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 10, 2005
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 11, 2005 THE REGISTRANT HAD A TOTAL OF 40,838,237 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. 11, 2004 Sept. 11, 2004
(RESTATED (RESTATED
Sept. 10, 2005 SEE NOTE 2) Sept. 10, 2005 SEE NOTE 2)
------------------ ------------------ ------------------ -----------------
Sales $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858
Cost of merchandise sold (1,551,585) (1,795,046) (3,997,260) (4,155,349)
------------ ------------ ------------ ------------
Gross margin 616,664 695,513 1,554,622 1,615,509
Store operating, general and administrative
expense (761,730) (734,365) (1,737,828) (1,655,439)
------------ ------------ ------------ ------------
Loss from operations (145,066) (38,852) (183,206) (39,930)
Gain on sale of Canadian operations 919,140 - 918,551 -
Interest expense (25,262) (27,734) (61,385) (62,126)
Interest income 3,157 768 4,343 1,609
Minority interest in earnings of consolidated
franchisees 405 (342) (1,131) (1,718)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 752,374 (66,160) 677,172 (102,165)
(Provision for) benefit from income taxes (160,103) 1,614 (173,968) (3,844)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 592,271 (64,546) 503,204 (106,009)
Discontinued operations (Note 10):
(Loss) income from operations of discontinued
businesses, net of tax provision of $0 for
both the 12 weeks ended 9/10/05 and
9/11/04 and both the 28 weeks ended
9/10/05 and 9/11/04, respectively (296) 344 (464) (1,039)
------------ ------------ ------------ ------------
(Loss) income from discontinued operations (296) 344 (464) (1,039)
------------ ------------ ------------ ------------
Net income (loss) $ 591,975 $ (64,202) $ 502,740 $ (107,048)
============ ============ ============ ============
Net income (loss) per share - basic:
Continuing operations $ 14.65 $ (1.68) $ 12.65 $ (2.75)
Discontinued operations (0.01) 0.01 (0.01) (0.03)
------------ ------------ ------------ ------------
Net income (loss) per share - basic $ 14.64 $ (1.67) $ 12.64 $ (2.78)
============ ============ ============ ============
Net income (loss) per share - diluted:
Continuing operations $ 14.41 $ (1.68) $ 12.48 $ (2.75)
Discontinued operations (0.01) 0.01 (0.01) (0.03)
------------ ------------ ------------ ------------
Net income (loss) per share - diluted $ 14.40 $ (1.67) $ 12.47 $ (2.78)
============ ============ ============ ============
Weighted average number of common shares
outstanding 40,434,194 38,521,685 39,758,780 38,520,732
Common stock equivalents 672,959 281,061 566,309 325,304
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding 41,107,153 38,802,746 40,325,089 38,846,036
============ ============ ============ ============
See Notes to Quarterly Report
2
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
(Unaudited)
Accumulated
Common Stock Additional Accumulated Other Total
----------------------------- Paid-in (Deficit) Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 WEEK PERIOD ENDED
SEPTEMBER 10, 2005
Balance at beginning of period 38,764,999 $ 38,765 $ 464,543 $ (266,198) $ (3,308) $ 233,802
Net income 502,740 502,740
Other comprehensive income 2,948 2,948
Stock options exercised 2,024,672 2,025 19,201 21,226
Other share based awards 5,303 5 4,922 4,927
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of period 40,794,974 $ 40,795 $ 488,666 $ 236,542 $ (360) $ 765,643
=========== =========== =========== =========== =========== ===========
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
=========== =========== =========== =========== =========== ===========
COMPREHENSIVE LOSS
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 10, 2005 Sept. 11, 2004 Sept. 10, 2005 Sept. 11, 2004
------------------ ------------------ ------------------ -----------------
Net income (loss) $ 591,975 $ (64,202) $ 502,740 $ (107,048)
------------ ----------- ----------- -----------
Foreign currency translation adjustment 6,883 18,970 2,920 12,197
Net unrealized (loss) gain on derivatives,
net of tax - (381) (57) 454
Net unrealized gain on marketable securities,
net of tax 85 - 85 -
------------ ------------ ----------- -----------
Other comprehensive income 6,968 18,589 2,948 12,651
------------ ------------ ----------- -----------
Total comprehensive income (loss) $ 598,943 $ (45,613) $ 505,688 $ (94,397)
============ =========== =========== ===========
ACCUMULATED OTHER COMPREHENSIVE LOSS BALANCES
Net Unrealized Accumulated
Foreign Gain on Net Unrealized Minimum Other
Currency Marketable Gain (Loss) Pension Comprehensive
Translation Securities on Derivatives Liability (Loss) Income
--------------- ---------------- --------------- ---------------- ---------------
Balance at February 26, 2005 $ 3,035 $ - $ 57 $ (6,400) $ (3,308)
Current period change 2,920 85 (57) - 2,948
--------------- ----------- ----------- ----------- -----------
Balance at September 10, 2005 $ 5,955 $ 85 $ - $ (6,400) $ (360)
=============== =========== ========== ============ ===========
Balance at February 28, 2004 $ (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)
=============== =========== ========== ============ ============
See Notes to Quarterly Report
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
(Unaudited)
September 10,
2005 February 26, 2005
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 363,365 $ 257,748
Marketable securities 276,130 -
Accounts receivable, net of allowance for doubtful accounts
of $4,798 and $5,713 at September 10, 2005 and
February 26, 2005, respectively 138,653 145,507
Inventories 488,480 720,799
Prepaid expenses and other current assets 80,921 40,627
------------- --------------
Total current assets 1,347,549 1,164,681
------------- --------------
Non-current assets:
Property:
Property owned 924,613 1,476,574
Property leased under capital leases 24,962 39,126
------------- --------------
Property - net 949,575 1,515,700
Equity investment in Metro, Inc. 327,026 -
Other assets 46,874 121,587
------------- --------------
Total assets $ 2,671,024 $ 2,801,968
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 567 $ 2,278
Current portion of obligations under capital leases 2,634 8,331
Accounts payable 236,697 543,481
Book overdrafts 65,801 83,306
Accrued salaries, wages and benefits 120,696 181,173
Accrued taxes 61,206 51,991
Other accruals 210,609 207,642
------------- --------------
Total current liabilities 698,210 1,078,202
------------- --------------
Non-current liabilities:
Long-term debt 246,942 634,028
Long-term obligations under capital leases 34,210 52,184
Long-term real estate liabilities 276,641 328,316
Other non-current liabilities 649,378 471,382
Minority interest in consolidated franchisees - 4,054
------------- --------------
Total liabilities 1,905,381 2,568,166
------------- --------------
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 - 40,794,974 and 38,764,999
shares at September 10, 2005 and February 26, 2005, respectively 40,795 38,765
Additional paid-in capital 488,666 464,543
Accumulated other comprehensive loss (360) (3,308)
Accumulated earnings (deficit) 236,542 (266,198)
------------- --------------
Total stockholders' equity 765,643 233,802
------------- --------------
Total liabilities and stockholders' equity $ 2,671,024 $ 2,801,968
============= ==============
See Notes to Quarterly Report
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
----------------------------------------
(Restated-See Note 2)
Sept. 10, 2005 Sept. 11, 2004
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 502,740 $ (107,048)
Adjustments to reconcile net (income) loss to net cash provided by operating
activities:
Asset disposition initiative 84,681 381
Restructuring charge 61,039 -
Depreciation and amortization 117,768 143,036
Other non-current income taxes 137,228 -
Deferred income tax benefit - (2,236)
(Gain) loss on disposal of owned property (27,427) 849
Impairment loss relating to Hurricane Katrina 670 -
Other property impairments 11,142 2,708
Gain on sale of Canadian operations (918,551) -
Loss on derivatives 15,446 -
Loss on early extinguishment of debt 28,623 -
Non-cash impact of early extinguishment of debt 809 -
Other share based awards 4,927 -
Other changes in assets and liabilities:
(Increase) decrease in receivables (27,043) 31,370
Decrease (increase) in inventories 27,485 (28,818)
Increase in prepaid expenses and other current assets (7,521) (23,568)
Increase in other assets (298) (10,466)
(Decrease) increase in accounts payable (71,052) 47,917
Decrease in accrued salaries, wages, benefits and taxes (4,123) (1,975)
Increase in other accruals 53,117 7,169
Increase (decrease) in minority interest 1,830 (798)
Decrease in other non-current liabilities (55,350) (4,767)
Other operating activities, net (4,341) 1,259
----------- -----------
Net cash (used in) provided by operating activities (68,201) 55,013
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (109,577) (107,357)
Proceeds from disposal of property 53,873 10,127
Proceeds from sale of Canadian operations 905,845 -
Payments for derivatives (15,446) -
Purchases of marketable securities (306,266) -
Proceeds from maturities of marketable securities 31,325 -
Proceeds from dividends from Metro, Inc. 1,512 -
----------- -----------
Net cash provided by (used in) investing activities 561,266 (97,230)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings - 109
Principal payments on long-term borrowings and other fees (413,529) (33)
Net proceeds from long-term real estate liabilities 1,618 14,670
Principal payments on capital leases (7,997) (6,392)
Proceeds from capital leases 10,000 -
(Decrease) increase in book overdrafts (12,570) 10,983
Deferred financing fees (1,638) (955)
Proceeds from exercises of stock options 21,226 16
----------- -----------
Net cash (used in) provided by financing activities (402,890) 18,398
Effect of exchange rate changes on cash and cash equivalents 15,442 3,645
----------- -----------
Net increase (decrease) in cash and cash equivalents 105,617 (20,174)
Cash and cash equivalents at beginning of period 257,748 297,008
----------- -----------
Cash and cash equivalents at end of period $ 363,365 $ 276,834
=========== ===========
See Notes to Quarterly Report
5
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 10,
2005 and September 11, 2004, and the Consolidated Balance Sheets at September
10, 2005 and February 26, 2005, are unaudited and, in the opinion of management,
contain all adjustments that are of a normal and recurring nature necessary for
a fair statement of financial position and results of operations for such
periods. The consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes contained in our
Fiscal 2004 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 and
all majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated. Our Company uses the equity method of
accounting for our investment in Metro, Inc. as we can exert significant
influence over substantive operating decisions made by Metro, Inc. through our
membership on Metro, Inc.'s Board of Directors and its committees and joint
purchasing and supplier arrangements.
Certain reclassifications have been made to prior year amounts to conform to
current year presentation.
On May 10, 2005, we announced plans for a major strategic restructuring that
would focus future effort and investment on our core operations in the
Northeastern United States. Therefore, we initiated efforts to divest our
businesses in Canada and the Midwestern United States.
As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, we sold our Canadian business at the close of business
on August 13, 2005 to Metro, Inc., a supermarket and pharmacy operator in the
Provinces of Quebec and Ontario, Canada. Although the Canadian operations have
been sold at September 10, 2005, the criteria necessary to classify the Canadian
operations as discontinued have not been satisfied as our Company retained
significant continuing involvement in the operations of this business upon its
sale.
The assets and liabilities relating to our operations in the Midwestern United
States have not been classified as held for sale at September 10, 2005 as the
criteria for such classification have not been met as of the balance sheet date.
As further discussed in Note 6 - Sale of our U.S. Distribution Operations and
Warehouses, our Company currently acquires a significant amount of our saleable
inventory from one supplier, C&S Wholesale Grocers. Although there are a limited
number of distributors that can supply our stores, we believe that other
suppliers could provide similar product on comparable terms. However, a change
in suppliers could cause a delay in distribution and a possible loss of sales,
which would affect operating results adversely.
Restatement of Previously Issued Financial Statements
As discussed in Note 2 - Restatement of Previously Issued Financial Statements,
our Company has restated our Consolidated Statements of Operations and Cash
Flows for the 12 and 28 weeks ended September 11, 2004 for corrections in our
accounting for leases. Readers of the financial statements should read this
restated information as opposed to the previously filed information. All
referenced amounts for prior periods reflect the balances and amounts on a
restated basis.
6
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In connection with the preparation of our fiscal 2004 consolidated financial
statements, our Company completed a review of our historical lease accounting to
determine whether our accounting for leases was in accordance with generally
accepted accounting principles. As a result of our review, we corrected our
accounting for leases in fiscal 2004 and restated our historical annual
financial statements and certain financial information for prior periods in our
Fiscal 2004 Annual Report to Stockholders, primarily to correct our accounting
for landlord allowances.
In certain situations, we receive allowances from our landlords in the form of
direct cash reimbursements to offset the costs of structural improvements to the
leased space. Historically, we have netted these reimbursements against the
related leasehold improvement assets on the consolidated balance sheets and
against capital expenditures in investing activities on the consolidated
statements of cash flows. In accordance with SFAS 13, "Accounting Leases,"
Emerging Issues Task Force ("EITF") 97-10, "The Effect of Lessee Involvement in
Asset Construction" and Question 2 of FASB Technical Bulletin 88-1 ("FTB 88-1"),
"Issues Relating to Accounting for Leases," we should have accounted for our
landlord allowances as follows:
o In those situations where we did not meet the criteria of EITF
97-10 for being deemed the owner of the construction projects
during the construction period, we should have recorded the
landlord allowances as deferred credits as opposed to an offset to
leasehold improvements on the consolidated balance sheets and as a
component of operating activities as opposed to a component of
investing activities on the consolidated statements of cash flows.
In addition, the deferred credits should have been amortized over
the term of the lease as a decrease to rent expense as opposed to
an offset to depreciation expense.
o In those situations where we did meet the criteria of EITF 97-10
for being deemed the owner of the construction projects, we should
have been considered the owner of those construction projects
during the construction period and we should have recorded the
associated landlord allowances as long-term real estate
liabilities as opposed to an offset to leasehold improvements as
we had paid directly for a substantial portion of the structural
improvement costs. In all situations upon completion of the
construction, we were unable to meet the requirements under SFAS
98, "Accounting for Leases" to qualify for sale-leaseback
treatment; thus, the long-term real estate liabilities should have
been amortized based on rent payments designated in the lease
agreements as opposed to an offset to depreciation expense.
These adjustments resulted in a correction of an understatement of Property -
net, Long-term real estate liabilities and Other non-current liabilities on our
consolidated balance sheets, an overstatement of rent expense and an
understatement of interest on our consolidated statements of operations for the
related periods.
7
CONSOLIDATED STATEMENT OF OPERATIONS
Consolidated
A&P for the Consolidated
12 weeks ended A&P for the
Sept. 11, 2004 Corrections 12 weeks ended
As Previously to lease Sept. 11, 2004
Reported accounting AS RESTATED
-------------------------------------------------------
Sales $ 2,490,559 $ - $ 2,490,559
Cost of merchandise sold (1,795,046) - (1,795,046)
----------- ----------- -----------
Gross margin 695,513 - 695,513
Store operating, general and administrative expense (740,021) 5,656 (734,365)
----------- ----------- -----------
(Loss) income from operations (44,508) 5,656 (38,852)
Interest expense (22,078) (5,656) (27,734)
Interest income 768 - 768
Minority interest in earnings of consolidated franchisees (342) - (342)
----------- ----------- -----------
Loss from continuing operations before
income taxes (66,160) - (66,160)
Benefit from income taxes 1,614 - 1,614
----------- ----------- -----------
Loss from continuing operations (64,546) - (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 $ (64,202) $ - $ (64,202)
=========== =========== ===========
Net loss - basic & diluted $ (1.67) $ - $ (1.67)
=========== =========== ===========
Depreciation $ (62,397) $ 207 $ (62,190)
----------- ----------- -----------
8
CONSOLIDATED STATEMENT OF OPERATIONS
Consolidated
A&P for the Consolidated
28 weeks ended A&P for the
Sept. 11, 2004 Corrections 28 weeks ended
As Previously to lease Sept. 11, 2004
Reported accounting AS RESTATED
--------------- ----------- --------------
Sales $ 5,770,858 $ - $ 5,770,858
Cost of merchandise sold (4,155,349) - (4,155,349)
----------- ------------- -----------
Gross margin 1,615,509 - 1,615,509
Store operating, general and administrative expense (1,668,637) 13,198 (1,655,439)
----------- ------------- -----------
(Loss) income from operations (53,128) 13,198 (39,930)
Interest expense (48,928) (13,198) (62,126)
Interest income 1,609 - 1,609
Minority interest in earnings of consolidated franchisees (1,718) - (1,718)
----------- ------------- -----------
Loss from continuing operations before
income taxes (102,165) - (102,165)
Provision for income taxes (3,844) - (3,844)
----------- ------------- -----------
Loss from continuing operations (106,009) - (106,009)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,039) - (1,039)
Loss on disposal of discontinued
operations, net of tax - - -
----------- ------------- -----------
Loss from discontinued operations (1,039) - (1,039)
----------- ------------- -----------
Net loss $ (107,048) $ - $ (107,048)
=========== ============= ===========
Net loss - basic & diluted $ (2.78) $ - $ (2.78)
=========== ============= ===========
Depreciation $ (143,519) $ 483 $ (143,036)
----------- ------------- -----------
SELECTED CONSOLIDATED STATEMENT OF CASH FLOW DATA FOR THE 28 WEEKS ENDED
SEPTEMBER 11, 2004:
As Corrections Consolidated
Previously to Lease A&P
Reported Accounting AS RESTATED
------------- --------------- --------------
Property impairments $ 1,679 $ 1,029 $ 2,708
Depreciation and amortization 143,519 (483) 143,036
(Increase) decrease in prepaid expenses and other current assets (23,647) 79 (23,568)
(Increase) decrease in other assets (11,857) 1,391 (10,466)
(Decrease) increase in other non-current liabilities (5,825) 1,058 (4,767)
Net cash provided by operating activities 51,939 3,074 55,013
Expenditures for property (97,442) (9,915) (107,357)
Net cash used in investing activities (87,315) (9,915) (97,230)
Proceeds from long-term borrowings 7,365 (7,256) 109
Net proceeds from long-term real estate liabilities - 14,670 14,670
Principal payments on capital leases (6,458) 66 (6,392)
Net cash provided by financing activities 10,918 7,480 18,398
Effect of exchange rate changes on cash and cash equivalents 4,284 (639) 3,645
9
3. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standard Board ("FASB") issued SFAS
151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS
151 requires that handling costs and waste material (spoilage) be recognized as
current-period charges regardless of whether they meet the previous requirement
of being abnormal. In addition, this Statement requires that allocations of
fixed overhead to the cost of inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for our 2006 fiscal year. We are
currently assessing the impact of this statement on our Consolidated Financial
Statements; however, we do not expect it to have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an
Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. This pronouncement amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005 (the quarter
ended June 17, 2006 for our Company). We have evaluated the provisions of SFAS
153 and concluded that its adoption will not have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123R (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB No. 25 and
related interpretations and amends SFAS No. 95, "Statement of Cash Flows." Refer
to Note 13 - Stock Based Compensation for further discussion regarding our
Company's adoption of SFAS 123R.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107") to provide
public companies additional guidance in applying the provisions of SFAS 123R.
Among other things, SAB 107 describes the SEC staff's expectations in
determining the assumptions that underlie the fair value estimates and discusses
the interaction of Statement 123R with certain existing SEC guidance. We have
adopted the provisions of SAB 107 in conjunction with the adoption of FAS 123R
beginning February 27, 2005. Refer to Note 13 - Stock Based Compensation for
further discussion and disclosure.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Contingent Asset Retirement Obligations" ("FIN 47"), an interpretation of FASB
Statement No. 143, "Asset Retirement Obligations" ("SFAS 143"). FIN 47 clarifies
that the term "conditional asset retirement obligation" as used in SFAS 143
refers to a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. An entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated, even
if conditional on a future event. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005, or our fiscal year ending February
25, 2006. For existing contingent asset retirement obligations which are
determined to be recognizable under FIN 47, the effect of applying FIN 47 would
be recognized as a cumulative effect of a change in accounting principle. We are
currently evaluating the provisions of FIN 47 and do not believe that its
adoption will have a material impact on our Company's financial condition or
results of operations.
10
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections" ("SFAS 154") which replaces Accounting Principles Board Opinions
No. 20 "Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements-An Amendment of APB Opinion No. 28." SFAS 154
provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, unless
impracticable, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error and for reporting a
change when retrospective application is impracticable. FAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by our Company in the
first quarter of fiscal 2006. Our Company is not currently contemplating an
accounting change which would be impacted by SFAS 154.
In October 2005, the FASB issued FASB Staff Position FAS 13-1 ("FSP FAS 13-1"),
which requires companies to expense rental costs associated with ground or
building operating leases that are incurred during a construction period. As a
result, companies that are currently capitalizing these rental costs are
required to expense them beginning in its first reporting period beginning after
December 15, 2005. FSP FAS 13-1 is effective for our Company as of the first
quarter of fiscal 2006. We evaluated the provisions of FSP FAS 13-1 and do
not believe that its adoption will have a material impact on our Company's
financial condition or results of operations.
4. DIVESTITURE OF OUR BUSINESSES IN CANADA AND THE MIDWESTERN UNITED STATES
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that focuses future effort and investment on our core
operations in the Northeastern United States. Therefore, we initiated efforts to
divest our businesses in Canada and the Midwestern United States.
Canadian Operations
At the close of business on August 13, 2005, our Company completed the sale of
our Canadian business to Metro, Inc., a supermarket and pharmacy operator in the
Provinces of Quebec and Ontario, Canada, for $1.5 billion in cash, stock and
certain debt that was assumed by Metro, Inc. The stock received consisted of
18,076,645 Class A subordinate shares of Metro, Inc., representing approximately
15.83% of the outstanding shares of that class after issuance.
We use the equity method of accounting to account for our investment in Metro,
Inc. as we can exert significant influence over substantive operating decisions
made by Metro, Inc. through our membership on Metro, Inc.'s Board of Directors
and its committees and joint purchasing and supplier arrangements. The value of
our equity investment in Metro, Inc. based upon Metro, Inc.'s quoted market
price is $535.3 million at September 10, 2005.
The following table summarizes the status and results of our Company's equity
investment in Metro, Inc. from the date of ownership through September 10, 2005:
Beginning investment at August 13, 2005 $ 494,578
Deferred portion of gain on sale of A&P Canada (171,701)
Dividends and distributions received (1,512)
Foreign currency translation 5,661
------------------
Equity investment in Metro, Inc. $ 327,026
==================
11
In accordance with Emerging Issues Task Force ("EITF") 01-2, "Interpretations of
APB Opinion No. 29," we have indefinitely deferred $171.7 million of the gain
resulting from the sale of our Canadian operations that directly related to the
economic interest we retained in Metro, Inc. We have not recorded any equity
earnings or losses relating to our equity investment in Metro, Inc. during the
12 and 28 weeks ended September 10, 2005 as we will record these earnings or
losses on about a three-month lag period commencing in our third quarter of
fiscal 2005 as permitted by APB 18, "The Equity Method of Accounting for
Investments in Common Stock."
The difference between the carrying value of our investment of $327.0 million
and the amount of our underlying equity in Metro, Inc.'s net assets of $149.4
million is $177.6 million.
As a result of the sale of our Canadian operations, our Company recorded a
pretax gain of $919.1 million ($766.3 million after tax) and $918.6 million
($765.8 million after tax) in "Gain on sale of Canadian operations" in our
Consolidated Statements of Operations for the 12 and 28 weeks ended September
10, 2005, respectively. Although the Canadian operations have been sold at
September 10, 2005, the criteria necessary to classify the Canadian operations
as discontinued have not been satisfied as our Company retained significant
continuing involvement in the operations of this business upon its sale through
our equity investment in Metro, Inc.
Midwestern United States Operations
Upon the decision to pursue selling the Midwest stores, we evaluated the
provisions of Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to this
business. As of the balance sheet date, September 10, 2005, the criteria set
forth by SFAS 144 to reclassify our Midwestern United States assets and
liabilities as properties held for sale were not met as the sale of this
business was not probable with transfer of these assets to the buyer within one
year of the balance sheet date.
In addition, as further discussed in Note 11 - Asset Disposition Initiatives, we
closed 31 of these stores at September 10, 2005. None of these stores in any
combination comprised a complete asset grouping and thus, have not been
disclosed as discontinued operations. However, as discussed in Note 9 -
Valuation of Long-Lived Assets, we recorded impairment losses on property, plant
and equipment related to property write-downs as a result of the divestiture of
this portion of our Midwestern U.S. business.
5. TENDER OFFER AND REPURCHASE OF 7.75% NOTES DUE 2007 AND 9.125% SENIOR
NOTES DUE 2011
In August 2005, our Company commenced a cash tender offer for all of the
outstanding principal amount of our 7.75% Notes due April 15, 2007 and 9.125%
Senior Notes due December 15, 2011. The tender offer expired on September 7,
2005. On September 8, 2005, our Company purchased pursuant to the tender offer
$166.7 million of our $199 million 7.75% Notes due April 15, 2007 and $203.7
million of our $216.5 million 9.125% Senior Notes due December 15, 2011 using
$370.4 million of the gross proceeds from the sale of our Canadian operations as
discussed in Note 4 - Divestiture of Our Businesses in Canada and the Midwestern
United States. Our Company also paid $28.6 million in tender premiums and other
fees and expenses with our Company's gross proceeds from the sale of our
Canadian operations and wrote off approximately $3.9 million of unamortized debt
discount and issuance costs related to this tender offer.
12
In addition, due to the early extinguishment of a significant portion of the
7.75% Notes due April 15, 2007, we recognized $3.1 million of the deferred gain
that resulted from the termination of three interest rate swaps we entered into
during fiscal 2002 to effectively convert a portion of our 7.75% Notes due April
15, 2007 from fixed rate debt to floating rate debt. The portion of the deferred
gain that was recognized related to the underlying debt instrument that was
early extinguished. The remaining portion of the deferred gain will continue to
be amortized as an offset to interest expense over the life of the remaining
underlying debt instrument and is classified as "Long term debt" in our
Consolidated Balance Sheets.
Both the tender premiums and other fees and expenses as well as the recognition
of the deferred gain are included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the 12
and 28 weeks ended September 10, 2005.
6. SALE OF OUR U.S. DISTRIBUTION OPERATIONS AND WAREHOUSES
During the first quarter of fiscal 2005, our Company held discussions to sell
our U.S. distribution operations and some warehouse facilities and related
assets to C&S Wholesale Grocers, Inc. On June 27, 2005, during the second
quarter of fiscal 2005, the definitive agreements, including an Asset Purchase
Agreement and a 15 year Supply Agreement, were finalized and signed. The Asset
Purchase Agreement included the assignment of our leases in Central Islip, New
York and Baltimore, Maryland, a sublease for our leased facility in New Orleans,
Louisiana, and warranty deeds for our owned facilities in Dunmore, Pennsylvania
and New Orleans, Louisiana. In the Supply Agreement, C&S Wholesale Grocers, Inc.
will supply our Company with all of our requirements for groceries, perishables,
frozen food and other merchandise in the product categories carried by C&S
Wholesale Grocers, Inc. The transition of our owned warehouses and operations
began in the second quarter of fiscal 2005 and is expected to be completed
during the third quarter of fiscal 2005.
Due to the scope of C&S Wholesale Grocers, Inc.'s distribution network, our
owned warehouses in Edison, New Jersey and the Bronx, New York will not be sold
as part of the transaction and have been closed. As a result of this decision,
we recorded a charge of $18.9 million ($1.2 million in "Cost of merchandise
sold" and $17.7 million in "Store, operating, general and administrative
expense" in our Consolidated Statement of Operations) and $66.9 million ($2.2
million in "Cost of merchandise sold" and $64.7 million in "Store, operating,
general and administrative expense" in our Consolidated Statement of Operations)
relating to the closing of these facilities during the 12 and 28 weeks ended
September 10, 2005, respectively.
13
These costs are detailed as follows:
12 weeks ended 28 weeks ended
September 10, 2005 September 10, 2005
------------------ ------------------
BALANCE SHEET ACCRUALS
Occupancy related $ 3,400 $ 3,400
Severance and benefits 6,410 46,827
------------------ ------------------
Total accrued to Balance Sheet 9,810 50,227
------------------ ------------------
NON-ACCRUABLE ITEMS RECORDED ON
STATEMENTS OF OPERATIONS
Property writeoffs 2,760 8,571
Inventory markdowns 1,211 2,241
Non-accruable closing costs 5,159 5,860
------------------ ------------------
Total non-accruable items 9,130 16,672
------------------ ------------------
TOTAL AMOUNT RECORDED ON STATEMENTS
OF OPERATIONS $ 18,940 66,899
------------------ ------------------
Less non-accruable closing costs (5,860)
------------------
TOTAL AMOUNT RECORDED ON STATEMENT OF
CASH FLOWS $ 61,039
==================
We have been pursuing the sale of our Midwest warehouses separately as part of
the divestiture of our Midwestern U.S. business.
The following table summarizes the activity to date related to the charges
recorded for the closing of these facilities. The table does not include
property writeoffs as they are not part of any reserves maintained on the
balance sheet. It also does not include inventory markdowns and non-accruable
closing costs since they are expensed as incurred in accordance with generally
accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ----------- ------------
Original charge (1) $ - $ 40,417 $ 40,417
Additions (2) 3,400 6,410 9,810
Utilization (3) - (40,884) (40,884)
----------- ------------- ------------
Balance at
Sept. 10, 2005 $ 3,400 $ 5,943 $ 9,343
=========== =========== ===========
(1) The original charge to severance and benefits during the first quarter of
fiscal 2005 of $40.4 million related to (i.) individual severings as well as
retention and productivity incentives that were accrued as earned of $7.6
million and (ii.) costs for future obligations for early withdrawal from
multi-employer union pension plans of $32.8 million.
(2) The additions to occupancy during the second quarter of fiscal 2005 related
to future obligations for the warehouses sold to C&S Wholesale Grocers, Inc.
The additions to severance and benefits during the second quarter of fiscal
2005 represented charges related to additional individual severings as well
as retention and productivity incentives that were accrued as earned.
(3) Severance and benefits utilization of $40.9 million for 28 weeks ended
September 10, 2005, represents payments made to terminated employees during
the period as well as payments made to pension funds for early withdrawal
from multi-employer union pension plans.
As of September 10, 2005, approximately $3.1 million of the liability was
included in "Accrued salaries, wages and benefits" and the remaining amount was
included in "Other non-current liabilities" on our Consolidated Balance Sheets.
14
We have evaluated the liability balance of $9.3 million as of September 10, 2005
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the warehouses and adjustments to the
reserve balance may be recorded in the future, if necessary.
7. HURRICANE KATRINA AND IMPACT ON U.S. BUSINESS
In August 2005, Hurricane Katrina had a major effect on certain portions of the
Gulf Coast region and resulted in the closure of our 28 stores and warehouse
facilities. As of September 10, 2005, 9 of these stores were open and operating.
We are currently working to re-open additional stores and expect to re-open most
of the remaining stores that are closed or damaged.
We maintain insurance coverage for this type of loss which provides for
reimbursement from losses resulting from property damage, loss of product as
well as business interruption coverage. As of the balance sheet date, September
10, 2005, we were able to determine that we incurred impairment losses of $0.7
million for property, plant & equipment that was damaged during the hurricane.
This amount has been included in "Impairment loss relating to Hurricane Katrina"
in our Consolidated Statement of Cash Flows for the 28 weeks ended September
10, 2005.
Our Company is currently assessing the remaining extent of our losses in the
Gulf Coast region and we expect to recover the losses caused by Hurricane
Katrina in excess of our estimated insurance deductible of approximately $5.0
million, which was recorded in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations for the 12 and 28 weeks
ended September 10, 2005.
8. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
Our Company considers all highly liquid investments with original maturities of
ninety days or less to be cash equivalents. Investments with original maturities
greater than ninety days are considered marketable securities. Our cash
equivalents and marketable securities are principally comprised of money market
funds, commercial paper, corporate bonds, securities of the U.S. government and
its agencies, and auction rate securities. Our Company's investments are
considered to be available-for-sale and are reported at fair value, with
unrealized gains and losses, net of tax, reported as a separate component of
stockholder's equity. The Company records other than temporary declines in fair
value to earnings as realized losses.
15
The following is a summary of cash and cash equivalents and marketable
securities as of September 10, 2005 and February 26, 2005:
At September 10, 2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
CLASSIFIED AS:
Cash $ 107,467 $ - $ - $ 107,467
Cash equivalents:
Money market funds 116,025 - - 116,025
Commercial paper 139,887 1 (15) 139,873
----------- ----------- ------------ -----------
Total cash equivalents 255,912 1 (15) 255,898
----------- ----------- ------------ -----------
Marketable securities:
Corporate bonds 39,731 52 (31) 39,752
Securities of the U.S. government and its agencies 45,020 71 - 45,091
Auction rate securities 191,280 7 - 191,287
----------- ----------- ----------- -----------
Total marketable securities 276,031 130 (31) 276,130
----------- ----------- ------------ -----------
Total cash, cash equivalents and marketable securities $ 639,410 $ 131 $ (46) $ 639,495
=========== =========== ============ ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 459,108 $ 459,085
=========== ===========
Maturing greater than one year $ 72,835 $ 72,943
=========== ===========
At February 26, 2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
CLASSIFIED AS:
Cash $ 153,791 $ - $ - $ 153,791
Cash equivalents:
Money market funds 78,983 - - 78,983
Commercial paper 24,974 - - 24,974
----------- ----------- ----------- -----------
Total cash equivalents 103,957 - - 103,957
----------- ----------- ----------- -----------
Total cash and cash equivalents $ 257,748 $ - $ - $ 257,748
=========== =========== =========== ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 103,957 $ 103,957
=========== ===========
Maturing greater than one year $ - $ -
=========== ===========
The gross unrealized losses related to our investments at September 10, 2005
were primarily due to changes in interest rates and are considered temporary in
nature. We review our investments for indications of possible impairment.
Factors considered in determining whether a loss is temporary include the length
of time and extent to which fair value has been less than the cost basis, the
financial condition and near-term prospects of the investee, and our Company's
intent and ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in market value.
There were no gross realized gains or losses on sales of investments for the 12
and 28 weeks ended September 10, 2005.
16
9. VALUATION OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"),
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.
During the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, we
recorded impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 12 weeks ended Sept. 11, 2004
-------------------------------- -----------------------------
U.S. Canada Total U.S. Canada Total
--------- --------- --------- -------- ---------- -------
Impairments due to closure or conversion in the
normal course of business $ 1,024 $ - $ 1,024 $ 1,679 $ - $ 1,679
Impairments due to unrecoverable assets 9,612 - 9,612 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 6,735 - 6,735 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 2,779 - 2,779 - - -
--------- ---------- --------- -------- ---------- --------
Total impairments $ 20,150 $ - $ 20,150 $ 1,679 $ - $ 1,679
========= ========== ========= ======== ========== ========
28 weeks ended Sept. 10, 2005 28 weeks ended Sept. 11, 2004
-------------------------------- -----------------------------
U.S. Canada Total U.S. Canada Total
--------- --------- --------- -------- ---------- -------
Impairments due to closure or conversion in the
normal course of business $ 1,024 $ 506 $ 1,530 $ 1,679 $ - $ 1,679
Impairments due to unrecoverable assets 9,612 - 9,612 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 6,861 - 6,861 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 8,590 - 8,590 - - -
--------- ---------- --------- -------- ---------- --------
Total impairments $ 26,087 $ 506 $ 26,593 $ 1,679 $ - $ 1,679
========= ========= ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives
(2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses
Impairments due to closure or conversion in the normal course of business
We 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 12 and 28 weeks ended September 10, 2005, we recorded impairment
losses on property, plant and equipment of $1.0 million and $1.5 million,
respectively, related to stores that were or will be closed in the normal course
of business as compared to $0.8 million in impairment losses on property, plant
and equipment related to stores that were or will be closed in the normal course
of business during both the 12 and 28 weeks ended September 11, 2004.
Our impairment reviews may also be triggered by appraisals of or offers for our
long-lived assets we receive in the normal course of business. During the 12 and
28 weeks ended September 11, 2004, we recorded an impairment loss of $0.9
million in the U.S. 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. There were no such
amounts recorded during the 12 and 28 weeks ended September 10, 2005.
17
These amounts were included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations.
Impairments due to unrecoverable assets
Through the second quarter of fiscal 2005, we experienced operating losses for
two of the past three years for one of our United States' asset groups, located
in Long Island, New York, which we believe was a triggering event under SFAS 144
for potential impairment of the asset group's long-lived assets. Thus, we
reviewed the carrying value of this asset group for potential impairment, and
based upon internal analysis, we estimated the asset group's future cash flows
from its long-lived assets, which primarily consisted of equipment and leasehold
improvements. As this asset group's carrying value was not recoverable from its
future cash flows, we determined the fair value of the related assets based on
the same analysis, primarily using the discounted cash flow approach. As a
result of this review, we recorded an impairment charge for the asset group's
long-lived assets of $9.6 million as a component of operating loss in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 10, 2005. There were no such
amounts recorded during the 12 and 28 weeks ended September 11, 2004.
Impairments related to the divestiture of the Midwestern U.S. business
During the 12 and 28 weeks ended September 10, 2005, we recorded impairment
losses on property, plant and equipment of $6.7 million and $6.9 million,
respectively, related to property write-downs as a result of the divestiture of
a portion of our Midwestern U.S. business as discussed in Note 11 - Asset
Disposition Initiatives. These amounts were included in "Store operating,
general and administrative expense" in our Consolidated Statements of Operations
for the 12 and 28 weeks ended September 10, 2005. There were no such amounts
recorded during the 12 and 28 weeks ended September 11, 2004.
Impairments related to the sale of U.S. distribution operations and warehouses
During the 12 and 28 weeks ended September 10, 2005, we recorded impairment
losses on property, plant and equipment of $2.8 million and $8.6 million,
respectively, related to property write-downs as a result of our decision to
sell our U.S. distribution operations and warehouses to C&S Wholesale Grocers as
discussed in Note 6 - Sale of Our U.S. Distribution Operations and Warehouses.
These amounts were included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations for the 12 and 28 weeks
ended September 10, 2005. There were no such amounts recorded during the 12 and
28 weeks ended September 11, 2004.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
10. 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.
18
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 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.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. In determining whether a 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 "(Loss) income from
operations of discontinued businesses, net of tax" for the 12 and 28 weeks
ending September 10, 2005 and September 11, 2004.
12 Weeks Ended September 10, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (10) (245) (41) (296)
------------- ------------- ------------- -------------
Loss from operations of
discontinued businesses, before
tax (10) (245) (41) (296)
Tax provision - - - -
------------- ------------- ------------- -------------
Loss from operations of
discontinued businesses, net
of tax $ (10) $ (245) $ (41) $ (296)
============= ============= ============= =============
Disposal related costs included
in operating expenses above:
Non-accruable closing costs $ (10) $ (93) $ (41) $ (144)
Interest accretion on present
value of future occupancy costs - (152) - (152)
------------- ------------- ------------- -------------
Total disposal related costs $ (10) $ (245) $ (41) $ (296)
------------- ------------- ------------- -------------
19
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
------------- ------------- ------------- -------------
28 Weeks Ended September 10, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (37) (376) (51) (464)
------------- ------------- ------------- -------------
Loss from operations of
discontinued businesses, before
tax (37) (376) (51) (464)
Tax provision - - - -
------------- ------------- ------------- -------------
Loss from operations of
discontinued businesses, net
of tax $ (37) $ (376) $ (51) $ (464)
=============== ================ =============== ================
Disposal related costs included
in operating expenses above:
Non-accruable closing costs $ (37) $ (18) $ (51) $ (106)
Interest accretion on present
value of future occupancy costs - (358) - (358)
------------- ------------- ------------- -------------
Total disposal related costs $ (37) $ (376) $ (51) $ (464)
------------- ------------- ------------- -------------
20
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)
------------ ------------- ------------- -------------
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. At
September 10, 2005, we have closed all locations in the northern New England
market.
During the 12 and 28 weeks ended September 10, 2005, we incurred additional
costs to wind down our operations in this region subsequent to the sale of these
stores of $0.01 million and $0.04 million, respectively, primarily related to
non-accruable closing costs. 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. These amounts
were included in "(Loss) income from operations of discontinued businesses, net
of tax" on our Consolidated Statements of Operations for the 12 and 28 weeks
ended September 10, 2005 and September 11, 2004.
21
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) 8 326 334
Utilization (3) (460) (384) (844)
------------ ------------- --------------
Balance at
February 26, 2005 $ - $ - $ -
Additions (2) - - -
Utilization (3) - - -
------------ ------------- --------------
Balance at
Sept. 10, 2005 $ - $ - $ -
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $4.0 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 $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 presented represent the interest accretion on
future occupancy costs which were recorded at present value at the time of
the original charge. The fiscal 2004 charge to severance and benefits of
$0.3 million related to additional severance required to be paid to
employees terminated in accordance with a union contract as a result of our
exit from the northern New England market.
(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 10, 2005, we paid approximately $3.0 million in severance and
benefit costs, which resulted from the termination of approximately 300
employees.
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.
During the 12 and 28 weeks ended September 10, 2005, we recorded costs of $0.3
million and $0.4 million primarily due to the costs of winding down this
business. During the 12 and 28 weeks ended September 11, 2004, we recorded costs
of $0.4 million and $0.8 million primarily due to the costs of winding down this
business. These amounts were included in "(Loss) income from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 10, 2005 and September 11,
2004.
22
The following table summarizes the reserve activity related to the exit of the
Kohl's market since the charge was recorded through the 28 weeks ended September
10, 2005:
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) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) - - (354)
------------ ------------- ------------- ------------
Balance at February 26, 2005 $ 17,455 $ 2,685 $ - $ 20,140
Additions (2) 331 27 - 358
Utilization (3) (1,534) (1,086) - (2,620)
------------ ------------- ------------- -------------
Balance at Sept. 10, 2005 $ 16,252 $ 1,626 $ - $ 17,878
============ ============= ============= ============
(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 fiscal 2003, fiscal 2004 and the year to date second quarter of fiscal
2005 additions to occupancy and severance and benefits represent the
interest accretion on future occupancy costs and future obligations for
early withdrawal from multi-employer union pension plans which were recorded
at present value at the time of the original charge. The addition to fixed
assets represents additional impairment losses recorded as a result of
originally estimated proceeds on the disposal of these assets not being
achieved.
(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. During fiscal 2004, we recorded a reversal of
previously accrued occupancy related costs due to favorable results of
terminating leases.
We paid $8.8 million of the total occupancy charges from the time of the
original charge through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $11.5 million of the total original severance and
benefits charges from the time of the original charges through September 10,
2005, which resulted from the termination of approximately 2,000 employees. The
remaining occupancy liability of $16.3 million relates to expected future
payments under long term leases and is expected to be paid out in full by 2020.
The remaining severance liability of $1.6 million relates to future obligations
for early withdrawal from multi-employer union pension plans which will be paid
by mid-2006.
At September 10, 2005 and February 26, 2005, $5.8 million and $5.9 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$12.1 million and $14.2 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $17.9 million as of September 10, 2005 based upon
current available information and have concluded that it is adequate. We will
continue to monitor the status of the vacant properties and adjustments to the
reserve balance may be recorded in the future, if necessary.
23
EIGHT O'CLOCK COFFEE
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee business,
generating gross proceeds of $107.5 million and a net gain after transaction
related costs 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 10, 2005, we incurred costs of $0.04
million and $0.05 million to wind down our operations in this business
subsequent to the sale. Similarly, we incurred costs of nil and $0.6 million
during the 12 and 28 weeks ended September 11, 2004, related to winding down
this business subsequent to the sale. These amounts were included in "(Loss)
income from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for the 12 and 28 weeks ended September
10, 2005 and September 11, 2004.
OTHER
Although the Canadian operations have been sold as of September 10, 2005, the
criteria necessary to classify the Canadian operations as discontinued have not
been satisfied as our Company retained significant continuing involvement in the
operations of this business upon its sale.
11. ASSET DISPOSITION INITIATIVES
OVERVIEW
In fiscal 1998 and fiscal 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). In addition, during the first and second
quarters of fiscal 2005, we initiated efforts to divest our businesses in the
Midwestern United States and closed 31 of those stores (Divestiture of the
Midwestern U.S. Business).
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 10, 2005 and
September 11, 2004. 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".
24
12 Weeks Ended September 10, 2005
-----------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ------------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ - $ 3,360 $ 56,752 $ 57,542
-------- -------- -------- -------- --------
PV interest 375 519 143 136 1,173
Severance - - - 782 782
Total accrued to -------- -------- -------- -------- --------
balance sheets (2,195) 519 3,503 57,670 59,497
-------- -------- -------- -------- --------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - 6,735 6,735
Inventory markdowns - - - 544 544
Loss on sale of property - - - 3,215 3,215
Gain on sale of pharmacy
scripts - - - - -
Closing costs - - - 2,525 2,525
-------- -------- -------- -------- --------
Total non-accruable items - - - 13,019 13,019
Less PV interest (375) (519) (143) (136) (1,173)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING
PV INTEREST (2,570) - 3,360 70,553 71,343
======== ======== ======== ======== ========
12 Weeks Ended September 11, 2004
--------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
--------- ----------- ------------- -------
BALANCE SHEET ACCRUALS
PV interest $ 446 $ 568 $ 158 $ 1,172
Total accrued to ------- ------- ------- -------
balance sheets 446 568 158 1,172
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - -
Inventory markdowns - - - -
Closing costs - - 9 9
------- ------- ------- -------
Total non-accruable items - - 9 9
------- ------- ------- -------
Less PV interest (446) (568) (158) (1,172)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST - - 9 9
======= ======= ======= =======
25
28 Weeks Ended September 10, 2005
------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ------------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ - $ 3,360 $ 71,518 $ 72,308
PV interest 900 1,232 337 136 2,605
Severance - - - 2,119 2,119
Total accrued to -------- -------- -------- -------- --------
balance sheets (1,670) 1,232 3,697 73,773 77,032
-------- -------- -------- -------- --------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - 6,861 6,861
Inventory markdowns - - - 1,130 1,130
Loss on sale of property - - - 2,263 2,263
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 2,957 2,957
-------- -------- -------- -------- --------
Total non-accruable items - - - 12,341 12,341
-------- -------- -------- -------- --------
Less PV interest (900) (1,232) (337) (136) (2,605)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (2,570) - 3,360 85,978 86,768
-------- -------- -------- -------- --------
Less Gain on sale of
pharmacy scripts - - - 870 870
Less closing costs - - - (2,957) (2,957)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS (2,570) - 3,360 83,891 84,681
======== ======== ======== ======== ========
28 Weeks Ended September 11, 2004
-----------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
------- ----------- ------------- --------
BALANCE SHEET ACCRUALS
PV interest $ 1,076 $ 1,349 $ 380 $ 2,805
Total accrued to ------- ------- ------- -------
balance sheets 1,076 1,349 380 2,805
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - 90 90
Inventory markdowns - - 291 291
Closing costs - - 689 689
------- ------- ------- -------
Total non-accruable items - - 1,070 1,070
------- ------- ------- -------
Less PV interest (1,076) (1,349) (380) (2,805)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING
PV INTEREST - - 1,070 1,070
------- ------- ------- -------
Less closing costs - - (689) (689)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS - - 381 381
======= ======= ======= =======
26
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 10, 2005, 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 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) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 893 7 900 - - - 893 7 900
Utilization (2) (3,280) (167) (3,447) (152) - (152) (3,432) (167) (3,599)
Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660)
--------- --------- --------- -------- -------- -------- --------- ---------- ---------
Balance at
Sept. 10, 2005 $ 23,007 $ - $ 23,007 $ 1,508 $ - $ 1,508 $ 24,515 $ - $ 24,515
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and $1.9
million during fiscal 2002, 2003 and 2004, respectively, and $0.9 million
during the 28 weeks ended September 10, 2005 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 $13.6 million, $20.0 million, and $5.6 million for
fiscal 2002, 2003 and 2004, respectively, and $3.5 million during the 28
weeks ended September 10, 2005 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $0.4 million, $0.3 million, and
$0.5 million for fiscal 2002, 2003 and 2004, respectively, and $0.2 million
during the 28 weeks ended September 10, 2005 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.
During the 28 weeks ended September 10, 2005, we recorded an additional
reduction of $2.6 million in occupancy accruals due to subleasing additional
closed stores. As discussed in Note 4 - Divestiture of Our Businesses in
Canada and the Midwestern United States, we sold our Canadian business and
as a result, the Canadian occupancy accruals of $0.1 million are no longer
consolidated in our Consolidated Balance Sheet at September 10, 2005.
27
We paid $101.8 million of the total occupancy charges from the time of the
original charges through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.1 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $23.0 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 $1.5 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020.
None of these stores were open during either of the first or second quarters of
fiscal 2004 or 2005. 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 10, 2005 and February 26, 2005, approximately $5.7 million and $5.4
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 10, 2005 of $24.5 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 ASSET DISPOSITION
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of September 10, 2005,
we had closed all stores and facilities related to this phase of the initiative.
28
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets 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 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) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 1,232 - 1,232 - - - 1,232 - 1,232
Utilization (2) (2,593) - (2,593) (52) - (52) (2,645) - (2,645)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
Sept. 10, 2005 $ 30,538 $ - $ 30,538 $ 62 $ - $ 62 $ 30,600 $ - $ 30,600
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and $2.4
million during fiscal 2002, 2003 and 2004, respectively, and $1.2 million
during the 28 weeks ended September 10, 2005 represent the interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge. The addition to severance of $3.5 million
during fiscal 2002 related to retention and productivity incentives that
were accrued as earned.
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during
fiscal 2002, 2003 and 2004, respectively, and $2.6 million during the 28
weeks ended September 10, 2005 represent payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $19.5 million, $3.5 million, and
$2.3 million during fiscal 2002, 2003 and 2004, respectively, and $0.1
million during the 28 weeks ended September 10, 2005 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. 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. Finally, during fiscal 2004, we recorded adjustments
of $4.5 million related to the reversals of previously accrued occupancy
costs due to the disposals and subleases of locations at more favorable
terms than originally anticipated at the time of the original charge.
29
We paid $41.8 million ($38.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
September 10, 2005 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$28.1 million ($19.1 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 10, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $30.5 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At September 10, 2005 and February 26, 2005, approximately $7.2 million and $7.1
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.
None of these stores were open during either of the first or second quarters of
fiscal 2004 or 2005. As such, there was no impact on the Statements of
Consolidated Operations from the 39 stores that were identified for closure as
part of this asset disposition.
Based upon current available information, we evaluated the reserve balances as
of September 10, 2005 of $30.6 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
FARMER JACK RESTRUCTURING
In 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. As of September 10, 2005, 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 this initiative all of which were in the U.S. The table does not
include property writeoffs as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
30
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) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 337 - 337
Utilization (2) (1,504) (6) (1,510)
Adjustment (3) 3,360 - 3,360
------------ ------------- ----------
Balance at
Sept. 10, 2005 $ 18,095 $ - $ 18,095
============ ============= ==========
(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, fiscal
2004 and the 28 weeks ended September 10, 2005 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, $4.7 million and $1.5 million
during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10,
2005, 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, $4.8 million and $0.01 million
during fiscal 2003, fiscal 2004 and the 28 weeks ended September 10,
2005, respectively, represent payments made to terminated employees
during the period.
(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. During the 28 weeks ended September 10,
2005, we recorded an increase of $3.4 million in occupancy accruals due
to changes in our original estimate of when we would terminate certain
leases and obtain sublease rental income related to such leases.
We paid $7.3 million of the total occupancy charges from the time of the
original charge through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $18.1 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of September 10, 2005 and no additional future
payments for severance and benefits to individual employees will be paid out.
31
Included in the Statements of Consolidated Operations for the 12 and 28 weeks
ended September 10, 2005 and September 11, 2004 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
----------------------------------- -----------------------------------
September 10, September 11, September 10, September 11,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ - $ - $ - $ 2,433
============== ============== =============== ==============
Loss from operations $ - $ - $ - $ (43)
============== ============== =============== ==============
At September 10, 2005 and February 26, 2005, approximately $1.6 million and $2.1
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $18.1 million as of September 10,
2005 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
DIVESTITURE OF THE MIDWESTERN U.S. BUSINESS
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
divest our businesses in the Midwestern United States. Although this planned
divestiture includes the closing of a total of 35 stores, we have closed 31 of
these stores as of September 10, 2005.
During the 12 and 28 weeks ended September 10, 2005, we recorded charges of
$70.6 million and $86.0 million, respectively, related to these closures ($0.5
million and $1.1 million in "Cost of merchandise sold," respectively, and $70.1
million and $84.9 million, respectively, in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations), excluding
PV interest. Included in property writeoffs for the 12 and 28 weeks ended
September 10, 2005, is an impairment loss on property, plant and equipment of
$2.7 million related to the additional closure of four stores that will close in
the third quarter of fiscal 2005.
12 Weeks Ended 28 Weeks Ended
September 10, 2005 September 10, 2005
------------------ ------------------
Occupancy related $ 56,752 $ 71,518
Severance and benefits 782 2,119
Property writeoffs 6,735 6,861
Loss on the sale of fixed assets 3,215 2,263
Sale of pharmacy scripts - (870)
Inventory markdowns 544 1,130
Nonaccruable closing costs 2,525 2,957
-------------- ---------------
Total charges $ 70,553 $ 85,978
============== ===============
The following table summarizes the activity to date related to the charges
recorded for this divestiture. The table does not include property writeoffs as
they are not part of any reserves maintained on the balance sheet. It also does
not include non-accruable closing costs and inventory markdowns since they are
expensed as incurred in accordance with generally accepted accounting
principles.
32
Severance
and
Occupancy Benefits Total
----------- ------------ ------------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 56,888 782 57,670
Utilization (3) (2,710) (1,142) (3,852)
------------ ------------- ----------
Balance at
Sept. 10, 2005 $ 68,944 $ 977 $ 69,921
============ ============= ==========
(1) The original charge to occupancy during the first quarter of fiscal 2005
represents charges related to closures of the first 8 stores in conjunction
with our decision to divest our Midwestern business of $14.7 million. The
original charge to severance during the first quarter of fiscal 2005 of $1.3
million related to individual severings as a result of these store closures.
(2) The additions to occupancy during the 28 weeks ended September 10, 2005
represents charges related to the closures of an additional 23 stores in the
amount of $56.8 million and interest accretion on future occupancy costs
which were recorded at present value at the time of the original charge in
the amount of $0.1 million. The additional charge to severance during the 28
weeks ended September 10, 2005 of $0.8 million related to individual
severings as a result of these store closures.
(3) Occupancy utilization of $2.7 million for 28 weeks ended September 10, 2005,
represents payments made for costs such as rent, common area maintenance,
real estate taxes and lease termination costs. Severance utilization of $1.1
million for the 28 weeks ended September 10, 2005 represents payments made
to terminated employees during the period.
We paid $2.7 million of the total occupancy charges from the time of the
original charge through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $1.1 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $68.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2021. The remaining severance
liability of $1.0 million relates to expected future payments for severance and
benefits to individual employees and will be fully paid out by February 25,
2006.
Included in the Statements of Consolidated Operations for the 12 and 28 weeks
ended September 10, 2005 and September 11, 2004 are the sales and operating
results of the 31 stores that were closed as part of this divestiture. The
results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
September 10, September 11, September 10, September 11,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ 10,462 $ 71,924 $ 85,906 $ 157,608
============== ============== =============== ==============
Loss from operations $ (10,520) $ (7,843) $ (18,755) $ (18,337)
============== ============== =============== ==============
At September 10, 2005, approximately $15.5 million of the liability was included
in "Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
33
We have evaluated the liability balance of $69.9 million as of September 10,
2005 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
12. 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 10, 2005 September 11, 2004
---------------------- -----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 1,384 $ 1,537 $ 836 $ 1,976
Interest cost 2,744 2,190 1,963 2,955
Expected return on plan assets (3,098) (2,812) (2,282) (3,823)
Amortization of unrecognized net transition asset - - (3) -
Amortization of unrecognized net prior service (gain) cost (67) 96 22 109
Amortization of unrecognized net loss (gain) 13 302 (30) 433
Administrative expenses and other - 46 2,825 63
--------- --------- -------- ---------
Net pension cost $ 976 $ 1,359 $ 3,331 $ 1,713
========= ========= ======== =========
For the 28 Weeks Ended
-----------------------------------------------------
September 10, 2005 September 11, 2004
---------------------- -----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 3,230 $ 4,576 $ 1,951 $ 4,549
Interest cost 6,401 6,519 4,580 6,803
Expected return on plan assets (7,228) (8,369) (5,325) (8,802)
Amortization of unrecognized net transition asset - - (7) -
Amortization of unrecognized net prior service (gain) cost (158) 286 51 252
Amortization of unrecognized net loss (gain) 31 900 (70) 998
Administrative expenses and other - 138 2,825 144
--------- --------- -------- ---------
Net pension cost $ 2,276 $ 4,050 $ 4,005 $ 3,944
========= ========= ======== =========
CONTRIBUTIONS
We previously disclosed in our consolidated financial statements for the year
ended February 26, 2005, that we expected to contribute $5.8 million in cash to
our defined benefit plans in fiscal 2005. As of September 10, 2005, we
contributed approximately $2.2 million to our defined benefit plans. We plan to
contribute approximately $3.6 million to our plans in the remainder of fiscal
2005.
34
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. We use a December 31 measurement date
for both the U.S. and Canadian postretirement benefits. The components of net
postretirement benefits (income) cost are as follows:
For the 12 Weeks Ended
-----------------------------------------------------
September 10, 2005 September 11, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 78 $ 25 $ 66 $ 57
Interest cost 276 91 268 151
Amortization of (gain) loss (64) 40 (110) 81
Prior service gain (311) (50) (311) (121)
--------- --------- -------- ---------
Net postretirement benefits (income) cost $ (21) $ 106 $ (87) $ 168
========== ========= ========= =========
For the 28 Weeks Ended
-----------------------------------------------------
September 10, 2005 September 11, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 182 $ 75 $ 154 $ 129
Interest cost 646 270 659 348
Amortization of (gain) loss (150) 118 (194) 186
Prior service gain (725) (148) (725) (277)
--------- --------- -------- ---------
Net postretirement benefits (income) cost $ (47) $ 315 $ (106) $ 386
========== ========= ========= =========
13. STOCK BASED COMPENSATION
In December 2004, the FASB issued FAS 123R. FAS 123R is a revision of FAS No.
123, as amended, "Accounting for Stock-Based Compensation" ("FAS 123") and
supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees." FAS 123R eliminates the alternative to use the
intrinsic value method of accounting that was provided in FAS 123, which
generally resulted in no compensation expense recorded in the financial
statements related to the issuance of equity awards to employees. FAS 123R
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. FAS 123R establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all companies to apply a fair-value-based measurement method in
accounting for generally all share-based payment transactions with employees.
On February 27, 2005 (the first day of our fiscal 2005 fiscal year), our Company
adopted FAS 123R. While the provisions of FAS 123R are not required to be
effective until the first annual reporting period that begins after June 15,
2005, we elected to adopt FAS 123R before the required effective date. Our
Company adopted FAS 123R using a modified prospective application, as permitted
under FAS 123R. Accordingly, prior period amounts have not been restated. Under
this application, we are required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption.
Prior to the adoption of FAS 123R, we applied APB 25 to account for our
stock-based awards. Under APB 25, we generally only recorded stock-based
compensation expense for our performance stock options issued under our 1998
Long Term Incentive and Share Award Plan and common stock issued under our 2004
Non-Employee Director Compensation Plan. Under the provisions of APB 25, we were
not required to recognize compensation expense for the cost of stock options.
Beginning with our fiscal 2005 year, with the adoption of FAS 123R, we recorded
stock-based compensation expense for the cost of stock options.
35
The following table details the effect on net income and earnings per share had
stock-based compensation expense been recorded for each quarter of fiscal 2004
based on the fair value method under FAS 123R. Net loss for the year ended
February 26, 2005 would have been $2.6 million higher, at $190.7 million, had
share-based compensation expense been accounted for under SFAS 123R, and net
loss per basic & diluted share for the year ended February 26, 2005 would have
been $4.94 under FAS 123R, rather than $4.88.
Quarter Ended Year Ended
------------------------------------------------------------------- -------------
June 19, 2004 Sept. 11, 2004 Dec. 4, 2004 Feb. 26, 2005 Feb. 26, 2005
------------- -------------- ------------ ------------- -------------
Net loss, as reported $ (42,846) $ (64,202) $ (75,343) $ (5,707) $ (188,098)
Add: Share-based compensation
expense included in net loss under
APB 25, net of tax - - - 1,617 1,617
Deduct: Net impact of SFAS 123R,
net of tax (1,287) (858) (836) (1,199) (4,180)
----------- ----------- ---------- ----------- -----------
Pro-forma net loss $ (44,133) $ (65,060) $ (76,179) $ (5,289) $ (190,661)
=========== =========== ========== =========== ===========
Net loss per common share:
Basic & diluted, as reported $ (1.11) $ (1.67) $(1.96) $(0.15) $(4.88)
Basic & diluted, pro-forma $ (1.15) $ (1.69) $(1.98) $(0.14) $(4.94)
During the 12 and 28 weeks ended September 10, 2005, compensation expense
related to share-based incentive plans was $2.7 million and $4.9 million, after
tax, compared to nil during the 12 and 28 weeks ended September 11, 2004.
Included in share-based compensation expense recorded during the 12 and 28 weeks
ended September 10, 2005 was $0.5 and $1.4 million, respectively, related to
expensing of stock options, $1.0 million and $2.2 million, respectively,
relating to expensing of restricted stock, $1.1 million relating to the
immediate vesting of certain stock options during the second quarter ended
September 10, 2005, $0.08 million and $0.2 million, respectively, relating to
expensing of common stock to be granted to our Board of Directors at the Annual
Meeting of Stockholders. There was no effect on the Consolidated Statement of
Cash Flows from the adoption of FAS 123R as we adopted FAS 123R using the
modified prospective application and did not grant any new stock options during
the 28 weeks ended September 10, 2005.
At September 10, 2005, we had two stock-based compensation plans. The general
terms of each plan, the method of estimating fair value for each plan and fiscal
2005 activity is reported below.
I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for
the granting of 5,000,000 shares in the form of options, SAR's, performance
units or stock awards to our Company's officers and key employees. Options
and SAR's issued under this plan vest 25% on each anniversary date of
issuance over a four year period. Performance restricted stock units issued
under this plan are earned based on our Company achieving in Fiscal 2007 a
profit after taxes, after adjusting for specific matters which our Company
considers to be of a non-operating nature, with an outlook for continued,
sustainable profitability on the same basis. The shares will vest 50% based
on achievement of a net profit in fiscal 2007 and 50% based on achievement
of a net profit in fiscal 2008. However, if our Company achieves
profitability in fiscal 2006, the shares will be earned and vesting will
commence in fiscal 2006 in one-third increments, based on achievement of
profitability in each year and the outlook for continued, sustainable
profitability.
36
The stock option awards under The 1998 Long Term Incentive and Share Award
Plan are granted at the fair market value of the Company's common stock at
the date of grant. Fair value calculated under SFAS 123 is used to
recognize expense upon adoption of SFAS 123R. Fair values for each grant
were estimated using a Black-Scholes valuation model which utilized
assumptions as detailed in the following table for expected life based upon
historical option exercise patterns, historical volatility for a period
equal to the stock option's expected life, and risk-free rate based on the
U.S. Treasury constant maturities in effect at the time of grant. During
the 12 and 28 weeks ended September 10, 2005, our Company did not grant any
stock options under this plan. The following assumptions were in place
during the 12 and 28 weeks ended September 11, 2004:
12 weeks ended 28 weeks ended
Sept. 11, 2004 Sept. 11, 2004
-------------- --------------
Expected life 7 years 7 years
Volatility 53% 53%
Risk-free interest rate range 3.82% - 4.37% 3.20% - 4.41%
The SAR awards under The 1998 Long Term Incentive and Share Award Plan were
granted at the fair market value of the Company's common stock at the date
of grant.
Performance restricted stock units issued under The 1998 Long Term
Incentive and Share Award Plan are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated
forfeiture rate.
Stock options
The following is a summary of the stock option activity during the 28 weeks
ended September 10, 2005:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ------------- ------------ -------------
Outstanding at February 26, 2005 4,464,134 $ 14.53
Granted - -
Canceled or expired (353,109) 20.43
Exercised (2,024,672) 10.46
------------- ----------
Outstanding at Sept. 10, 2005 2,086,353 $ 17.49 5.5 $ 20,932
============= ========== ============= ===========
Exercisable at:
Sept. 10, 2005 1,471,547 $ 21.53 4.7 $ 8,812
============= ===========
Nonvested at:
Sept. 10, 2005 614,806 $ 7.81 7.5 $ 12,120
============= ===========
The total intrinsic value of options exercised during the 28 weeks ended
September 10, 2005 was $34.5 million.
As of September 10, 2005, approximately $2.1 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 1.5 years.
37
The amount of cash received from the exercise of stock options was approximately
$21.2 million. There was no related tax benefit recorded in the first and second
quarter of fiscal 2005 as we adopted FAS 123R using the modified prospective
application and did not grant any new stock options during the 12 and 28 weeks
ended September 10, 2005.
SAR's
The following is a summary of the SAR's activity during the 28 weeks ended
September 10, 2005:
Weighted
Average
Exercise
Shares Price
------ --------------
Outstanding at February 26, 2005 12,500 $ 31.63
Granted - -
Canceled or expired (12,500) 31.63
Exercised - -
------- -------------
Outstanding at Sept. 10, 2005 - $ -
======= =============
Performance Restricted Stock Units
During the 12 and 28 weeks ended September 10, 2005, our Company granted 150,000
and 1,750,000 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $21.7 million.
Approximately $14.2 million of unrecognized fair value compensation expense
relating to these performance restricted stock units is expected to be
recognized through fiscal 2008 based on estimates of attaining vesting criteria.
The following is a summary of the performance restricted stock units activity
during the 28 weeks ended September 10, 2005:
Weighted
Average
Exercise
Shares Price
------ --------------
Nonvested at February 26, 2005 - $ -
Granted 1,750,000 12.38
Canceled or expired (332,500) 11.12
Exercised - -
--------- -------------
Nonvested at Sept. 10, 2005 1,417,500 $ 12.67
========= =============
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent to $45 to members of our Board
of Directors. The $45 grant of common stock shall be made on the first business
day following the Annual Meeting of Stockholders held in July of each year. The
number of shares of our Company's $1.00 common stock granted annually to each
non-employee Director will be based on the closing price of the common stock on
the New York Stock Exchange, as reported in the Wall Street Journal on the date
of grant. Only whole shares will be granted; any remaining amounts will be paid
in cash as promptly as practicable following the date of grant. This plan
replaced The 1994 Stock Option Plan for the Board of Directors which provided
for the granting of 100,000 stock options at the fair value of our common stock
at the date of grant to members of our Board of Directors. One-third of the
options granted under The 1994 Stock Option Plan for the Board of Directors on a
given date vested on each anniversary date of issuance over a 3 year period.
38
14. INCOME TAXES
The income tax provision recorded for the 28 weeks ended September 10, 2005 and
September 11, 2004 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 existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Based upon our continued assessment of
the realization of our U.S. net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net U.S. deferred tax asset to zero. For the 12
and 28 weeks ended September 10, 2005, the valuation allowance was decreased by
$260.5 million and $257.0 million, respectively, as compared to increased by
$27.0 million and $40.3 million during the 12 and 28 weeks ended September 11,
2004, 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, we will continue to record a valuation allowance
against net deferred tax assets that are created by U.S. losses until such time
as the certainty of future tax benefits can be reasonably assured.
In October 2004, the U.S. government passed the "Homeland Investment Act" which
allows companies to repatriate cash balances from their controlled foreign
subsidiaries at a reduced tax rate. This is achieved by permitting a one time
85% dividends received deduction. As discussed in Note 4 - Divestiture of Our
Businesses in Canada and the Midwestern United States, our Company completed the
sale of our Canadian subsidiary to Metro, Inc. during the second quarter of
fiscal 2005. As a result of this transaction, our Company repatriated $949.0
million from our foreign subsidiaries, of which $500.0 million is intended to
qualify for the 85% dividends received deduction. Until such time as the taxing
authorities have affirmed the adequacy of our Company's Domestic Reinvestment
Plan, we have recorded a tax provision of $137.2 million for the potential
disallowance of the 85% dividend received deduction. This amount was recorded in
"Provision for (benefit from) income taxes" on our Consolidated Statements of
Operations for the 12 and 28 weeks ended September 10, 2005 and in "Other
non-current liabilities" in our Consolidated Balance Sheet at September 10,
2005.
For the second quarter of fiscal 2005, our effective income tax rate of 21.3%
changed from the effective income tax rate of 2.4% in the second quarter of
fiscal 2004 as follows:
12 Weeks Ended
--------------------------------------------------------------------
September 10, 2005 September 11, 2004
--------------------------------- ---------------------------------
Tax Effective Tax (Provision) Effective
Provision Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (154,045) 20.5% $ (1,035) 1.6%
Canada (6,058) 0.8% 2,649 (4.0%)
--------------- ---------------- ------------- ----------------
$ (160,103) 21.3% $ 1,614 (2.4%)
=============== ================ =============== ================
39
The change in our effective tax rate was primarily due to the tax provisions we
recorded in connection with (i.) our Company's Domestic Reinvestment Plan as
discussed above and (ii.) the sale of our Canadian operations that occurred
during the second quarter of fiscal 2005, in addition to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's income (loss) from continuing operations in the second quarter of
fiscal 2005 as compared to the second quarter of fiscal 2004.
For the 28 weeks ended September 10, 2005, our effective income tax rate of
25.7% changed from the effective income tax rate of 3.8% for the 28 weeks ended
September 11, 2004 as follows:
28 Weeks Ended
--------------------------------------------------------------------
September 10, 2005 September 11, 2004
--------------------------------- ---------------------------------
Effective Effective
Tax Provision Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (155,429) 23.0% $ (2,415) 2.4%
Canada (18,539) 2.7% (1,429) 1.4%
--------------- ---------------- --------------- ----------------
$ (173,968) 25.7% $ (3,844) 3.8%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we
recorded in connection with (i.) our Company's Domestic Reinvestment Plan as
discussed above and (ii.) the sale of our Canadian operations that occurred
during the 28 weeks ended September 10, 2005, in addition to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's income (loss) from continuing operations for the 28 weeks ended
September 10, 2005 as compared to the 28 weeks ended September 11, 2004.
At September 10, 2005 and February 26, 2005, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheet totaling $47.4 million and $10.7 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheets totaling
$47.4 million and $22.9 million, respectively.
15. 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 President and
Chief Executive Officer.
During the 12 and 28 weeks ended September 10, 2005 and September 11, 2004, we
operated in three reportable segments: United States, Canada, and our investment
in Metro, Inc. Our United States and Canadian segments are comprised of retail
supermarkets. Our equity investment represents our economic interest in Metro,
Inc. and is required to be reported as an operating segment in accordance with
SFAS 131, "Disclosure about Segments of an Enterprise and Related Information"
as our investment is greater than 10% of our Company's combined assets of all
operating segments and we can exert significant influence over substantive
operating decisions through our membership on Metro, Inc.'s Board of Directors
and its committees and joint purchasing and supplier arrangements. The
accounting policies for these segments are the same as those described in the
summary of significant accounting policies included in our Fiscal 2004 Annual
Report. We measure segment performance based upon income (loss) from operations.
40
Interim information on segments is as follows:
12 Weeks Ended 28 Weeks Ended
---------------------------------------- ---------------------------------------
September 10, September 11, September 10, September 11,
2005 2004 2005 2004
------------------ ------------------ ----------------- -----------------
Sales
United States $ 1,598,085 $ 1,708,460 $ 3,828,003 $ 3,938,110
Canada * 570,164 782,099 1,723,879 1,832,748
------------------ ------------------ ----------------- -----------------
Total Company $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858
================== ================== ================= =================
Sales by category
Grocery (1) $ 1,410,451 $ 1,625,208 $ 3,611,153 $ 3,780,163
Meat (2) 449,490 530,987 1,145,777 1,204,478
Produce (3) 307,010 334,364 793,654 786,217
Other (4) 1,298 - 1,298 -
------------------ ------------------ ----------------- -----------------
Total Company $ 2,168,249 $ 2,490,559 $ 5,551,882 $ 5,770,858
================== ================== ================= =================
(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.
(4) Other includes sales from an information technology services agreement with
Metro, Inc.
Depreciation and amortization
United States $ 45,846 $ 47,432 $ 106,826 $ 109,385
Canada * 47 14,758 10,942 33,651
------------------ ------------------ ----------------- -----------------
Total Company $ 45,893 $ 62,190 $ 117,768 $ 143,036
================== ================== ================= =================
(Loss) income from operations
United States $ (162,593) $ (24,887) $ (240,430) $ (43,319)
Canada * 17,527 (13,965) 57,224 3,389
------------------ ------------------ ----------------- -----------------
Total Company $ (145,066) $ (38,852) $ (183,206) $ (39,930)
================== =================== ================== ==================
Income (loss) from continuing
operations before income taxes
United States $ 736,944 $ (48,088) $ 628,971 $ (94,983)
Canada * 15,430 (18,072) 48,201 (7,182)
Equity investment in Metro, Inc.** - - - -
------------------ ------------------ ----------------- -----------------
Total Company $ 752,374 $ (66,160) $ 677,172 $ (102,165)
================== ================== ================= =================
Capital expenditures
United States $ 22,742 $ 28,521 $ 62,376 $ 71,462
Canada * 17,015 17,679 47,201 35,895
------------------ ------------------ ----------------- -----------------
Total Company $ 39,757 $ 46,200 $ 109,577 $ 107,357
================== ================== ================= =================
September 10, February 26,
2005 2005
----------------- -----------------
Total assets
United States $ 2,343,998 $ 1,958,566
Canada - 843,402
Equity investment in Metro, Inc. 327,026 -
----------------- -----------------
Total Company $ 2,671,024 $ 2,801,968
================= =================
41
* As discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, we sold our Canadian operations during the second
quarter ended September 10, 2005; thus, we have included the operating results
of our Canadian subsidiary through the date of the sale.
** There was no income (loss) from continuing operations before incomes taxes
relating to our equity investment in Metro, Inc. for the 12 and 28 weeks ended
September 10, 2005 as any equity earnings or losses are recorded on about a
three-month lag period commencing in our third quarter of fiscal 2005.
16. HEDGE OF NET INVESTMENT IN FOREIGN OPERATIONS
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.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operation against adverse
movements in exchange rates. Our Company measures ineffectiveness based upon the
change in forward exchange rates.
In the second quarter of fiscal 2005 and upon completion of the sale of our
Canadian operations, this forward contract was terminated prior to its
expiration. Upon settlement, the effective portion of this net investment hedge
contract resulted in a loss, after tax, of approximately $12.8 million and $21.1
million during the 12 and 28 weeks ended September 10, 2005, respectively, and
was recognized as an offset to the gain recorded in connection with the sale of
our Canadian subsidiary as discussed in Note 4 - Divestiture of Our Businesses
in Canada and the Midwestern United States. The gain was recorded in "Gain on
sale of Canadian operations" in our Consolidated Statements of Operations for
the 12 and 28 weeks ended September 10, 2005.
In addition, the amount excluded from the measure of effectiveness on this net
investment hedge amounted to $12.5 million and $15.4 million, before income
taxes, and was recorded as "Store operating, general and administrative expense"
in our Consolidated Statements of Operations for the 12 and 28 weeks ended
September 10, 2005, respectively.
17. COMMITMENTS AND CONTINGENCIES
We are subject to various 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.
42
18. SUBSEQUENT EVENTS
During the second quarter ended September 10, 2005 and due to the sale of our
Canadian operations as discussed in Note 4 - Divestiture of Our Businesses in
Canada and the Midwestern United States, our $400 million secured Revolving
Credit Agreement was amended, reducing the Canadian portion of the agreement by
$65 million. At September 10, 2005, we had a $335 million Revolving Credit
Agreement with a syndicate of lenders enabling us to borrow funds on a revolving
basis for short-term borrowings and provide working capital as needed.
On October 14, 2005, the Revolving Credit Agreement was terminated.
Concurrently, we entered into new, cash collateralized, Letter of Credit
Agreement that enables us to issue letters of credit up to $200 million. We are
also in the process of negotiating an additional $150 million revolving credit
agreement that will be collateralized by inventory, certain accounts receivable
and pharmacy scripts. We expect to complete the new revolving credit agreement
by early November 2005.
43
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 10, 2005 and September 11, 2004.
o Restatement of Previously Issued Financial Statements - a discussion of our
Company's restatement of previously issued financial statements resulting
from a correction in our accounting for leases.
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 2005 that Management wishes to share with the reader to
assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources -- a
discussion of the following:
- Results for the 12 weeks ended September 10, 2005 compared to the 12
weeks ended September 11, 2004 and results for the 28 weeks ended
September 10, 2005 compared to the 28 weeks ended September 11, 2004;
- Our Company's Asset Disposition Initiatives; and
- Current and expected future liquidity.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
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 10, 2005 and
September 11, 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
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2004
Annual Report to Stockholders 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. Our Company uses the
equity method of accounting for our investment in and earnings or losses of
Metro, Inc. as we can exert significant influence over substantive operating
decisions made by Metro, Inc. through our membership on Metro, Inc.'s Board of
Directors and its committees and joint purchasing and supplier arrangements.
Restatement of Previously Issued Financial Statements
As discussed in Note 2 - Restatement of Previously Issued Financial Statements,
our Company has restated our Consolidated Statements of Operations and Cash
Flows for the 12 and 28 weeks ended September 11, 2004 for corrections in our
accounting for leases. Readers of the financial statements should read this
restated information as opposed to the previously filed information. All
referenced amounts for prior periods reflect the balances and amounts on a
restated basis.
44
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 and the District of Columbia. Our
Company's business consists strictly of its retail grocery operations, comprised
of 417 stores as of September 10, 2005.
Commencing in the second half of fiscal 2005, our UNITED STATES retail
operations are now organized in three regions: North Region, operating A&P
supermarkets in New York, The Food Emporium in Westchester County, N.Y,
A&P/Super Foodmart stores in Connecticut, and all Food Basics discount stores;
Central Region, operating all Waldbaum's supermarkets, The Food Emporium in
Manhattan, and the Farmer Jack supermarkets in Michigan; and South Region,
operating Super Fresh supermarkets in Baltimore and Philadelphia, A&P
supermarkets in New Jersey and Sav-A-Center supermarkets in the greater New
Orleans market.
During the second quarter of fiscal 2005, we made significant progress in the
restructuring of the Company and other strategic measures geared to position the
business for turnaround and future growth. In August, we completed the sale of
A&P Canada to Metro, Inc., resulting in proceeds of $1.5 billion to our Company,
including a significant investment position in Metro, Inc. which combined with
our former Canadian operations forms one of the strongest and most profitable
retail entities in North America. The cash proceeds from the sale are being
utilized primarily to reduce debt and strengthen our balance sheet, and to
finance the ongoing conversion of our store network.
Our remaining Company was unprofitable in the second quarter, with sales and
earnings progress challenged by a difficult selling and operating environment
throughout our key markets. Both consumer spending and product and distribution
costs were affected negatively by steadily rising gasoline prices throughout the
period, resulting in stiff competition as retailers sought to protect their
business under those circumstances. In order to strengthen our ability to deal
with these challenges, we maintained our strict focus on expense reduction and
cost control.
On July 20, 2005, our Company announced changes in senior executive management
responsibility, in alignment with the new scope and structure of the business
resulting from the sale of A&P Canada. Christian Haub, previously Chairman and
Chief Executive Officer, was elected Executive Chairman of our Company. Eric
Claus, previously President and CEO of A&P Canada, was elected President and
Chief Executive Officer of the Company. Brian Piwek, previously President and
Chief Operating Officer of the Company, retired effective July 31, 2005.
On September 6, 2005, our Company announced that Mitchell P. Goldstein will
resign from his position as Executive Vice President, Chief Financial Officer &
Secretary of our Company, effective December 31, 2005 (or an earlier date if
decided upon by our Company). Our Company also announced that upon Mitchell P.
Goldstein's resignation from our Company, Brenda Galgano, currently Senior Vice
President and Corporate Controller, will assume the role of Senior Vice
President & Chief Financial Officer.
45
OUTLOOK
Our primary objectives in the third quarter and beyond are as follows:
o Improve store operations and merchandising effectiveness, including the
conversion of stores to the new Fresh and Discount retail format.
o Realign specific units such as our Midwest and Supply & Logistics
operations.
o Restructure the organization, to align functionality and administrative and
other overheads to the needs of our smaller U.S. retail business.
In addition to the emphasis on those major initiatives, day-to-day expense
reduction remains a high priority as we continue to seek and exploit additional
means of improving labor productivity, and lowering administrative, advertising,
occupancy and operating expenses.
As our rebuilding efforts proceed, we remain conservative regarding anticipated
results in the day-to-day business. Our operations in New Orleans and
surrounding areas were shut down by Hurricane Katrina, and as of this writing,
we are in the process of reopening stores, where possible, and assessing overall
damage and recovery prospects.
The likely impact will be continued stiff competition in our markets, as
retailers strive to keep costs stable while marketing aggressively to protect
market share until conditions improve. We are confident that our strong
financial condition positions us well to compete as needed to maintain our
presence, while we accelerate the renewal of our store network.
Our primary goal remains the achievement of sustainable profitability by Fiscal
2007, and the pursuit of growth opportunities afterward, and all of our efforts
are being focused toward achievement of those objectives.
Various 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 effectively 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 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.
46
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.
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 supporting activities, 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 the coming year, 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, the
extent to which trustees of the plans reduce the costs of future service
benefits as well as our internal execution of our overall company strategic
initiatives which could lead to further pension withdrawal liabilities.
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.
47
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
Our consolidated financial information presents the results related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focus on
continuing operations.
As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, we sold our Canadian operations to Metro, Inc. at the
close of business on August 13, 2005. Therefore, comparative information
relating to our Canadian business that follows was comprised of 8 weeks and 12
weeks during the second quarters ended September 10, 2005 and September 11,
2004, respectively, and 24 weeks and 28 weeks during the year to date periods
ended September 10, 2005 and September 11, 2004, respectively.
12 WEEKS ENDED SEPTEMBER 10, 2005 COMPARED TO THE 12 WEEKS ENDED SEPTEMBER 11,
2004
OVERALL
Sales for the second quarter of fiscal 2005 were $2.2 billion compared to $2.5
billion with the second quarter of fiscal 2004; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, decreased -0.6%. This decrease in comparable store sales
excludes the impact of sales from the 28 stores that were effected by Hurricane
Katrina as those sales are not considered comparable year over year. Loss from
continuing operations decreased from $64.5 million for the second quarter of
fiscal 2004 to income from continuing operations of $592.3 million for the
second quarter of fiscal 2005. Net income per share - basic and diluted for the
second quarter of fiscal 2005 was $14.64 and $14.40, respectively, compared to a
net loss per share - basic and diluted of $1.67 for the second quarter of fiscal
2004.
12 Weeks 12 Weeks
Ended Ended (Unfavorable) /
Sept. 10, 2005 Sept. 11, 2004 Favorable % Change
---------------------- -------------------- -------------------- ---------
Sales $ 2,168.2 $ 2,490.6 $ (322.4) (12.9%)
(Decrease) increase in comparable
store sales (0.6%) 0.1% NA NA
Income (loss) from continuing
operations 592.3 (64.5) 656.8 >100.0%
(Loss) income from discontinued
operations (0.3) 0.3 (0.6) >100.0%
Net income (loss) 592.0 (64.2) 656.2 >100.0%
Net income (loss) per share - basic 14.64 (1.67) 16.31 >100.0%
Net income (loss) per share - diluted 14.40 (1.67) 16.07 >100.0%
48
SALES
Sales for the second quarter of fiscal 2005 of $2,168.2 million decreased $322.4
million or 12.9% from sales of $2,490.6 million for second quarter of fiscal
2004. The lower sales were due to a decrease in U.S. sales of $110.4 million and
a decrease in Canadian sales of $212.0 million. The following table presents
sales for each of our operating segments for the second quarter of fiscal 2005
and the second quarter of fiscal 2004:
12 Weeks Ended 12 Weeks Ended
Sept. 10, 2005 Sept. 11, 2004 Decrease % Change
----------------- ----------------- ---------- -----------
United States $ 1,598.1 $ 1,708.5 $ (110.4) (6.5%)
Canada 570.1 782.1 (212.0) (27.1)
----------------- ----------------- ---------- -----------
Total $ 2,168.2 $ 2,490.6 $ (322.4) (12.9%)
================= ================= ========== ===========
The following details the dollar impact of several items affecting the decrease
in sales by operating segment from the second quarter of fiscal 2004 to the
second quarter of fiscal 2005:
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store Hurricane
Stores Stores Rate Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
United States $ 10.3 $ (89.8) $ - $ (16.0) $ (16.2) $ 1.3 $ (110.4)
Canada 11.3 (37.7) 65.2 4.1 - (254.9) (212.0)
------------- ------------- -------------- ------------- ------------- ------------ -------------
Total $ 21.6 $ (127.5) $ 65.2 $ (11.9) $ (16.2) $ (253.6) $ (322.4)
============= ============= ============== ============= ============= ============ =============
The decrease in U.S. sales was primarily attributable to the closing of
50 stores since the beginning of the second quarter of fiscal 2004, of which 36
were closed in fiscal 2005, decreasing sales by $89.8 million, the decrease in
comparable store sales for the second quarter of fiscal 2005 of $16.0 million or
-1.1% as compared with the second quarter of fiscal 2004, and the decrease in
sales caused by the overall impact of Hurricane Katrina of $16.2 million. These
decreases were partially offset by the opening or re-opening of 8 new stores
since the beginning of the second quarter of fiscal 2004, of which 1 was opened
or re-opened in fiscal 2005, increasing sales by $10.3 million, and the increase
in sales relating to an information technology services agreement with Metro,
Inc. of $1.3 million. Included in the 50 stores closed since the beginning of
the second quarter of fiscal 2004 were 31 stores closed as part of the asset
disposition initiative as discussed in Note 11 of our Consolidated Financial
Statements.
The decrease in Canadian sales was primarily attributable to the closure
of 5 stores since the beginning of the second quarter of fiscal 2004, of which 1
was closed in fiscal 2005, decreasing sales by $37.7 million and the sale of our
Canadian operations that resulted in the inclusion of 8 weeks of sales during
the second quarter of fiscal 2005 as compared to 12 weeks during the second
quarter of fiscal 2004, decreasing sales by $254.9 million. These decreases were
partially offset by the opening or re-opening of 7 stores since the beginning of
the second quarter of fiscal 2004, of which 1 was opened or re-opened in fiscal
2005, increasing sales by $11.3 million, the favorable effect of the Canadian
exchange rate, which increased sales by $65.2 million, and the increase in
comparable store sales for the second quarter of fiscal 2005 of $4.1 million or
0.8% for Company-operated stores and franchised stores combined, as compared to
the second quarter of fiscal 2004.
Average weekly sales per supermarket for the U.S. were approximately $324,800
for the second quarter of fiscal 2005 versus $325,500 for the corresponding
period of the prior year, a decrease of 0.2% primarily due to negative
comparable store sales partially offset by the impact of closing smaller stores.
Average weekly sales per supermarket for Canada were approximately $298,500 for
the second quarter of fiscal 2005 versus $277,200 for the corresponding period
of the prior year, an increase of 7.7%. This increase was primarily due to the
increase in the Canadian exchange rate and higher comparable store sales.
49
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 2005
as compared to the second quarter of fiscal 2004. Gross margin as a percentage
of sales increased 51 basis points to 28.44% for the second quarter of fiscal
2005 from 27.93% for the second quarter of fiscal 2004. This 51 basis point
increase was caused primarily by the closure of stores in our Midwestern U.S.
business as discussed in Note 11 - Asset Disposition Initiatives which had 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 10, 2005 September 11, 2004
---------------------------------------- -----------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
-------------- --------------- -------------- -----------------
United States $ 480.2 30.05% $ 506.8 29.66%
Canada 136.5 23.94 188.7 24.13
-------------- --------------- -------------- -----------------
Total $ 616.7 28.44% $ 695.5 27.93%
================== =============== ============== =================
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the second quarter of fiscal 2004
to the second quarter of fiscal 2005:
Sales Volume Gross Margin Rate Exchange Rate Total
------------- ----------------- ------------- -----------
United States $ (32.7) $ 6.1 $ - $ (26.6)
Canada (63.4) (1.0) 12.2 (52.2)
------------- --------------- ------------ -----------
Total $ (96.1) $ 5.1 $ 12.2 $ (78.8)
============= =============== ============ ===========
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 2005 compared with the second quarter of fiscal 2004.
SG&A expense was $761.7 million or 35.13% for the second quarter of fiscal 2005
as compared to $734.4 million or 29.49% for the second quarter of fiscal 2004.
12 Weeks Ended 12 Weeks Ended
Sept. 10, 2005 Sept. 11, 2004
--------------------------------------- --------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
-------------- --------------- -------------- --------------
United States $ 642.8 40.22% $ 531.7 31.12%
Canada 118.9 20.85 202.7 25.92
-------------- --------------- -------------- --------------
Total $ 761.7 35.13% $ 734.4 29.49%
============== =============== ============== ==============
50
The increase in SG&A for the U.S. of $111.1 million (910 basis points) for the
second quarter ended September 10, 2005 as compared to September 11, 2004
primarily related to costs we recorded (i.) in connection with the closing of
our owned warehouses in Edison, New Jersey and the Bronx, New York of $17.7
million (111 basis points) that will not be sold as part of the sale of our U.S.
distribution operations and some warehouse facilities and related assets to C&S
Wholesale Grocers as discussed in Note 6 - Sale of Our U.S. Distribution
Operations and Warehouses; (ii.) relating to the divestiture of our Midwestern
U.S. business as discussed in Note 11 - Asset Disposition Initiatives of $70.2
million (439 basis points); (iii.) relating to the cash tender offer completed
during the second quarter of fiscal 2005, as discussed in Note 5 - Tender Offer
and Repurchase of 7.75% Notes Due 2007 and 9.125% Senior Notes Due 2011 of $29.5
million (184 basis points); (iv.) relating to the long-lived assets impairment
charge for one of our U.S. asset groups as discussed in Note 9 - Valuation of
Long-Lived Assets of $9.6 million (60 basis points) and (v.) relating to the
settlement of our net investment hedge as discussed in Note 16 - Hedge of Net
Investment in Foreign Operations of $12.5 million (78 basis points). These
increases in SG&A were partially offset by higher gains on the sale of certain
of our assets of $12.7 million (79 basis points) during the second quarter of
fiscal 2005 as compared to the second quarter of fiscal 2004.
The decrease in SG&A in Canada of $83.8 million (507 basis points) was primarily
due to the inclusion of 8 weeks of costs in the second quarter of fiscal 2005 as
compared to 12 weeks in the second quarter of fiscal 2004, in addition to (i.)
lower depreciation expense of $11.2 million (196 basis points) as the Canadian
assets were sold during the second quarter of fiscal 2005 as discussed in Note 4
- Divestiture of Our Businesses in Canada and the Midwestern United States, and
(ii.) the absence of costs relating to the settlement of the Canadian lawsuit of
$24.8 million (317 basis points) which were included in the second quarter of
fiscal 2004. These decreases were partially offset by the increase in the
Canadian exchange rate of $14.8 million (260 basis points).
During the 12 weeks ended September 10, 2005 and September 11, 2004, we recorded
impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 12 weeks ended Sept. 11, 2004
------------------------------- ------------------------------
U.S. Canada Total U.S. Canada Total
--------- ---------- --------- -------- ---------- --------
Impairments due to closure or conversion in the
normal course of business $ 1,024 $ - $ 1,024 $ 1,679 $ - $ 1,679
Impairments due to unrecoverable assets 9,612 - 9,612 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 6,735 - 6,735 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 2,779 - 2,779 - - -
--------- ---------- --------- -------- ---------- --------
Total impairments $ 20,150 $ - $ 20,150 $ 1,679 $ - $ 1,679
========= ========== ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives
(2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses
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.
GAIN ON SALE OF CANADIAN OPERATIONS
As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, we sold our Canadian operations to Metro, Inc. at the
close of business on August 13, 2005. As a result of this sale, we recorded a
pretax gain of $919.1 million ($766.3 million after tax) during the 12 weeks
ended September 10, 2005.
51
INTEREST EXPENSE
Interest expense of $25.3 million for the second quarter of fiscal 2005
decreased from the prior year amount of $27.7 million primarily due to (i.)
lower interest expense of $0.5 million relating to our 7.75% Notes due April 15,
2007 due to the cash tender offer completed during the second quarter of fiscal
2005, (ii.) a decrease in capitalized interest of $0.2 million due to mainly a
reduction in new store builds, and (iii.) lower interest expense of $1.0 million
relating to our Canadian operations due to the inclusion of its operating
results for 8 weeks in the second quarter of fiscal 2005 as compared to 12 weeks
in the second quarter of 2004 as a result of its sale.
INCOME TAXES
The provision for income taxes from continuing operations for the second quarter
of fiscal 2005 was $160.1 million (a $154.0 million provision for our U.S.
operations and a $6.1 million provision for our Canadian operations) compared to
a benefit from income taxes of $1.6 million (a $1.0 million provision for our
U.S. operations and a $2.6 million benefit for our Canadian operations).
Consistent with prior year, we continue to record a valuation allowance against
our U.S. net deferred tax assets.
For the second quarter of fiscal 2005, our effective income tax rate of 21.3%
changed from the effective income tax rate of 2.4% in the second quarter of
fiscal 2004 as follows:
12 Weeks Ended
--------------------------------------------------------------------
September 10, 2005 September 11, 2004
--------------------------------- ---------------------------------
Tax Effective Tax (Provision) Effective
Provision Tax Rate Benefit Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (154,045) 20.5% $ (1,035) 1.6%
Canada (6,058) 0.8% 2,649 (4.0%)
--------------- ---------------- ------------- ----------------
$ (160,103) 21.3% $ 1,614 (2.4%)
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we
recorded in connection with (i.) our Company's Domestic Reinvestment Plan as
discussed above and (ii.) the sale of our Canadian operations that occurred
during the second quarter of fiscal 2005, in addition to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's income (loss) from continuing operations in the second quarter of
fiscal 2005 as compared to the second quarter of fiscal 2004.
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.
Although the Canadian operations have been sold as of September 10, 2005, the
criteria necessary to classify the Canadian operations as discontinued have not
been satisfied as our Company has retained significant continuing involvement in
the operations of this business upon its sale through our equity investment in
Metro, Inc.
52
The loss from operations of discontinued businesses, net of tax, for the second
quarter of fiscal 2005 was $0.3 million as compared to a loss from operations of
discontinued businesses, net of tax, of $0.3 million for the second quarter of
fiscal 2004 and is detailed by business as follows:
12 Weeks Ended September 10, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (10) (245) (41) (296)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (10) (245) (41) (296)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (10) $ (245) $ (41) $ (296)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (10) $ (93) $ (41) $ (144)
Interest accretion on present value
of future occupancy costs - (152) - (152)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (10) $ (245) $ (41) $ (296)
--------------- ---------------- --------------- ----------------
53
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
--------------- ---------------- --------------- -------------
28 WEEKS ENDED SEPTEMBER 10, 2005 COMPARED TO THE 28 WEEKS ENDED SEPTEMBER 11,
2004
OVERALL
Sales for the 28 weeks ended September 10, 2005 were $5.6 billion, compared with
$5.8 billion for the 28 weeks ended September 11, 2004; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, decreased -0.5%. This decrease in comparable store sales
excludes the impact of sales from the 28 stores that were effected by Hurricane
Katrina as those sales are not considered comparable year over year. Loss from
continuing operations decreased from $106.0 million for the 28 weeks ended
September 11, 2004 to income from continuing operations of $503.2 million for
the 28 weeks ended September 10, 2005. Net income per share - basic and diluted
for the 28 weeks ended September 10, 2005 was $12.64 and $12.47, respectively,
compared to a net loss per share - basic and diluted of $2.78 for the 28 weeks
ended September 11, 2004.
28 Weeks 28 Weeks
Ended Ended (Unfavorable)/
Sept. 10, 2005 Sept. 11, 2004 Favorable % Change
---------------- ----------------- -------------- ---------
Sales $ 5,551.9 $ 5,770.8 $ (218.9) (3.8%)
(Decrease) increase in comparable
store sales (0.5%) 0.6% NA NA
Income (loss) from continuing
operations 503.2 (106.0) 609.2 >100.0%
Loss from discontinued operations (0.5) (1.0) 0.5 50.0%
Net income (loss) 502.7 (107.0) 609.7 >100.0%
Net income (loss) per share - basic 12.64 (2.78) 15.42 >100.0%
Net income (loss) per share - diluted 12.47 (2.78) 15.25 >100.0%
54
SALES
Sales for the 28 weeks ended September 10, 2005 of $5,551.9 million
decreased $218.9 million or 3.8% from sales of $5,770.8 million for 28 weeks
ended September 11, 2004. The lower sales were due to a decrease in U.S. sales
of $110.1 million and a decrease in Canadian sales of $108.8 million. The
following table presents sales for each of our operating segments for the 28
weeks ended September 10, 2005 and the 28 weeks ended September 11, 2004:
28 Weeks Ended 28 Weeks Ended
Sept. 10, 2005 Sept. 11, 2004 Decrease % Change
----------------- ----------------- -------------- ----------
United States $ 3,828.0 $ 3,938.1 $ (110.1) (2.8%)
Canada 1,723.9 1,832.7 (108.8) (5.9)
----------------- ----------------- -------------- ----------
Total $ 5,551.9 $ 5,770.8 $ (218.9) (3.8%)
================= ================= ============== ==========
The following details the dollar impact of several items affecting the decrease
in sales by operating segment from the 28 weeks ended September 11, 2004 to the
28 weeks ended September 10, 2005:
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store Hurricane
Stores Stores Rate Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
United States $ 42.4 $ (132.1) $ - $ (24.8) $ 3.1 $ 1.3 $ (110.1)
Canada 47.6 (65.1) 162.0 1.6 - (254.9) (108.8)
------------- ------------- -------------- ------------- ------------- ------------ -------------
Total $ 90.0 $ (197.2) $ 162.0 $ (23.2) $3.1 $ (253.6) $ (218.9)
============= ============= ============== ============= ============= ============ =============
The decrease in U.S. sales was primarily attributable to the closing of 54
stores since the beginning of fiscal 2004, of which 36 were closed in fiscal
2005, decreasing sales by $132.1 million, and the decrease in comparable store
sales for the 28 weeks ended September 10, 2005 of $24.8 million or -0.7% as
compared with the 28 weeks ended September 11, 2004. These decreases were
partially offset by the opening or re-opening of 17 new stores since the
beginning of fiscal 2004, of which 1 was opened or re-opened in fiscal 2005,
increasing sales by $42.4 million, the increase in sales caused by the overall
impact of Hurricane Katrina of $3.1 million, and the increase in sales relating
to an information technology services agreement with Metro, Inc. of $1.3
million. Included in the 54 stores closed since the beginning of fiscal 2004
were 31 stores closed as part of the asset disposition initiative as discussed
in Note 11 of our Consolidated Financial Statements.
The decrease in Canadian sales was primarily attributable to the closure of 14
stores since the beginning of fiscal 2004, of which 1 was closed in fiscal 2005,
decreasing sales by $65.1 million, and the sale of our Canadian operations that
resulted in the inclusion of 24 weeks of sales during the 28 weeks ended
September 10, 2005 as compared to 28 weeks during the 28 weeks ended September
11, 2004, decreasing sales by $254.9 million. These decreases were partially
offset by the opening or re-opening of 9 stores since the beginning of fiscal
2004, of which 1 was opened or re-opened in fiscal 2005, increasing sales by
$47.6 million, the favorable effect of the Canadian exchange rate, which
increased sales by $162.0 million, and the increase in comparable store sales
for the 28 weeks ended September 10, 2005 of $1.6 million or 0.1% for
Company-operated stores and franchised stores combined, as compared to the 28
weeks ended September 11, 2004.
Average weekly sales per supermarket for the U.S. were approximately $323,600
for the 28 weeks ended September 10, 2005 versus $323,400 for the corresponding
period of the prior year, an increase of 0.1% primarily due to the impact of
closing smaller stores partially offset by negative comparable store sales.
Average weekly sales per supermarket for Canada were approximately $298,600 for
the 28 weeks ended September 10, 2005 versus $274,400 for the corresponding
period of the prior year, an increase of 8.8%. This increase was primarily due
to the increase in the Canadian exchange rate and higher comparable store sales.
55
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 10,
2005 as compared to the 28 weeks ended September 11, 2004. Gross margin as a
percentage of sales increased 1 basis point to 28.00% for the 28 weeks ended
September 10, 2005 from 27.99% for the 28 weeks ended September 11, 2004. We
believe the impact on margin for changes in costs and special reductions was not
significant.
28 Weeks Ended 28 Weeks Ended
September 10, 2005 September 11, 2004
---------------------------------------- ---------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
-------------- --------------- -------------- ---------------
United States $ 1,133.9 29.62% $ 1,173.4 29.80%
Canada 420.7 24.40 442.1 24.12
-------------- --------------- -------------- ---------------
Total $ 1,554.6 28.00% $ 1,615.5 27.99%
============== =============== ============== ===============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the 28 weeks ended September 11,
2004 to the 28 weeks ended September 10, 2005:
Sales Volume Gross Margin Rate Exchange Rate Total
---------------- ------------------ -------------- -------------
United States $ (32.8) $ (6.7) $ - $ (39.5)
Canada (58.8) 4.5 32.9 (21.4)
---------------- ---------------- -------------- -------------
Total $ (91.6) $ (2.2) $ 32.9 $ (60.9)
================ ================ ============== =============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative expense
by operating segment, in dollars and as a percentage of sales for the 28 weeks
ended September 10, 2005 compared with the 28 weeks ended September 11, 2004.
SG&A expense was $1,737.8 million or 31.30% for the 28 weeks ended September 10,
2005 as compared to $1,655.4 million or 28.69% for the 28 weeks ended September
11, 2004.
28 Weeks Ended 28 Weeks Ended
Sept. 10, 2005 Sept. 11, 2004
--------------------------------------- --------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
-------------- --------------- -------------- --------------
United States $ 1,374.3 35.90% $ 1,216.7 30.90%
Canada 363.5 21.09 438.7 23.94
-------------- --------------- -------------- --------------
Total $ 1,737.8 31.30% $ 1,655.4 28.69%
============== =============== ============== ==============
56
The increase in SG&A for the U.S. of $157.6 million (500 basis points) for the
28 weeks ended September 10, 2005 as compared to the 28 weeks ended September
11, 2004 primarily related to costs we recorded (i.) in connection with the
closing of our owned warehouses in Edison, New Jersey and the Bronx, New York of
$64.7 million (169 basis points) that will not be sold as part of the sale of
our U.S. distribution operations and some warehouse facilities and related
assets to C&S Wholesale Grocers as discussed in Note 6 - Sale of Our U.S.
Distribution Operations and Warehouses; (ii.) relating to the divestiture of our
Midwestern U.S. business as discussed in Note 11 - Asset Disposition Initiatives
of $85.0 million (222 basis points); (iii.) relating to the cash tender offer
completed during the 28 weeks ended September 10, 2005, as discussed in Note 5 -
Tender Offer and Repurchase of 7.75% Notes Due 2007 and 9.125% Senior Notes Due
2011 of $29.5 million (77 basis points); (iv.) relating to the long-lived assets
impairment charge for one of our U.S. asset groups as discussed in Note 9 -
Valuation of Long-Lived Assets of $9.6 million (25 basis points) and (v.)
relating to the settlement of our net investment hedge as discussed in Note 16 -
Hedge of Net Investment in Foreign Operations of $15.4 million (40 basis
points). These increases in SG&A were partially offset by higher gains on the
sale of certain of our assets of $28.5 million (75 basis points) during the 28
weeks ended September 10, 2005 as compared to the 28 weeks ended September 11,
2004.
The decrease in SG&A in Canada of $75.2 million (285 basis points) is primarily
due to the inclusion of 24 weeks of costs during the 28 weeks ended September
10, 2005 as compared to 28 weeks during the 28 weeks ended September 11, 2004,
in addition to (i.) lower depreciation expense of $21.6 million (125 basis
points) as the Canadian assets were sold during the 28 weeks ended September 10,
2005 as discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, and (ii.) the absence of costs relating to the
settlement of the Canadian lawsuit of $24.9 million (136 basis points), which
were included in the 28 weeks ended September 10, 2004. These decreases were
partially offset by the increase in the Canadian exchange rate of $27.8 million
(161 basis points).
During the 28 weeks ended September 10, 2005 and September 11, 2004, we recorded
impairment losses on long-lived assets as follows:
28 weeks ended Sept. 10, 2005 28 weeks ended Sept. 11, 2004
------------------------------- ------------------------------
U.S. Canada Total U.S. Canada Total
--------- ---------- --------- -------- ---------- --------
Impairments due to closure or conversion in the
normal course of business $ 1,024 $ 506 $ 1,530 $ 1,679 $ - $ 1,679
Impairments due to unrecoverable assets 9,612 - 9,612 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 6,861 - 6,861 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 8,590 - 8,590 - - -
--------- ---------- --------- -------- ---------- --------
Total impairments $ 26,087 $ 506 $ 26,593 $ 1,679 $ - $ 1,679
========= ========= ========= ======== ========== ========
(1) Refer to Note 11 - Asset Disposition Initiatives
(2) Refer to Note 6 - Sale of our U.S. Distribution Operations and Warehouses
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.
57
GAIN ON SALE OF CANADIAN OPERATIONS
As further discussed in Note 4 - Divestiture of Our Businesses in Canada and the
Midwestern United States, we sold our Canadian operations to Metro, Inc. at the
close of business on August 13, 2005. As a result of this sale, we recorded a
pretax gain of $918.6 million ($765.8 million after tax) during the 28 weeks
ended September 10, 2005.
INTEREST EXPENSE
Interest expense of $61.4 million for the 28 weeks ended September 10,
2005 decreased from the prior year amount of $62.1 million due primarily to (i.)
lower interest expense of $0.6 million relating to our 7.75% Notes due April 15,
2007 due to the cash tender offer completed during the 28 weeks ended September
10, 2005, (ii.) a decrease in capitalized interest of $0.7 million due to mainly
a reduction in new store builds, and (iii.) lower interest expense of $0.3
million relating to our Canadian operations due to the inclusion of its
operating results for 20 weeks for the 28 weeks ended September 10, 2005 as
compared to 28 weeks for the 28 weeks ended September 11, 2004 as a result of
its sale, partially offset by higher interest expense resulting from our
on-balance sheet long-term real estate liabilities, which includes sale
leaseback of Company-owned properties entered into in the fourth quarter of
fiscal 2003, of approximately $0.8 million and sale leaseback of locations for
which we received landlord allowances of $0.4 million.
INCOME TAXES
The provision for income taxes from continuing operations for the 28 weeks ended
September 10, 2005 was $174.0 million (a $155.4 million provision for our U.S.
operations and a $18.6 million provision for our Canadian operations) compared
to $3.8 million (a $2.4 million provision for our U.S. operations and a $1.4
million provision for our Canadian operations). Consistent with prior year, we
continue to record a valuation allowance against our U.S. net deferred tax
assets.
For the 28 weeks ended September 10, 2005, our effective income tax rate of
25.7% changed from the effective income tax rate of 3.8% for the 28 weeks ended
September 11, 2004 as follows:
28 Weeks Ended
--------------------------------------------------------------------
September 10, 2005 September 11, 2004
--------------------------------- ---------------------------------
Effective Effective
Tax Provision Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (155,429) 23.0% $ (2,415) 2.4%
Canada (18,539) 2.7% (1,429) 1.4%
--------------- ---------------- --------------- ----------------
$ (173,968) 25.7% $ (3,844) 3.8%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we
recorded in connection with (i.) our Company's Domestic Reinvestment Plan as
discussed above and (ii.) the sale of our Canadian operations that occurred
during the 28 weeks ended September 10, 2005, in addition to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's income (loss) from continuing operations for the 28 weeks ended
September 10, 2005 as compared to the 28 weeks ended September 11, 2004.
58
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.
Although the Canadian operations have been sold as of September 10, 2005, the
criteria necessary to classify the Canadian operations as discontinued have not
been satisfied as our Company has retained significant continuing involvement in
the operations of this business upon its sale.
The loss from operations of discontinued businesses, net of tax, for the 28
weeks ended September 10, 2005 was $0.5 million as compared to a loss from
operations of discontinued businesses, net of tax, of $1.0 million for the 28
weeks ended September 11, 2004 and is detailed by business as follows:
28 Weeks Ended September 10, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (37) (376) (51) (464)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (37) (376) (51) (464)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (37) $ (376) $ (51) $ (464)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (37) $ (18) $ (51) $ (106)
Interest accretion on present value
of future occupancy costs - (358) - (358)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (37) $ (376) $ (51) $ (464)
--------------- ---------------- --------------- ----------------
59
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)
--------------- ---------------- --------------- -------------
ASSET DISPOSITION INITIATIVES
OVERVIEW
In fiscal 1998 and fiscal 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). In addition, during the first and second
quarters of fiscal 2005, we initiated efforts to divest our businesses in the
Midwestern United States and closed 31 of those stores (Divestiture of the
Midwestern U.S. Business).
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 10, 2005 and
September 11, 2004. 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".
60
12 Weeks Ended September 10, 2005
--------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ----------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ - $ 3,360 $ 56,752 $ 57,542
PV interest 375 519 143 136 1,173
Severance - - - 782 782
Total accrued to ----------- ----------- --------------- ----------- -----------
balance sheets (2,195) 519 3,503 57,670 59,497
----------- ----------- --------------- ----------- -----------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - 6,735 6,735
Inventory markdowns - - - 544 544
Loss on sale of property - - - 3,215 3,215
Gain on sale of pharmacy
scripts - - - - -
Closing costs - - - 2,525 2,525
----------- ----------- --------------- ----------- -----------
Total non-accruable items - - - 13,019 13,019
----------- ----------- --------------- ----------- -----------
Less PV interest (375) (519) (143) (136) (1,173)
----------- ----------- --------------- ----------- -----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING
PV INTEREST (2,570) - 3,360 70,553 71,343
=========== =========== =============== =========== ===========
12 Weeks Ended September 11, 2004
--------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
BALANCE SHEET ACCRUALS
PV interest $ 446 $ 568 $ 158 $ 1,172
Total accrued to -------- ----------- ----------- ---------
balance sheets 446 568 158 1,172
-------- ----------- ----------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - -
Inventory markdowns - - - -
Closing costs - - 9 9
-------- ----------- ----------- ---------
Total non-accruable items - - 9 9
-------- ----------- ----------- ---------
Less PV interest (446) (568) (158) (1,172)
-------- ----------- ----------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF OPERATIONS
EXCLUDING
PV INTEREST - - 9 9
======== =========== =========== =========
61
28 Weeks Ended September 10, 2005
------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ------------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ - $ 3,360 $ 71,518 $ 72,308
PV interest 900 1,232 337 136 2,605
Severance - - - 2,119 2,119
Total accrued to -------- -------- -------- -------- --------
balance sheets (1,670) 1,232 3,697 73,773 77,032
-------- -------- -------- -------- --------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - - 6,861 6,861
Inventory markdowns - - - 1,130 1,130
Loss on sale of property - - - 2,263 2,263
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 2,957 2,957
-------- -------- -------- -------- --------
Total non-accruable items - - - 12,341 12,341
-------- -------- -------- -------- --------
Less PV interest (900) (1,232) (337) (136) (2,605)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF OPERATIONS
EXCLUDING PV INTEREST (2,570) - 3,360 85,978 86,768
-------- -------- -------- -------- --------
Less Gain on sale of
pharmacy scripts - - - 870 870
Less closing costs - - - (2,957) (2,957)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED ON
STATEMENTS OF CASH FLOWS (2,570) - 3,360 83,891 84,681
======== ======== ======== ======== ========
28 Weeks Ended September 11, 2004
-----------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
------- ----------- ------------- --------
BALANCE SHEET ACCRUALS
PV interest $ 1,076 $ 1,349 $ 380 $ 2,805
Total accrued to ------- ------- ------- -------
balance sheets 1,076 1,349 380 2,805
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - - 90 90
Inventory markdowns - - 291 291
Closing costs - - 689 689
------- ------- ------- -------
Total non-accruable items - - 1,070 1,070
------- ------- ------- -------
Less PV interest (1,076) (1,349) (380) (2,805)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING
PV INTEREST - - 1,070 1,070
------- ------- ------- -------
Less closing costs - - (689) (689)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS - - 381 381
======= ======= ======= =======
62
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 10, 2005, 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 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) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 893 7 900 - - - 893 7 900
Utilization (2) (3,280) (167) (3,447) (152) - (152) (3,432) (167) (3,599)
Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660)
--------- --------- --------- -------- -------- -------- --------- ---------- ---------
Balance at
Sept. 10, 2005 $ 23,007 $ - $ 23,007 $ 1,508 $ - $ 1,508 $ 24,515 $ - $ 24,515
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and $1.9
million during fiscal 2002, 2003 and 2004, respectively, and $0.9 million
during the 28 weeks ended September 10, 2005 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 $13.6 million, $20.0 million, and $5.6 million for
fiscal 2002, 2003 and 2004, respectively, and $3.5 million during the 28
weeks ended September 10, 2005 represents payments made during those
periods for costs such as rent, common area maintenance, real estate taxes
and lease termination costs. Severance utilization of $0.4 million, $0.3
million, and $0.5 million for fiscal 2002, 2003 and 2004, respectively, and
$0.2 million during the 28 weeks ended September 10, 2005 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.
During the 28 weeks ended September 10, 2005, we recorded an additional
reduction of $2.6 million in occupancy accruals due to subleasing
additional closed stores. As discussed in Note 4 - Divestiture of Our
Businesses in Canada and the Midwestern United States, we sold our Canadian
business and as a result, the Canadian occupancy accruals of $0.1 million
are no longer consolidated in our Consolidated Balance Sheet at September
10, 2005.
63
We paid $101.8 million of the total occupancy charges from the time of the
original charges through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.1 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $23.0 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 $1.5 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out in 2020.
None of these stores were open during either of the first or second quarters of
fiscal 2004 or 2005. 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 10, 2005 and February 26, 2005, approximately $5.7 million and $5.4
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 10, 2005 of $24.5 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 ASSET DISPOSITION
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of September 10, 2005,
we had closed all stores and facilities related to this phase of the initiative.
64
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets 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 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) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 1,232 - 1,232 - - - 1,232 - 1,232
Utilization (2) (2,593) - (2,593) (52) - (52) (2,645) - (2,645)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
Sept. 10, 2005 $ 30,538 $ - $ 30,538 $ 62 $ - $ 62 $ 30,600 $ - $ 30,600
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and $2.4
million during fiscal 2002, 2003 and 2004, respectively, and $1.2 million
during the 28 weeks ended September 10, 2005 represent the interest
accretion on future occupancy costs which were recorded at present value at
the time of the original charge. The addition to severance of $3.5 million
during fiscal 2002 related to retention and productivity incentives that
were accrued as earned.
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during
fiscal 2002, 2003 and 2004, respectively, and $2.6 million during the 28
weeks ended September 10, 2005 represent payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $19.5 million, $3.5
million, and $2.3 million during fiscal 2002, 2003 and 2004, respectively,
and $0.1 million during the 28 weeks ended September 10, 2005 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. 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. Finally, during
fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals
and subleases of locations at more favorable terms than originally
anticipated at the time of the original charge.
65
We paid $41.8 million ($38.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
September 10, 2005 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$28.1 million ($19.1 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 10, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $30.5 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At September 10, 2005 and February 26, 2005, approximately $7.2 million and $7.1
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.
None of these stores were open during either of the first or second quarters of
fiscal 2004 or 2005. As such, there was no impact on the Statements of
Consolidated Operations from the 39 stores that were identified for closure as
part of this asset disposition.
Based upon current available information, we evaluated the reserve balances as
of September 10, 2005 of $30.6 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
FARMER JACK RESTRUCTURING
In 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. As of September 10, 2005, we had closed all 6 stores
and successfully completed the conversions related to this phase of the
initiative.
66
The following table summarizes the activity to date related to the charges
recorded for this initiative all of which were in the U.S. The table does not
include property writeoffs as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 337 - 337
Utilization (2) (1,504) (6) (1,510)
Adjustment (3) 3,360 - 3,360
------------ ------------- ----------
Balance at
Sept. 10, 2005 $ 18,095 $ - $ 18,095
============ ============= ==========
(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, fiscal 2004
and the 28 weeks ended September 10, 2005 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, $4.7 million and $1.5 million during
fiscal 2003, fiscal 2004 and the 28 weeks ended September 10, 2005,
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, $4.8 million and $0.01 million during fiscal
2003, fiscal 2004 and the 28 weeks ended September 10, 2005, respectively,
represent payments made to terminated employees during the period.
(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. During the 28 weeks ended September 10,
2005, we recorded an increase of $3.4 million in occupancy accruals due to
changes in our original estimate of when we would terminate certain leases
and obtain sublease rental income related to such leases.
We paid $7.3 million of the total occupancy charges from the time of the
original charge through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $18.1 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of September 10, 2005 and no additional future
payments for severance and benefits to individual employees will be paid out.
67
Included in the Statements of Consolidated Operations for the 12 and 28 weeks
ended September 10, 2005 and September 11, 2004 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
----------------------------------- -----------------------------------
September 10, September 11, September 10, September 11,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ - $ - $ - $ 2,433
============== ============== =============== ==============
Loss from operations $ - $ - $ - $ (43)
============== ============== =============== ==============
At September 10, 2005 and February 26, 2005, approximately $1.6 million and $2.1
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $18.1 million as of September 10,
2005 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
DIVESTITURE OF THE MIDWESTERN U.S. BUSINESS
During the first quarter of fiscal 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we initiated efforts to
divest our businesses in the Midwestern United States. Although this planned
divestiture includes the closing of a total of 35 stores, we have closed 31 of
these stores as of September 10, 2005.
During the 12 and 28 weeks ended September 10, 2005, we recorded charges of
$70.6 million and $86.0 million, respectively, related to these closures ($0.5
million and $1.1 million in "Cost of merchandise sold," respectively, and $70.1
million and $84.9 million, respectively, in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations), excluding
PV interest. Included in property writeoffs for the 12 and 28 weeks ended
September 10, 2005, is an impairment loss on property, plant and equipment of
$2.7 million related to the additional closure of four stores that will close in
the third quarter of fiscal 2005.
12 Weeks Ended 28 Weeks Ended
September 10, 2005 September 10, 2005
------------------ ------------------
Occupancy related $ 56,752 $ 71,518
Severance and benefits 782 2,119
Property writeoffs 6,735 6,861
Loss on the sale of fixed assets 3,215 2,263
Sale of pharmacy scripts - (870)
Inventory markdowns 544 1,130
Nonaccruable closing costs 2,525 2,957
-------------- ---------------
Total charges $ 70,553 $ 85,978
============== ===============
68
The following table summarizes the activity to date related to the charges
recorded for this divestiture. The table does not include property writeoffs as
they are not part of any reserves maintained on the balance sheet. It also does
not include non-accruable closing costs and inventory markdowns since they are
expensed as incurred in accordance with generally accepted accounting
principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 56,888 782 57,670
Utilization (3) (2,710) (1,142) (3,852)
------------ ------------- ----------
Balance at
Sept. 10, 2005 $ 68,944 $ 977 $ 69,921
============ ============= ==========
(1) The original charge to occupancy during the first quarter of fiscal 2005
represents charges related to closures of the first 8 stores in conjunction
with our decision to divest our Midwestern business of $14.7 million. The
original charge to severance during the first quarter of fiscal 2005 of
$1.3 million related to individual severings as a result of these store
closures.
(2) The additions to occupancy during the 28 weeks ended September 10, 2005
represents charges related to the closures of an additional 23 stores in
the amount of $56.8 million and interest accretion on future occupancy
costs which were recorded at present value at the time of the original
charge in the amount of $0.1 million. The additional charge to severance
during the 28 weeks ended September 10, 2005 of $0.8 million related to
individual severings as a result of these store closures.
(3) Occupancy utilization of $2.7 million for 28 weeks ended September 10,
2005, represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $1.1 million for the 28 weeks ended September 10, 2005
represents payments made to terminated employees during the period.
We paid $2.7 million of the total occupancy charges from the time of the
original charge through September 10, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $1.1 million of the total net severance charges from
the time of the original charges through September 10, 2005, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $68.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2021. The remaining severance
liability of $1.0 million relates to expected future payments for severance and
benefits to individual employees and will be fully paid out by February 25,
2006.
Included in the Statements of Consolidated Operations for the 12 and 28 weeks
ended September 10, 2005 and September 11, 2004 are the sales and operating
results of the 31 stores that were closed as part of this divestiture. The
results of these operations are as follows:
12 Weeks Ended 28 Weeks Ended
----------------------------------- -----------------------------------
September 10, September 11, September 10, September 11,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ 10,462 $ 71,924 $ 85,906 $ 157,608
============== ============== =============== ==============
Loss from operations $ (10,520) $ (7,843) $ (18,755) $ (18,337)
============== ============== =============== ==============
At September 10, 2005, approximately $15.5 million of the liability was included
in "Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
69
We have evaluated the liability balance of $69.9 million as of September 10,
2005 based upon current available information and have concluded that it is
adequate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
The following table presents excerpts from our Consolidated Statement of Cash
Flows:
Sept. 10, 2005 Sept. 11, 2004
----------------- -----------------
Net cash (used in) provided by operating activities $ (68,201) $ 55,013
----------------- -----------------
Net cash provided by (used in) investing activities $ 561,266 $ (97,230)
----------------- -----------------
Net cash (used in) provided by financing activities $ (402,890) $ 18,398
----------------- -----------------
Net cash flow used in operating activities of $68.2 million for the 28 weeks
ended September 10, 2005 primarily reflected our net income of $502.7 million,
adjusted for non-cash charges for (i.) depreciation and amortization of $117.8
million, (ii.) our asset disposition initiatives of $84.7 million, (iii.)
restructuring charges of $61.0 million, and (iv.) non-current income taxes of
$137.2 million, partially offset by the non-cash gain on sale of Canadian
operations of $918.6 million, a decrease in inventories of $27.5 million and an
increase in other accruals primarily due to timing of $53.1 million partially
offset by a decrease in accounts payable of $71.1 million and a decrease in
other non-current liabilities of $55.4 million primarily due to the sale of our
Canadian operations. Refer to Working Capital below for discussion of changes in
working capital items. Net cash flow provided by operating activities of $55.0
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 $143.0 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 $10.5 million and a decrease in
non-current liabilities of $4.8 million due mainly to a decrease in closed store
accruals.
Net cash flow provided by investing activities of $561.3 million for the 28
weeks ended September 10, 2005 primarily reflected proceeds from the sale of our
Canadian operations of $905.8 million, proceeds received from the sale of
certain of our assets of $53.9 million partially offset by property expenditures
totaling $109.6 million, which included 2 new supermarkets and 30 major
remodels, payments for derivatives of $15.4 million, and the net purchases of
marketable securities of $275.0 million. For the remainder of fiscal 2005, we
have planned capital expenditures of approximately $50 to $75 million, which
relate primarily to enlarging or remodeling approximately 20 supermarkets. We
currently expect to close approximately 5 - 10 stores during the remainder of
fiscal 2005. Net cash flow used in investing activities of $97.2 million for the
28 weeks ended September 11, 2004 primarily reflected property expenditures
totaling $107.4 million, which included 9 new supermarkets and 11 major remodels
partially offset by cash received from the sale of our certain of our assets of
$10.1 million.
Net cash flow used in financing activities of $402.9 million for the 28 weeks
ended September 10, 2005 primarily reflected principal payments on long term
borrowings and other fees of $413.5 million and principal payments on capital
leases of $8.0 million partially offset by proceeds from exercise of stock
options of $21.2 million. Net cash flow provided by financing activities of
$18.4 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 real
estate liabilities of $14.7 million partially offset by principal payments on
capital leases of $6.4 million and a decrease in deferred financing fees of $1.0
million.
70
We reviewed our Company's strategy during the fourth quarter of fiscal 2004 and
into early 2005 to establish and sustain a profitable business with long-range
growth potential. That review concluded with the plan that future effort and
investment should be focused on our core operations in the Northeastern United
States, which accounted for about half of total sales, our strongest market
positions, and we believe, the best potential for profitable growth going
forward. Therefore, we initiated efforts to divest our businesses in both Canada
and the Midwestern U.S. At the close of business on August 13, 2005, our Company
completed the sale of our Canadian business to Metro, Inc., a supermarket and
pharmacy operator in the Provinces of Quebec and Ontario, Canada, for $1.5
billion in cash, stock and certain debt to be assumed by Metro, Inc. We have
closed 31 of the 101 stores in the Midwest at this time and are exploring
alternatives for the remaining stores including their sale or continued
operations.
We operate under an annual operating plan which is reviewed and approved by our
Board of Directors and incorporates the specific operating initiatives we expect
to pursue and the anticipated financial results of our Company. We are in the
process of planning for fiscal 2006 and beyond at this time and we believe that
our present cash resources, including invested cash on hand as well as our
marketable securities, available borrowings from our revolving credit agreement
and other sources, are sufficient to meet our needs.
Profitability, cash flow, asset sale proceeds and timing 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 we are unsuccessful in the selling of the Midwest business
or if the taxing authorities do not affirm the adequacy of our Company's
Domestic Reinvestment Plan, we anticipate that we will be able to modify the
operating plan in order to ensure that we have appropriate resources.
WORKING CAPITAL
We had working capital of $649.3 million at September 10, 2005 compared to
working capital of $86.5 million at February 26, 2005. We had cash and cash
equivalents aggregating $363.4 million at September 10, 2005 compared to $257.7
million at February 26, 2005. The increase in working capital was attributable
primarily to the following:
o An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o An increase in marketable securities as we invested our cash received from
the sale of our Canadian operations;
o An increase in prepaid expenses and other current assets mainly due to the
timing of payments, an increase in our deferred tax assets, partially
offset by the sale of our Canadian operations;
o A decrease in accounts payable (inclusive of book overdrafts) due to the
sale of our Canadian operations, timing and seasonality; and
o A decrease in accrued salaries, wages and benefits due primarily to the
sale of our Canadian operations and timing.
Partially offset by the following:
71
o A decrease in accounts receivable due to the sale of our Canadian
operations partially offset by the timing of receipts;
o A decrease in inventories mainly due to the sale of our Canadian operations
and seasonality; and
o An increase in other accruals mainly due to timing partially offset by the
sale of our Canadian operations.
REVOLVING CREDIT AGREEMENT
During the second quarter ended September 10, 2005 and due to the sale of our
Canadian operations as discussed in Note 4 - Divestiture of Our Businesses in
Canada and the Midwestern United States, our $400 million secured Revolving
Credit Agreement was amended, reducing the Canadian portion of the agreement by
$65 million. At September 10, 2005, we had a $335 million Credit Agreement (the
"Credit Agreement") with a syndicate of lenders enabling us to borrow funds on a
revolving basis for short-term borrowings and provide working capital as needed.
This agreement expires in December 2007. Under the Credit Agreement, we are
permitted to make bond repurchases and may do so from time to time in the
future.
The Credit Agreement is collateralized by inventory, certain accounts receivable
and certain pharmacy scripts. Borrowings under the Credit Agreement bear
interest based on LIBOR and Prime interest rate pricing. As of September 10,
2005, there were no borrowings under these credit agreements. As of September
10, 2005, after reducing availability for outstanding letters of credit and
borrowing base requirements, we had $101.3 million available under the Credit
Agreement. Combined with the cash we held in short-term investments and
marketable securities of $532.0 million, we had total cash availability of
$633.3 million at September 10, 2005.
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 10, 2005 totaled $101.3 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.
On October 14, 2005, the Credit Agreement was terminated. Concurrently, we
entered into new, cash collateralized, Letter of Credit Agreement that
enables us to issue letters of credit up to $200 million. We are also in the
process of negotiating an additional $150 million revolving credit agreement
that will be collateralized by inventory, certain accounts receivable and
pharmacy scripts. We expect to complete the new revolving credit agreement by
early November 2005.
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $245.1 million at September 10, 2005 consisted of
$32.3 million of 7.75% Notes due April 15, 2007, $12.8 million of 9.125% Senior
Notes due December 15, 2011 and $200 million of 9.375% Notes due August 1, 2039.
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 are now callable at par ($25 per bond) and the 9.125%
Notes may be called at a premium to par after December 15, 2006. The 9.375%
Notes 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. The 9.375% Notes are effectively
subordinate to the Credit Agreement and do not contain cross default provisions.
All covenants and restrictions for the 7.75% Notes and the 9.125% Senior Notes
have been eliminated in connection with the tender offer as discussed in Note 5
- Tender Offer and Repurchase of 7.75% Notes due 2007 and 9.125% Senior Notes
due 2011. Our notes are not guaranteed by any of our subsidiaries.
72
During the first quarter of fiscal 2005, we repurchased in the open market $14.5
million of our 7.75% Notes due April 15, 2007. The cost of this open market
repurchase resulted in a pretax loss due to the early extinguishment of debt of
$0.5 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this
loss has been classified within loss from operations.
During the second quarter of fiscal 2005, we repurchased in the open market
$166.7 million of our 7.75% Notes due April 15, 2007 and $203.7 million of our
9.125 Senior Notes due December 15, 2011 through a cash tender offer. The cost
of this open market repurchase resulted in a pretax loss due to the early
extinguishment of debt of $29.4 million. In accordance with SFAS No. 145,
this loss has been classified within loss from operations.
OTHER
We currently have 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 10, 2005 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 the
normal course of business in fiscal 2005. 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 $1.9 million related to a shopping center,
which will expire in 2011.
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases"). When the
Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of September 10, 2005, 147 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $371.8 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with developing outlook with Moody's
Investors Service ("Moody's") and B- with developing outlook with Standard &
Poor's Ratings Group ("S&P") as of September 10, 2005. Our liquidity rating was
SGL3 with Moody's as of September 10, 2005. Our recovery rating was 1 with S&P
as of September 10, 2005 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.
73
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets is recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis using a probability weighted approach and a risk free
rate.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During the 12 and 28 weeks ended September 10, 2005, we recorded
impairment losses on long-lived assets as follows:
12 weeks ended Sept. 10, 2005 28 weeks ended Sept. 10, 2005
------------------------------- ------------------------------
U.S. Canada Total U.S. Canada Total
--------- ---------- --------- -------- ---------- --------
Impairments due to closure or conversion in the
normal course of business $ 1,024 $ - $ 1,024 $ 1,024 $ 506 $ 1,530
Impairments due to unrecoverable assets 9,612 - 9,612 9,612 - 9,612
Impairments related to the divestiture of the Midwestern
U.S. business (1) 6,735 - 6,735 6,861 - 6,861
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 2,779 - 2,779 8,590 - 8,590
--------- ---------- --------- -------- ---------- --------
Total impairments $ 20,150 $ - $ 20,150 $ 26,087 $ 506 $ 26,593
========= ========== ========= ======== ========== ========
74
(1) Refer to Note 11 - Asset Disposition Initiatives
(2) Refer to Note 6 - Sale of Our U.S. Distribution Operations and Warehouses
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.
Closed Store Reserves
For closed stores 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
10, 2005, we had recorded liabilities for estimated probable obligations of $172
million. Of this amount, $15 million relates to stores closed in the normal
course of business, $141 million relates to stores closed as part of the asset
disposition initiatives (see Note 11 of our Consolidated Financial Statements)
and $16 million relates to stores closed as part of our exit of the northern New
England and Kohl's businesses (see Note 10 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 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.
75
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 $247.5 million in total indebtedness as of September 10, 2005 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 10, 2005 and 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 10, 2005, a
change in the Canadian currency of 10% would have resulted in a fluctuation in
net income of $0.9 million and $3.0 million, respectively, as compared to a
fluctuation in net loss of $1.5 million and $0.9 million during the 12 and 28
weeks ended September 11, 2004, 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.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operation against adverse
movements in exchange rates. In the second quarter of fiscal 2005 and upon
completion of the sale of our Canadian operations as discussed in Note 16 -
Hedge of Net Investment in Foreign Operations, this forward contract was
terminated prior to its expiration.
ITEM 4 - CONTROLS AND PROCEDURES
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
President and Chief Executive Officer and Executive Vice President, Chief
Financial Officer and Secretary, as appropriate, to allow timely decisions
regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's President and Chief
Executive Officer along with our Company's Executive Vice President, Chief
Financial Officer and Secretary, of the effectiveness of the design and
operation of our Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(b). Based upon the foregoing, as of September 10, 2005,
our Company's President and Chief Executive Officer along with our Company's
Executive Vice President, Chief Financial Officer and Secretary, concluded that
our Company's disclosure controls and procedures were effective as of September
10, 2005.
In the third quarter of fiscal 2005, our Company will complete the sale of our
U.S. distribution operations and the majority of our warehouse facilities and
related assets to C&S Wholesale Grocers, Inc. In connection with the sale of
these operations, our Company no longer maintains internal controls over
financial reporting relating to these warehouse physical inventories and the
related reconciliations. We are in the process of establishing controls over the
price and quantity of goods purchased from C&S Wholesale Grocers, Inc.
76
There have been no other changes during our Company's fiscal quarter ended
September 10, 2005 in our Company's internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
Company's internal control over financial reporting.
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.
77
PART II. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
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 14, 2005, there were 37,396,943
shares or 94.59% of the 39,537,186 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 87.51% of
the shares present.
Seventy-two percent (72%) of the total shares cast voted for the approval of the
Amendment to the 1998 Long Term Incentive and Share Award Plan to increase the
number of shares that may be issued under the Plan by 3,000,000.
ITEM 5 - OTHER INFORMATION
TERMINATION OF CREDIT AGREEMENT AND ENTRY INTO LETTER OF CREDIT AGREEMENT
On October 14, 2005, the Company terminated its Credit Agreement, and
concurrently, therewith, entered into new, cash collateralized, Letter of Credit
Agreement with Bank of America, N.A., as issuing bank. The Letter of Credit
enables the Company to issue letters of credit up to $200 million. The Company
is also negotiating a new $150 million revolving credit agreement that will be
collateralized by inventory, certain accounts receivable and pharmacy scripts.
See Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Liquidity and Capital Resources, for a description of the
Credit Agreement and the Letter of Credit Agreement.
The foregoing description of the Letter of Credit Agreement is qualified in its
entirety by reference to the full text of the Letter of Credit Agreement, filed
as Exhibit 10.42 to this Form 10-Q, and incorporated herein by reference.
ITEM 6 - EXHIBITS
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock Purchase Agreement, dated as of July 19, 2005, by and among the Company, A&P Luxembourg
S.a.r.l., Metro Inc. and 4296711 Canada Inc. (incorporated herein by reference to Exhibit 2.1 to
Form 8-K filed on July 22, 2005)
78
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 and restated through October 6,
2005 (incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on October 11, 2005)
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)
4.5 Third Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company
and Wilmington Trust Company (as successor to JPMorgan Chase Bank) (incorporated herein by
reference to Exhibit 4.1 to Form 8-K filed on August 23, 2005)
4.6 Fourth Supplemental Indenture, dated as of August 23, 2005, to the Indenture between the Company
and Wilmington Trust Company (as successor to JPMorgan Chase Bank). (incorporated herein by
reference to Exhibit 4.2 to Form 8-K filed on August 23, 2005)
10.1 Executive Employment Agreement, made and entered into as of the 15th day of August, 2005, by and
between the Company and Mr. Eric Claus (incorporated herein by reference to Exhibit 10.1 to Form
8-K filed on September 9, 2005)
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)
79
10.4 Confidential Separation and Release Agreement by and between William P. Costantini and The Great
Atlantic & Pacific Tea Company, Inc. dated November 4, 2004 (incorporated herein by reference to
Exhibit 10.4 to Form 10-Q filed on January 7, 2005)
10.5 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)
10.6 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)
10.7 Letter Agreement dated September 6, 2005, between Mitchell P. Goldstein and our Company
(incorporated herein by reference to Exhibit 10.2 to Form 8-K filed on September 9, 2005)
10.8 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) ("Jueptner Agreement")
10.9 Amendment to Jueptner Agreement dated November 10, 2004 (incorporated herein by reference to
Exhibit 10.8 to Form 10-K filed on May 10, 2005)
10.10 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)
10.11 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) ("Metzger Agreement")
10.12 Amendment to John E. Metzger Agreement dated September 13, 2004 (incorporated herein by reference
to Exhibit 10.11 to Form 10-K filed on May 10, 2005)
10.13 Amendment to John E. Metzger Agreement dated October 25, 2004 (incorporated herein by reference to
Exhibit 10.12 to Form 10-K filed on May 10, 2005)
10.14 Employment Agreement, made and entered into as of the 1st day of March 2005, by and between our
Company and William J. Moss (incorporated herein by reference to Exhibit 10.13 to Form 10-K filed
on May 10, 2005)
10.15 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) ("Piwek Agreement")
80
10.16 Amendment to Brian Piwek Agreement dated February 4, 2005 (incorporated herein by reference to
Exhibit 10.15 to Form 10-K filed on May 10, 2005)
10.17* Employment Agreement, made and entered into as of the 12th of September 2005, by and between our
Company and Paul Wiseman, as filed herein
10.18* Employment Agreement, made and entered into as of the 2nd of December 2004, by and between our
Company and Allan Richards, as filed herein
10.19* Employment Agreement, made and entered into as of the 2nd of December 2004, by and between our
Company and Stephen Slade, as filed herein
10.20 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)
10.21 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)
10.22 1994 Stock Option Plan (incorporated herein by reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.23 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)
10.24 Form of Stock Option Grant (incorporated herein by reference to Exhibit 10.20 to Form 10-K filed
on May 10, 2005)
10.25 Description of 2005 Turnaround Incentive Compensation Program (incorporated herein by reference to
Exhibit 10.21 to Form 10-K filed on May 10, 2005)
10.26 Form of Restricted Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.22
to Form 10-K filed on May 10, 2005)
10.27 1994 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Exhibit
10(f) to Form 10-K filed on May 24, 1995)
10.28 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)
10.29 Description of Management Incentive Plan (incorporated herein by reference to Exhibit 10.26 to
Form 10-K filed on May 10, 2005)
81
10.30 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)
10.31 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)
10.32 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)
10.33 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)
10.34 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)
10.35 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)
10.36 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)
10.37 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)
10.38* Asset Purchase Agreement, dated as of June 27, 2005, by and between the Company, Ocean Logistics
LLC and C&S Wholesale Grocers, Inc., as filed herein
10.39* Supply Agreement, dated as of June 27, 2005, by and between the Company and C&S Wholesale Grocers,
Inc., as filed herein
10.40* Information Technology Transition Services Agreement by and between The Great Atlantic and Pacific
Tea Company, Limited ("A&P Canada") and Metro, Inc. entered into on August 15, 2005, as filed
herein
10.41* Investor Agreement by and between A&P Luxembourg S.a.r.l., a wholly owned subsidiary of the
Company, and Metro, Inc. entered into on August 15, 2005, as filed herein
10.42* Letter of Credit Agreement, dated as of October 14, 2005 between the Company and Bank of America, N.A.,
as Issuing Bank, as filed herein.
14 Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14 to Form 10-K
filed on May 21, 2004)
82
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 Registered Public Accounting Firm (incorporated herein by reference to
Exhibit 23 to Form 10-K filed on May 10, 2005)
31.1* Certification of the Chief Executive Officer Pursuant Section 302 of the Sarbanes-Oxley Act of
2002
31.2* Certification of the Chief Financial Officer Pursuant 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
83
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 18, 2005 By: /s/ Brenda M. Galgano
-----------------------------------------------
Brenda M.Galgano, Senior Vice President,
Corporate Controller (Chief Accounting Officer)
84
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
SECTION 302 CERTIFICATION
I, Eric Claus, 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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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
d) 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/ Eric Claus Date: October 18, 2005
--------------
Eric Claus
President and
Chief Executive Officer
Exhibit 31.2
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) 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
d) 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 18, 2005
-------------------------
Mitchell P. Goldstein
Executive Vice President, Chief
Financial Officer & Secretary
Exhibit 32
CERTIFICATION ACCOMPANYING PERIODIC REPORT
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SS. 1350)
The undersigned, Eric Claus, President and Chief Executive Officer of The Great
Atlantic & Pacific Tea Company, Inc. ("Company"), and Mitchell P. Goldstein,
Executive Vice President, Chief Financial Officer & Secretary of the Company,
each hereby certifies that (1) the Quarterly Report of the Company on Form 10-Q
for the period ended September 10, 2005 fully complies with the requirements of
Section 13(a) or 15(d) 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 18, 2005 /s/ Eric Claus
--------------
Eric Claus
President
and
Chief Executive Officer
Dated: October 18, 2005 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Executive Vice President,
Chief Financial Officer &
Secretary