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 September 11, 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 October 15, 2004 the Registrant had a total of 38,555,180 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 6, 2003 Sept. 6, 2003
(As Restated (As Restated
Sept. 11, 2004 See Note 3) Sept. 11, 2004 See Note 3)
------------------ ------------------ ------------------ -----------------
Sales $ 2,490,559 $ 2,464,758 $ 5,770,858 $ 5,693,281
Cost of merchandise sold (1,795,046) (1,773,689) (4,155,349) (4,079,038)
------------ -------------- -------------- -------------
Gross margin 695,513 691,069 1,615,509 1,614,243
Store operating, general and administrative
expense (740,021) (711,111) (1,668,637) (1,644,895)
------------ -------------- --------------- -------------
Loss from operations (44,508) (20,042) (53,128) (30,652)
Interest expense (22,078) (17,945) (48,928) (42,829)
Interest income 768 574 1,609 1,354
Minority interest in earnings of consolidated
franchisees (342) 446 (1,718) 172
------------- -------------- --------------- -------------
Loss from continuing operations before
income taxes (66,160) (36,967) (102,165) (71,955)
Benefit from (provision for) income taxes 1,614 (20,125) (3,844) (5,767)
------------ --------------- --------------- -------------
Loss from continuing operations (64,546) (57,092) (106,009) (77,722)
Discontinued operations (Note 5):
Income (loss) from operations of discontinued
businesses, net of tax provision of $0 and
tax benefit of $15,902 for the
12 weeks ended 9/11/04 and 9/06/03,
respectively, and tax benefit of $0
and $21,696 for the 28 weeks
ended 9/11/04 and 9/06/03, respectively 344 (19,684) (1,039) (29,962)
(Loss) gain on disposal of discontinued
operations, net of tax provision of $0 and
$3,160 for the 12 weeks ended 9/11/04, and
9/06/03, respectively, and $0 and $31,853
for the 28 weeks ended
9/11/04 and 9/06/03, respectively - (6,911) - 43,989
------------ -------------- -------------- -------------
Income (loss) from discontinued operations 344 (26,595) (1,039) 14,027
------------ -------------- -------------- -------------
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - - - (8,047)
------------ -------------- -------------- -------------
Net loss $ (64,202) $ (83,687) $ (107,048) $ (71,742)
============ ============== ============== =============
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.68) $ (1.48) $ (2.75) $ (2.01)
Discontinued operations 0.01 (0.69) (0.03) 0.36
Cumulative effect of a change in accounting
principle - FIN 46-R - - - (0.21)
------------- --------------- -------------- --------------
Net loss per share - basic and diluted $ (1.67) $ (2.17) $ (2.78) $ (1.86)
============= ============== ============== =============
Weighted average number of common shares
outstanding 38,521,685 38,516,670 38,520,732 38,516,176
Common stock equivalents 281,061 635,554 325,304 392,570
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 38,802,746 39,152,224 38,846,036 38,908,746
============= ============== ============== =============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 Week Period Ended
September 11, 2004
------------------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (107,048) (107,048)
Other comprehensive income 12,651 12,651
Stock options exercised 3,375 3 13 16
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,522,280 $ 38,522 $ 459,592 $ (185,148) $ (14,588) $ 298,378
============ =========== =========== ============ =========== ===========
28 Week Period Ended
September 6, 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 loss (71,742) (71,742)
Other comprehensive income 27,305 27,305
Stock options exercised 1,412 1 11 12
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,517,218 $ 38,517 $ 459,422 $ 7,107 $ (33,818) $ 471,228
============ =========== =========== ============ =========== ===========
Comprehensive loss
------------------
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
(As Restated (As Restated
See Note 3) See Note 3)
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
------------------ ------------------ ------------------ -----------------
Net loss $ (64,202) $ (83,687) $ (107,048) $ (71,742)
----------- ----------- ----------- -----------
Foreign currency translation adjustment 18,970 (9,520) 12,197 29,972
Net unrealized (loss) gain on derivatives,
net of tax (381) (1,960) 454 (2,667)
------------ ------------ ----------- -----------
Other comprehensive income (loss) 18,589 (11,480) 12,651 27,305
------------ ----------- ----------- -----------
Total comprehensive loss $ (45,613) $ (95,167) $ (94,397) $ (44,437)
=========== =========== =========== ===========
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 12,197 454 - 12,651
----------- ---------- ----------- -----------
Balance at September 11, 2004 $ (11,695) $ 296 $ (3,189) $ (14,588)
============ ========== ============ ============
Balance at February 22, 2003 $ (62,496) $ 3,015 $ (1,642) $ (61,123)
Current period change, As Restated 29,972 (2,667) - 27,305
----------- ----------- ----------- -----------
Balance at September 6, 2003, As Restated $ (32,524) $ 348 $ (1,642) $ (33,818)
============ ========== ============ ============
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
September 11, (As Restated
2004 See Note 3)
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,834 $ 297,008
Accounts receivable, net of allowance for doubtful accounts
of $13,166 and $13,620 at September 11, 2004 and
February 28, 2004, respectively 141,713 171,835
Inventories 728,925 694,120
Prepaid expenses and other current assets 61,812 33,796
------------- --------------
Total current assets 1,209,284 1,196,759
------------- --------------
Non-current assets:
Property:
Property owned 1,380,244 1,405,925
Property leased under capital leases 60,628 65,632
------------- --------------
Property - net 1,440,872 1,471,557
Other assets 120,751 115,500
------------- --------------
Total assets $ 2,770,907 $ 2,783,816
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,274 $ 2,271
Current portion of obligations under capital leases 11,878 15,901
Accounts payable 536,092 480,712
Book overdrafts 107,827 96,273
Accrued salaries, wages and benefits 180,973 177,142
Accrued taxes 71,320 74,698
Other accruals 246,672 236,238
------------- --------------
Total current liabilities 1,157,036 1,083,235
------------- --------------
Non-current liabilities:
Long-term debt 829,770 823,738
Long-term obligations under capital leases 73,167 73,980
Other non-current liabilities 405,964 402,932
Minority interest in consolidated franchisees 6,592 7,172
------------- --------------
Total liabilities 2,472,529 2,391,057
------------- --------------
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 - 38,522,280 and 38,518,905
shares at September 11, 2004 and February 28, 2004, respectively 38,522 38,519
Additional paid-in capital 459,592 459,579
Accumulated other comprehensive loss (14,588) (27,239)
Accumulated deficit (185,148) (78,100)
-------------- --------------
Total stockholders' equity 298,378 392,759
------------- --------------
Total liabilities and stockholders' equity $ 2,770,907 $ 2,783,816
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
-------------------------------------------------
Sept. 6, 2003
(As Restated
Sept. 11, 2004 See Note 3)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (107,048) $ (71,742)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Asset disposition initiative 1,070 (5,230)
Property impairments 1,679 466
Depreciation and amortization 143,519 150,331
Deferred income taxes (2,236) 4,661
Loss on disposal of owned property 849 100
Gain on sale of discontinued operations - (75,842)
Cumulative effect of change in accounting principle - FIN 46-R - 8,047
Other changes in assets and liabilities:
Decrease (increase) in receivables 31,370 (8,103)
(Increase) decrease in inventories (28,818) 15,323
Increase in prepaid expenses and other current assets (23,647) (31,778)
(Increase) decrease in other assets (11,857) 7,170
Increase in accounts payable 47,917 17,968
(Decrease) increase in accrued salaries, wages, benefits and taxes (1,975) 24,994
Increase in other accruals 7,169 8,769
Decrease in minority interest (798) (1,074)
Decrease in other non-current liabilities (6,514) (21,720)
Other operating activities, net 1,259 (2,028)
----------- ------------
Net cash provided by operating activities 51,939 20,312
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (97,442) (75,864)
Proceeds from disposal of property 10,127 142,064
----------- -----------
Net cash (used in) provided by investing activities (87,315) 66,200
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on revolving lines of credit - (135,000)
Proceeds from long-term borrowings 7,365 16,016
Principal payments on long-term borrowings (33) (1,127)
Principal payments on capital leases (6,458) (7,203)
Increase in book overdrafts 10,983 15,413
Deferred financing fees (955) (414)
Proceeds from exercises of stock options 16 12
----------- -----------
Net cash provided by (used in) financing activities 10,918 (112,303)
Initial impact of FIN 46-R - 20,921
Effect of exchange rate changes on cash and cash equivalents 4,284 8,914
----------- -----------
Net (decrease) increase in cash and cash equivalents (20,174) 4,044
Cash and cash equivalents at beginning of period 297,008 199,014
----------- -----------
Cash and cash equivalents at end of period $ 276,834 $ 203,058
=========== ===========
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 12 and 28 weeks ended September 11,
2004 and September 6, 2003, and the Consolidated Balance Sheets at September 11,
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 Financial Accounting Standards Board ("FASB") 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 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 12 and 28 weeks ended September 11, 2004 and
September 6, 2003 in Note 8 - 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. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"). Refer to Note 8 - Retirement Plans and
Benefits regarding the impact of adoption of FAS 106-2 in our consolidated
financial statements.
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 ended June 19, 2004
for our Company).
Based upon the new criteria for consolidation of VIE's, we have determined that
(i.) all of our franchised stores do not have sufficient equity at risk to allow
them to finance their own activities, (ii.) we absorb the expected losses of all
of our franchised stores, and (iii.) we have a de facto agency relationship with
the franchisees in which the franchisees cannot sell, transfer, or encumber its
interests in the franchise without our prior approval. Therefore, we are deemed
the primary beneficiary and accordingly have included the franchisee operations
in our consolidated financial statements as of February 23, 2003. As permitted
by FIN 46-R, our Company elected to restate fiscal 2003's consolidated financial
statements for the impact of adopting this interpretation for comparability
purposes.
As of September 11, 2004, we served 65 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 $185 million and
$177 million for the 12 weeks ended September 11, 2004 and September 6, 2003,
respectively, and $439 million and $428 million for the 28 weeks ended September
11, 2004 and September 6, 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.
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 11 - Commitments and Contingencies regarding our settlement
of a 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 $12.3 million and $10.1 million for the 12 weeks ended September 11,
2004 and September 6, 2003, respectively, and $27.6 million and $24.8 million
for the 28 weeks ended September 11, 2004 and September 6, 2003, respectively.
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 (i.) FIN 46-R on our
Canadian operations, including the impact of all elimination entries relating to
the consolidation of the franchisees, (ii.) EITF 03-10 on our U.S. ($6.4 million
and $14.8 million for the 12 and 28 weeks ended September 11, 2004,
respectively, as compared to $7.5 million and $18.2 million for the 12 and 28
weeks ended September 6, 2003, respectively) and Canadian ($5.9 million and
$12.9 million for the 12 and 28 weeks ended September 11, 2004, respectively, as
compared to $2.6 million and $6.6 million for the 12 and 28 weeks ended
September 6, 2003, respectively) operations, and (iii.) the change in our method
of valuing certain of our inventories from the LIFO method to the FIFO method on
our U.S. operations in 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 $1.1 million impact on our Consolidated
Statement of Operations for both the 12 and 28 weeks ended September 6, 2003.
Consolidated
A&P for the Consolidated
12 weeks ended Impact of Impact of A&P for the
Sept. 11, 2004 adoption of adoption of 12 weeks ended
prior to changes FIN 46-R EITF 03-10 Sept. 11, 2004
---------------- ------------- ------------- --------------
Sales $ 2,467,688 $ 35,196 $ (12,325) $ 2,490,559
Cost of merchandise sold (1,806,601) (770) 12,325 (1,795,046)
------------- -------------- ------------- -------------
Gross margin 661,087 34,426 - 695,513
Store operating, general and administrative
expense (707,541) (32,480) - (740,021)
------------- ------------- ------------- -------------
(Loss) income from operations (46,454) 1,946 - (44,508)
Interest expense (22,078) - - (22,078)
Interest income 1,809 (1,041) - 768
Minority interest in earnings of consolidated
franchisees - (342) - (342)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (66,723) 563 - (66,160)
Benefit from (provision for) income taxes 1,944 (330) - 1,614
------------- ------------- ------------- -------------
(Loss) income from continuing operations (64,779) 233 - (64,546)
Discontinued operations:
Income from operations of discontinued
businesses, net of tax 344 - - 344
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Income from discontinued operations 344 - - 344
------------- ------------- ------------- -------------
Net (loss) income $ (64,435) $ 233 $ - $ (64,202)
============= ============= ============= =============
Depreciation $ (61,249) $ (1,148) $ - $ (62,397)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Change from Restated for the
12 weeks ended adoption of adoption of LIFO to 12 weeks ended
Sept. 6, 2003 FIN 46-R EITF 03-10 FIFO Sept. 6, 2003
--------------- ---------------- --------------- ---------------- -----------------
Sales $ 2,443,700 $ 31,176 $ (10,118) $ - $ 2,464,758
Cost of merchandise sold (1,784,774) (92) 10,118 1,059 (1,773,689)
-------------- -------------- ------------- ------------- -------------
Gross margin 658,926 31,084 - 1,059 691,069
Store operating, general
and administrative expense (679,839) (31,272) - - (711,111)
-------------- ------------- ------------- ------------- -------------
(Loss) income from operations (20,913) (188) - 1,059 (20,042)
Interest expense (17,945) - - - (17,945)
Interest income 1,773 (1,199) - - 574
Minority interest in earnings
of consolidated franchisees - 446 - - 446
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (37,085) (941) - 1,059 (36,967)
Provision for income taxes (20,010) (115) - - (20,125)
-------------- -------------- ------------- ------------- --------------
(Loss) income from continuing
operations (57,095) (1,056) - 1,059 (57,092)
Discontinued operations:
Loss from operations of
discontinued businesses,
net of tax (19,684) - - - (19,684)
Loss on disposal of
discontinued operations,
net of tax (6,911) - - - (6,911)
-------------- ------------- ------------- ------------- --------------
Loss from discontinued
operations (26,595) - - - (26,595)
-------------- ------------- ------------- ------------- --------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - - - - -
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (83,690) $ (1,056) $ - $ 1,059 $ (83,687)
============== ============== ============= ============= ==============
Depreciation $ (61,596) $ (1,407) $ - $ - $ (63,003)
-------------- ------------- ------------- ------------- -------------
Consolidated
A&P for the Consolidated
28 weeks ended Impact of Impact of A&P for the
Sept. 11, 2004 adoption of adoption of 28 weeks ended
prior to changes FIN 46-R EITF 03-10 Sept. 11, 2004
---------------- ------------- ------------- --------------
Sales $ 5,720,343 $ 78,172 $ (27,657) $ 5,770,858
Cost of merchandise sold (4,186,498) 3,492 27,657 (4,155,349)
------------- ------------- ------------- -------------
Gross margin 1,533,845 81,664 - 1,615,509
Store operating, general and administrative
expense (1,595,400) (73,237) - (1,668,637)
------------- ------------- ------------- -------------
(Loss) income from operations (61,555) 8,427 - (53,128)
Interest expense (48,928) - - (48,928)
Interest income 4,103 (2,494) - 1,609
Minority interest in earnings of consolidated
franchisees - (1,718) - (1,718)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (106,380) 4,215 - (102,165)
Provision for income taxes (2,470) (1,374) - (3,844)
------------- ------------- ------------- -------------
(Loss) income from continuing operations (108,850) 2,841 - (106,009)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,039) - - (1,039)
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Loss from discontinued operations (1,039) - - (1,039)
-------------- ------------- ------------- -------------
Net (loss) income $ (109,889) $ 2,841 $ - $ (107,048)
============= ============= ============= =============
Depreciation $ (140,923) $ (2,596) $ - $ (143,519)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Change from Restated for the
28 weeks ended adoption of adoption of LIFO to 28 weeks ended
Sept. 6, 2003 FIN 46-R EITF 03-10 FIFO Sept. 6, 2003
--------------- ---------------- --------------- ---------------- -----------------
Sales $ 5,647,530 $ 70,585 $ (24,834) $ - $ 5,693,281
Cost of merchandise sold (4,109,435) 4,504 24,834 1,059 (4,079,038)
-------------- ------------- ------------- ------------- -------------
Gross margin 1,538,095 75,089 - 1,059 1,614,243
Store operating, general
and administrative expense (1,571,467) (73,428) - - (1,644,895)
-------------- ------------- ------------- ------------- -------------
(Loss) income from operations (33,372) 1,661 - 1,059 (30,652)
Interest expense (42,829) - - - (42,829)
Interest income 3,912 (2,558) - - 1,354
Minority interest in earnings
of consolidated franchisees - 172 - - 172
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (72,289) (725) - 1,059 (71,955)
Provision for income taxes (5,148) (619) - - (5,767)
-------------- -------------- ------------- ------------- --------------
(Loss) income from continuing
operations (77,437) (1,344) - 1,059 (77,722)
Discontinued operations:
Loss from operations of
discontinued businesses,
net of tax (29,962) - - - (29,962)
Gain on disposal of
discontinued operations,
net of tax 43,989 - - - 43,989
------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 14,027 - - - 14,027
------------- ------------- ------------- ------------- -------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - (8,047) - - (8,047)
------------- -------------- ------------- ------------- --------------
Net (loss) income $ (63,410) $ (9,391) $ - $ 1,059 $ (71,742)
============== ============== ============= ============= ==============
Depreciation $ (145,692) $ (3,088) $ - $ - $ (148,780)
-------------- ------------- ------------- ------------- -------------
Consolidated
A&P at Impact of Consolidated
September 11, 2004 adoption of A&P at
prior to adoption FIN 46-R September 11, 2004
-------------------- -------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 251,422 $ 25,412 $ 276,834
Accounts receivable 169,166 (27,453) 141,713
Inventories 702,887 26,038 728,925
Prepaid expenses and other current assets 60,827 985 61,812
------------------ ------------------ ------------------
Total current assets 1,184,302 24,982 1,209,284
------------------ ------------------ ------------------
Non-current assets:
Property:
Property owned 1,361,466 18,778 1,380,244
Property leased under capital leases, net 60,628 - 60,628
------------------ ------------------ ------------------
Property, net 1,422,094 18,778 1,440,872
Other assets 155,898 (35,147) 120,751
------------------ ------------------ ------------------
Total assets $ 2,762,294 $ 8,613 $ 2,770,907
================== ================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,274 $ - $ 2,274
Current portion of obligations under capital
leases 11,878 - 11,878
Accounts payable 535,515 577 536,092
Book overdrafts 107,827 - 107,827
Accrued salaries, wages and benefits 178,396 2,577 180,973
Accrued taxes 66,035 5,285 71,320
Other accruals 245,731 941 246,672
------------------ ------------------ ------------------
Total current liabilities 1,147,656 9,380 1,157,036
------------------ ------------------ ------------------
Non-current liabilities:
Long-term debt 829,770 - 829,770
Long-term obligations under capital leases 73,167 - 73,167
Other non-current liabilities 406,085 (121) 405,964
Minority interest in consolidated franchisees - 6,592 6,592
------------------ ------------------ ------------------
Total liabilities 2,456,678 15,851 2,472,529
------------------ ------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,522 - 38,522
Additional paid-in capital 459,592 - 459,592
Accumulated other comprehensive loss (14,258) (330) (14,588)
Accumulated deficit (178,240) (6,908) (185,148)
------------------ ------------------ ------------------
Total stockholders' equity 305,616 (7,238) 298,378
------------------ ------------------ ------------------
Total liabilities and stockholders'equity $ 2,762,294 $ 8,613 $ 2,770,907
================== ================== ==================
Consolidated
Consolidated Impact of Impact of A&P as
A&P 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 33,651 145 - 33,796
----------- ----------- ----------- -----------
Total current assets 1,154,883 24,591 17,285 1,196,759
----------- ----------- ----------- -----------
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 $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
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 401,659 1,273 - 402,932
Minority interest in consolidated franchisees - 7,172 - 7,172
----------- ----------- ----------- -----------
Total liabilities 2,373,297 17,760 - 2,391,057
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - - -
Common stock 38,519 - - 38,519
Additional paid-in capital 459,579 - - 459,579
Accumulated other comprehensive loss (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 $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
4. Income Taxes
The income tax provision recorded for the 28 weeks ended September 11, 2004 and
September 6, 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") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on the weight of available
evidence, 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. deferred tax asset and our historic cumulative losses,
we concluded that it was appropriate to record a valuation allowance in an
amount that would reduce our U.S. deferred tax asset to the amount that is more
likely than not to be realized. For the 12 and 28 weeks ended September 11,
2004, the valuation allowance was increased by $27.0 million and $40.3 million,
respectively. To the extent that our U.S. operations generate sufficient 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 28 weeks ended September 6, 2003 at our
effective tax rate. The tax provision for discontinued operations of $10.2
million for the 28 weeks ended September 6, 2003 was completely offset by a tax
benefit from continuing operations. Similarly, the tax benefit for discontinued
operations of $12.7 million for the 12 weeks ended September 6, 2003 was
completely offset by a tax provision for continuing operations.
For the second quarter of fiscal 2004, our effective income tax rate of 2.4%
changed from the effective income tax rate of 54.5% in the second quarter of
fiscal 2003 as follows:
12 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax (Benefit) Effective
Benefit Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,035) 1.6% $ (14,117) 38.2%
Canada 2,649 (4.0%) (6,008) 16.3%
--------------- ---------------- -------------- ----------------
$ 1,614 (2.4%) $ (20,125) 54.5%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
provision recognized from continuing operations. As discussed above, $12.7
million of provision was recognized in the second quarter of fiscal 2003 as
compared to the second quarter of fiscal 2004, where no provision was
recognized. The remaining provisions recorded in the U.S. of $1.0 million and
$1.4 million for the second quarters of fiscal 2004 and 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations in
the second quarter of fiscal 2004 as compared to the second quarter of fiscal
2003.
For the 28 weeks ended September 11, 2004, our effective income tax rate of 3.8%
changed from the effective income tax rate of 8.0% for the 28 weeks ended
September 6, 2003 as follows:
28 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax Benefit Effective
Benefit Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (2,415) 2.4% $ 7,907 (11.0%)
Canada (1,429) 1.4% (13,674) 19.0%
--------------- ---------------- --------------- ----------------
$ (3,844) 3.8% $ (5,767) 8.0%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $10.2 million
of benefit was recognized for the 28 weeks ended September 6, 2003 as compared
to the 28 weeks ended September 11, 2004, where no benefit was recognized. The
remaining provisions recorded in the U.S. of $2.4 million and $2.3 million for
the 28 weeks ended September 11, 2004 and September 6, 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations for
the 28 weeks ended September 11, 2004 as compared to the 28 weeks ended
September 6, 2003.
At September 11, 2004 and February 28, 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 $16.6 million and $8.9 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheet totaling $27.9
million and $22.5 million, respectively.
5. 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 primarily 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.
Such review may also be based upon appraisals of or offers for our long-lived
assets we receive in the normal course of business. During both the 12 and 28
weeks ended September 11, 2004, we recorded an impairment loss of $0.9 million
related to certain idle property that, based upon new information received about
such assets, including an appraisal and an offer, was impaired and written down
to its net realizable value. This amount was included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations. There were no such amounts recorded during the 12 and 28 weeks ended
September 6, 2003.
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 both the 12 and 28 weeks ended September 11, 2004, we recorded
impairment losses on property, plant and equipment of $0.8 million compared to
$4.2 million and $19.4 million during the 12 and 28 weeks ended September 6,
2003, respectively. Of these amounts, $0.8 million in both fiscal 2004 periods
presented and $0.5 million in both fiscal 2003 periods presented related to
United States stores that were or will be closed in the normal course of
business and are included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations. The remaining impairment
losses we recorded of $3.7 million and $18.9 million during the 12 and 28 weeks
ended September 6, 2003, respectively, related to stores closed as a result of
our exit of the Kohl's business and are included in our Consolidated Statements
of Operations under the caption "(Loss) gain on disposal of discontinued
operations, net of tax" (see Note 6 of our Consolidated Financial Statements).
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
6. 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 our remaining 23 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 stores, 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, plant and equipment 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 stores to be disposed of are replaced by other 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 "Income (loss) from
operations of discontinued businesses, net of tax" for the 12 and 28 weeks
ending September 11, 2004 and September 6, 2003, and the results of disposing
these businesses which are included in "(Loss) gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations for 12 and
28 weeks ending September 11, 2004 and September 6, 2003.
12 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 699 (352) (3) 344
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 699 (352) (3) 344
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 699 $ (352) $ (3) $ 344
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Non-accruable closing costs $ 702 $ (192) $ (3) $ 507
Interest accretion on present value of
future occupancy costs (3) (160) - (163)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 699 $ (352) $ (3) $ 344
--------------- ---------------- --------------- -------------
12 Weeks ended September 6, 2003
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ - $ 38,494 $ 18,901 $ 57,395
Operating expenses (474) (79,500) (13,007) (92,981)
------------- ---------------- --------------- --------------
(Loss) income from operations of
discontinued businesses, before
tax (474) (41,006) 5,894 (35,586)
Tax benefit (provision) 212 18,324 (2,634) 15,902
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (262) $ (22,682) $ 3,260 $ (19,684)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Pension withdrawal liability $ - $ (2,500) $ - $ (2,500)
Occupancy related costs - (25,077) - (25,077)
Severance and benefits - (7,138) - (7,138)
Non-accruable inventory costs - (692) - (692)
Non-accruable closing costs (474) 451 (320) (343)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (474) $ (34,956) $ (320) $ (35,750)
--------------- ---------------- --------------- ----------------
Loss on disposal of
discontinued businesses
Gain on sale of fixed assets $ - $ - $ - $ -
Fixed asset impairments - (3,751) - (3,751)
Loss on disposal of
--------------- ---------------- --------------- ----------------
discontinued businesses, before
tax - (3,751) - (3,751)
Tax provision - (3,160) - (3,160)
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (6,911) $ - $ (6,911)
=============== ================ =============== ================
28 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 328 (774) (593) (1,039)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 328 (774) (593) (1,039)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 328 $ (774) $ (593) $ (1,039)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Non-accruable closing costs 660 (390) (593) (323)
Interest accretion on present value
of future occupancy costs (6) (384) - (390)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 328 $ (774) $ (593) $ (1,039)
--------------- ---------------- --------------- -------------
28 Weeks ended September 6, 2003
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 44,073 $ 200,028
Operating expenses (43,464) (175,865) (32,357) (251,686)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (10,738) (52,636) 11,716 (51,658)
Tax benefit (provision) 3,912 22,517 (4,733) 21,696
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (6,826) $ (30,119) $ 6,983 $ (29,962)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (25,387) - (29,380)
Non-accruable inventory costs - (1,989) - (1,989)
Non-accruable closing costs (3,114) (1,837) (1,443) (6,394)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,635) (8,415) - (11,050)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (8,097) $ (44,128) $ (1,443) $ (53,668)
--------------- ---------------- --------------- --------------
28 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain (loss) from disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 8,827 $ - $ 94,810
Fixed asset impairments - (18,968) - (18,968)
Gain (loss) on disposal of
------------- ------------- ------------- ----------------
discontinued businesses, before
tax 85,983 (10,141) - 75,842
Tax provision (30,997) (856) - (31,853)
------------- ---------------- ------------- ----------------
Gain (loss) disposal of discontinued
businesses, net of tax $ 54,986 $ (10,997) $ - $ 43,989
============= ================ ============= ================
Northern New England
--------------------
As previously stated, as part of our strategic plan we decided, in February
2003, 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 $86.0 million ($55.0 million after tax). This gain was included in
"(Loss) gain on disposal of discontinued operations, net of tax" on our
Consolidated Statements of Operations for the 28 weeks ended September 6, 2003.
In addition, as part of the exit of this business, we reported a loss of $0.5
million ($0.3 million after tax) and $10.7 million ($6.8 million after tax) for
the 12 and 28 weeks ended September 6, 2003, respectively, which were included
in "Income (loss) from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for those periods. During the 12 and 28
weeks ended September 11, 2004, we recorded gains of $0.7 million and $0.3
million, respectively, primarily due to favorable results of winding down this
business.
The following table summarizes the reserve activity related to the exit of the
northern New England market since the charge was recorded:
Severance
and
Occupancy Benefits Total
--------- ---------- -------
Fiscal 2003 charge (1) $3,993 $2,670 $6,663
Additions (2) 6 - 6
Utilization (3) (3,547) (2,612) (6,159)
-------- ------- --------
Balance at
February 28, 2004 452 58 510
Additions (2) 6 326 332
Utilization (3) (25) (384) (409)
-------- ------- --------
Balance at
September 11, 2004 $ 433 $ - $ 433
======= ====== ========
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
future expected occupancy costs such as rent, common area maintenance and
real estate taxes. The addition to occupancy represents 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.
(2) The additions to occupancy represents the 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. Severance and benefits utilization represents payments made to
terminated employees during the period.
As of September 11, 2004, we had paid approximately $3.0 million in severance
and benefits costs, which resulted from the termination of approximately 300
employees.
At September 11, 2004, $0.1 million of the northern New England exit reserves
was included in "Other accruals" and $0.3 million was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $0.4 million as of September 11, 2004 based upon
current available information and have concluded that it is appropriate. 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
-------------
As previously stated, as part of our strategic plan we decided to exit the
Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner.
As a result of the Madison sales, we generated proceeds of $20.1 million,
resulting in a gain of $8.8 million ($5.6 million after tax). This gain was
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for the 28 weeks ended September 6,
2003.
As a result of the decision to exit Milwaukee, we estimated the assets' fair
market value using a probability weighted average approach based upon expected
proceeds and recorded impairment losses on the property, plant and equipment at
the remaining Kohl's locations of $3.8 million and $18.9 million during the 12
and 28 weeks ended September 6, 2003, respectively. This net loss is also
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for those periods.
As a result of the closure and impending sale of certain Milwaukee locations, we
recorded exit costs net of the results of these businesses while they were open
of $41.0 million and $52.6 million for the 12 and 28 weeks ended September 6,
2003. These charges are detailed in the tables above and are included in "Income
(loss) from operations of discontinued businesses, net of tax" in our
Consolidated Statements of Operations for those periods. During the 12 and 28
weeks ended September 11, 2004, we recorded charges of $0.4 million and $0.8
million, respectively, primarily due to residual costs of winding down this
business.
The following table summarizes the reserve activity since the charge was
recorded:
Severance
and Fixed
Occupancy Benefits Assets Total
--------- ----------- ----------- -----------
Fiscal 2003 charge (1) $25,487 $13,062 $18,968 $57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
-------- ---------------- -------- ---------
Balance at
February 28, 2004 19,039 4,834 - 23,873
Additions (2) 384 - - 384
Utilization (3) (2,309) (1,614) - (3,923)
-------- -------- -------- --------
Balance at
September 11, 2004 $17,114 $ 3,220 $ - $20,334
======== ======== ======== ========
(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. 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. The fiscal 2003 charge to
property of $18.9 million represents the impairment losses at certain
Kohl's locations.
(2) The additions to occupancy represents the 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.
As of September 11, 2004, we had paid approximately $9.8 million of the total
original severance and benefits charge recorded, which resulted from the
termination of approximately 2,000 employees. The remaining severance liability
relates to future obligations for early withdrawal from multi-employer union
pension plans which will be paid by mid-2006, and individual severance payments
which will be paid by the end of fiscal 2004.
At September 11, 2004, $6.7 million of the Kohl's exit reserves was included in
"Other accruals" and $13.6 million was included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $20.3 million as of September 11, 2004 based upon current available
information and have concluded that it is appropriate. 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 second half of fiscal 2003, we completed the sale of our Eight
O'Clock Coffee business, generating gross proceeds of $107.5 million and a gain
of $85.0 million ($49.3 million after tax). The sale of the coffee business also
included a contingent note for up to $20.0 million, the value and payment of
which is based upon certain elements of the future performance of the Eight
O'Clock Coffee business and therefore is not included in the gain. During the 12
and 28 weeks ended September 6, 2003, we incurred costs of $0.3 million and $1.4
million related to the pending sale. During the 12 and 28 weeks ended September
11, 2004, we incurred costs of nil and $0.6 million related to winding down this
business subsequent to the sale during the latter half of fiscal 2003.
7. 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 12 and 28 weeks ended September 11, 2004 and
September 6, 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".
12 Weeks Ended September 11, 2004 12 Weeks Ended September 6, 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 $ 446 $ 568 $ 158 $ 1,172 $ 592 $ 714 $ - $ 1,306
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 446 568 158 1,172 592 714 - 1,306
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - - - - 422 - 422
Inventory markdowns - - - - - - - -
Closing costs - - 9 9 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Total non-accruable
items - - 9 9 - 422 - 422
-------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Less PV interest (446) (568) (158) (1,172) (592) (714) - (1,306)
--------- ----------- ------------ ---------- ------------ ----------- ----------- -----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 9 $ 9 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= =========== =========== =========== ===========
28 Weeks Ended September 11, 2004 28 Weeks Ended September 6, 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 $ 1,076 $ 1,349 $ 380 $ 2,805 $ 1,420 $ 1,700 $ - $ 3,120
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 1,076 1,349 380 2,805 1,420 1,700 - 3,120
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - 90 90 - 422 - 422
Inventory markdowns - 291 291 - - - -
Closing costs - - 689 689 - - - -
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Total non-accruable
items - - 1,070 1,070 - 422 - 422
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Less PV interest (1,076) (1,349) (380) (2,805) (1,420) (1,700) - (3,120)
--------- ----------- ------------ ---------- ------------- ------------ ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 1,070 $ 1,070 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= ============ =========== =========== ========
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 September 11, 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) 1,063 13 1,076 - - - 1,063 13 1,076
Utilization (2) (3,285) (85) (3,370) (433) - (433) (3,718) (85) (3,803)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
Sept. 11, 2004 $ 29,250 $ 380 $ 29,630 $ 1,724 $ - $ 1,724 $ 30,974 $ 380 $ 31,354
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.1 million
during the 28 weeks ended September 11, 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 $3.4 million during the 28
weeks ended September 11, 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
$0.4 million during the 28 weeks ended September 11, 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 $96.1 million of the total occupancy charges from the time of the
original charges through September 11, 2004 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.8 million of the total net severance charges from
the time of the original charges through September 11, 2004, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $29.6 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 $1.7 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out by 2020.
None of these stores were open during either of the first or second 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 September 11, 2004 and February 28, 2004, approximately $5.6 million and $6.5
million, respectively, 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 September 11, 2004 of $31.4 million for this phase of the asset disposition
initiative and have concluded that they are appropriate 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 September 11, 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) 1,349 - 1,349 - - - 1,349 - 1,349
Utilization (2) (3,030) 13 (3,017) (69) (58) (127) (3,099) (45) (3,144)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
Sept. 11, 2004 $ 37,903 $ 388 $ 38,291 $ 2,242 $ - $ 2,242 $ 40,145 $ 388 $ 40,533
======== ======== ======== ======== ======== ======== ========= ========= =========
(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
$1.3 million during the 28 weeks ended September 11, 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 expensed as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $3.0 million
during the 28 weeks ended September 11, 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 28 weeks ended
September 11, 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 $36.2 million ($33.5 million in the U.S. and $2.7 million in Canada) of
the total occupancy charges from the time of the original charges through
September 11, 2004 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$26.0 million ($17.0 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
September 11, 2004, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $38.3 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $2.2 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At September 11, 2004 and February 28, 2004 approximately $12.4 million and
$12.0 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 12 and 28 weeks
ended September 11, 2004 and September 6, 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:
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
-------------- ------------- -------------- -------------
Sales $ - $ - $ - $ 316
============= ============= ============= =============
Operating loss $ - $ - $ - $ (72)
============= ============= ============= ==============
Based upon current available information, we evaluated the reserve balances as
of September 11, 2004 of $40.5 million for this phase of the asset disposition
initiative and have concluded that they are appropriate 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), excluding PV interest, we recorded costs in the 12 and 28 weeks ended
September 11, 2004 of nil and $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"), respectively, as follows:
12 Weeks Ended 28 Weeks Ended
September 11, 2004 September 11, 2004
------------------ ------------------
Occupancy related $ - $ -
Severance and benefits - -
Property writedowns - 90
Inventory markdowns - 291
Nonaccruable closing costs 9 689
-------------- --------------
Total charges $ 9 $ 1,070
============== ==============
As of September 11, 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 writedowns 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) 380 - 380
Utilization (2) (3,530) (4,235) (7,765)
------------ ------------- ----------
Balance at
Sept. 11, 2004 $ 16,812 $ 584 $ 17,396
============ ============= ==========
(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 28
weeks ended September 11, 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 $3.5 million during fiscal
2003 and the 28 weeks ended September 11, 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
28 weeks ended September 11, 2004, respectively, represent payments
made to terminated employees during the period.
We paid $4.6 million of the total occupancy charges from the time of the
original charge through September 11, 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 September 11, 2004, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $16.8 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 $0.6 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 12 and 28 weeks
ended September 11, 2004 and September 6, 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:
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
-------------- ------------- -------------- -------------
Sales $ - $ 12,390 $ 2,433 $ 29,356
============= ============= ============= =============
Operating loss $ - $ (2,270) $ (43) $ (4,749)
============= ============= ============== ==============
At September 11, 2004 and February 28, 2004, approximately $2.3 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 $17.4 million as of September 11,
2004 based upon current available information and have concluded that it is
appropriate. 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.
8. 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 12 Weeks Ended
---------------------------------------------------
September 11, 2004 September 6, 2003
---------------------------------------------------
U.S. Canada U.S. Canada
------- ------ -------- --------
Service cost $ 836 $ 1,976 $ 742 $ 1,575
Interest cost 1,963 2,955 2,069 2,668
Expected return on plan assets (2,282) (3,823) (4,868) (3,428)
Amortization of unrecognized net transition asset (3) - (3) (101)
Amortization of unrecognized net prior service cost 22 109 33 76
Amortization of unrecognized net (gain) loss (30) 433 2,511 133
Administrative expenses and other * 2,825 63 - 58
--------- --------- -------- ---------
Net pension cost $ 3,331 $ 1,713 $ 484 $ 981
========= ========= ======== =========
For the 28 Weeks Ended
---------------------------------------------------
September 11, 2004 September 6, 2003
------------------- ----------------------
U.S. Canada U.S. Canada
------ ------ -------- ---------
Service cost $ 1,951 $ 4,549 $ 1,731 $ 3,674
Interest cost 4,580 6,803 4,828 6,225
Expected return on plan assets (5,325) (8,802) (11,358) (7,997)
Amortization of unrecognized net transition asset (7) - (7) (234)
Amortization of unrecognized net prior service cost 51 252 77 177
Amortization of unrecognized net (gain) loss (70) 998 5,858 309
Administrative expenses and other * 2,825 144 - 134
--------- --------- -------- ---------
Net pension cost $ 4,005 $ 3,944 $ 1,129 $ 2,288
========= ========= ======== =========
* During fiscal 2004, it came to our attention that one of our Taft-Hartley U.S.
defined benefit pension plans that was previously recorded off balance sheet as
a multiemployer plan was entirely sponsored by our Company. In accordance with
SFAS 87, "Employers' Accounting for Pensions" ("SFAS 87"), the funded status of
single employer defined benefit plans is to be recorded on balance sheet with
net pension income or cost recorded each quarter since the adoption of SFAS 87.
Given (i.) the lack of employee data needed to calculate the funded status of
the plan at each balance sheet date since the adoption of SFAS 87, (ii.) the
inability to determine if the plan would have had unrecognized actuarial gains
and losses during the past several years in question, and (iii.) as the
difference between actual net pension cost recognized in our Consolidated
Statements of Operations and net pension cost that should have been recorded per
SFAS 87 was not significant to each of the past three years, an adjustment of
$2.8 million was made to record the plan's funded status (i.e., net liability)
at the latest measurement date on our Consolidated Balance Sheet at September
11, 2004. The impact of this adjustment was not significant to the second
quarter and fiscal 2004 as well as to the prior periods to which it relates.
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 September 11, 2004, we only
expect to contribute approximately $0.6 million to our plans in 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 12 Weeks Ended
-------------------------------------------------
September 11, 2004 September 6, 2003
------------------- ------------------
U.S. Canada U.S. Canada
---- ------ ---- ------
Service cost $ 66 $ 57 $ 55 $ 86
Interest cost 268 151 298 232
Prior service cost (311) (121) (305) (9)
Amortization of (gain) loss (110) 81 (83) 68
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (87) $ 168 $ (35) $ 377
========== ========= ========= =========
For the 28 Weeks Ended
-----------------------------------------------------
September 11, 2004 September 6, 2003
---------------------- --------- ---------
U.S. Canada U.S. Canada
---------- --------- --------- ---------
Service cost $ 154 $ 129 $ 127 $ 200
Interest cost 659 348 695 543
Prior service cost (725) (277) (711) (20)
Amortization of (gain) loss (194) 186 (194) 159
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (106) $ 386 $ (83) $ 882
========== ========= ========= =========
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. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"), which is effective for public
companies the first interim or annual period beginning after June 15, 2004 (the
quarter ended September 11, 2004 for our Company).
We performed a measurement of the effects of the Act on our accumulated
postretirement benefit obligation ("APBO") as of April 20, 2004 for a closed
group of retirees. Our Company and our actuarial advisors determined that, based
on regulatory guidance currently available, benefits provided by the plan were
at least actuarially equivalent to Medicare Part D, and, accordingly, we expect
to be entitled to the Federal subsidy in all years after 2005.
We are adopting the provisions of the Act prospectively beginning in our second
quarter of fiscal 2004 and have incorporated the required disclosure provisions
into our consolidated financial statements. As a result of the Act, our APBO as
of the beginning of the second quarter decreased by $1.9 million. This change in
the APBO due to the Act is treated as an actuarial gain. In measuring the $1.9
million APBO impact of the Act, we projected that the future Federal subsidies
we would receive approximates 25% of our Company's projected prescription drug
costs under our plan.
The effect of applying FAS 106-2 had no cumulative effect on our Company's
retained earnings as of February 28, 2004. Accordingly, we reported net
postretirement benefits income of $72 for the 28 weeks ended September 11,
2004, representing the second quarter's portion of the annual reduction under
the Act. Had the effect of FAS 106-2 been applied retroactively to the beginning
of fiscal 2004, net postretirement benefits income for the first quarter ended
June 19, 2004 would have increased by $96.
9. 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 and net loss per
share would have been increased to the pro forma amounts indicated below:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
Sept. 6, 2003 Sept. 6, 2003
Sept. 11, 2004 (As Restated) Sept. 11, 2004 (As Restated)
-------------- ---------------- ----------------- ------------------
Net loss, as reported: $ (64,202) $ (83,687) $ (107,048) $ (71,742)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (858) (1,422) (2,145) (3,543)
--------------- ---------------- --------------- ---------------
Pro forma net loss $ (65,060) $ (85,109) $ (109,193) $ (75,285)
=============== ================ =============== ===============
Net loss per share - basic and diluted:
As reported $ (1.67) $ (2.17) $ (2.78) $ (1.86)
Pro forma $ (1.69) $ (2.21) $ (2.83) $ (1.95)
The pro forma effect on net loss and net loss 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:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
Sept. 11, Sept. 6, Sept. 11, Sept. 6,
2004 2003 2004 2003
--------------- ---------------- --------------- ---------------
Expected life 7 years 7 years 7 years 7 years
Volatility 53% 49% 53% 49%
Risk-free interest rate range 3.82%-4.37% 2.71%-4.01% 3.20%-4.41% 2.71%-4.01%
10. 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:
12 Weeks Ended 28 Weeks Ended
---------------------------------------- ---------------------------------------
September 11, September 6, September 11, September 6,
2004 2003 2004 2003
------------------ ------------------ ----------------- -----------------
Sales
United States $ 1,708,460 $ 1,727,485 $ 3,938,110 $ 3,975,158
Canada 782,099 737,273 1,832,748 1,718,123
------------------ ------------------ ----------------- -----------------
Total Company $ 2,490,559 $ 2,464,758 $ 5,770,858 $ 5,693,281
================== ================== ================= =================
Sales by category
Grocery (1) $ 1,625,208 $ 1,624,332 $ 3,780,163 $ 3,778,398
Meat (2) 530,987 503,316 1,204,478 1,148,226
Produce (3) 334,364 337,110 786,217 766,657
------------------ ------------------ ----------------- -----------------
Total Company $ 2,490,559 $ 2,464,758 $ 5,770,858 $ 5,693,281
================== ================== ================= =================
Depreciation and amortization
United States $ 47,852 $ 50,002 $ 110,364 $ 119,403
Canada 14,545 13,001 33,155 29,377
------------------ ------------------ ----------------- -----------------
Total Segments 62,397 63,003 143,519 148,780
Discontinued operations - - - 1,551
------------------ ------------------ ----------------- -----------------
Total Company $ 62,397 $ 63,003 $ 143,519 $ 150,331
================== ================== ================= =================
12 Weeks Ended 28 Weeks Ended
---------------------------------------- ---------------------------------------
September 11, September 6, September 11, September 6,
2004 2003 2004 2003
------------------ ------------------ ----------------- -----------------
Loss from operations
United States $ (28,085) $ (36,191) $ (50,780) $ (68,548)
Canada (16,423) 16,149 (2,348) 37,896
------------------- ------------------ ------------------ -----------------
Total Company $ (44,508) $ (20,042) $ (53,128) $ (30,652)
================== =================== ================== ==================
Loss from continuing
operations before income taxes
United States $ (48,088) $ (51,958) $ (94,983) $ (106,479)
Canada (18,072) 14,991 (7,182) 34,524
------------------- ------------------ ------------------ -----------------
Total Company $ (66,160) $ (36,967) $ (102,165) $ (71,955)
================== ================== ================= =================
Capital expenditures
United States $ 26,465 $ 7,249 $ 66,664 $ 46,314
Canada 15,486 11,666 30,778 29,550
------------------ ------------------ ----------------- -----------------
Total Company $ 41,951 $ 18,915 $ 97,442 $ 75,864
================== ================== ================= =================
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor, pharmacy and fuel.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
February 28, 2004
September 11, (As Restated
2004 See Note 3)
----------------- -----------------
Total assets
United States $ 1,946,659 $ 2,011,165
Canada 824,248 772,651
----------------- -----------------
Total Company $ 2,770,907 $ 2,783,816
================= =================
11. Commitments and Contingencies
On October 1, 2004, our Company announced that we had reached a settlement,
subject to court approval, of the previously disclosed Canadian class action
lawsuit, captioned 1176560 Ontario Limited, 1184883 Ontario Inc. and 1205427
Ontario Limited vs. The Great Atlantic & Pacific Company of Canada Limited;
Ontario Superior Court of Justice, Court File No. 02 CV-227777CP, which was
filed by certain franchisees of our Food Basics discount grocery operations in
Ontario, Canada. The settlement was approved by the Canadian court on October 4,
2004. Under the terms of the settlement, A&P Canada will pay approximately $32
million (pre-tax), representing payment for damages as well the repurchase of
the franchise shares. The transaction is scheduled to be completed during the
third quarter of this fiscal year and the estimated pre-tax loss is
approximately $24.7 million ($19.4 million after-tax). The estimated loss has
been included in SG&A for the 12 and 28 weeks ended September 11, 2004.
As previously disclosed, the dismissal by the United States District Court for
the District of New Jersey of the amended securities class action Complaint
filed against our Company and certain of our officers and directors in In re The
Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674
(D.N.J.) (FSH), was affirmed in July 2004 by the United States Court of Appeals
for the Third Circuit. The deadline by which plaintiffs could have filed with
the United States Supreme Court a petition seeking a writ of certiorari
challenging the Third Circuit's ruling expired in early October 2004 without
plaintiffs having made such a filing.
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
12 and 28 weeks ended September 11, 2004 and September 6, 2003.
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 12 weeks ended September 11, 2004 compared to the 12
weeks ended September 6, 2003 and results for the 28 weeks ended
September 11, 2004 compared to the 28 weeks ended September 6, 2003;
- The 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 12 and 28 weeks ended September 11, 2004 and
September 6, 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 630
directly managed stores and 65 franchised stores as of September 11, 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
these 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.
Although the Company remained unprofitable during the quarter, we view our
second quarter performance as consistent with the previous trend, with sales and
operating income in our U.S. and Canadian operations, excluding the costs of
settling the Canadian lawsuit (refer to Note 11 - Commitments and Contingencies
for further discussion of the settlement), improving slightly versus year ago,
while operating cash flow was essentially flat.
Our ongoing strategies have three focal points (i.) to turn around and rebuild
our U.S. business, (ii.) to maintain profitability and accelerate growth in
Canada, and (iii.) to preserve our financial liquidity through strict cost
control, appropriate capital spending and diligent cash management.
In the U.S., although overall comparable store sales were negative (-1.0%), we
achieved year over year progress in operating income due to our continued
emphasis on improvement of merchandising and operating fundamentals, expense
management and productivity measures, and the ongoing development of our
discount and fresh food marketing concepts for the future.
The profitability of our Canadian operations continued in the second quarter, as
we improved our year-over-year sales trend with positive comparable store sales
of +3.9% for Company owned stores, +2.4% for all stores. The improvement
reflects the continued development of A&P Canada's fresh food marketing
initiatives, which continue to differentiate our stores from conventional
competitors.
Our Food Basics operation also contributed to our positive sales trend by
further sharpening its low cost appeal within the competitive discount segment.
Our Canadian management is fine-tuning the Food Basics format to heighten its
low price, high value impact, and is executing the changes across the store
network.
A recent, significant development was the settlement in late September of a
class action by 29 Food Basics franchisees, which resulted in our plan to
purchase 23 franchised operating units (refer to Note 11 - Commitments and
Contingencies for further discussion of the settlement). The resolution of this
matter eliminates a major obstacle to the growth of Food Basics in Ontario and
enables us to continue developing our Canadian discount business with a larger
complement of corporate-owned stores, while also strengthening the ongoing
franchise operations.
Financially, we remain very focused on managing cash flow, capital spending and
debt levels effectively, to ensure we have sufficient cash availability. Despite
having budgeted increased capital expenditures through fiscal 2004, we continue
to manage spending closely in alignment with ongoing results and the competitive
environment. As a result, we have chosen to complete many of our capital
expenditure projects especially in the U.S., late in this fiscal year or next
year.
OUTLOOK
-------
In light of the continued lack of vibrancy in the U.S. economy, and the unknown
impact of the upcoming Presidential election and related events on the immediate
future, we remain conservative in our near-term outlook for both sales growth
and earnings improvement.
Going forward, we continue to pursue the long-term strategies and initiatives
that we believe will restore sustainable profitability in the U.S., and drive
additional growth in Canada, which are as follows:
o In the U.S., strengthen our mainstream operations with improved
fresh food marketing, an improved quality image and more efficient
operations; and sharpen the focus and efficiency of our expanded
Food Basics discount business in the U.S.;
o In Canada, sustain and grow our positive operating trends with
continued fresh box development in mainstream operations, and the
renewed and more aggressive discount impact of Food Basics, and
o Centrally, continue to maintain liquidity with focus on cash flow
generation, efficient support operations and strict cost 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, super-centers, 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. Our present pace of spending
indicates that our capital expenditures will be somewhat less than
our original estimates for the year, due to the timing of
carefully thought out expansion projects.
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 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 focuses on
continuing operations.
12 WEEKS ENDED SEPTEMBER 11, 2004 COMPARED TO THE 12 WEEKS ENDED
SEPTEMBER 6, 2003
----------------------------------------------------------------
OVERALL
-------
Sales for the second quarter of fiscal 2004 were $2.5 billion consistent with
the second quarter of fiscal 2003; comparable store sales, which includes stores
that have been in operation for two full fiscal years and replacement stores,
increased 0.1%. Net loss per share - basic and diluted for the second quarter of
fiscal 2004 was $1.67 compared to $2.17 for the second quarter of fiscal 2003.
12 Weeks 12 Weeks
Ended Ended Favorable/
Sept. 11, 2004 Sept. 6, 2003 (Unfavorable) % Change
------------------ ----------------- --------------- ------------------
Sales $ 2,490.6 $ 2,464.8 $ 25.8 1.0%
Increase in comparable
store sales for Company-operated
stores 0.1% 1.1% NA NA
Loss from continuing operations (64.5) (57.1) (7.4) (13.0%)
Income (loss) from discontinued
operations 0.3 (26.6) 26.9 101.1%
Net loss (64.2) (83.7) 19.5 23.3%
Net loss per share (1.67) (2.17) 0.50 23.0%
SALES
-----
Sales for the second quarter of fiscal 2004 of $2,490.6 million increased
$25.8 million or 1.0% from sales of $2,464.8 million for second quarter of
fiscal 2003. The higher sales were due to an increase in Canadian sales of $44.8
million partially offset by a decrease in U.S. sales of $19.0 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 second quarter of fiscal 2004 and the second quarter
of fiscal 2003:
12 Weeks Ended 12 Weeks Ended
Sept. 11, 2004 Sept. 6, 2003 (Decrease) Increase % Change
----------------- ------------------- ---------------------- ------------------
United States $ 1,708.5 $ 1,727.5 $ (19.0) (1.1%)
Canada 782.1 737.3 44.8 6.1
----------------- ----------------- -------------------- ------------------
Total $ 2,490.6 $ 2,464.8 $ 25.8 1.0%
================= ================= ==================== ==================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the second quarter of fiscal 2003 to the
second quarter of fiscal 2004:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- -----------
United States $ 65.2 $ (67.5) $ - $ (16.7) $ (19.0)
Canada 81.2 (74.3) 22.3 15.6 44.8
------------- -------------- ------------- ------------- -----------
Total $ 146.4 $ (141.8) $ 22.3 $ (1.1) $ 25.8
============= ============== ============= ============= ===========
The decrease in U.S. sales was primarily attributable to the closing of 27
stores since the beginning of the second quarter of fiscal 2003, of which 9 were
closed in fiscal 2004, decreasing sales by $67.5 million, and the decrease in
comparable store sales for the second quarter of fiscal 2004 of $16.7 million or
-1.0% as compared with the second quarter of fiscal 2003. This decrease was
partially offset by the opening or re-opening of 20 new stores since the
beginning of the second quarter of fiscal 2003, of which 15 were opened or
re-opened in fiscal 2004, increasing sales by $65.2 million. Included in the 27
stores closed since the beginning of the second quarter of fiscal 2003 were 6
stores closed as part of the asset disposition initiative as discussed in Note 7
of our Consolidated Financial Statements.
The increase in Canadian sales was primarily attributable to the opening or
re-opening of 13 stores since the beginning of the second quarter of fiscal
2003, of which 4 were opened or re-opened in fiscal 2004, increasing sales by
$81.2 million, the favorable effect of the Canadian exchange rate, which
increased sales by $22.3 million, and the increase in comparable store sales for
the second quarter of fiscal 2004 of $15.6 million or 2.4% for Company-operated
stores and franchised stores combined, as compared to the second quarter of
fiscal 2003. These increases were partially offset by the closure of 19 stores
since the beginning of the second quarter of fiscal 2003, of which 11 were
closed in fiscal 2004, decreasing sales by $74.3 million.
Average weekly sales per supermarket for the U.S. were approximately $325,500
for the second quarter of fiscal 2004 versus $277,800 for the corresponding
period of the prior year, an increase of 17.2% primarily due to the impact of
openings and closings with net higher average weekly sales. Average weekly sales
per supermarket for Canada were approximately $212,200 for the second quarter of
fiscal 2004 versus $193,400 for the corresponding period of the prior year, an
increase of 9.7%. 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 second quarter of fiscal 2004
as compared to the second quarter of fiscal 2003. Gross margin as a percentage
of sales decreased 11 basis points to 27.93% for the second quarter of fiscal
2004 from 28.04% for the second quarter of fiscal 2003. This 11 basis point
decrease was caused by the increase in Canadian sales as a percentage of our
total as Canada has a lower gross margin rate. We believe the impact on margin
for changes in costs and special reductions was not significant.
12 Weeks Ended 12 Weeks Ended
September 11, 2004 September 6, 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ ------------- ------------ --------------
United States $ 506.8 29.66% $ 508.8 29.46%
Canada 188.7 24.13 182.3 24.72
------------ ------------- ------------ --------------
Total $ 695.5 27.93% $ 691.1 28.04%
============ ============= ============= ===============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the second quarter of fiscal 2003
to the second quarter of fiscal 2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ (5.6) $ 3.6 $ - $ (2.0)
Canada 2.3 (4.3) 8.4 6.4
---------------- ---------------- -------------- -------------
Total $ (3.3) $ (0.7) $ 8.4 $ 4.4
================ ================ ============== =============
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
second quarter of fiscal 2004 compared with the second quarter of fiscal 2003.
SG&A expense was $740.0 million or 29.71% for the second quarter of fiscal 2004
as compared to $711.1 million or 28.85% for the second quarter of fiscal 2003.
12 Weeks Ended 12 Weeks Ended
Sept. 11, 2004 Sept. 6, 2003
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 534.9 31.31% $ 545.0 31.55%
Canada 205.1 26.23 166.1 22.53
-------------- --------------- -------------- -----------------
Total $ 740.0 29.71% $ 711.1 28.85%
============== =============== ============== ==============
The increase in total SG&A as a percentage of sales is driven by the costs of
settling the Canadian lawsuit of $24.7 million (refer to Note 11 - Commitments
and Contingencies for further discussion of the settlement) partially offset 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 24 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
due to less spend ($6.6 million), labor ($4.5 million), and corporate
administrative expenses due to increased information technology charges to
Canada ($3.6 million).
The increase in SG&A in Canada of $39.0 million is primarily due to the costs of
settling the Canadian lawsuit of $24.7 million, an increase in labor of $5.1
million due mainly to increased sales, an increase in occupancy of $2.8 million
as a result of the opening of new stores, increased group overhead mainly due to
information technology costs previously charged to the U.S. now charged to
Canada of $4.1 million and an increase in store conversion costs of $1.8
million.
Included in SG&A for the second quarter of fiscal 2003 were net gains of $5.2
million primarily relating to favorable lease terminations previously reserved
for as part of our asset disposition initiative as described in Note 7 of our
Consolidated Financial Statements.
During the second quarter of fiscal 2004, we recorded an impairment loss of $0.9
million related to certain idle property that, based upon new information
received about such assets, including an appraisal and an offer, was impaired
and written down to its net realizable value. This amount was included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations. There were no such amounts recorded during the second quarter of
fiscal 2003.
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 second quarter of fiscal 2004 and 2003, we recorded impairment
losses on property, plant and equipment of $0.8 million and $0.5 million,
respectively, related to United States stores that were or will be closed in the
normal course of business. These amounts are included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations. The effects of changes in estimates of useful lives were not
material to ongoing depreciation expense. 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.
INTEREST EXPENSE
----------------
Interest expense of $22.1 million for the second quarter of fiscal 2004
increased from the prior year amount of $17.9 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 $3.9 million. This impact was partially offset by
lower interest from lower borrowings of approximately $0.4 million.
INCOME TAXES
------------
The benefit from income taxes from continuing operations for the second quarter
of fiscal 2004 was $1.6 million (a $1.0 million provision for our U.S.
operations and a $2.6 million benefit from our Canadian operations) compared to
a $20.1 million provision for income taxes from continuing operations for the
second quarter of fiscal 2003 (a $14.1 million provision for our U.S. operations
and a $6.0 million provision for our Canadian operations). Our U.S. tax
provision for continuing operations for the second quarter of fiscal 2003 was
offset by a tax benefit provided on discontinued operations of $12.7 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 in an amount that would reduce our U.S. deferred tax asset to the
amount that is more likely than not to be realized.
For the second quarter of fiscal 2004, our effective income tax rate of 2.4%
changed from the effective income tax rate of 54.5% in the second quarter of
fiscal 2003 as follows:
12 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax (Provision) Effective
Benefit Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,035) 1.6% $ (14,117) 38.2%
Canada 2,649 (4.0%) (6,008) 16.3%
--------------- ---------------- -------------- ----------------
$ 1,614 (2.4%) $ (20,125) 54.5%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
provision recognized from continuing operations. As discussed above,
$12.7 million of provision was recognized in the second quarter of fiscal 2003
as compared to the second quarter of fiscal 2004, where no provision was
recognized. The remaining provisions recorded in the U.S. of $1.0 million and
$1.4 million for the second quarters of fiscal 2004 and 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations in
the second quarter of fiscal 2004 as compared to the second 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 income from operations of discontinued businesses, net of tax, for the
second quarter of fiscal 2004 was $0.3 million as compared to a loss from
operations of discontinued businesses, net of tax, of $19.7 million for the
second quarter of fiscal 2003 and is detailed by business as follows:
12 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 699 (352) (3) 344
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 699 (352) (3) 344
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 699 $ (352) $ (3) $ 344
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Non-accruable closing costs $ 702 $ (192) $ (3) $ 507
Interest accretion on present value of
future occupancy costs (3) (160) - (163)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 699 $ (352) $ (3) $ 344
--------------- ---------------- --------------- -------------
12 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ - $ 38,494 $ 18,901 $ 57,395
Operating expenses (474) (79,500) (13,007) (92,981)
------------- ---------------- --------------- --------------
(Loss) income from operations of
discontinued businesses, before
tax (474) (41,006) 5,894 (35,586)
Tax benefit (provision) 212 18,324 (2,634) 15,902
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (262) $ (22,682) $ 3,260 $ (19,684)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Pension withdrawal liability $ - $ (2,500) $ - $ (2,500)
Occupancy related costs - (25,077) - (25,077)
Severance and benefits - (7,138) - (7,138)
Non-accruable inventory costs - (692) - (692)
Non-accruable closing costs (474) 451 (320) (343)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (474) $ (34,956) $ (320) $ (35,750)
--------------- ---------------- --------------- ----------------
The loss on disposal of discontinued operations, net of tax, was nil for the
second quarter of fiscal 2004 as compared to $6.9 million for the second quarter
of fiscal 2003 and is detailed by business as follows:
12 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Loss on disposal of
discontinued businesses
Gain on sale of fixed assets $ - $ - $ - $ -
Fixed asset impairments - (3,751) - (3,751)
Loss on disposal of
--------------- ---------------- --------------- ----------------
discontinued businesses, before
tax - (3,751) - (3,751)
Tax provision - (3,160) - (3,160)
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (6,911) $ - $ (6,911)
=============== ================ =============== ================
28 WEEKS ENDED SEPTEMBER 11, 2004 COMPARED TO THE 28 WEEKS ENDED
SEPTEMBER 6, 2003
----------------------------------------------------------------
OVERALL
-------
Sales for the 28 weeks ended September 11, 2004 were $5.8 billion, compared with
$5.7 billion for the 28 weeks ended September 6, 2003; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, increased 0.6%. Net loss per share - basic and diluted for
the 28 weeks ended September 11, 2004 was $2.78 compared to $1.86 for the 28
weeks ended September 6, 2003.
28 Weeks 28 Weeks
Ended Ended Favorable /
Sept. 11, 2004 Sept. 6, 2003 (Unfavorable) % Change
---------------- --------------- -------------- ------------------
Sales $ 5,770.8 $ 5,693.3 $ 77.5 1.4%
Increase in comparable store
sales for Company- operated
stores 0.6% 0.4% NA NA
Loss from continuing operations (106.0) (77.7) (28.3) (36.4%)
(Loss) income from discontinued operations (1.0) 14.0 (15.0) (107.1%)
Cumulative effect of a change in
accounting principle - FIN 46-R - (8.0) 8.0 100%
Net loss (107.0) (71.7) (35.3) (49.2%)
Net loss per share (2.78) (1.86) (0.92) (49.5%)
Included in our results for the 28 weeks ended September 11, 2004 was a $1.1
million charge ($0.03 per share) relating to our Farmer Jack restructuring
program as described in Note 7 of our Consolidated Financial Statements.
SALES
-----
Sales for the 28 weeks ended September 11, 2004 of $5,770.8 million
increased $77.5 million or 1.4% from sales of $5,693.3 million for 28 weeks
ended September 6, 2003. The higher sales were due to an increase in Canadian
sales of $114.6 million partially offset by a decrease in U.S. sales of $37.1
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 28 weeks ended September 11, 2004 and the
28 weeks ended September 6, 2003:
28 Weeks Ended 28 Weeks Ended
Sept. 11, 2004 Sept. 6, 2003 (Decrease) Increase % Change
----------------- ---------------- ---------------------- ------------------
United States $ 3,938.1 $ 3,975.2 $ (37.1) (0.9%)
Canada 1,832.7 1,718.1 114.6 6.7
----------------- ----------------- -------------------- ------------------
Total $ 5,770.8 $ 5,693.3 $ 77.5 1.4%
================= ================= ==================== ==================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the 28 weeks ended September 6, 2003 to the
28 weeks ended September 11, 2004:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- -----------
United States $ 130.3 $ (160.9) $ - $ (6.5) $ (37.1)
Canada 195.3 (158.1) 59.8 17.6 114.6
------------- -------------- ------------- ------------- ----------------
Total $ 325.6 $ (319.0) $ 59.8 $ 11.1 $ 77.5
============= ============== ============= ============= ================
The decrease in U.S. sales was primarily attributable to the closing of 32
stores since the beginning of fiscal 2003, of which 9 were closed in fiscal
2004, decreasing sales by $160.9 million, and the decrease in comparable store
sales for the 28 weeks ended September 11, 2004 of $6.5 million or 0.2% as
compared with the 28 weeks ended September 6, 2003. These decreases were
partially offset by the opening or re-opening of 25 new stores since the
beginning of fiscal 2003, of which 15 were opened or re-opened in fiscal 2004,
increasing sales by $130.3 million. Included in the 32 stores closed since the
beginning of fiscal 2003 were 6 stores closed as part of the asset disposition
initiative as discussed in Note 7 of our Consolidated Financial Statements.
The increase in Canadian sales was primarily attributable to the opening or
re-opening of 16 stores since the beginning of fiscal 2003, of which 4 were
opened or re-opened in fiscal 2004, increasing sales by $195.3 million, the
favorable effect of the Canadian exchange rate, which increased sales by $59.8
million, and the increase in comparable store sales for the 28 weeks ended
September 11, 2004 of $17.6 million or 1.2% for Company-operated stores and
franchised stores combined, as compared to the 28 weeks ended September 6, 2003.
These increases were partially offset by the closure of 22 stores since the
beginning of 2003, of which 11 were closed in fiscal 2004, decreasing sales by
$158.1 million.
Average weekly sales per supermarket for the U.S. were approximately $323,400
for the 28 weeks ended September 11, 2004 versus $298,700 for the corresponding
period of the prior year, an increase of 8.3% primarily due to the impact of
openings and closings with net higher average weekly sales. Average weekly sales
per supermarket for Canada were approximately $210,000 for the 28 weeks ended
September 11, 2004 versus $191,700 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 28 weeks ended September 11,
2004 as compared to the 28 weeks ended September 6, 2003. Gross margin as a
percentage of sales decreased 36 basis points to 27.99% for the 28 weeks ended
September 11, 2004 from 28.35% for the second quarter of fiscal 2003. This 36
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 26 basis points). We
believe the impact on margin for changes in costs and special reductions was not
significant.
28 Weeks Ended 28 Weeks Ended
September 11, 2004 September 6, 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ -----------------
United States $ 1,173.4 29.8% $ 1,194.6 30.05%
Canada 442.1 24.12 419.6 24.42
------------ --------------- -------------- -----------------
Total $ 1,615.5 27.99% $ 1,614.2 28.35%
============ =============== ============== ==================
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the 28 weeks ended September 6,
2003 to the 28 weeks ended September 11, 2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ (11.1) $ (10.1) $ - $ (21.2)
Canada 4.0 (3.5) 22.0 22.5
---------------- ---------------- -------------- -------------
Total $ (7.1) $ (13.6) $ 22.0 $ 1.3
================ ================ ============== =============
Included in the U.S. gross margin for the 28 weeks ended September 11,
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 28 weeks ended September 6, 2003.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
---------------------------------------------------
The following table presents store operating, general and administrative by
operating segment, in dollars and as a percentage of sales for the 28 weeks
ended September 11, 2004 compared with the 28 weeks ended September 6, 2003.
SG&A expense was $1,668.6 million or 28.91% for the 28 weeks ended September 11,
2004 as compared to $1,644.9 million or 28.89% for the 28 weeks ended September
6, 2003.
28 Weeks Ended 28 Weeks Ended
Sept. 11, 2004 Sept. 6, 2003
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 1,224.1 31.08% $ 1,263.2 31.78%
Canada 444.5 24.25 381.7 22.22
-------------- --------------- -------------- -----------------
Total $ 1,668.6 28.91% $ 1,644.9 28.89%
============== =============== ============== ==============
The increase in total SG&A as a percentage of sales is driven by the costs of
settling the Canadian lawsuit of $24.7 million (refer to Note 11 - Commitments
and Contingencies for further discussion of the settlement) partially offset 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 70 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
due to less spend ($16.5 million), utilities ($1.1 million), labor ($9.3
million), corporate administrative expenses due to increased information
technology charges to Canada ($6.9 million), and severance ($1.7 million).
The increase in SG&A in Canada of $62.8 million is primarily due to the costs of
settling the Canadian lawsuit of $24.7 million, an increase in labor of $13.7
million due mainly to increased sales, an increase in occupancy of $7.8 million
as a result of the opening of new stores, increased group overhead of $9.1
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 $2.2
million.
Included in SG&A for the 28 weeks ended September 11, 2004 was a $0.8 million
charge relating to our Farmer Jack restructuring program in the United States as
described in Note 7 of our Consolidated Financial Statements. Included in SG&A
for the 28 weeks ended September 6, 2003 were net gains of $5.2 million
primarily relating to favorable lease terminations previously reserved for as
part of our asset disposition initiative.
During the 28 weeks ended September 11, 2004, we recorded an impairment loss of
$0.9 million related to certain idle property that, based upon new information
received about such assets, including an appraisal and an offer, was impaired
and written down to its net realizable value. This amount was included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations. There were no such amounts recorded during the 28 weeks ended
September 6, 2003.
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 28 weeks ended September 11, 2004 and September 6, 2003, we
recorded impairment losses on property, plant and equipment of $0.8 million and
$0.5 million, respectively, related to United States stores that were or will be
closed in the normal course of business. These amounts are included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations. The effects of changes in estimates of useful lives were not
material to ongoing depreciation expense. 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.
INTEREST EXPENSE
----------------
Interest expense of $48.9 million for the 28 weeks ended September 11,
2004 increased from the prior year amount of $42.8 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 $9.1 million. This impact was
partially offset by lower interest from lower borrowings of approximately $2.0
million.
INCOME TAXES
------------
The provision for income taxes from continuing operations for the 28 weeks ended
September 11, 2004 was $3.8 million (a $2.4 million provision for our U.S.
operations and a $1.4 million provision for our Canadian operations) compared to
a $5.8 million provision for income taxes from continuing operations for the 28
weeks ended September 6, 2003 (a $7.9 million benefit from our U.S. operations
and a $13.7 million provision for our Canadian operations). Our U.S. tax benefit
from continuing operations for the 28 weeks ended September 6, 2003 was offset
by a tax provision provided on discontinued operations of $10.2 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 in an amount that would reduce our U.S deferred tax asset to the
amount that is more likely not to be realized.
For the 28 weeks ended September 11, 2004, our effective income tax rate of 3.8%
changed from the effective income tax rate of 8.0% for the 28 weeks ended
September 6, 2003 as follows:
28 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax Benefit Effective
Benefit Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (2,415) 2.4% $ 7,907 (11.0%)
Canada (1,429) 1.4% (13,674) 19.0%
--------------- ---------------- --------------- ----------------
$ (3,844) 3.8% $ (5,767) 8.0%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $10.2 million
of benefit was recognized for the 28 weeks ended September 6, 2003 as compared
to the 28 weeks ended September 11, 2004, where no benefit was recognized. The
remaining provisions recorded in the U.S. of $2.4 million and $2.3 million for
the 28 weeks ended September 11, 2004 and September 6, 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations for
the 28 weeks ended September 11, 2004 as compared to the 28 weeks ended
September 6, 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 28
weeks ended September 11, 2004 was $1.0 million as compared to a loss from
operations of discontinued businesses, net of tax, of $30.0 million for the 28
weeks ended September 6, 2003 and is detailed by business as follows:
28 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 328 (774) (593) (1,039)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 328 (774) (593) (1,039)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 328 $ (774) $ (593) $ (1,039)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Severance and benefits $ (326) $ - $ - $ (326)
Non-accruable closing costs 660 (390) (593) (323)
Interest accretion on present value
of future occupancy costs (6) (384) - (390)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 328 $ (774) $ (593) $ (1,039)
--------------- ---------------- --------------- -------------
28 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 44,073 $ 200,028
Operating expenses (43,464) (175,865) (32,357) (251,686)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (10,738) (52,636) 11,716 (51,658)
Tax benefit (provision) 3,912 22,517 (4,733) 21,696
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (6,826) $ (30,119) $ 6,983 $ (29,962)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
-----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (25,387) - (29,380)
Non-accruable inventory costs - (1,989) - (1,989)
Non-accruable closing costs (3,114) (1,837) (1,443) (6,394)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,635) (8,415) - (11,050)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (8,097) $ (44,128) $ (1,443) $ (53,668)
--------------- ---------------- --------------- --------------
The gain on disposal of discontinued operations, net of tax, was nil for the 28
weeks ended September 11, 2004 as compared to $44.0 million for the 28 weeks
ended September 6, 2003 and is detailed by business as follows:
28 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain (loss) from disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 8,827 $ - $ 94,810
Fixed asset impairments - (18,968) - (18,968)
Gain (loss) on disposal of
------------- ------------- ------------- -------------
discontinued businesses, before
tax 85,983 (10,141) - 75,842
Tax provision (30,997) (856) - (31,853)
------------- ---------------- ------------- -------------
Gain (loss) disposal of discontinued
businesses, net of tax $ 54,986 $ (10,997) $ - $ 43,989
============= ================ ============= =============
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 12 and 28 weeks ended September 11, 2004 and
September 6, 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".
12 Weeks Ended September 11, 2004 12 Weeks Ended September 6, 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 $ 446 $ 568 $ 158 $ 1,172 $ 592 $ 714 $ - $ 1,306
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- --------
balance sheets 446 568 158 1,172 592 714 - 1,306
-------- ----------- ----------- --------- ----------- ----------- ----------- --------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- --------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ----------- ----------- ----------- --------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - - - - 422 - 422
Inventory markdowns - - - - - - - -
Closing costs - - 9 9 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- --------
Total non-accruable
items - - 9 9 - 422 - 422
-------- ---------- ----------- --------- ----------- ----------- ----------- --------
Less PV interest (446) (568) (158) (1,172) (592) (714) - (1,306)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 9 $ 9 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= =========== =========== =========== =========
28 Weeks Ended September 11, 2004 28 Weeks Ended September 6, 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 $ 1,076 $ 1,349 $ 380 $ 2,805 $ 1,420 $ 1,700 $ - $ 3,120
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 1,076 1,349 380 2,805 1,420 1,700 - 3,120
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - 90 90 - 422 - 422
Inventory markdowns - - 291 291 - - - -
Closing costs - - 689 689 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - - 1,070 1,070 - 422 - 422
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (1,076) (1,349) (380) (2,805) (1,420) (1,700) - (3,120)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 1,070 $ 1,070 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= =========== =========== =========== =========
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 September 11, 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) 1,063 13 1,076 - - - 1,063 13 1,076
Utilization (2) (3,285) (85) (3,370) (433) - (433) (3,718) (85) (3,803)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
Sept. 11, 2004 $ 29,250 $ 380 $ 29,630 $ 1,724 $ - $ 1,724 $ 30,974 $ 380 $ 31,354
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.1
million during the 28 weeks ended September 11, 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 $3.4 million during
the 28 weeks ended September 11, 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 $0.4 million during the 28 weeks ended September 11,
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 $96.1 million of the total occupancy charges from the time of the
original charges through September 11, 2004 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.8 million of the total net severance charges from
the time of the original charges through September 11, 2004, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $29.6 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 $1.7 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out by 2020.
None of these stores were open during either of the first or second 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 September 11, 2004 and February 28, 2004, approximately $5.6 million and $6.5
million, respectively, 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 September 11, 2004 of $31.4 million for this phase of the asset disposition
initiative and have concluded that they are appropriate 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 September 11, 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) 1,349 - 1,349 - - - 1,349 - 1,349
Utilization (2) (3,030) 13 (3,017) (69) (58) (127) (3,099) (45) (3,144)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
Sept. 11, 2004 $ 37,903 $ 388 $ 38,291 $ 2,242 $ - $ 2,242 $ 40,145 $ 388 $ 40,533
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.3
million during the 28 weeks ended September 11, 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 expensed as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $3.0 million
during the 28 weeks ended September 11, 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 28 weeks ended
September 11, 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 $36.2 million ($33.5 million in the U.S. and $2.7 million in Canada) of
the total occupancy charges from the time of the original charges through
September 11, 2004 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$26.0 million ($17.0 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
September 11, 2004, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $38.3 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $2.2 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At September 11, 2004 and February 28, 2004 approximately $12.4 million and
$12.0 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 12 and 28 weeks
ended September 11, 2004 and September 6, 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:
c
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
-------------- ------------- -------------- -------------
Sales $ - $ - $ - $ 316
============= ============= ============= =============
Operating loss $ - $ - $ - $ (72)
============= ============= ============= ==============
Based upon current available information, we evaluated the reserve balances as
of September 11, 2004 of $40.5 million for this phase of the asset disposition
initiative and have concluded that they are appropriate 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), excluding PV interest, we recorded costs in the 12 and 28 weeks ended
September 11, 2004 of nil and $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"), respectively, as follows:
12 Weeks Ended 28 Weeks Ended
September 11, 2004 September 11, 2004
------------------ ------------------
Occupancy related $ - $ -
Severance and benefits - -
Property writedowns - 90
Inventory markdowns - 291
Nonaccruable closing costs 9 689
-------------- --------------
Total charges $ 9 $ 1,070
============== ==============
As of September 11, 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 writedowns 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) 380 - 380
Utilization (2) (3,530) (4,235) (7,765)
------------ ------------- ----------
Balance at
Sept. 11, 2004 $ 16,812 $ 584 $ 17,396
============ ============= ==========
(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 28
weeks ended September 11, 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 $3.5 million during fiscal
2003 and the 28 weeks ended September 11, 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
28 weeks ended September 11, 2004, respectively, represent payments
made to terminated employees during the period.
We paid $4.6 million of the total occupancy charges from the time of the
original charge through September 11, 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 September 11, 2004, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $16.8 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 $0.6 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 12 and 28 weeks
ended September 11, 2004 and September 6, 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:
12 Weeks Ended 28 Weeks Ended
------------------------------- -------------------------------
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
-------------- ------------- -------------- -------------
Sales $ - $ 12,390 $ 2,433 $ 29,356
============= ============= ============= =============
Operating loss $ - $ (2,270) $ (43) $ (4,749)
============= ============= ============== ==============
At September 11, 2004 and February 28, 2004, approximately $2.3 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 $17.4 million as of September 11,
2004 based upon current available information and have concluded that it is
appropriate. 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:
Sept. 11, 2004 Sept. 6, 2003
----------------- -----------------
Net cash provided by operating activities $ 51,939 $ 20,312
----------------- -----------------
Net cash (used in) provided by investing activities $ (87,315) $ 66,200
----------------- -----------------
Net cash provided by (used in) financing activities $ 10,918 $ (112,303)
----------------- -----------------
Net cash flow provided by operating activities of $51.9 million for the 28 weeks
ended September 11, 2004 primarily reflected our net loss of $107.0 million,
adjusted for a non-cash charge of $143.5 million for depreciation and
amortization, a decrease in accounts receivable of $31.4 million, an increase in
accounts payable of $47.9 million, and a increase in other accruals of $7.2
million partially offset by an increase in inventories of $28.8 million, an
increase in prepaid assets and other current assets of $23.6 million, an
increase in other assets of $11.9 million and a decrease in non-current
liabilities of $6.5 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 $20.3 million for the
28 weeks ended September 6, 2003 primarily reflected our net loss of $71.7
million adjusted for non-cash charges of $150.3 million for depreciation and
amortization and $8.0 million for the cumulative effect of a change in
accounting principle - FIN 46-R, and the decrease in inventories of $15.3
million, partially offset by the gain on sale of discontinued operations of
$75.8 million.
Net cash flow used in investing activities of $87.3 million for the 28 weeks
ended September 11, 2004 primarily reflected property expenditures totaling
$97.4 million, which included 9 new supermarkets and 11 major remodels partially
offset by cash received from the sale of our assets of $10.1 million. For the
remainder of fiscal 2004, we have planned capital expenditures of approximately
$150 to $175 million, which relate primarily to opening approximately 1 to 3 new
supermarkets, converting approximately 2 to 5 stores to new banners, and
enlarging or remodeling approximately 60 supermarkets. However, year-to-date we
are spending at a rate below our plan and we may choose not to complete all
projects in this fiscal year. We currently expect to close approximately 5 - 10
stores during the remainder of fiscal 2004. Net cash flow provided by investing
activities of $66.2 million for the 28 weeks ended September 6, 2003 primarily
reflected $142.1 million in proceeds from property disposals (most of which
related to discontinued operations), partially offset by $75.9 million used for
property expenditures, which included 11 new supermarkets and 2 major remodels
or enlargements.
Net cash flow provided by financing activities of $10.9 million for the 28 weeks
ended September 11, 2004 primarily reflected an increase in book overdrafts of
$11.0 million and proceeds from long term borrowings of $7.4 million partially
offset by principal payments on capital leases of $6.5 million and a decrease in
deferred financing fees of $1.0 million. Net cash flow used in financing
activities of $112.3 million for the 28 weeks ended September 6, 2003 primarily
reflected $135.0 million in payments on our revolving lines of credit and
principal payments on capital leases of $7.2 million partially offset by
proceeds from long term borrowings of $16.0 million and an increase in book
overdrafts of $15.4 million.
In the short term, 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 needs. 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 the Food Basics banner. We anticipate
that we will incur net 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 and financing and operating actions, which we believe we can
pursue but which are uncertain at this time, could 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 and cash flow 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 and cash flow do not improve in line with our plans, or if they
otherwise provide sufficient resorces to operate effectively, 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 appropriate
resources. However, there is no assurance that we will pursue such contingency
actions or that they will be successful in generating the resources necessary to
operate the business.
WORKING CAPITAL
---------------
We had working capital of $52.2 million at September 11, 2004 compared to
working capital of $113.5 million at February 28, 2004. We had cash and cash
equivalents aggregating $276.8 million at September 11, 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;
o An increase in accounts payable (inclusive of book overdrafts) due to timing
and seasonality; and
o An increase in other accruals mainly due to timing.
Partially offset by the following:
o An increase in inventories mainly due to seasonality and the favorable impact
of the Canadian exchange rate; and
o An increase in prepaid expenses and other current assets mainly due to the
amortization of prepaid rent.
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 September 11, 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 September 11, 2004 totaled $232.9 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$90.4 million at September 11, 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 September 11, 2004, there were no borrowings under these credit
agreements. As of September 11, 2004, after reducing availability for
outstanding letters of credit and borrowing base requirements, we had $232.9
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 September 11, 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 September 11, 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 Caa1 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 September 11, 2004. Our liquidity rating was
SGL3 with Moody's as of September 11, 2004. Our recovery rating was 1 with S&P
as of September 11, 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 primarily 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.
Such review may also be based upon appraisals of or offers for our long-lived
assets we receive in the normal course of business. During both the 12 and 28
weeks ended September 11, 2004, we recorded an impairment loss of $0.9 million
related to certain idle property that, based upon new information received about
such assets, including an appraisal and an offer, was impaired and written down
to its net realizable value. This amount was included in "Store operating,
general and administrative expense" in our Consolidated Statements of Operations
during the 12 and 28 weeks ended September 11, 2004.
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 both the 12 and 28 weeks ended September 11, 2004, we recorded
impairment losses on property, plant and equipment of $0.8 million related to
United States stores that were or will be closed in the normal course of
business and are included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations. The effects of changes in
estimates of useful lives were not material to ongoing depreciation expense.
If current operating levels and trends continue, there may be additional 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 September
11, 2004, we had liabilities for future minimum lease payments of $124 million,
which related to 70 closed stores and 49 subleased or assigned stores. Of this
amount, $22 million relates to stores closed in the normal course of business,
$84 million relates to stores closed as part of the asset disposition initiative
(see Note 7 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 6 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
-----------
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 September 11, 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 12 and 28 weeks ended September 11, 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 12 and 28 weeks ended September 11, 2004, a
change in the Canadian currency of 10% would have resulted in a fluctuation in
net income of $1.5 million and $0.9 million, respectively. 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
On October 1, 2004, our Company announced that we had reached a settlement,
subject to court approval, of the previously disclosed Canadian class action
lawsuit, captioned 1176560 Ontario Limited, 1184883 Ontario Inc. and 1205427
Ontario Limited vs. The Great Atlantic & Pacific Company of Canada Limited;
Ontario Superior Court of Justice, Court File No. 02 CV-227777CP, which was
filed by certain franchisees of our Food Basics discount grocery operations in
Ontario, Canada. The settlement was approved by the Canadian court on October 4,
2004. Under the terms of the settlement, A&P Canada will pay approximately $32
million (pre-tax), representing payment for damages as well the repurchase of
the franchise shares. The transaction is scheduled to be completed during the
third quarter of this fiscal year and the estimated pre-tax loss is
approximately $24.7 million ($19.4 million after-tax). The estimated loss has
been included in SG&A for the 12 and 28 weeks ended September 11, 2004.
As previously disclosed, the dismissal by the United States District Court for
the District of New Jersey of the amended securities class action Complaint
filed against our Company and certain of our officers and directors in In re The
Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674
(D.N.J.) (FSH), was affirmed in July 2004 by the United States Court of Appeals
for the Third Circuit. The deadline by which plaintiffs could have filed with
the United States Supreme Court a petition seeking a writ of certiorari
challenging the Third Circuit's ruling expired in early October 2004 without
plaintiffs having made such a filing.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
At our annual meeting of shareholders, held July 13, 2004, there were 35,855,456
shares or 93.0% of the 38,520,530 shares outstanding and entitled to vote
represented either in person or by proxy.
The nine (9) directors nominated to serve on the Board of for a one-year term
were all elected, with each receiving an affirmative vote of at least 77.6% of
the shares present.
Eighty-one percent (81%) of the total shares cast voted for the approval of the
Company's 2004 Non-Employee Director Compensation Plan.
The Stockholder Proposal for a Stockholder Vote on Annual Meeting Locations was
voted against by 80.3% of the total shares cast.
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 (incorporated
herein by reference to Exhibit 10.15 to Form
10-Q filed on July 29, 2004)
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 (incorporated herein
by reference to Exhibit 18 to Form 10-Q filed on
July 29, 2004)
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 July 23, 2004, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the July 23, 2004 press release, which announced the
Company's financial results for the quarter ended June 19, 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: October 19, 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 officer 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 officer 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: October 19, 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 officer 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 officer 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: October 19, 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 September 11, 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: October 19, 2004 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board,
President and
Chief Executive Officer
Dated: October 19, 2004 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer