (34,988)
(Provision for) benefit from income taxes (5,458) 14,358
---------------- ----------------
Loss from continuing operations (41,463) (20,630)
Discontinued operations (Note 5):
Loss from operations of discontinued businesses, net of tax benefit of
$0 and $6,460 for the 16 weeks ended June 19, 2004 and June 14, 2003,
respectively (1,383) (11,459)
Gain on disposal of discontinued operations, net of tax provision of $29,359
for the 16 weeks ended June 14, 2003 - 52,081
--------------- ----------------
(Loss) income from discontinued operations (1,383) 40,622
--------------- ----------------
Cumulative effect of change in accounting principle - FIN 46-R, net
of tax - (8,047)
--------------- ----------------
Net (loss) income $ (42,846) $ 11,945
=============== ================
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.08) $ (0.53)
Discontinued operations (0.03) 1.05
Cumulative effect of change in accounting principle - FIN 46-R - (0.21)
--------------- ----------------
Net (loss) income per share - basic and diluted $ (1.11) $ 0.31
=============== ================
Weighted average number of common shares outstanding 38,520,018 38,515,806
Common stock equivalents 370,914 185,411
--------------- ----------------
Weighted average number of common and common equivalent
shares outstanding 38,890,932 38,701,217
=============== ================
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(Accumulated Accumulated
Common Stock Additional Deficit) Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
16 Week Period Ended
June 19, 2004
-------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (42,846) (42,846)
Other comprehensive loss (5,938) (5,938)
Stock options exercised 1,625 1 6 7
------------ ----------- ----------- ---------- ------------ ------------
Balance at end of period 38,520,530 $ 38,520 $ 459,585 $ (120,946) $ (33,177) $ 343,982
============ =========== =========== ============ ============ ===========
16 Week Period Ended
June 14, 2003
As Restated - See Note 3
------------------------
Balance at beginning of period,
as previously stated 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191
Add adjustment for the cumulative
effect on prior years of
applying retroactively the
new method of accounting
for inventory (LIFO to FIFO) 17,462 17,462
------------ ----------- ----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted 38,515,806 38,516 459,411 78,849 (61,123) 515,653
Net income 11,945 11,945
Other comprehensive income 38,785 38,785
------------ ----------- ----------- ----------- ------------ -----------
Balance at end of period 38,515,806 $ 38,516 $ 459,411 $ 90,794 $ (22,338) $ 566,383
============ =========== =========== =========== ============ ===========
Comprehensive (Loss) Income
---------------------------
16 Weeks Ended
----------------------------------
(As Restated
See Note 3)
June 19, 2004 June 14, 2003
------------- -------------
Net (loss) income $ (42,846) $ 11,945
---------- ----------
Foreign currency translation adjustment (6,773) 39,492
Net unrealized gain (loss) on derivatives, net of tax 835 (707)
--------- -----------
Other comprehensive (loss) income, net of tax (5,938) 38,785
--------- ----------
Total comprehensive (loss) income $ (48,784) $ 50,730
========= ==========
Accumulated Other Comprehensive Loss Balances
---------------------------------------------
Accumulated
Foreign Net Unrealized Minimum Other
Currency (Loss) Gain Pension Comprehensive
Translation on Derivatives Liability (Loss) Income
------------- -------------- ------------ -------------
Balance at February 28, 2004, As Restated - See Note 3 $ (23,892) $ (158) $ (3,189) $ (27,239)
Current period change (6,773) 835 - (5,938)
------------ ----------- ------------ ------------
Balance at June 19, 2004 $ (30,665) $ 677 $ (3,189) $ (33,177)
============ =========== ============ ============
Balance at February 22, 2003 $ (62,496) $ 3,015 $ (1,642) $ (61,123)
Current period change, As Restated 39,492 (707) - 38,785
------------ ----------- ------------ ------------
Balance at June 14, 2003, As Restated $ (23,004) $ 2,308 $ (1,642) $ (22,338)
============ =========== ============ ============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
February 28, 2004
June 19, (As Restated
2004 See Note 3)
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 278,934 $ 297,008
Accounts receivable, net of allowance for doubtful accounts of
$13,002 and $13,620 at June 19, 2004 and February 28, 2004,
respectively 146,177 171,835
Inventories 712,989 694,120
Prepaid expenses and other current assets 36,467 25,225
------------- --------------
Total current assets 1,174,567 1,188,188
------------- --------------
Non-current assets:
Property:
Property owned 1,381,984 1,405,925
Property leased under capital leases, net 61,842 65,632
------------- --------------
Property - net 1,443,826 1,471,557
Other assets 110,274 115,500
------------- --------------
Total assets $ 2,728,667 $ 2,775,245
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,272 $ 2,271
Current portion of obligations under capital leases 13,165 15,901
Accounts payable 532,169 480,712
Book overdrafts 90,329 96,273
Accrued salaries, wages and benefits 167,182 177,142
Accrued taxes 76,317 74,698
Other accruals 208,133 236,238
------------- --------------
Total current liabilities 1,089,567 1,083,235
------------- --------------
Non-current liabilities:
Long-term debt 830,297 823,738
Long-term obligations under capital leases 71,030 73,980
Other non-current liabilities 386,045 394,361
Minority interests in consolidated franchisees 7,746 7,172
------------- --------------
Total liabilities 2,384,685 2,382,486
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000
shares; issued - none - -
Common stock--$1 par value; authorized - 80,000,000
shares; issued and outstanding - 38,520,530 and
38,518,905 shares at June 19, 2004 and February 28, 2004,
respectively 38,520 38,519
Additional paid-in capital 459,585 459,579
Accumulated other comprehensive loss (33,177) (27,239)
Accumulated deficit (120,946) (78,100)
------------- --------------
Total stockholders' equity 343,982 392,759
------------- --------------
Total liabilities and stockholders' equity $ 2,728,667 $ 2,775,245
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
-------------------------------------------------
June 14, 2003
(As Restated
June 19, 2004 See Note 3)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (42,846) $ 11,945
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Asset disposition initiative 1,061 -
Depreciation and amortization 81,122 87,328
Deferred income tax provision (benefit) 1,012 (6,314)
Loss on disposal of owned property 397 13
Gain on sale of discontinued operations - (81,440)
Cumulative effect of change in accounting principle - FIN 46-R - 8,047
Other changes in assets and liabilities:
Decrease in receivables 24,840 9,585
Increase in inventories (22,822) (17,200)
Increase in prepaid expenses and other current assets (14,933) (21,964)
(Increase) decrease in other assets (433) 1,659
Increase in accounts payable 55,635 5,949
(Decrease) increase in accrued salaries, wages and benefits, and taxes (6,813) 22,806
Decrease in other accruals (27,899) (3,207)
Increase (decrease) in minority interest 727 (46)
Decrease in other non-current liabilities (13,020) (15,829)
Other operating activities, net 1,060 838
----------- -----------
Net cash provided by operating activities 37,088 2,170
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (55,491) (56,949)
Proceeds from disposal of property 6,140 137,614
----------- -----------
Net cash (used in) provided by investing activities (49,351) 80,665
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving lines of credit - (135,000)
Proceeds from long-term borrowings 7,301 16
Payments on long-term borrowings - (1,159)
Principal payments on capital leases (4,616) (4,088)
(Decrease) increase in book overdrafts (5,717) 9,543
Deferred financing fees (813) (62)
Proceeds from stock option exercise 7 -
----------- -----------
Net cash used in financing activities (3,838) (130,750)
Initial impact of adoption of FIN 46-R - 22,030
Effect of exchange rate changes on cash and cash equivalents (1,973) 9,748
----------- -----------
Net decrease in cash and cash equivalents (18,074) (16,137)
Cash and cash equivalents at beginning of period 297,008 199,014
----------- -----------
Cash and cash equivalents at end of period $ 278,934 $ 182,877
=========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation
The accompanying Consolidated Statements of Operations and Consolidated
Statements of Cash Flows of The Great Atlantic & Pacific Tea Company, Inc.
("We," "Our," "Us" or "Our Company") for the 16 weeks ended June 19, 2004 and
June 14, 2003, and the Consolidated Balance Sheets at June 19, 2004 and February
28, 2004, are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial position and results of operations for such periods. The
accompanying consolidated financial statements also include the impact of
adopting Interpretation No. 46 ("FIN 46-R"), "Consolidation of Variable Interest
Entities - an interpretation of 'Accounting Research Bulletin No. 51'", EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers" ("EITF
03-10") and the change in our method of valuing certain of our inventories from
the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO")
method during the first quarter of fiscal 2004. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in our Fiscal 2003 Annual Report on Form
10-K. Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries, and franchise operations. Significant intercompany
accounts and transactions have been eliminated. Certain reclassifications have
been made to prior year amounts to conform to current year presentation.
2. Impact of New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
132 R, "Employer's Disclosure about Pensions and Other Postretirement Benefits"
("SFAS 132 R"). SFAS 132 R requires new annual disclosures about the type of
plan assets, investments strategy, measurement date, plan obligations, and cash
flows as well as the components of the net periodic benefit cost recognized in
interim periods. The new annual disclosure requirements apply to fiscal years
ending after December 15, 2003, except for the disclosure of expected future
benefit payments, which must be disclosed for fiscal years ending after June 15,
2004. Interim period disclosures are generally effective for interim periods
beginning after December 15, 2003. We have included the disclosures required by
SFAS 132 R, including expected future benefit payments, in our consolidated
financial statements for the year ended February 28, 2004. We have also included
all newly required interim period disclosures for the quarter ending June 19,
2004 in Note 7 - Retirement Plans and Benefits.
In December 2003, the United States enacted into law the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act"). The Act establishes
a prescription drug benefit under Medicare, known as "Medicare Part D," and a
Federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB issued FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"). We have elected to defer the
accounting for the effects of the Act, as permitted by FAS 106-2. Therefore, in
accordance with FAS 106-2, our consolidated financial statements and
accompanying notes do not reflect the favorable effects of the Act on the plans,
the magnitude of which has not yet been determined. Specific authoritative
guidance on the accounting for the federal subsidy is pending, and that
guidance, when issued, could require our Company to change previously reported
information.
Refer to Note 3 - Restatement and Changes in Accounting regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our consolidated financial statements.
3. Restatement and Changes in Accounting
FIN 46-R
--------
In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of `Accounting Research
Bulletin No. 51'". FIN 46-R addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at risk to allow the
entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46-R requires the
consolidation of these entities, known as variable interest entities ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns, or
both. FIN 46-R applies immediately to variable interests in VIE's created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46-R applies to VIE's no later than the end of the first
reporting period ending after March 15, 2004 (the quarter ending June 19, 2004
for our Company).
As of June 19, 2004, we served 66 franchised stores. These franchisees are
required to purchase inventory from our Company, which acts as a wholesaler to
the franchisees. We had sales to these franchised stores of $254 million and
$251 million for the first quarter of fiscal years 2004 and 2003, respectively.
In addition, we sublease the stores and lease the equipment in the stores to the
franchisees. We also provide merchandising, advertising, bookkeeping and other
consultative services to the franchisees for which we receive a fee, which
primarily represents the reimbursement of costs incurred to provide such
services. Based upon the new criteria for consolidation of VIE's, we have
determined that all of our franchised stores do not have sufficient equity at
risk to allow them to finance their own activities. Thus, these franchisees are
VIE's of which, under FIN 46-R, we are deemed the primary beneficiary and
accordingly have included them in our consolidated financial statements as of
February 23, 2003. As permitted by FIN 46-R, our Company elected to restate
prior year's consolidated financial statements for the impact of adopting this
interpretation for comparability purposes.
Prior to February 23, 2003, we held as assets inventory notes collateralized by
the inventory in the stores and equipment lease receivables collateralized by
the equipment in the stores. The current portion of the inventory notes and
equipment leases, net of allowance for doubtful accounts, had been included in
"Accounts receivable" on our Consolidated Balance Sheets, while the long-term
portion of the inventory notes and equipment leases had been included in "Other
assets" on our Consolidated Balance Sheets. The repayment of these inventory
notes and equipment leases had been dependent upon positive operating results of
the stores. To the extent that the franchisees incurred operating losses, we had
established an allowance for doubtful accounts. We assessed the sufficiency of
the allowance on a store by store basis based upon the operating results and the
related collateral underlying the amounts due from the franchisees. In the event
of default by a franchisee, we reserved the option to reacquire the inventory
and equipment at the store and operate the franchise as a corporate owned store.
The cumulative effect adjustment of $8.0 million primarily represents the
difference between consolidating these entities as of February 23, 2003 and the
allowance for doubtful accounts that was provided for these franchises at that
date.
Also refer to Note 10 - Commitments and Contingencies regarding our pending
class action lawsuit relating to our Canadian franchise business.
EITF 03-10
----------
In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers". The
provisions of EITF 03-10 became effective for our Company in the first quarter
of fiscal 2004. EITF 03-10 provides guidance for the reporting of vendor
consideration received by a reseller as it relates to manufacturers' incentives,
such as rebates or coupons, tendered by consumers. Vendor incentives should be
included in revenues only if defined criteria are met. As such, our Company will
continue to record as part of revenues manufacturers' coupons that can be
presented at any retailer that accepts coupons. However, in the case of vendor
incentives that can only be redeemed at a Company retail store, such
consideration would be recorded as a decrease in cost of sales. As permitted by
the transition provisions of EITF 03-10, we have reclassified prior year's sales
and cost of sales for comparative purposes in this report. Implementation of
EITF 03-10 has no effect on gross margin dollars, net income or cash flows, but
certain vendor coupons or rebates that had been recorded in sales in the past
are currently being recognized as a reduction of cost of sales. The
implementation of EITF 03-10 has resulted in decreases in both sales and cost of
sales of $15.3 million in the first quarter of fiscal 2004 and $14.7 million in
the first quarter of fiscal 2003.
Inventory
---------
At February 28, 2004, approximately 6% of our inventories, relating to all
merchandise sold in our Waldbaums and Farmer Jack banners, that were acquired
during the past two decades, were valued at the lower of cost or market using
the LIFO method. During the first quarter of fiscal 2004, we changed our method
of valuing these inventories from the LIFO method to the FIFO method. We believe
that the new method is preferable because the FIFO method produces an inventory
value on our Consolidated Balance Sheets that better approximates current costs.
In addition, under FIFO, the flow of costs is generally more consistent with our
physical flow of goods. The adoption of the FIFO method will enhance
comparability of our financial statements by conforming all of our inventories
to the same accounting method. Our Company applied this change by retroactively
restating our consolidated financial statements as required by Accounting
Principles Board Opinion No. 20, "Accounting Changes," which resulted in an
increase to retained earnings as of February 23, 2003 of approximately $17.5
million.
Overall Impact
--------------
The following tables reflect the impact of the adoption of FIN 46-R, including
the impact of all elimination entries relating to the consolidation of the
franchisees, EITF 03-10, and the change in our method of valuing certain of our
inventories from the LIFO method to the FIFO method on our Consolidated
Statements of Operations and Consolidated Balance Sheets for the periods
presented. Note that the adoption of EITF 03-10 only impacts our Consolidated
Statements of Operations. Furthermore, the change in our method of valuing
certain of our inventories impacts our Consolidated Balance Sheets and had a $0
impact on our Consolidated Statement of Operations for the 16 weeks ended June
14, 2003.
Consolidated
A&P for the Consolidated
16 weeks ended Impact of Impact of A&P for the
June 19, 2004 adoption of adoption of 16 weeks ended
prior to changes FIN 46-R EITF 03-10 June 19, 2004
---------------- --------------- ---------------- -----------------
Sales $ 3,258,579 $ 42,976 $ (15,332) $ 3,286,223
Cost of merchandise sold (2,376,163) 4,262 15,332 (2,356,569)
------------- ------------- ------------- -------------
Gross margin 882,416 47,238 - 929,654
Store operating, general and administrative
expense (897,517) (40,757) - (938,274)
------------- ------------- ------------- -------------
(Loss) income from operations (15,101) 6,481 - (8,620)
Interest expense (26,850) - - (26,850)
Interest income 2,294 (1,453) - 841
Minority interest in earnings of consolidated
franchisees - (1,376) - (1,376)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (39,657) 3,652 - (36,005)
Provision for income taxes (4,414) (1,044) - (5,458)
------------- ------------- ------------- -------------
(Loss) income from continuing operations (44,071) 2,608 - (41,463)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,383) - - (1,383)
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Loss from discontinued operations (1,383) - - (1,383)
-------------- ------------- ------------- -------------
Net (loss) income $ (45,454) $ 2,608 $ - $ (42,846)
============= ============= ============= =============
Depreciation $ (79,674) $ (1,448) $ - $ (81,122)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Restated for the
16 weeks ended adoption of adoption of 16 weeks ended
June 14, 2003 FIN 46-R EITF 03-10 June 14, 2003
---------------- --------------- ---------------- -----------------
Sales $ 3,203,830 $ 39,409 $ (14,716) $ 3,228,523
Cost of merchandise sold (2,324,661) 4,596 14,716 (2,305,349)
-------------- ------------- ------------- -------------
Gross margin 879,169 44,005 - 923,174
Store operating, general and administrative
expense (891,628) (42,156) - (933,784)
------------- ------------- ------------- -------------
(Loss) income from operations (12,459) 1,849 - (10,610)
Interest expense (24,884) - - (24,884)
Interest income 2,139 (1,359) - 780
Minority interest in earnings of consolidated
franchisees - (274) - (274)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (35,204) 216 - (34,988)
Benefit from (provision for) income taxes 14,862 (504) - 14,358
------------- ------------- ------------- -------------
Loss from continuing operations (20,342) (288) - (20,630)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (11,459) - - (11,459)
Gain on disposal of discontinued operations,
net of tax 52,081 - - 52,081
------------- ------------- ------------- -------------
Income from discontinued operations 40,622 - - 40,622
------------- ------------- ------------- -------------
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - (8,047) - (8,047)
------------- ------------- ------------- -------------
Net income (loss) $ 20,280 $ (8,335) $ - $ 11,945
============= ============= ============= =============
Depreciation $ (84,096) $ (1,681) $ - $ (85,777)
-------------- ------------- ------------- -------------
Consolidated
A&P at Impact of Consolidated
June 19, 2004 adoption of A&P at
prior to adoption FIN 46-R June 19, 2004
-------------------- -------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 254,505 $ 24,429 $ 278,934
Accounts receivable 167,365 (21,188) 146,177
Inventories 690,020 22,969 712,989
Prepaid expenses and other current assets 36,444 23 36,467
------------------ ------------------ ------------------
Total current assets 1,148,334 26,233 1,174,567
------------------ ------------------ ------------------
Non-current assets:
Property:
Property owned 1,362,633 19,351 1,381,984
Property leased under capital leases, net 61,842 - 61,842
------------------ ------------------ ------------------
Property, net 1,424,475 19,351 1,443,826
Other assets 146,637 (36,363) 110,274
------------------ ------------------ ------------------
Total assets $ 2,719,446 $ 9,221 $ 2,728,667
================== ================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,272 $ - $ 2,272
Current portion of obligations under capital
leases 13,165 - 13,165
Accounts payable 532,506 (337) 532,169
Book overdrafts 90,329 - 90,329
Accrued salaries, wages and benefits 164,716 2,466 167,182
Accrued taxes 71,554 4,763 76,317
Other accruals 207,166 967 208,133
------------------ ------------------ ------------------
Total current liabilities 1,081,708 7,859 1,089,567
------------------ ------------------ ------------------
Non-current liabilities:
Long-term debt 830,297 - 830,297
Long-term obligations under capital leases 71,030 - 71,030
Other non-current liabilities 384,956 1,089 386,045
Minority interests - 7,746 7,746
------------------ ------------------ ------------------
Total liabilities 2,367,991 16,694 2,384,685
------------------ ------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,520 - 38,520
Additional paid-in capital 459,585 - 459,585
Accumulated other comprehensive income (32,844) (333) (33,177)
Accumulated deficit (113,806) (7,140) (120,946)
------------------ ------------------ ------------------
Total stockholders' equity 351,455 (7,473) 343,982
------------------ ------------------ ------------------
Total liabilities and stockholders'equity $ 2,719,446 $ 9,221 $ 2,728,667
================== ================== ==================
Consolidated
A&P as Consolidated
previously Impact of Impact of A&P as
reported at adoption of change from Restated at
February 28, 2004 FIN 46-R LIFO to FIFO February 28, 2004
----------------- ------------------ ------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,151 $ 20,857 $ - $ 297,008
Accounts receivable 190,737 (18,902) - 171,835
Inventories 654,344 22,491 17,285 694,120
Prepaid expenses and other current assets 25,080 145 - 25,225
----------- ----------- ----------- -----------
Total current assets 1,146,312 24,591 17,285 1,188,188
----------- ----------- ----------- -----------
Non-current assets:
Property:
Property owned 1,383,702 22,223 - 1,405,925
Property leased under capital leases, net 65,632 - - 65,632
----------- ----------- ----------- -----------
Property, net 1,449,334 22,223 - 1,471,557
Other assets 154,904 (39,404) - 115,500
----------- ----------- ----------- -----------
Total assets $ 2,750,550 $ 7,410 $ 17,285 $ 2,775,245
=========== =========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,271 $ - $ - $ 2,271
Current portion of obligations under capital
leases 15,901 - - 15,901
Accounts payable 477,536 3,176 - 480,712
Book overdrafts 96,273 - - 96,273
Accrued salaries, wages and benefits 176,812 330 - 177,142
Accrued taxes 69,217 5,481 - 74,698
Other accruals 235,910 328 - 236,238
----------- ----------- ----------- -----------
Total current liabilities 1,073,920 9,315 - 1,083,235
----------- ----------- ----------- -----------
Non-current liabilities:
Long-term debt 823,738 - - 823,738
Long-term obligations under capital leases 73,980 - - 73,980
Other non-current liabilities 393,088 1,273 - 394,361
Minority interests - 7,172 - 7,172
----------- ----------- ----------- -----------
Total liabilities 2,364,726 17,760 - 2,382,486
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - - -
Common stock 38,519 - - 38,519
Additional paid-in capital 459,579 - - 459,579
Accumulated other comprehensive income (26,637) (602) - (27,239)
Accumulated deficit (85,637) (9,748) 17,285 (78,100)
----------- ----------- ----------- -----------
Total stockholders' equity 385,824 (10,350) 17,285 392,759
----------- ------------ ----------- -----------
Total liabilities and stockholders'equity $ 2,750,550 $ 7,410 $ 17,285 $ 2,775,245
=========== =========== =========== ===========
4. Income Taxes
The income tax provision recorded for the 16 weeks ended June 19, 2004 and June
14, 2003 reflects our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") requires that a
valuation allowance be created and offset against a net deferred tax asset if,
based on existing facts and circumstances, it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Based upon our
continued assessment of the realization of our U.S. net deferred tax asset and
our historic cumulative losses, and in particular, the significant increase in
U.S. operating losses during the second quarter of fiscal 2002, we concluded
that it was appropriate to establish a full valuation allowance for our U.S. net
deferred tax asset. For the 16 weeks ended June 19, 2004, the valuation
allowance was increased by $20.5 million. To the extent that our U.S. operations
generate taxable income in future periods, we will reverse the income tax
valuation allowance. In future periods, U.S. earnings or losses will not be tax
effected until such time as the certainty of future tax benefits can be
reasonably assured.
Further, in accordance with SFAS 109, income from discontinued operations can be
tax effected under certain circumstances. As a result, we taxed the income from
discontinued operations for the first quarter ended June 14, 2003 at our
effective tax rate. The tax provision for discontinued operations of $22.9
million for the first quarter ended June 14, 2003 was completely offset by a tax
benefit from continuing operations.
For the first quarter of fiscal 2004, our effective income tax rate provision
of 15.1% increased from the effective income tax rate benefit of (41.0%) in the
first quarter of fiscal 2003 as follows:
16 weeks ended
--------------------------------------------------------
June 19,2004 June 14, 2003
--------------------------- ---------------------------
Tax Effective Tax Rate Tax Effective Tax Rate
----- ------------------ ------- ------------------
United States $(1,380) 3.8% $22,024 (62.9%)
Canada (4,078) 11.3% (7,666) 21.9%
-------- ------- -------- -------
$(5,458) 15.1% $14,358 (41.0%)
======== ======= ======== =======
The increase in our effective tax rate was primarily due to the absence of a tax
benefit recognized from the loss on continuing operations. As discussed above,
$22.9 million of benefit was recognized in the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2004, where no benefit was recognized.
The remaining provisions included in the U.S. of $1.4 million and $0.9 million
for the first quarters of fiscal 2004 and 2003, respectively, represent state
and local taxes. Partially offsetting the increase was the impact of the lower
mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations in the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003.
We had a net current deferred tax asset which is included in "Prepaid expenses
and other current assets" on our Consolidated Balance Sheet totaling $0.3
million and a net non-current deferred tax liability which is included in "Other
non-current liabilities" on our Consolidated Balance Sheet totaling $14.9
million at June 19, 2004, relating to our Canadian operations.
5. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee,
Wisconsin market, where 23 of our remaining 24 Kohl's stores were located, as
well as our Eight O'Clock Coffee business, through the sale and/or disposal of
these assets.
Upon the decision to sell these businesses, we applied the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered, where available, the binding sale agreements related to these
properties as an estimate of the assets' fair value. As a result of the adoption
of SFAS 144, $22.1 million in net property was reclassified as held for sale as
of February 22, 2003, and included in "Prepaid expenses and other current
assets" on our Consolidated Balance Sheets. Of this amount, $12.4 million
related to northern New England locations and $9.7 million related to Kohl's
locations. These assets were no longer depreciated after this date.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. In determining whether a store or group
of stores qualifies as discontinued operations treatment, we include only those
stores for which (i.) the operations and cash flows will be eliminated from our
ongoing operations as a result of the disposal and (ii.) we will not have any
significant continuing involvement in the operations of the stores after the
disposal. In making this determination, we consider the geographic location of
the stores. If the operations and cash flows of stores to be disposed of are
replaced by other operations and cash flows of stores in the same geographic
district, we would not include the stores as discontinued operations.
Amounts in the financial statements and related notes for all periods shown have
been reclassified to reflect the discontinued operations. Summarized below are
the operating results for these discontinued businesses, which are included in
our Consolidated Statements of Operations, under the caption "Loss from
operations of discontinued businesses, net of tax" for the 16 weeks ended June
19, 2004 and June 14, 2003 and the results of disposing these businesses which
were included in "Gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for the 16 weeks ended June 14, 2003.
16 Weeks Ended June 19, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses - 24 - 24
--------------- ---------------- --------------- ----------------
Income from operations - 24 - 24
Disposal costs:
Severance and benefits (326) - - (326)
Non-accruable closing costs (42) (222) (590) (854)
Interest accretion on present value
of future occupancy costs (3) (224) - (227)
--------------- ---------------- --------------- ----------------
Total disposal costs (371) (446) (590) (1,407)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (371) (422) (590) (1,383)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (371) $ (422) $ (590) $ (1,383)
=============== ================ =============== ================
16 Weeks Ended June 14, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ 32,726 $ 84,735 $ 25,172 $ 142,633
Operating expenses (35,367) (87,193) (18,227) (140,787)
--------------- ---------------- --------------- ----------------
(Loss) gain from operations (2,641) (2,458) 6,945 1,846
Disposal costs:
---------------
Property impairments - (15,217) - (15,217)
Pension withdrawal liability - (4,000) - (4,000)
Non-accruable closing costs 565 10 (1,123) (548)
--------------- ---------------- --------------- ----------------
Total disposal costs 565 (19,207) (1,123) (19,765)
--------------- ------------- --------------- ----------------
(Loss) gain from operations of
discontinued businesses, before
tax (2,076) (21,665) 5,822 (17,919)
Income tax benefit (provision) 748 7,810 (2,098) 6,460
--------------- ------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (1,328) $ (13,855) $ 3,724 $ (11,459)
=============== ================ =============== ================
Gain (loss) from disposal of
discontinued businesses
Gain on sale of property $ 85,983 $ 8,827 $ - $ 94,810
Gain on sale of inventory 1,645 - - 1,645
Occupancy related costs (3,993) (310) - (4,303)
Severance and benefits (2,670) (812) - (3,482)
Non-accruable inventory costs - (1,297) - (1,297)
Non-accruable closing costs (3,170) (2,763) - (5,933)
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses, before
tax 77,795 3,645 - 81,440
Tax provision (28,045) (1,314) - (29,359)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ 49,750 $ 2,331 $ - $ 52,081
=============== ================ =============== ================
Northern New England
As previously stated, as part of our strategic plan we decided to exit the
northern New England market by closing and/or selling 21 stores in that region
in order to focus on our core geographic markets. As a result of these sales, we
generated proceeds of $117.5 million, resulting in a gain of $77.8 million
($49.8 million after tax). This gain was included in "Gain on disposal of
discontinued operations, net of tax" on our Consolidated Statements of
Operations for the 16 weeks ended June 14, 2003. Included in these amounts were
occupancy related costs for locations not sold of $4.0 million, severance and
related costs of $2.7 million, non-accruable closing costs of $3.2 million and a
gain of $1.6 million from inventory disposals. During the first quarter of
fiscal 2004, we incurred additional costs to wind down our operations in this
region subsequent to the sale of these stores of $0.4 million primarily related
to additional severance costs which were included in "Loss from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations.
The following table summarizes the reserve activity during fiscal 2003 and the
first quarter of 2004 related to the exit of the northern New England market:
Severance
and
Occupancy Benefits Total
------------ ------------- --------------
Fiscal 2003 charge (1) $ 3,993 $ 2,670 $ 6,663
Additions (1) 6 - 6
Utilization (2) (3,547) (2,612) (6,159)
------------ ------------- ---------------
Balance at
February 28, 2004 $ 452 $ 58 $ 510
Additions (1) 3 326 329
Utilization (2) (22) (383) (405)
------------ ------------- ---------------
Balance at
June 19, 2004 $ 433 $ 1 $ 434
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
expected future occupancy costs such as rent, common area maintenance
and real estate taxes. The additions to occupancy for both periods
presented represent the interest accretion on future occupancy costs
which were recorded at present value at the time of the original
charge. The fiscal 2003 charge to severance and benefits of $2.7
million related to severance to be paid to employees terminated as a
result of our exit from the northern New England market. The first
quarter of fiscal 2004 charge to severance and benefits of $0.3 million
related to additional severance required to be paid to employees
terminated in accordance with a union contract as a result of our exit
from the northern New England market.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance and benefits utilization represents
payments made to terminated employees during the period.
We paid $3.6 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $3.0 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$0.4 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2007. The remaining severance liability
relates to expected future payments for severance and benefits to individual
employees and will be fully paid out by mid-2004.
At June 19, 2004 and February 28, 2004, $0.2 million and $0.3 million,
respectively, of the northern New England exit reserves was included in "Other
accruals" and $0.2 million and $0.2 million, respectively, was included in
"Other non-current liabilities" on our Consolidated Balance Sheets. We have
evaluated the liability balance of $0.4 million as of June 19, 2004 based upon
current available information and have concluded that it is adequate. We will
continue to monitor the status of the vacant properties and adjustments to the
reserve balance may be recorded in the future, if necessary.
Kohl's Market
Madison
-------
As previously stated, as part of our strategic plan we decided to exit the
Kohl's-Madison market by selling 7 stores and closing 1 store in that region in
order to focus on our core geographic markets. As a result of this sale, we
generated proceeds of $20.1 million, resulting in a gain of $3.6 million ($2.3
million after tax). This gain was included in "Gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations for the 16
weeks ended June 14, 2003. Included in these amounts were occupancy related
costs for locations not sold of $0.3 million, severance and related costs of
$0.8 million, non-accruable closing costs of $2.8 million and a loss of $1.3
million from inventory disposals.
Milwaukee
---------
As previously stated, we adopted a formal plan to exit the Kohl's-Milwaukee
market, where 23 of our remaining 24 Kohl's stores were located, by closing
and/or selling these locations. Upon our initial decision to exit the Kohl's
stores located in Milwaukee, Wisconsin, we estimated the assets' fair market
value using a probability weighted average approach based upon expected proceeds
and recorded impairment losses on the property at the remaining Kohl's locations
of $15.2 million. Further, we participate in various multi-employer union
pension plans, which are administered jointly by management and union
representatives and in which most full-time and certain part-time union
employees who are not covered by our other pension plans participate. The
decision to close our Kohl's stores and terminate our participation in these
plans triggered our Company's liability for our unfunded vested benefits or
other expenses under these jointly administered union/management plans. As a
result, we recorded expense for these plans of approximately $4.0 million for
the 16 weeks ended June 14, 2003. These amounts, as well as the tax benefit of
$7.8 million are included in "Loss from operations of discontinued businesses,
net of tax" in our Consolidated Statements of Operations for the 16 weeks ended
June 14, 2003.
The following table summarizes the reserve activity during fiscal 2003 and the
16 weeks ended June 19, 2004 related to the exit of the Kohl's market:
Severance
and
Occupancy Benefits Total
------------ ------------- --------------
Fiscal 2003 charge (1) $ 25,487 $ 13,062 $ 38,549
Additions (2) 352 - 352
Utilization (3) (5,342) (8,228) (13,570)
Adjustments (4) (1,458) - (1,458)
------------ ------------- --------------
Balance at
February 28, 2004 $ 19,039 $ 4,834 $ 23,873
Additions (2) 224 - 224
Utilization (3) (1,396) (969) (2,365)
------------ ------------- --------------
Balance at
June 19, 2004 $ 17,867 $ 3,865 $ 21,732
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related
to future occupancy costs such as rent, common area maintenance and
real estate taxes, which was recorded subsequent to the first quarter
of fiscal 2003. The fiscal 2003 charge to severance and benefits of
$13.1 million related to severance costs of $6.6 million and costs for
future obligations for early withdrawal from multi-employer union
pension plans and a health and welfare plan of $6.5 million, of which
$4.0 million was recorded in the first quarter of fiscal 2003.
(2) The fiscal 2003 and the first quarter of fiscal 2004 additions to
occupancy of $0.3 million and $0.2 million, respectively, relate to
interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(3) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization
represents payments made to terminated employees during the period and
payments for pension withdrawal.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million.
We paid $6.7 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $9.2 million of the total severance charges from the
time of the original charges through June 19, 2004, which resulted from the
termination of approximately 2000 employees. The remaining occupancy liability
of $17.9 million relates to expected future payments under long term leases and
is expected to be paid out in full by 2020. The remaining severance liability of
$3.9 million relates to future obligations for early withdrawal from
multi-employer union pension plans, and individual severance payments, which
will be paid by mid-2006.
At June 19, 2004 and February 28, 2004, $8.1 million and $4.8 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$13.6 million and $19.1 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $21.7 million as of June 19, 2004 based upon current
available information and have concluded that it is adequate. We will continue
to monitor the status of the vacant properties and adjustments to the reserve
balance may be recorded in the future, if necessary.
Eight O'Clock Coffee
During the 16 weeks ended June 14, 2003, we were in the process of selling our
Eight O'Clock Coffee business. As a result of this decision, we included certain
professional services costs amounting to $1.1 million, the operating profits of
this business of $6.9 million and the tax provision of $2.1 million in "Loss
from operations of discontinued businesses, net of tax" on our Consolidated
Statements of Operations for the 16 weeks ended June 14, 2003.
Additional costs incurred to wind down our operations in this business
subsequent to the sale of $0.6 million were included in "Loss from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations for 16 weeks ended June 19, 2004.
6. Asset Disposition Initiative
Overview
--------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 19, 2004 and June 14, 2003.
Present value ("PV") interest represents interest accretion on future occupancy
costs which were recorded at present value at the time of the original charge.
Non-accruable items represent charges related to the restructuring that are
required to be expensed as incurred in accordance with SFAS 146 "Accounting for
Costs Associated with Exit or Disposal Activities".
16 Weeks Ended June 19, 2004 16 Weeks Ended June 14, 2003
---------------------------------------------- ----------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
--------- ----------- ------------- --------- ----------- ------------- ------------- -------
Balance Sheet accruals
PV interest $ 630 $ 781 $ 222 $ 1,633 $ 828 $ 986 $ - $ 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Total accrued to
balance sheets 630 781 222 1,633 828 986 - 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - 90 90 - - - -
Inventory markdowns - - 291 291 - - - -
Closing costs - - 680 680 - - - -
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Total non-accruable items - - 1,061 1,061 - - - -
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Less PV interest (630) (781) (222) (1,633) (828) (986) - (1,814)
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - 1,061 1,061 - - - -
========= =========== =========== ========= =========== =========== =========== ==========
Project Great Renewal
---------------------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets. As of June 19, 2004, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 622 8 630 - - - 622 8 630
Utilization (2) (1,777) (40) (1,817) (62) - (62) (1,839) (40) (1,879)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 30,317 $ 420 $ 30,737 $ 2,095 $ - $ 2,095 $ 32,412 $ 420 $ 32,832
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $0.6 million
during the 16 weeks ended June 19, 2004 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $23.3 million, $13.6 million and $20.0 million for
fiscal 2001, 2002 and 2003, respectively, and $1.8 million during the 16
weeks ended June 19, 2004 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.5 million, $0.4
million and $0.3 million for fiscal 2001, 2002 and 2003, respectively, and
$0.1 million during the 16 weeks ended June 19, 2004 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $94.5 million of the total occupancy charges from the time of the
original charges through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.5 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $30.7 million relates to expected future payments under long term leases and
is expected to be paid in full by 2020. The remaining severance liability of
$2.1 million primarily relates to expected future payments for early withdrawals
from multi-employer union pension plans and will be fully paid out in 2020.
None of these stores were open during either of the first quarters of fiscal
2003 or 2004. As such, there was no impact on the Statements of Consolidated
Operations from the 166 stores included in this phase of the initiative.
At both June 19, 2004 and February 28, 2004, approximately $6.2 million of the
reserve was included in "Other accruals" and the remaining amount was included
in "Other non-current liabilities" on the Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $32.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of June 19, 2004, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Original charge $ 78,488 $ 1,968 $ 80,456 $ 15,688 $ 7,747 $ 23,435 $ 94,176 $ 9,715 $ 103,891
Addition (1) 1,653 20 1,673 - - - 1,653 20 1,673
Utilization (2) (1,755) (51) (1,806) (1,945) (946) (2,891) (3,700) (997) (4,697)
Adjustments (3) - - - - (584) (584) - (584) (584)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 781 - 781 - - - 781 - 781
Utilization (2) (1,680) (7) (1,687) (36) (57) (93) (1,716) (64) (1,780)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 38,685 $ 368 $ 39,053 $ 2,275 $ 1 $ 2,276 $ 40,960 $ 369 $ 41,329
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $1.7 million, $4.1 million and $2.9
million during fiscal 2001, 2002 and 2003, respectively, and $0.8
million during the 16 weeks ended June 19, 2004 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $1.7 million
during the 16 weeks ended June 19, 2004 represent payments made during
those periods for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of
$2.9 million, $19.5 million and $3.5 million during fiscal 2001, 2002
and 2003, respectively, and $0.1 million during the 16 weeks ended
June 19, 2004 represent payments made to terminated employees during
the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. Under Ontario provincial
law, employees to be terminated as part of a mass termination are
entitled to receive compensation, either worked or paid as severance,
for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained
in the aforementioned guarantee period. As a result, during fiscal
2001, we recorded an adjustment to severance and benefits of $0.6
million related to a reduction in the severance payments required to be
made to certain store employees in Canada. Further, during fiscal 2002,
we recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge.
We paid $34.8 million ($32.1 million in the U.S. and $2.7 million in Canada) of
the total occupancy charges from the time of the original charges through June
19, 2004 which was primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes and lease termination costs. We paid $25.9
million ($16.9 million in the U.S. and $9.0 million in Canada) of the total net
severance charges from the time of the original charges through June 19, 2004,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $39.1 million primarily relates to expected
future payments under long term leases through 2017. The remaining severance
liability of $2.3 million relates to expected future payments for severance and
benefits payments to individual employees and will be fully paid out by 2006.
At June 19, 2004 and February 28, 2004 approximately $11.8 million and $11.6
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 39 stores that
were identified for closure as part of this asset disposition. The results of
these operations are as follows:
June 19, 2004 June 14, 2003
------------- -------------
Sales $ - $ 316
============= =============
Operating loss $ - $ (72)
============= =============
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $41.3 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
-------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. In addition to the charge of
$37.7 million related to the last phase of this initiative ($2.2 million in
"Cost of merchandise sold" and $35.5 million in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations for fiscal
2003), we recorded costs in the first quarter of fiscal 2004 of $1.1 million
($0.3 million in "Cost of merchandise sold" and $0.8 million in "Store
operating, general and administrative expense") as follows:
16 Weeks Ended 53 Weeks Ended
June 19, 2004 February 28, 2004
---------------- ------------------
Occupancy related $ - $ 20,999
Severance and benefits - 8,930
Property writeoffs 90 4,129
Nonaccruable closing costs 680 1,449
Inventory markdowns 291 2,244
--------------- ---------------
Total charges $ 1,061 $ 37,751
=============== ===============
As of June 19, 2004, we had closed all 6 stores and successfully completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writeoffs as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 222 - 222
Utilization (2) (2,356) (4,157) (6,513)
------------ ------------- ----------
Balance at
June 19, 2004 $ 17,828 $ 662 $ 18,490
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and the 16
weeks ended June 19, 2004 represent interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The original charge to severance during fiscal 2003 of
$8.9 million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $2.4 million during fiscal
2003 and the 16 weeks ended June 19, 2004, respectively, represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $4.1
million and $4.2 million during fiscal 2003 and the 16 weeks ended June
19, 2004, respectively, represent payments made to terminated employees
during the period.
We paid $3.4 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.3 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$17.8 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2014. The remaining severance liability of
$0.7 million relates to expected future payments for severance and benefits to
individual employees and will be fully paid out by mid-2005.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 6 stores that
were identified for closure as part of this phase of the initiative. The results
of these operations are as follows:
16 Weeks Ended
-----------------------------------
June 19, June 14,
2004 2003
---------------- ---------------
Sales $ 2,433 $ 16,966
================ ==============
Operating loss $ (43) $ (2,479)
================ ==============
At June 19, 2004 and February 28, 2004, approximately $2.9 million and $9.0
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $18.5 million as of June 19, 2004
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
7. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. The
components of net pension cost were as follows:
For the 16 Weeks Ended
-----------------------------------------------------
June 19, 2004 June 14, 2003
--------------------- ---------------------
U.S. Canada U.S. Canada
--------- --------- ------- ----------
Service cost $ 1,115 $ 2,573 $ 989 $ 2,099
Interest cost 2,617 3,848 2,759 3,557
Expected return on plan assets (3,043) (4,979) (6,490) (4,569)
Amortization of unrecognized net transition asset (4) - (4) (133)
Amortization of unrecognized net prior service cost 29 143 44 101
Amortization of unrecognized net (gain) loss (40) 565 3,347 176
Administrative expenses and other - 81 - 76
--------- --------- -------- ---------
Net pension cost $ 674 $ 2,231 $ 645 $ 1,307
========= ========= ======== =========
Contributions
We previously disclosed in our consolidated financial statements for the year
ended February 28, 2004, that we expected to contribute $2.0 million in cash to
our defined benefit plans in fiscal 2004. As of June 19, 2004, these
contributions have not been made; however, we continue to expect to contribute
this amount during fiscal 2004.
Postretirement Benefits
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. The components of net postretirement
benefits (income) cost are as follows:
For the 16 Weeks Ended
-----------------------------------------------------
June 19, 2004 June 14, 2003
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- --------- ---------
Service cost $ 88 $ 72 $ 72 $ 114
Interest cost 391 197 397 311
Prior service cost (414) (156) (111) (11)
Amortization of gain (84) 105 (406) 91
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (19) $ 218 $ (48) $ 505
========== ========= ========= =========
8. Stock Based Compensation
We apply the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25") with pro forma disclosure of compensation expense, net income or loss and
earnings per share as if the fair value based method prescribed by SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148") had been
applied.
Had compensation cost for our stock options been determined based on the fair
value at the grant dates for awards under those plans consistent with the fair
value methods prescribed by SFAS 123 and SFAS 148, our net (loss) income and net
(loss) income per share would have been reduced to the pro forma amounts
indicated below:
16 Weeks Ended
----------------------------------
June 14, 2003
June 19, 2004 As Restated
--------------- ----------------
Net (loss) income, as reported: $ (42,846) $ 11,945
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (1,287) (2,121)
-------------- -------------
Pro forma net (loss) income $ (44,133) $ 9,824
============== =============
Net (loss) income per share - basic:
As reported $ (1.11) $ 0.31
Pro forma $ (1.15) $ 0.26
Net income (loss) per share - diluted:
As reported $ (1.11) $ 0.31
Pro forma $ (1.15) $ 0.25
The pro forma effect on net income and net income per share may not be
representative of the pro forma effect in future years because it includes
compensation cost on a straight-line basis over the vesting periods of the
grants.
The fair value of the option grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
16 Weeks Ended
-----------------------------------
June 19, June 14,
2004 2003
---------------- ---------------
Expected life 7 years 7 years
Volatility 53% 48%
Dividend yield range 0% 0%
Risk-free interest rate range 3.20%-3.38% 2.89%-3.37%
9. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our Chairman of the
Board, President and Chief Executive Officer.
We currently operate in two reportable segments: United States and Canada. The
segments are comprised of retail supermarkets in the United States and Canada.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in our Fiscal 2003 Annual
Report. We measure segment performance based upon income (loss) from operations.
Interim information on segments is as follows:
16 Weeks Ended
---------------------------------------
June 14, 2003
(As Restated
June 19, 2004 See Note 3)
----------------- -----------------
Sales
United States $ 2,235,574 $ 2,247,673
Canada 1,050,649 980,850
----------------- -----------------
Total Company $ 3,286,223 $ 3,228,523
================= =================
Depreciation and amortization
United States $ 62,512 $ 69,401
Canada 18,610 16,376
----------------- -----------------
Total Segments 81,122 85,777
Discontinued operations - 1,551
----------------- -----------------
Total Company $ 81,122 $ 87,328
================= =================
(Loss) income from operations
United States $ (22,695) $ (32,357)
Canada 14,075 21,747
----------------- -----------------
Total Company $ (8,620) $ (10,610)
================== ==================
(Loss) income from continuing operations before income taxes
United States $ (46,895) $ (54,521)
Canada 10,890 19,533
----------------- -----------------
Total Company $ (36,005) $ (34,988)
================== ==================
Capital expenditures
United States $ 40,199 $ 39,065
Canada 15,292 17,884
----------------- -----------------
Total Company $ 55,491 $ 56,949
================= =================
February 28, 2004
(As Restated
June 19, 2004 See Note 3)
----------------- -----------------
Total assets
United States $ 1,970,908 $ 2,002,594
Canada 757,759 772,651
----------------- -----------------
Total Company $ 2,728,667 $ 2,775,245
================= =================
10. Commitments and Contingencies
In April 2002, three Canadian Food Basics franchisees commenced a breach of
contract action in a Canadian court against The Great Atlantic & Pacific Company
of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported
class of approximately 70 current and former Canadian Food Basics franchisees.
The lawsuit seeks unspecified damages in connection with A&P Canada's alleged
failure to distribute to the franchisees the full amount of vendor allowances
and/or rebates to which the franchisees claim they are entitled under the
operative franchise agreements. A&P Canada disputes the plaintiff-franchisees'
claim and has filed a counterclaim seeking to recover subsidies made by it to
the plaintiffs. The lawsuit was certified as a class action in December 2002. A
majority of the class members have opted out of the proceeding. A&P Canada's
appeal of the class certification order was dismissed and the Company is seeking
leave to file a further appeal. This suit is scheduled for trial in October 2004
and the range of potential loss cannot be determined at this time.
On June 5, 2002, a purported securities class action Complaint was filed in the
United States District Court for the District of New Jersey against our Company
and certain of our officers and directors in an action captioned Brody v. The
Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit
and four subsequently-filed related lawsuits were consolidated into a single
lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc.
Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On
December 2, 2002, plaintiffs filed their Consolidated Amended Class Action
Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934
arising out of our Company's July 5, 2002 filing of restated financial
statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal
2001. The Complaint in the Class Action Lawsuit sought unspecified money
damages, costs and expenses. On January 17, 2003, defendants filed a motion
seeking to dismiss the Complaint. In an Opinion & Order entered September 18,
2003, the District Court dismissed plaintiffs' Complaint without prejudice.
After declining to file a Second Amended Complaint, plaintiffs appealed the
District Court's dismissal of their Complaint to the United States Court of
Appeals for the Third Circuit. After briefing and oral argument, the Third
Circuit, in an Opinion dated July 9, 2004, affirmed the District Court's
dismissal of the Complaint.
We are subject to various other legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. While the outcome of these claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of our Company, including a discussion of the results
of continuing operations as well as liquidity and capital resources. These items
are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the
first quarter of fiscal 2004.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2004 that Management wishes to share with the reader to
assist in understanding the business.
o Results of Continuing Operations and Liquidity and Capital Resources -- a
discussion of the following:
- Results for the 16 weeks ended June 19, 2004 compared to the 16 weeks
ended June 14, 2003;
- Our Company's Asset Disposition Initiative; and
- Current and expected future liquidity.
o Critical Accounting Estimates -- a discussion of significant estimates
made by Management.
BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 16 weeks ended June 19, 2004 and June 14, 2003
are unaudited and, in the opinion of management, contain all adjustments that
are of a normal and recurring nature necessary to present fairly the financial
position and results of operations for such periods. The accompanying
consolidated financial statements also include the impact of adopting FIN 46-R,
EITF 03-10, and the change in our method of valuing certain of our inventories
from the LIFO method to the FIFO method during the first quarter of fiscal 2004.
The consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2003
Annual Report on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries, and franchise operations.
OVERVIEW
--------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 10 U.S. states, the District of Columbia, and Ontario,
Canada.
Our Company's business consists of retail grocery operations, which include 628
directly managed stores and 66 franchised stores as of June 19, 2004. Operations
are managed by two strategic business units ("SBUs") within the Company, A&P
U.S. and A&P Canada, which are supported by central corporate functions. The
chief executives of both SBUs, and the executives leading corporate functions,
report directly to the Chairman of the Board, President & Chief Executive
Officer of our Company.
o A&P U.S., based in Paterson, New Jersey, oversees all operations in the
United States. Our conventional operations include the A&P, Waldbaum's
and Food Emporium banners, which serve Metro New York; Super Fresh,
which serves Philadelphia and Baltimore; Farmer Jack, which serves the
greater Detroit area; and Sav-A-Center, which serves the New Orleans
area. We also operate the Food Basics discount banner in several of our
areas. The stores are supported by eight regional distribution centers
located in the various markets in which we operate.
o A&P Canada, based in Toronto, Ontario, oversees operations across
Ontario, with stores operating under the A&P, Dominion, Food Basics,
Ultra Food & Drug and The Barn Market banners. A&P Canada also serves
as a franchisor to certain Food Basics stores in Ontario. The stores
are supported by four distribution centers.
Our first quarter performance was consistent with our recent trend, with total
comparable store sales running slightly positive, and operating income
relatively stable on a year-over-year basis.
Our first quarter objective was the continuation of progress behind the existing
strategic direction; namely to continue improving our Company's financial
condition; rebuilding our U.S. business, and strengthening our profitable
Canadian operations.
In the U.S., the revitalization of our mainstream supermarket operations
continued, as the result of improved operating fundamentals, strong cost
management, disciplined promotional spending, and the initial introduction of
new programs to enhance our fresh food offering. Positive results were achieved
in all of our regional banner operations, in terms of comparable store sales
relative to major competitors, and improving bottom line trends.
A significant development was our Company's opportunistic acquisition of four
quality store locations in Louisiana from Albertsons, which has decided to exit
the market. We reopened three Sav-A-Centers in early July; the fourth is
scheduled to open in August. This store base enhancement was driven by
Sav-A-Center's improved operations and results, and by our Company's renewed
ability to invest when such opportunities arise.
The first quarter was also significant for our developing discount business in
the U.S. The extensive refinement of our Food Basics banner in fiscal 2003
resulted in the acceleration of sales in our 11 Northeastern locations; and in
the first quarter of this year, the expansion of Food Basics to the Midwest with
11 units in Michigan and three in Toledo, Ohio. We continue to fine-tune our
Food Basics merchandising and operations, and hope to identify suitable
locations throughout our operating territory.
A&P Canada posted another solid and profitable performance in the first quarter,
achieving renewed sales growth in our mainstream supermarkets in and around
Toronto. Those operations reflect the ongoing development of our fresh food
marketing approach, and new and remodeled Dominion stores in the Toronto
marketplace reflect those enhancements.
On the discount side, our well-established Canadian Food Basics operations has
been challenged by increased discount competition in many areas of Ontario, a
development spurred last year by the economic impact of the SARS and Mad Cow
Disease incidents in Canada. Our Canadian leadership is further sharpening the
no-frills, low-price impact of our Food Basic operations to meet those
challenges, and to continue to complement our mainstream fresh stores.
On the financial side, we continue to believe we can manage our debt level and
that we have sufficient cash availability. During the quarter, we completed a
sale-leaseback of Company property that resulted in proceeds of $7 million to
the Company, and expect to complete additional sale-leaseback transactions later
in the fiscal year.
Although we have budgeted increased capital expenditures for fiscal 2004, we
continue to manage spending closely, in alignment with ongoing results and other
environmental factors. We maintained our commitment to cost reduction and
control throughout our administration and operations, continuing to make
progress in administrative expenses, labor productivity, occupancy, advertising
and supplies. We continually seek opportunities to remove unnecessary expense in
those and other areas, without detriment to the quality of our store operations
and customer service.
OUTLOOK
-------
We believe the necessary internal elements are in place to maintain our pattern
of improvement in the second quarter. However, we remain conservative in our
expectations in light of the continued competitive nature of our markets, as
well as uncertainty about the impact of economic and market factors on our
eventual results.
Although recently improving employment and job creation statistics are good long
term signs for the economy and business, we do not anticipate increased
food-at-home spending to immediately materialize as a result.
In addition, the recent and persistent price inflation within such important
food product categories as dairy and fresh meat and poultry may pose challenges
for our industry. In a competitive environment in which the ability to include
cost increases in retail pricing is not always assured, sales and in particular
gross margin performance could be affected should such conditions continue.
Despite such variables, our Company key focal points and objectives for the
fiscal 2004 second quarter remain intact, as follows:
o In the U.S., continue to strengthen our conventional banner
operations behind improved marketing, merchandising and store
operations; and maximize the impact and results of our expanded
Food Basics operations;
o In Canada, enhance our strong operating and market position, and
further develop our distinct retail banners; and
o Centrally, continue to maintain liquidity with focus on cash
flow generation, efficient support operations and expense
control.
While we believe that we have opportunities for profit improvement, various
uncertainties and other factors could cause us to fail to achieve these goals.
These include, among others, the following:
o Actions of competitors could adversely affect our sales and future
profits. The grocery retailing industry continues to experience
fierce competition from other food retailers, supercenters, mass
merchandiser clubs, warehouse stores, drug stores and restaurants.
Our continued success is dependent upon our ability to compete in
this industry and to reduce operating expenses, including managing
health care and pension costs contained in our collective
bargaining agreements. The competitive practices and pricing in
the food industry generally and particularly in our principal
markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our
operating regions, including the rate of inflation, population
growth, the nature and extent of continued consolidation in the
food industry and employment and job growth in the markets in
which we operate, may affect our ability to hire and train
qualified employees to operate our stores. This would
negatively affect earnings and sales growth. General economic
changes may also affect the shopping habits and buying patterns
of our customers, which could affect sales and earnings. We have
assumed economic and competitive situations will not change
significantly for the balance of fiscal 2004 and will not worsen
in fiscal 2005 and 2006. However, we cannot fully foresee the
effects of changes in economic conditions, inflation, population
growth, customer shopping habits and the consolidation of the
food industry on A&P's business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, if
development and remodel costs vary from those budgeted, or if
changes in financial markets negatively affect our cost of
capital or our ability to access capital.
o Our ability to achieve our profit goals will be affected by (i)
our success in executing category management and purchasing
programs that we have underway, which are designed to improve our
gross margins and reduce product costs while making our product
selection more attractive to consumers, (ii) our ability to
achieve productivity improvements and shrink reduction in our
stores, (iii) our success in generating efficiencies in our
distribution centers and our administrative offices, and (iv) our
ability to eliminate or maintain a minimum level of supply and/or
quality control problems with our vendors
o The vast majority of our employees are members of labor unions.
While we believe that our relationships with union
leaderships and our employees are satisfactory, we operate under
collective bargaining agreements which periodically must be
renegotiated. In fiscal 2004, we have several contracts expiring
and under negotiation. In each of these negotiations rising
health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but
cannot be certain, that we can reach satisfactory agreements
without work stoppages in these markets. However, the actual
terms of the renegotiated collective bargaining agreements, our
future relationships with our employees and/or a prolonged work
stoppage affecting a substantial number of stores could have a
material effect on our results.
o The amount of contributions made to our pension and multi-employer
plans will be affected by the performance of investments made by
the plans as well as the extent to which trustees of the plans
reduce the costs of future service benefits.
o We have estimated our exposure to claims, administrative
proceedings and litigation arising in the normal course of
business and believe we have made adequate provisions for them,
where appropriate. Unexpected outcomes in both the costs and
effects of these matters could result in an adverse effect on our
earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------
Our consolidated financial information presents the income related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focus on
continuing operations.
16 WEEKS ENDED JUNE 19, 2004 COMPARED TO THE 16 WEEKS ENDED JUNE 14, 2003
-------------------------------------------------------------------------
OVERALL
-------
Sales for the first quarter of fiscal 2004 were $3.3 billion, compared with $3.2
billion in the first quarter of fiscal 2003; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, increased 1.0%. Net loss per share - basic for the first
quarter of fiscal 2004 was $1.11 compared to net income per share - basic &
diluted of $0.31 for the first quarter of fiscal 2003.
16 Weeks 16 Weeks
Ended Ended Favorable /
June 19, 2004 June 14, 2003 (Unfavorable) % Change
------------------- ------------------- ---------------- ------------------
Sales $ 3,286.2 $ 3,228.5 $ 57.7 1.8%
Increase (decrease) in comparable
store sales for Company- operated
stores 1.0% (0.1%) NA NA
Loss from continuing operations (41.5) (20.6) (20.9) (101.5%)
(Loss) income from discontinued
operations (1.4) 40.6 (42.0) (103.4%)
Cumulative effect of a change in
accounting principle - FIN 46-R - (8.0) 8.0 100%
Net (loss) income (42.8) 11.9 (54.7) NM
Net (loss) income per share (1.11) 0.31 (1.42) NM
NM = not meaningful
Included in our results for the first quarter ended June 19, 2004 was a $1.1
million charge ($0.03 per share) relating to our Farmer Jack restructuring
program as described in Note 6 of our Consolidated Financial Statements.
SALES
-----
Sales for the first quarter of fiscal 2004 of $3,286.2 million increased
$57.7 million or 1.8% from sales of $3,228.5 million for first quarter of fiscal
2003. The higher sales were due to an increase in Canadian sales of $69.7
million partially offset by a decrease in U.S. sales of $12.0 million. The
increase in Canadian sales was primarily due to the favorable impact of the
Canadian exchange rate. The following table presents sales for each of our
operating segments for the first quarter of fiscal 2004 and the first quarter of
fiscal 2003:
16 Weeks Ended 16 Weeks Ended
June 19, 2004 June 14, 2003 (Decrease)Increase % Change
----------------- ------------------- ---------------------- --------------------
United States $ 2,235.6 $ 2,247.6 $ (12.0) (0.5%)
Canada 1,050.6 980.9 69.7 7.1
----------------- ----------------- -------------------- -------------------
Total $ 3,286.2 $ 3,228.5 $ 57.7 1.8%
================= ================= ==================== ===================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the first quarter of fiscal 2003 to the first
quarter of fiscal 2004:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- ----------------
United States $ 28.3 $ (52.9) $ - $ 12.6 $ (12.0)
Canada 101.2 (81.8) 58.0 (7.7) 69.7
------------- -------------- ------------- ------------- ----------------
Total $ 129.5 $ (134.7) $ 58.0 $ 4.9 $ 57.7
============= ============== ============= ============= ================
The decrease in U.S. sales was primarily attributable to the closing of
27 stores since the beginning of fiscal 2003, of which 4 were closed in the
first quarter of fiscal 2004, decreasing sales by $52.9 million. This decrease
was partially offset by the opening of 19 new stores since the beginning of
fiscal 2003, of which 9 were opened in the first quarter of fiscal 2004,
increasing sales by $28.3 million, and the increase in comparable store sales
for the first quarter of fiscal 2004 of $12.6 million or 0.5% as compared with
the first quarter of fiscal 2003. Included in the 27 stores closed since the
beginning of fiscal 2003 were 16 stores closed as part of the asset disposition
initiative as discussed in Note 6 of our Consolidated Financial Statements.
The increase in Canadian sales was primarily attributable to the opening
of 14 stores since the beginning of fiscal 2003, of which 2 were opened in the
first quarter of fiscal 2004, increasing sales by $101.2 million, and the
favorable effect of the Canadian exchange rate, which increased sales by $58.0
million. These increases were partially offset by the closure of 20 stores since
the beginning of 2003, of which 9 were closed in the first quarter of 2004,
decreasing sales by $81.8 million, and the decrease in comparable store sales
for the first quarter of fiscal 2004 of $7.7 million, comprised of 2.7% in
Company-operated stores and -6.4% in franchised stores, as compared to the first
quarter of fiscal 2003.
Average weekly sales per supermarket for the U.S. were approximately $322,700
for the first quarter of fiscal 2004 versus $317,400 for the corresponding
period of the prior year, an increase of 1.7% primarily due to higher comparable
store sales. Average weekly sales per supermarket for Canada were approximately
$208,400 for the first quarter of fiscal 2004 versus $190,400 for the
corresponding period of the prior year, an increase of 9.5%. This increase was
primarily due to the increase in the Canadian exchange rate and higher
comparable store sales.
GROSS MARGIN
------------
The following table presents gross margin dollar results and gross margin as a
percentage of sales by operating segment for the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003. Gross margin as a percentage of
sales decreased 30 basis points to 28.29% for the first quarter of fiscal 2004
from 28.59% for the first quarter of fiscal 2003. This 30 basis point decrease
was caused by the increase in Canadian sales as a percentage of our total
(approximately 10 basis points) and from the increase in U.S. Food Basics as a
percentage of sales (approximately 20 basis points). We believe the impact on
margin for changes in costs and special reductions was not significant.
16 Weeks Ended 16 Weeks Ended
June 19, 2004 June 14, 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
----------------------- ----------------- -------------------- ------------------
United States $ 672.5 30.08% $ 685.8 30.51%
Canada 257.2 24.48 237.4 24.20
-------------- --------------- -------------------- -----------------
Total $ 929.7 28.29% $923.2 28.59%
============== =============== ==================== =================
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the first quarter of fiscal 2003 to
the first quarter of fiscal 2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ (3.7) $ (9.6) $ - $ (13.3)
Canada 3.2 2.6 14.0 19.8
---------------- ---------------- -------------- -------------
Total $ (0.5) $ (7.0) $ 14.0 $ 6.5
================ ================ ============== =============
Included in the U.S. gross margin for the first quarter of 2004 were
costs related to our asset disposition initiative of $0.3 million, which had
been incurred to mark down inventory in stores announced for closure. There were
no such costs in the first quarter of fiscal 2003.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
The following table presents store operating, general and administrative expense
("SG&A"), by operating segment, in dollars and as a percentage of sales for the
first quarter of fiscal 2004 compared with the first quarter of fiscal 2003.
SG&A expense was $938.3 million or 28.55% for the first quarter of fiscal 2004
as compared to $933.8 or 28.92% for the first quarter of fiscal 2003.
16 Weeks Ended 16 Weeks Ended
June 19, 2004 June 14, 2003
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 695.2 31.10% $ 718.2 31.95%
Canada 243.1 23.14 215.6 21.98
-------------- --------------- -------------- -------------
Total $ 938.3 28.55% $ 933.8 28.92%
============== =============== ============== =============
The improvement in SG&A as a percentage of sales is partially driven by the
increase in Canadian sales as a percentage of our total as Canada has a lower
SG&A rate.
The U.S. had overall favorability of 85 basis points. While part of the
improvement in the U.S. is due to the increase in Food Basics as a percentage of
U.S. sales, most of the favorability is due to very tight cost controls.
Categories in which the U.S. experienced cost improvements include advertising
($4.0 million), utilities ($3.7 million), labor ($4.8 million), corporate
administrative expenses ($3.3 million) due to increased information technology
charges to Canada, and severance ($1.7 million).
The increase in SG&A in Canada of $27.5 million is primarily due to an increase
in labor of $8.6 million due mainly to increased sales, an increase in occupancy
of $5.0 million as a result of the opening of new stores, increased group
overhead of $5.0 million mainly due to information technology costs previously
charged to the U.S. now charged to Canada and an increase in store conversion
costs of $3.7 million.
Included in SG&A for the first quarter of fiscal 2004 was a $0.8 million charge
relating to our Farmer Jack restructuring program in the United States as
described in Note 6 of our Consolidated Financial Statements. There were no such
costs in the first quarter of fiscal 2003.
INTEREST EXPENSE
----------------
Interest expense of $26.9 million for the first quarter of fiscal 2004
increased from the prior year amount of $24.9 million due primarily to higher
interest expense resulting from our on balance sheet financing obligations (sale
leaseback of Company-owned properties) entered into in the fourth quarter of
fiscal 2003 of approximately $5.2 million. This impact was partially offset by
lower interest from lower borrowings of approximately $2.4 million.
INCOME TAXES
------------
The provision for income taxes from continuing operations for the first quarter
of fiscal 2004 was $5.4 million (a $1.4 million provision for our U.S.
operations and a $4.0 million provision for our Canadian operations) compared to
$14.4 million benefit from income taxes from continuing operations for the first
quarter of fiscal 2003 (a $22.0 million benefit from our U.S. operations and a
$7.6 million provision for our Canadian operations). Our U.S. tax benefit from
continuing operations for the first quarter of fiscal 2003 was offset by a tax
provision provided on discontinued operations of $22.9 million in accordance
with Statement of Financial Accounting Standards 109, "Accounting for Income
Taxes". Consistent with prior year, we continue to record a valuation allowance
against our U.S. net deferred tax assets.
For the first quarter of fiscal 2004, our effective income tax rate provision of
15.1% increased from the effective income tax rate benefit of (41.0%) in the
first quarter of fiscal 2003 as follows:
16 weeks ended
--------------------------------------------------------
June 19,2004 June 14, 2003
--------------------------- ---------------------------
Tax Effective Tax Rate Tax Effective Tax Rate
----- ------------------ ------- ------------------
United States $(1,380) 3.8% $22,024 (62.9%)
Canada (4,078) 11.3% (7,666) 21.9%
-------- ------- -------- -------
$(5,458) 15.1% $14,358 (41.0%)
======== ======= ======== =======
The increase in our effective tax rate was primarily due to the absence of a tax
benefit recognized from the loss on continuing operations. As discussed above,
$22.9 million of benefit was recognized in the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2004, where no benefit was recognized.
The remaining provisions included in the U.S. of $1.4 million and $0.9 million
for the first quarters of fiscal 2004 and 2003, respectively, represent state
and local taxes. Partially offsetting the increase was the impact of the lower
mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations in the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003.
DISCONTINUED OPERATIONS
-----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for the first
quarter of fiscal 2004 was $1.4 million as compared to a loss from operations of
discontinued businesses, net of tax, of $11.5 million for the first quarter of
fiscal 2003 and is detailed by business as follows:
16 Weeks Ended June 19, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses - 24 - 24
--------------- ---------------- --------------- ----------------
Income from operations - 24 - 24
Disposal costs:
Severance and benefits (326) - - (326)
Non-accruable closing costs (42) (222) (590) (854)
Interest accretion on present value
of future occupancy costs (3) (224) - (227)
--------------- ---------------- --------------- ----------------
Total disposal costs (371) (446) (590) (1,407)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (371) (422) (590) (1,383)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (371) $ (422) $ (590) $ (1,383)
=============== ================ =============== ================
16 Weeks Ended June 14, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ 32,726 $ 84,735 $ 25,172 $ 142,633
Operating expenses (35,367) (87,193) (18,227) (140,787)
--------------- ---------------- --------------- ----------------
(Loss) gain from operations (2,641) (2,458) 6,945 1,846
Disposal costs:
---------------
Property impairments - (15,217) - (15,217)
Pension withdrawal liability - (4,000) - (4,000)
Non-accruable closing costs 565 10 (1,123) (548)
--------------- ---------------- --------------- ----------------
Total disposal costs 565 (19,207) (1,123) (19,765)
--------------- ------------- --------------- ----------------
(Loss) gain from operations of
discontinued businesses, before
tax (2,076) (21,665) 5,822 (17,919)
Income tax benefit (provision) 748 7,810 (2,098) 6,460
--------------- ------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (1,328) $ (13,855) $ 3,724 $ (11,459)
=============== ================ =============== ================
The gain on disposal of discontinued operations, net of tax, was nil for the
first quarter of fiscal 2004 as compared to $52.1 million for the first
quarter of fiscal 2003 and is detailed by business as follows:
16 Weeks Ended June 14, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain (loss) from disposal of
discontinued businesses
Gain on sale of property $ 85,983 $ 8,827 $ - $ 94,810
Gain on sale of inventory 1,645 - - 1,645
Occupancy related costs (3,993) (310) - (4,303)
Severance and benefits (2,670) (812) - (3,482)
Non-accruable inventory costs - (1,297) - (1,297)
Non-accruable closing costs (3,170) (2,763) - (5,933)
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses, before
tax 77,795 3,645 - 81,440
Tax provision (28,045) (1,314) - (29,359)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ 49,750 $ 2,331 $ - $ 52,081
=============== ================ =============== ================
ASSET DISPOSITION INITIATIVE
----------------------------
Overview
--------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 19, 2004 and June 14, 2003.
Present value ("PV") interest represents interest accretion on future occupancy
costs which were recorded at present value at the time of the original charge.
Non-accruable items represent charges related to the restructuring that are
required to be expensed as incurred in accordance with SFAS 146 "Accounting for
Costs Associated with Exit or Disposal Activities".
16 Weeks Ended June 19, 2004 16 Weeks Ended June 14, 2003
---------------------------------------------- ----------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
--------- ----------- ------------- --------- ----------- ------------- ------------- -------
Balance Sheet accruals
PV interest $ 630 $ 781 $ 222 $ 1,633 $ 828 $ 986 $ - $ 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Total accrued to
balance sheets 630 781 222 1,633 828 986 - 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - 90 90 - - - -
Inventory markdowns - - 291 291 - - - -
Closing costs - - 680 680 - - - -
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Total non-accruable items - - 1,061 1,061 - - - -
-------- ----------- ---------- --------- ----------- ------------ ------------ ---------
Less PV interest (630) (781) (222) (1,633) (828) (986) - (1,814)
-------- ----------- ---------- --------- ----------- ------------ ------------ ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - 1,061 1,061 - - - -
========= =========== =========== ========= =========== =========== =========== ==========
Project Great Renewal
---------------------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets. As of June 19, 2004, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 622 8 630 - - - 622 8 630
Utilization (2) (1,777) (40) (1,817) (62) - (62) (1,839) (40) (1,879)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 30,317 $ 420 $ 30,737 $ 2,095 $ - $ 2,095 $ 32,412 $ 420 $ 32,832
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $0.6 million
during the 16 weeks ended June 19, 2004 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $23.3 million, $13.6 million and $20.0 million for
fiscal 2001, 2002 and 2003, respectively, and $1.8 million during the 16
weeks ended June 19, 2004 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.5 million, $0.4
million and $0.3 million for fiscal 2001, 2002 and 2003, respectively, and
$0.1 million during the 16 weeks ended June 19, 2004 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $94.5 million of the total occupancy charges from the time of the
original charges through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.5 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $30.7 million relates to expected future payments under long term leases and
is expected to be paid in full by 2020. The remaining severance liability of
$2.1 million primarily relates to expected future payments for early withdrawals
from multi-employer union pension plans and will be fully paid out in 2020.
None of these stores were open during either of the first quarters of fiscal
2003 or 2004. As such, there was no impact on the Statements of Consolidated
Operations from the 166 stores included in this phase of the initiative.
At both June 19, 2004 and February 28, 2004, approximately $6.2 million of the
reserve was included in "Other accruals" and the remaining amount was included
in "Other non-current liabilities" on the Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $32.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of June 19, 2004, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Original charge $ 78,488 $ 1,968 $ 80,456 $ 15,688 $ 7,747 $ 23,435 $ 94,176 $ 9,715 $ 103,891
Addition (1) 1,653 20 1,673 - - - 1,653 20 1,673
Utilization (2) (1,755) (51) (1,806) (1,945) (946) (2,891) (3,700) (997) (4,697)
Adjustments (3) - - - - (584) (584) - (584) (584)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 781 - 781 - - - 781 - 781
Utilization (2) (1,680) (7) (1,687) (36) (57) (93) (1,716) (64) (1,780)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 38,685 $ 368 $ 39,053 $ 2,275 $ 1 $ 2,276 $ 40,960 $ 369 $ 41,329
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $1.7 million, $4.1 million and $2.9
million during fiscal 2001, 2002 and 2003, respectively, and $0.8
million during the 16 weeks ended June 19, 2004 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $1.7 million
during the 16 weeks ended June 19, 2004 represent payments made during
those periods for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of
$2.9 million, $19.5 million and $3.5 million during fiscal 2001, 2002
and 2003, respectively, and $0.1 million during the 16 weeks ended
June 19, 2004 represent payments made to terminated employees during
the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. Under Ontario provincial
law, employees to be terminated as part of a mass termination are
entitled to receive compensation, either worked or paid as severance,
for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained
in the aforementioned guarantee period. As a result, during fiscal
2001, we recorded an adjustment to severance and benefits of $0.6
million related to a reduction in the severance payments required to be
made to certain store employees in Canada. Further, during fiscal 2002,
we recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of $3.6
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge.
We paid $34.8 million ($32.1 million in the U.S. and $2.7 million in Canada) of
the total occupancy charges from the time of the original charges through June
19, 2004 which was primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes and lease termination costs. We paid $25.9
million ($16.9 million in the U.S. and $9.0 million in Canada) of the total net
severance charges from the time of the original charges through June 19, 2004,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $39.1 million primarily relates to expected
future payments under long term leases through 2017. The remaining severance
liability of $2.3 million relates to expected future payments for severance and
benefits payments to individual employees and will be fully paid out by 2006.
At June 19, 2004 and February 28, 2004 approximately $11.8 million and $11.6
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 39 stores that
were identified for closure as part of this asset disposition. The results of
these operations are as follows:
June 19, 2004 June 14, 2003
------------- -------------
Sales $ - $ 316
========= =========
Operating loss $ - $ (72)
========= =========
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $41.3 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
-------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. In addition to the charge of
$37.7 million related to the last phase of this initiative ($2.2 million in
"Cost of merchandise sold" and $35.5 million in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations for fiscal
2003), we recorded costs in the first quarter of fiscal 2004 of $1.1 million
($0.3 million in "Cost of merchandise sold" and $0.8 million in "Store
operating, general and administrative expense") as follows:
16 Weeks Ended 53 Weeks Ended
June 19, 2004 February 28, 2004
---------------------- --------------------
Occupancy related $ - $ 20,999
Severance and benefits - 8,930
Property writeoffs 90 4,129
Nonaccruable closing costs 680 1,449
Inventory markdowns 291 2,244
-------------- ---------------
Total charges $ 1,061 $ 37,751
============== ===============
As of June 19, 2004, we had closed all 6 stores and successfully completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writeoffs as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 222 - 222
Utilization (2) (2,356) (4,157) (6,513)
------------ ------------- ----------
Balance at
June 19, 2004 $ 17,828 $ 662 $ 18,490
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and the 16
weeks ended June 19, 2004 represent interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The original charge to severance during fiscal 2003 of
$8.9 million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $2.4 million during fiscal
2003 and the 16 weeks ended June 19, 2004, respectively, represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $4.1
million and $4.2 million during fiscal 2003 and the 16 weeks ended June
19, 2004, respectively, represent payments made to terminated employees
during the period.
We paid $3.4 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.3 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$17.8 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2014. The remaining severance liability of
$0.7 million relates to expected future payments for severance and benefits to
individual employees and will be fully paid out by mid-2005.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 6 stores that
were identified for closure as part of this phase of the initiative. The results
of these operations are as follows:
16 Weeks Ended
-----------------------------------
June 19, June 14,
2004 2003
---------------- ---------------
Sales $ 2,433 $ 16,966
=============== ==============
Operating loss $ (43) $ (2,479)
=============== ==============
At June 19, 2004 and February 28, 2004, approximately $2.9 million and $9.0
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $18.5 million as of June 19, 2004
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOWS
----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows:
June 19, 2004 June 14, 2003
----------------- -----------------
Net cash provided by operating activities $ 37,088 $ 2,170
----------------- -----------------
Net cash (used in) provided by investing activities $ (49,351) $ 80,665
----------------- -----------------
Net cash used in financing activities $ (3,838) $ (130,750)
----------------- -----------------
Net cash flow provided by operating activities of $37.1 million for the 16 weeks
ended June 19, 2004 primarily reflected our net loss of $42.8 million, adjusted
for a non-cash charge of $81.1 million for depreciation and amortization, a
decrease in accounts receivable of $24.8 million and an increase in accounts
payable of $55.6 million, partially offset by an increase in inventories of
$22.8 million, a decrease in other accruals of $27.9 million, an increase in
other current assets of $14.9 million, and a decrease in non-current liabilities
of $13.0 million due mainly to a decrease in closed store accruals. Refer to
Working Capital below for discussion of changes in working capital items. Net
cash flow provided by operating activities of $2.2 million for the 16 weeks
ended June 14, 2003 primarily reflected our net income of $11.9 million adjusted
for non-cash charges of $87.3 million for depreciation and amortization and $8.0
million for the cumulative effect of a change in accounting principles - FIN
46-R, partially offset by the gain on sale of discontinued operations of $81.4
million and the increase in prepaid expense and other current assets of $22.0
million.
Net cash flow used in investing activities of $49.4 million for the 16 weeks
ended June 19, 2004 primarily reflected property expenditures totaling $55.5
million, which included 11 new supermarkets and 1 major remodel partially offset
by cash received from the sale of our assets of $6.1 million. For the remainder
of fiscal 2004, we have planned capital expenditures of approximately $200 to
$225 million, which relate primarily to opening approximately 5 to 10 new
supermarkets, converting approximately 10 to 20 stores to new banners, and
enlarging or remodeling approximately 75 supermarkets. We currently expect to
close approximately 5 - 10 stores during the remainder of fiscal 2004. Net cash
flow provided by investing activities of $80.7 million for the 16 weeks ended
June 14, 2003 primarily reflected $137.6 million in proceeds from property
disposals (most of which related to discontinued operations), partially offset
by $56.9 million used for property expenditures, which included 7 new
supermarkets and 2 major remodels or enlargements.
Net cash flow used in financing activities of $3.8 million for the 16 weeks
ended June 19, 2004 primarily reflected a decrease in book overdrafts of $5.7
million and principal payments on capital leases of $4.6 million partially
offset by proceeds from long term borrowings of $7.3 million. Net cash flow
used in financing activities of $130.8 million for the 16 weeks ended June 14,
2003 primarily reflected $135.0 million in payments on our revolving lines of
credit.
We believe that our present cash resources, including invested cash on hand,
available borrowings from our revolving credit agreement and other sources, are
sufficient to meet our short term and long term needs. In the short term, we
operate under an annual operating plan which is reviewed and approved by our
Board of Directors and incorporates the specific initiatives we expect to pursue
and the anticipated financial results of our SBU's and our Company. The annual
operating plan is generally consistent with the first year of a longer term
strategic plan that is approved each year, and identifies specific initiatives
and financial results, including sales, profits and cash flow, to be achieved
over a three year period.
The Fiscal 2004 annual operating plan anticipates limited profit growth from
Fiscal 2003, and calls for increased capital investment to support a focused
program of remodeling existing conventional grocery stores in the U.S. and
Canada and converting certain stores to our growing discount Food Basics banner.
We anticipate that we will incur operating losses and have negative operating
cash flow as a result of this plan. We also have $2.3 million of current debt
maturities in Fiscal 2004. We believe that proceeds from asset sales completed
in Fiscal 2003 and our present financing plans, including, among other things,
the 4 year revolving credit agreement completed in Fiscal 2003 and planned
sale-leaseback transactions, will provide for sufficient cash availability to
ensure that we have the resources to pursue our Fiscal 2004 annual operating
plan.
Our longer term strategic plan anticipates improved performance in Fiscal 2005
and Fiscal 2006. This plan also calls for higher levels of capital investment in
Fiscal 2005 and 2006, and we anticipate that, while profitability may improve,
operating cash flow after investing activities will remain negative as we
continue to make investments to strengthen our store base. We believe that the
funds currently available, combined with additional funds from improved
profitability, will be sufficient to pursue these plans and programs, and to
refinance the $218.8 million bonds maturing in 2007 which, under the terms of
our revolving credit agreement, must be refinanced six months prior to maturity.
Profitability can be impacted by certain external factors such as unfavorable
economic conditions, competition, labor relations and fuel and utility costs
which could have a significant impact on cash generation. If our profitability
does not improve in line with our plans, we anticipate that we will be able to
modify the plan, by reducing capital investments and through other contingency
actions, in order to ensure that we have adequate resources. However, there is
no assurance that we will pursue contingency actions on a timely basis or that
they will be successful in generating the resources necessary to operate the
business.
WORKING CAPITAL
---------------
We had working capital of $85.0 million at June 19, 2004 compared to working
capital of $105.0 million at February 28, 2004. We had cash and cash equivalents
aggregating $278.9 million at June 19, 2004 compared to $297.0 million at
February 28, 2004. The decrease in working capital was attributable primarily to
the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in accounts receivable due to the timing of receipts; and
o An increase in accounts payable (inclusive of book overdrafts) due to
timing and seasonality.
Partially offset by the following:
o An increase in inventories mainly due to seasonality and the favorable
impact of the Canadian exchange rate;
o An increase in prepaid expenses and other current assets mainly due to the
amortization of prepaid rent; and
o A decrease in other accruals mainly due to timing.
REVOLVING CREDIT AGREEMENT
--------------------------
During fiscal 2003, we amended and restated our Secured Credit Agreement (the
"Amended and Restated Credit Agreement") and decreased our borrowing base to
$400 million. Thus, at June 19, 2004, we had a $400 million secured revolving
credit agreement with a syndicate of lenders enabling us to borrow funds on a
revolving basis sufficient to refinance short-term borrowings and provide
working capital as needed. This facility provides us with greater operating
flexibility and provides for increased capital spending. Under the terms of this
agreement, should availability fall below $50 million, a borrowing block will be
implemented which provides that no additional borrowings be made unless we are
able to maintain a fixed charge coverage ratio of 1.0 to 1.0. Although we do not
meet the required ratio at this time, it is not applicable as availability at
June 19, 2004 exceeded $223 million. In the event that availability falls below
$50 million and we do not maintain the ratio required, unless otherwise waived
or amended, the lenders may, at their discretion, declare, in whole or in part,
all outstanding obligations immediately due and payable.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$95.4 million at June 19, 2004) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of June 19, 2004, there were no borrowings under these credit agreements. As
of June 19, 2004, after reducing availability for outstanding letters of credit
and borrowing base requirements, we had $223.2 million available under the
Amended and Restated Credit Agreement.
Under the Amended and Restated Credit Agreement, we are permitted to make bond
repurchases and may do so from time to time in the future.
PUBLIC DEBT OBLIGATIONS
-----------------------
Outstanding notes totaling $637 million at June 19, 2004 consisted of $200
million of 9.375% Notes due August 1, 2039, $217 million of 9.125% Senior Notes
due December 15, 2011 and $220 million of 7.75% Notes due April 15, 2007.
Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes can be redeemed after August 11, 2004, and the 9.125%
Notes may be redeemed after December 15, 2006. All of the notes outstanding are
unsecured obligations and were issued under the terms of our senior debt
securities indenture, which contains among other provisions, covenants
restricting the incurrence of secured debt. In addition, the 9.125% Notes
contain additional covenants, including among other things, limitations on asset
sales, on the payment of dividends, and on the incurrence of liens and
additional indebtedness. None of our notes are guaranteed by any of our
subsidiaries. Our notes are effectively subordinate to our secured revolving
credit agreement and do not contain cross default provisions.
OTHER
-----
We currently have active Registration Statements dated January 23, 1998 and June
23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities as of June 19, 2004 at terms contingent upon market conditions at the
time of sale.
Our Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in
fiscal 2004. In addition, our Company is prohibited, under the terms of our
Revolving Credit Agreement, to pay cash dividends on common shares.
We are the guarantor of a loan of $2.1 million related to a shopping center,
which will expire in 2011.
Our existing senior debt rating was B3 with negative implications with Moody's
Investors Service ("Moody's") and B with negative implications with Standard &
Poor's Ratings Group ("S&P") as of June 19, 2004. Our liquidity rating was SGL2
with Moody's as of June 19, 2004. Our recovery rating was 1 with S&P as of June
19, 2004 indicating a high expectation of 100% recovery of our senior debt to
our lenders. Future rating changes could affect the availability and cost of
financing to our Company.
CRITICAL ACCOUNTING ESTIMATES
-----------------------------
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
-----------------------
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
-----------------
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets is recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis using a probability weighted approach and a risk free
rate.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During the first quarters of fiscal 2004 and 2003, we recorded no
impairment losses on long-lived assets.
If current operating levels and trends continue, there may be future impairments
on long-lived assets, including the potential for impairment of assets that are
held and used.
Closed Store Reserves
---------------------
For stores closed that are under long-term leases, we record a discounted
liability using a risk free rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates. As of June 19,
2004, we had liabilities for future minimum lease payments of $128 million,
which related to 75 closed stores and 49 subleased or assigned stores. Of this
amount, $22 million relates to stores closed in the normal course of business,
$88 million relates to stores closed as part of the asset disposition initiative
(see Note 6 of our Consolidated Financial Statements), and $18 million relates
to stores closed as part of our exits of the northern New England and Kohl's
businesses (see Note 5 of our Consolidated Financial Statements).
Employee Benefit Plans
----------------------
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of increase in
compensation and health care costs. In accordance with U.S. GAAP, actual results
that differ from our Company's assumptions are accumulated and amortized over
future periods and, therefore, affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant
changes in our assumptions may materially affect our pension and other
post-retirement obligations and our future expense.
Inventories
-----------
Store inventories are valued at the lower of cost or market with cost determined
under the retail method on a first-in, first-out ("FIFO") basis. Warehouse and
other inventories are valued primarily at the lower of cost or market with cost
determined on a FIFO basis. Prior to the first quarter of fiscal 2004,
inventories of our Waldbaum's and Farmer Jack banners, that were acquired during
the past two decades, were valued using the last-in, first-out ("LIFO") method,
which was their practice prior to acquisition; however, during the first quarter
of fiscal 2004, we changed our method of valuing these inventories from the LIFO
method to the FIFO method. We believe that the new method is preferable because
the FIFO method produces an inventory value on our Consolidated Balance Sheets
that better approximates current costs. In addition, under FIFO, the flow of
costs is generally more consistent with our physical flow of goods. The adoption
of the FIFO method will enhance comparability of our financial statements by
conforming all of our inventories to the same accounting method. Refer to Note 3
- Restatement and Changes in Accounting in the Notes to our Consolidated
Financial Statements for further discussion of this change.
We evaluate inventory shrinkage throughout the year based on actual physical
counts in our stores and distribution centers and record reserves based on the
results of these counts to provide for estimated shrinkage between the store's
last inventory and the balance sheet date.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
-----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to such risk in the areas of
interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
--------------
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. We do not have cash flow exposure due to rate changes on
our $635.4 million in notes as of June 19, 2004 because they are at fixed
interest rates. However, we do have cash flow exposure on our committed bank
lines of credit due to our variable floating rate pricing. Accordingly, during
the first quarter of 2004, a presumed 1% change in the variable floating rate
would not have impacted interest expense as there were no borrowings on our
committed bank lines of credit.
Foreign Exchange Risk
---------------------
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. During the first quarter of 2004, a change in the Canadian
currency of 10% would have resulted in a fluctuation in net income of $0.7
million. We do not believe that a change in the Canadian currency of 10% will
have a material effect on our financial position or cash flows.
ITEM 4 - Controls and Procedures
Our Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our Company's published
consolidated financial statements and other disclosures included in this report.
Within the 90-day period prior to the date of this report, the Company's
Chairman of the Board, President and Chief Executive Officer, and Senior Vice
President, Chief Financial Officer evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon
that evaluation, the Company's Chairman of the Board, President and Chief
Executive Officer, and Senior Vice President, Chief Financial Officer concluded
that our Company's disclosure controls and procedures, which we designed to
ensure that our Company is able to collect, process and disclose required
information within the time periods specified in the Commission's rules and
forms, were effective as of the end of the period covered by this quarterly
report on 10-Q.
Since the date of the most recent evaluation of our Company's internal controls
over financial reporting by our Chairman of the Board, President and Chief
Executive Office, and Senior Vice President, Chief Financial Officer, there have
been no significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CAUTIONARY NOTE
---------------
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
In April 2002, three Canadian Food Basics franchisees commenced a breach of
contract action in a Canadian court against The Great Atlantic & Pacific Company
of Canada, Limited ("A&P Canada") as representative plaintiffs for a purported
class of approximately 70 current and former Canadian Food Basics franchisees.
The lawsuit seeks unspecified damages in connection with A&P Canada's alleged
failure to distribute to the franchisees the full amount of vendor allowances
and/or rebates to which the franchisees claim they are entitled under the
operative franchise agreements. A&P Canada disputes the plaintiff-franchisees'
claim and has filed a counterclaim seeking to recover subsidies made by it to
the plaintiffs. The lawsuit was certified as a class action in December 2002. A
majority of the class members have opted out of the proceeding. A&P Canada's
appeal of the class certification order was dismissed and the Company is seeking
leave to file a further appeal. This suit is scheduled for trial in October 2004
and the range of potential loss cannot be determined at this time.
On June 5, 2002, a purported securities class action Complaint was filed in the
United States District Court for the District of New Jersey against our Company
and certain of our officers and directors in an action captioned Brody v. The
Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The Brody lawsuit
and four subsequently-filed related lawsuits were consolidated into a single
lawsuit captioned In re The Great Atlantic & Pacific Tea Company, Inc.
Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit"). On
December 2, 2002, plaintiffs filed their Consolidated Amended Class Action
Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934
arising out of our Company's July 5, 2002 filing of restated financial
statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal
2001. The Complaint in the Class Action Lawsuit sought unspecified money
damages, costs and expenses. On January 17, 2003, defendants filed a motion
seeking to dismiss the Complaint. In an Opinion & Order entered September 18,
2003, the District Court dismissed plaintiffs' Complaint without prejudice.
After declining to file a Second Amended Complaint, plaintiffs appealed the
District Court's dismissal of their Complaint to the United States Court of
Appeals for the Third Circuit. After briefing and oral argument, the Third
Circuit, in an Opinion dated July 9, 2004, affirmed the District Court's
dismissal of the Complaint.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of The Great Atlantic
& Pacific Tea Company, Inc., as amended through
July 1987 (incorporated herein by reference to
Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea
Company, Inc., as amended through July 2, 2002
(incorporated herein by reference to Exhibit
3.2 to Form 10-K filed on July 5, 2002)
4.1 Indenture, dated as of January 1, 1991 between
the Company and JPMorgan Chase Bank (formerly
The Chase Manhattan Bank as successor by merger
to Manufacturers Hanover Trust Company), as
trustee (the "Indenture") (incorporated herein
by reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of
December 4, 2001, to the Indenture, dated as of
January 1, 1991 between our Company and JPMorgan
Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4,
2001)
4.3 Second Supplemental Indenture, dated as of
December 20, 2001, to the Indenture between our
Company and JPMorgan Chase Bank, relating to the
9 1/8% Senior Notes due 2011 (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by
reference to Exhibit 4.4 to Form 10-K filed on
May 9, 2003)
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q
filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as
of the 1st day of November, 2000, by and between
the Company and William P. Costantini
(incorporated herein by reference to Exhibit 10
to Form 10-Q filed on January 16, 2001)
("Costantini Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Employment Agreement, made and entered into as of
the 16th day of June, 2003, by and between our
Company and Brenda Galgano (incorporated herein
by reference to Exhibit 10.9 to Form 10-Q filed
on October 17, 2003)
10.5 Employment Agreement, made and entered into as
of the 24th day of February, 2002, by and
between our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit
10.8 to Form 10-K filed on July 5, 2002)
10.6 Employment Agreement, made and entered into as
of the 2nd day of October, 2002, by and between
our Company and Peter Jueptner (incorporated
herein by reference to Exhibit 10.26 to Form
10-Q filed on October 22, 2002)
10.7 Offer Letter dated the 18th day of September
2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January 10,
2003)
10.8 Employment Agreement, made and entered into as
of the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002)
10.9 Employment Agreement, made and entered into as of
the 28th day of October, 2002, by and between our
Company and Brian Piwek, and Offer Letter dated
the 23rd day of October, 2002 (incorporated
herein by reference to Exhibit 10.14 to Form 10-Q
filed on January 10, 2003)
10.10 Supplemental Executive Retirement Plan effective
as of September 30, 1991 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 28, 1993)
10.11 Supplemental Executive Retirement Plan effective
as of September 1, 1997 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 27, 1998)
10.12 Supplemental Retirement and Benefit Restoration
Plan effective as of January 1, 2001
(incorporated herein by reference to
Exhibit 10(j) to Form 10-K filed on May 23, 2001)
10.13 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed
on May 24, 1995)
10.14 1998 Long Term Incentive and Share Award Plan
(incorporated herein by reference to Exhibit
10(k) to Form 10-K filed on May 19, 1999)
10.15* 2004 Non-Employee Director Compensation
effective as of July 14, 2004, as filed herein
10.16 Credit Agreement dated as of February 23, 2001,
among our Company, The Great Atlantic & Pacific
Company of Canada, Limited and the other
Borrowers party hereto and the Lenders party
hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan
Bank of Canada, as Canadian Administrative Agent
("Credit Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-K filed on May
23, 2001)
10.17 Amendment No. 1 and Waiver, dated as of November
16, 2001 to Credit Agreement (incorporated
herein by reference to Exhibit 10.23 to Form
10-K filed on July 5, 2002)
10.18 Amendment No. 2 dated as of March 21, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.24 to Form 10-K filed
on July 5, 2002)
10.19 Amendment No. 3 dated as of April 23, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.25 to Form 10-K filed
on July 5, 2002)
10.20 Waiver dated as of June 14, 2002 to Credit
Agreement (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on July 5, 2002)
10.21 Amendment No. 4 dated as of October 10, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.27 to Form 10-Q filed
on October 22, 2002)
10.22 Amendment No. 5 dated as of February 21, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on
March 7, 2003)
10.23 Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.28 to Form 10-K filed on
May 9, 2003)
18* Preferability Letter Issued by
PricewaterhouseCoopers LLP, as filed herein
23 Consent of Independent Accountants from
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 23.1 to Form 10-K filed
on May 21, 2004)
31.1* Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2* Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32* Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
* Filed with this 10-Q
(b) Reports on Form 8-K
On May 13, 2004, our Company filed a Form 8-K pursuant to which it furnished the
SEC with a copy of the May 13, 2004 press release, which indicated that the
Company would file a Form 12b-25 with the SEC to obtain an automatic 15 day
extension of the period in which to file its Form 10-K for Fiscal 2003.
On April 30, 2004, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the April 30, 2004 press release, which announced the
Company's financial results for the quarter and the fiscal year ended February
28, 2004.
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements 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.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Dated: July 29, 2004 By: /s/ Brenda M. Galgano
-------------------------------
Brenda M. Galgano, Vice President,
Corporate Controller
(Chief Accounting Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Christian W.E. Haub, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Christian W. E. Haub Date: July 29, 2004
------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Mitchell P. Goldstein Date: July 29, 2004
-------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W. E. Haub, Chairman of the Board, President and
Chief Executive Officer of The Great Atlantic & Pacific Tea Company, Inc.
("Company"), and Mitchell P. Goldstein, Senior Vice President and Chief
Financial Officer of the Company, each hereby certifies that (1) the Quarterly
Report of the Company on Form 10-Q for the period ended June 19, 2004 fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Company.
Dated: July 29, 2004 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
Dated: July 29, 2004 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer