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 DECEMBER 3, 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 JANUARY 3, 2005 THE REGISTRANT HAD A TOTAL OF 41,008,716 SHARES OF COMMON
STOCK - $1 PAR VALUE OUTSTANDING.
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED 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 40 Weeks Ended
---------------------------- ---------------------------
Dec. 4, 2004 Dec. 4, 2004
(RESTATED (RESTATED
Dec. 3, 2005 SEE NOTE 2) Dec. 3, 2005 SEE NOTE 2)
------------ ------------ ------------ ------------
Sales $ 1,580,942 $ 2,523,759 $ 7,132,824 $ 8,294,617
Cost of merchandise sold (1,116,399) (1,827,221) (5,113,659) (5,982,570)
------------ ------------ ------------ ------------
Gross margin 464,543 696,538 2,019,165 2,312,047
Store operating, general and administrative
expense (546,100) (742,791) (2,283,928) (2,398,230)
------------ ------------ ------------ ------------
Loss from operations (81,557) (46,253) (264,763) (86,183)
(Loss) gain on sale of Canadian operations (6,083) - 912,468 -
Interest expense (15,398) (24,874) (76,783) (87,000)
Interest income 4,803 485 9,146 2,094
Minority interest in earnings of consolidated
franchisees - 2,815 (1,131) 1,097
Equity in earnings of Metro, Inc. 3,397 - 3,397 -
------------ ------------ ------------ ------------
(Loss) income from continuing operations
before income taxes (94,838) (67,827) 582,334 (169,992)
Benefit from (provision for) income taxes 21,083 (4,924) (152,885) (8,768)
------------ ------------ ------------ ------------
(Loss) income from continuing operations (73,755) (72,751) 429,449 (178,760)
Discontinued operations (Note 10):
Income (loss) from operations of discontinued
businesses, net of tax provision of $1,428
and $0 for the 12 weeks ended 12/3/05 and
12/4/04, respectively, and $1,232 and $0 for
the 40 weeks ended 12/3/05 and 12/4/04,
respectively 1,972 110 1,704 (929)
Gain (loss) on disposal of discontinued operations,
net of tax provision of $417 and $0 for the 12
weeks ended 12/3/05 and 12/4/04, respectively,
and $417 and $0 for the 40 weeks ended
12/3/05 and 12/4/04, respectively 577 (2,702) 577 (2,702)
------------ ------------ ------------ ------------
Income (loss) from discontinued operations 2,549 (2,592) 2,281 (3,631)
------------ ------------ ------------ ------------
Net (loss) income $ (71,206) $ (75,343) $ 431,730 $ (182,391)
============ ============ ============ ============
Net (loss) income per share - basic:
Continuing operations $ (1.80) $ (1.89) $ 10.71 $ (4.64)
Discontinued operations 0.06 (0.07) 0.06 (0.10)
------------ ------------ ------------ ------------
Net (loss) income per share - basic $ (1.74) $ (1.96) $ 10.77 $ (4.74)
============ ============ ============ ============
Net (loss) income per share - diluted:
Continuing operations $ (1.80) $ (1.89) $ 10.56 $ (4.64)
Discontinued operations 0.06 (0.07) 0.06 (0.10)
------------ ------------ ------------ ------------
Net (loss) income per share - diluted $ (1.74) $ (1.96) $ 10.62 $ (4.74)
============ ============ ============ ============
Weighted average number of common shares
outstanding 40,997,714 38,553,356 40,075,391 38,530,519
Common stock equivalents 622,161 255,997 559,174 298,054
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares outstanding 41,619,875 38,809,353 40,634,565 38,828,573
============ ============ ============ ============
See Notes to Consolidated Financial Statements
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
-------------- ------------- ------------- ------------- ----------------- ---------------
40 WEEK PERIOD ENDED
DECEMBER 3, 2005
--------------------
Balance at beginning of period 38,764,999 $ 38,765 $ 464,543 $ (266,198) $ (3,308) $ 233,802
Net income 431,730 431,730
Other comprehensive income 4,648 4,648
Stock options exercised 2,209,963 2,210 21,208 23,418
Other share based awards 5,303 5 6,965 6,970
---------- ------------ ------------ ------------ ------------ ------------
Balance at end of period 40,980,265 $ 40,980 $ 492,716 $ 165,532 $ 1,340 $ 700,568
========== ============ ============ ============ ============ ============
40 WEEK PERIOD ENDED
DECEMBER 4, 2004
--------------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (182,391) (182,391)
Other comprehensive income 40,754 40,754
Stock options exercised 38,674 38 540 578
---------- ------------ ------------ ------------ ------------ ------------
Balance at end of period 38,557,579 $ 38,557 $ 460,119 $ (260,491) $ 13,515 $ 251,700
========== ============ ============ ============ ============ ============
COMPREHENSIVE (LOSS) INCOME
---------------------------
12 Weeks Ended 40 Weeks Ended
---------------------------- ---------------------------
Dec. 3, 2005 Dec. 4, 2004 Dec. 3, 2005 Dec. 4, 2004
------------ ------------ ------------ -----------
Net (loss) income $ (71,206) $ (75,343) $ 431,730 $ (182,391)
------------ ------------ ------------ ------------
Foreign currency translation adjustment 2,591 27,999 5,511 40,196
Net unrealized gain (loss) on derivatives,
net of tax - 104 (57) 558
Net unrealized loss on marketable securities,
net of tax (891) - (806) -
------------ ------------ ------------ ------------
Other comprehensive income 1,700 28,103 4,648 40,754
------------ ------------ ------------ ------------
Total comprehensive (loss) income $ (69,506) $ (47,240) $ 436,378 $ (141,637)
============ ============ ============ ============
ACCUMULATED OTHER COMPREHENSIVE LOSS BALANCES
---------------------------------------------
Net Unrealized Accumulated
Foreign Loss 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 5,511 (806) (57) - 4,648
------------ ------------ ------------ -------- ----------
Balance at December 3, 2005 $ 8,546 $ (806) $ - $ (6,400) $ 1,340
============ ============ ============ ======== ==========
Balance at February 28, 2004 $ (23,892) $ - $ (158) $ (3,189) $ (27,239)
Current period change 40,196 - 558 - 40,754
------------ ------------ ------------ -------- ----------
Balance at December 4, 2004 $ 16,304 $ - $ 400 $ (3,189) $ 13,515
============ ============ ============ ======== ==========
See Notes to Consolidated Financial Statements
3
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
(Unaudited)
December 3, February 26,
2005 2005
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 127,511 $ 257,748
Restricted cash 146,651 -
Marketable securities 243,670 -
Accounts receivable, net of allowance for doubtful accounts
of $5,252 and $5,713 at December 3, 2005 and
February 26, 2005, respectively 145,570 145,507
Inventories 482,527 720,799
Prepaid expenses and other current assets 84,630 40,627
----------- -----------
Total current assets 1,230,559 1,164,681
----------- -----------
Non-current assets:
Property:
Property owned 874,252 1,476,574
Property leased under capital leases 23,683 39,126
----------- -----------
Property - net 897,935 1,515,700
Equity investment in Metro, Inc. 331,699 -
Other assets 47,882 121,587
----------- -----------
Total assets $ 2,508,075 $ 2,801,968
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 567 $ 2,278
Current portion of obligations under capital leases 2,324 8,331
Accounts payable 221,399 543,481
Book overdrafts 67,517 83,306
Accrued salaries, wages and benefits 110,799 181,173
Accrued taxes 39,767 51,991
Other accruals 165,887 207,642
----------- -----------
Total current liabilities 608,260 1,078,202
----------- -----------
Non-current liabilities:
Long-term debt 246,409 634,028
Long-term obligations under capital leases 32,698 52,184
Long-term real estate liabilities 276,670 328,316
Other non-current liabilities 643,470 471,382
Minority interest in consolidated franchisees - 4,054
----------- -----------
Total liabilities 1,807,507 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 - 40,980,265 and 38,764,999
shares at December 3, 2005 and February 26, 2005, respectively 40,980 38,765
Additional paid-in capital 492,716 464,543
Accumulated other comprehensive income (loss) 1,340 (3,308)
Accumulated earnings (deficit) 165,532 (266,198)
----------- -----------
Total stockholders' equity 700,568 233,802
----------- -----------
Total liabilities and stockholders' equity $ 2,508,075 $ 2,801,968
=========== ===========
See Notes to Consolidated Financial Statements
4
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
--------------------------------------------
(RESTATED - SEE NOTE 2)
Dec. 3, 2005 Dec. 4, 2004
------------ ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 431,730 $ (182,391)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Asset disposition initiative 100,372 (1,709)
Restructuring charge 62,736 -
Depreciation and amortization 164,042 205,683
Other non-current income taxes 119,643 -
Deferred income tax benefit - 431
(Gain) loss on disposal of owned property (25,836) 3,381
Impairment loss relating to Hurricane Katrina 6,090 -
Midwest long lived asset impairment charge - 34,688
Other property impairments 23,018 3,518
(Gain) loss on sale of discontinued operations (994) 2,702
Gain on sale of Canadian operations (912,468) -
Loss on derivatives 15,446 -
Equity in earnings of Metro, Inc. (3,397) -
Loss on early extinguishment of debt 28,623 -
Non-cash impact of early extinguishment of debt 809 -
Other share based awards 6,970 -
Other changes in assets and liabilities:
(Increase) decrease in receivables (25,770) 39,527
Decrease (increase) in inventories 33,432 (98,337)
Increase in prepaid expenses and other current assets (15,890) (26,410)
Increase in other assets (44) (20,679)
(Decrease) increase in accounts payable (89,717) 79,389
Decrease in accrued salaries, wages, benefits and taxes (36,152) (19,257)
Increase (decrease) in other accruals 8,558 (25,835)
Increase (decrease) in minority interest 1,806 (2,745)
Decrease in other non-current liabilities (59,721) (6,840)
Other operating activities, net 6,191 3,777
----------- -----------
Net cash used in operating activities (160,523) (11,107)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (134,762) (164,311)
Proceeds from disposal of property 62,538 15,665
Proceeds from sale of Canadian operations, net of cash disposed 960,689 -
Disposal related expenditures for sale of Canadian operations (53,543) -
Payments for derivatives (15,446) -
Increase in restricted cash (146,651) -
Purchases of marketable securities (517,883) -
Proceeds from maturities of marketable securities 274,835 -
Proceeds from dividends from Metro, Inc. 3,061 -
----------- -----------
Net cash provided by (used in) investing activities 432,838 (148,646)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings and other fees (413,948) (5,883)
Net proceeds from long-term real estate liabilities 1,339 29,912
Principal payments on capital leases (9,635) (10,041)
Proceeds from capital leases 10,000 -
(Decrease) increase in book overdrafts (10,887) 19,677
Deferred financing fees (2,921) (965)
Proceeds from exercises of stock options 23,418 233
----------- -----------
Net cash (used in) provided by financing activities (402,634) 32,933
Effect of exchange rate changes on cash and cash equivalents 82 6,506
----------- -----------
Net decrease in cash and cash equivalents (130,237) (120,314)
Cash and cash equivalents at beginning of period 257,748 297,008
----------- -----------
Cash and cash equivalents at end of period $ 127,511 $ 176,694
=========== ===========
See Notes to Consolidated Financial Statements
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 for the 12 and 40 weeks
ended December 3, 2005 and December 4, 2004, Consolidated Statements of Cash
Flows for the 40 weeks ended December 3, 2005 and December 4, 2004, and the
Consolidated Balance Sheets at December 3, 2005 and February 26, 2005, of The
Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "Our Company"),
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, 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.
As we have not identified a buyer for our operations in the Midwestern United
States, our current plan is to operate this business as part of our core
business going forward. Thus, the assets and liabilities relating to our
operations in the Midwestern United States have not been classified as held for
sale at December 3, 2005.
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 40 weeks ended December 4, 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
Dec. 4, 2004 Corrections 12 weeks ended
As Previously to lease Dec. 4, 2004
Reported accounting AS RESTATED
-------------- ------------- --------------
Sales $ 2,523,759 $ - $ 2,523,759
Cost of merchandise sold (1,827,221) - (1,827,221)
----------- ----------- -----------
Gross margin 696,538 - 696,538
Store operating, general and administrative expense (748,447) 5,656 (742,791)
----------- ----------- -----------
(Loss) income from operations (51,909) 5,656 (46,253)
Interest expense (19,218) (5,656) (24,874)
Interest income 485 - 485
Minority interest in earnings of consolidated franchisees 2,815 - 2,815
----------- ----------- -----------
Loss from continuing operations before
income taxes (67,827) - (67,827)
Provision for income taxes (4,924) - (4,924)
----------- ----------- -----------
Loss from continuing operations (72,751) - (72,751)
Discontinued operations:
Income from operations of discontinued
businesses, net of tax 110 - 110
Loss on disposal of discontinued
operations, net of tax (2,702) - (2,702)
----------- ----------- -----------
Loss from discontinued operations (2,592) - (2,592)
----------- ----------- -----------
Net loss $ (75,343) $ - $ (75,343)
=========== =========== ===========
Net loss - basic & diluted $ (1.96) $ - $ (1.96)
=========== =========== ===========
Depreciation $ (62,854) $ 207 $ (62,647)
----------- ----------- -----------
8
CONSOLIDATED STATEMENT OF OPERATIONS
Consolidated
A&P for the Consolidated
40 weeks ended A&P for the
Dec. 4, 2004 Corrections 40 weeks ended
As Previously to lease Dec. 4, 2004
Reported accounting AS RESTATED
----------- ------------- -------------
Sales $ 8,294,617 $ - $ 8,294,617
Cost of merchandise sold (5,982,570) - (5,982,570)
----------- ----------- -----------
Gross margin 2,312,047 - 2,312,047
Store operating, general and administrative expense (2,417,084) 18,854 (2,398,230)
----------- ----------- -----------
(Loss) income from operations (105,037) 18,854 (86,183)
Interest expense (68,146) (18,854) (87,000)
Interest income 2,094 - 2,094
Minority interest in earnings of consolidated franchisees 1,097 - 1,097
----------- ----------- -----------
Loss from continuing operations before
income taxes (169,992) - (169,992)
Provision for income taxes (8,768) - (8,768)
----------- ----------- -----------
Loss from continuing operations (178,760) - (178,760)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (929) - (929)
Loss on disposal of discontinued
operations, net of tax (2,702) - (2,702)
----------- ----------- -----------
Loss from discontinued operations (3,631) - (3,631)
----------- ----------- -----------
Net loss $ (182,391) $ - $ (182,391)
=========== =========== ===========
Net loss - basic & diluted $ (4.74) $ - $ (4.74)
=========== =========== ===========
Depreciation $ (206,373) $ 690 $ (205,683)
----------- ----------- -----------
SELECTED CONSOLIDATED STATEMENT OF CASH FLOW DATA FOR THE 40 WEEKS ENDED DECEMBER 4, 2004:
As Corrections Consolidated
Previously to Lease A&P
Reported Accounting AS RESTATED
------------- -------------- --------------
Other property impairments $ 2,048 $ 1,470 $ 3,518
Depreciation and amortization 206,373 (690) 205,683
(Increase) decrease in prepaid expenses and other current assets (26,523) 113 (26,410)
(Increase) decrease in other assets (22,666) 1,987 (20,679)
(Decrease) increase in other non-current liabilities (8,353) 1,513
(6,840)
Net cash (used in) provided by operating activities (15,500) 4,393
(11,107)
Expenditures for property (150,146) (14,165) (164,311)
Net cash used in investing activities (134,481) (14,165)
(148,646)
Proceeds from long-term borrowings 19,321 (19,321) -
Net proceeds from long-term real estate liabilities - 29,912
29,912
Principal payments on capital leases (10,136) 95
(10,041)
Net cash provided by financing activities 22,247 10,686 32,933
Effect of exchange rate changes on cash and cash equivalents 7,420 (914) 6,506
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
have evaluated the provisions of FIN 47 and concluded that its adoption will not
have a material impact on our consolidated financial position 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 June 2005, the Emerging Issues Task Force ("EITF") reached a consensus on
EITF Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements Purchased after Lease Inception or Acquired in a Business
Combination" ("EITF 05-6"). EITF 05-6 requires that leasehold improvements
acquired in a business combination be amortized over the shorter of the useful
life of the assets or a term that includes required lease periods and renewals
that are deemed to be reasonably assured at the date of acquisition. EITF 05-6
also requires that leasehold improvements that are placed in service
significantly after and not contemplated at or near the beginning of the lease
term be amortized over the shorter of the useful life of the assets or a term
that includes required lease periods and renewals that are deemed to be
reasonably assured at the date the leasehold improvements are purchased. EITF
05-6 is effective for our third quarter beginning September 11, 2005. The impact
of EITF 05-6 is not expected to have a material effect on our Company's
financial condition and results of operations.
In September 2005, the FASB ratified the consensus reached in EITF Issue No.
04-13, "Accounting for Purchases and Sales of Inventory with the Same
Counterparty" (EITF 04-13). EITF 04-13 defines when a purchase and a sale of
inventory with the same party that operates in the same line of business should
be considered a single nonmonetary transaction. EITF 04-13 is effective for new
arrangements that a company enters into in periods beginning after March 15,
2006 (our second quarter beginning June 18, 2006). We have evaluated the
provisions of EITF 04-13 and have adopted the guidance. This adoption did not
have a material impact on our Company's financial condition or results of
operations.
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.
On November 3, 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS
124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" (FSP FAS 115-1 and FAS 124-1"). FSP FAS 115-1 and FAS 124-1
address the determination as to when an investment is considered impaired,
whether that impairment is other-than-temporary and the measurement of loss. It
also includes accounting considerations subsequent to the recognition of an
other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 and FAS 124-1 are effective for reporting periods
beginning after December 15, 2005 and are required to be adopted by our Company
in the first quarter of fiscal 2006. We have evaluated the impact of FSP FAS
115-1 and FAS 124-1 on our Company and concluded that its adoption will not have
a material impact on our consolidated financial position or results of
operations. We have included the necessary disclosures relating to unrealized
losses that have not been recognized as other-than-temporary impairments in Note
8 - Cash, Restricted Cash, Cash Equivalents, and Marketable Securities at
December 3, 2005.
11
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 $492.1 million at December 3, 2005.
The following table summarizes the status and results of our Company's equity
investment in Metro, Inc. from the date of ownership through December 3, 2005:
Beginning investment at August 13, 2005 $ 494,578
Deferred portion of gain on sale of A&P Canada (171,714)
Dividends and distributions received (3,061)
Equity earnings in Metro, Inc. 3,397
Foreign currency translation 8,499
--------------
Equity investment in Metro, Inc. $ 331,699
==============
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 will record our equity earnings
or losses relating to our equity investment in Metro, Inc. on about a
three-month lag period as permitted by APB 18, "The Equity Method of Accounting
for Investments in Common Stock." Thus, during the 12 and 40 weeks ended
December 3, 2005, we recorded $3.4 million in equity earnings relating to our
equity investment in Metro, Inc. and included this amount in "Equity in earnings
of Metro, Inc." on our Consolidated Statements of Operations.
The difference between the carrying value of our investment of $331.7 million
and the amount of our underlying equity in Metro, Inc.'s net assets of $241.1
million is $90.6 million.
12
During the third quarter of fiscal 2005, we recorded additional costs relating
to the sale of our Canadian operations of $6.1 million, which resulted in a
year-to-date pretax gain of $912.5 million (gain of $780.4 million after tax),
and are included in "(Loss) gain on sale of Canadian operations" in our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 3,
2005, respectively. Although the Canadian operations have been sold at December
3, 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
As we have not identified a buyer for our operations in the Midwestern United
States, our current plan is to operate this business as part of our core
business going forward. As further discussed in Note 11 - Asset Disposition
Initiatives, we closed 35 of these stores during the 40 weeks ended December 3,
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 and wrote off approximately $3.9 million of unamortized debt
discount and issuance costs related to this tender offer.
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 40
weeks ended December 3, 2005.
13
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 fourth 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 $3.7 million ($1.1 million in "Cost of merchandise sold"
and $2.6 million in "Store, operating, general and administrative expense" in
our Consolidated Statement of Operations) and $70.6 million ($3.3 million in
"Cost of merchandise sold" and $67.3 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 40 weeks ended December 3,
2005, respectively.
These costs are detailed as follows:
12 weeks ended 40 weeks ended
December 3, 2005 December 3, 2005
-------------------------- ----------------------
BALANCE SHEET ACCRUALS
Occupancy related $ 1,000 $ 4,400
Severance and benefits (482) 46,345
------------------- ------------------
Total accrued to Balance Sheet 518 50,745
------------------ ------------------
NON-ACCRUABLE ITEMS RECORDED ON
STATEMENTS OF OPERATIONS
Property writeoffs 106 8,677
Inventory markdowns 1,073 3,314
Non-accruable closing costs 2,044 7,904
------------------ ------------------
Total non-accruable items 3,223 19,895
------------------ ------------------
TOTAL AMOUNT RECORDED ON STATEMENTS
OF OPERATIONS $ 3,741 70,640
------------------ ------------------
Less non-accruable closing costs (7,904)
------------------
TOTAL AMOUNT RECORDED ON STATEMENTS
OF CASH FLOWS - RESTRUCTURING CHARGE $ 62,736
=================
14
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) 4,400 6,410 10,810
Utilization (3) (220) (42,975) (43,195)
Adjustments (4) - (482) (482)
----------- ------------ ------------
Balance at
Dec. 3, 2005 $ 4,180 $ 3,370 $ 7,550
=========== =========== ===========
(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 and third quarters 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 and third quarters of fiscal 2005 represented
charges related to additional individual severings as well as
retention and productivity incentives that were accrued as earned.
(3) Occupancy utilization of $0.2 million for the 40 weeks ended December
3, 2005 represents payments made to C&S Wholesale Grocers, Inc. for
the warehouses. Severance and benefits utilization of $43.0 million
for 40 weeks ended December 3, 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.
(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 the third quarter of fiscal
2005, we recorded adjustments of $0.5 million primarily related to
reversals of previously accrued severance and benefits due to changes
in individual severings and associated benefit costs.
As of December 3, 2005, approximately $1.1 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.
We have evaluated the liability balance of $7.6 million as of December 3, 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.
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.
15
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 December 3, 2005, 21 of these stores were open and operating.
During the third quarter of fiscal 2005, we determined that we would not re-open
5 of our stores and recorded a charge for future occupancy costs of $7.1
million, which has been included in "Store operating, general and administrative
expense" in our Statement of Consolidated Operations. We are currently working
to re-open the remaining two stores in the fourth quarter of fiscal 2005.
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, December
3, 2005, we were able to determine that we incurred impairment losses of $6.1
million for property, plant & equipment that was not covered by insurance. This
amount has been included in "Impairment loss relating to Hurricane Katrina" in
our Consolidated Statement of Cash Flows for the 40 weeks ended December 3,
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 40 weeks ended
December 3, 2005.
8. CASH, RESTRICTED CASH, CASH EQUIVALENTS, AND MARKETABLE SECURITIES
At December 3, 2005, we had $146.7 million in restricted cash, which was held in
a money market fund and can only be used as collateral for our new Letter of
Credit Agreement that we entered into during the third quarter of fiscal 2005.
Refer to Note 17 - Indebtedness for further discussion of our new Letter of
Credit Agreement and Revolving Credit Agreement.
Our Company considers all highly liquid investments with maturities of ninety
days or less when purchased to be cash equivalents. Investments with maturities
greater than ninety days when purchased 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.
16
The following is a summary of cash, restricted cash, cash equivalents, and
marketable securities as of December 3, 2005 and February 26, 2005:
At December 3, 2005
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Costs Gains Losses Value
------------- ------------- ------------- -------------
CLASSIFIED AS:
Cash $ 104,624 $ - $ - $ 104,624
Restricted cash 146,651 - - 146,651
Cash equivalents:
Money market funds 22,887 - - 22,887
----------- ----------- ----------- -----------
Total cash equivalents 22,887 - - 22,887
----------- ----------- ----------- -----------
Marketable securities:
Corporate bonds 51,902 - (414) 51,488
Securities of the U.S. government and its agencies 45,483 - (392) 45,091
Auction rate securities 147,089 2 - 147,091
----------- ----------- ----------- -----------
Total marketable securities 244,474 2 (806) 243,670
----------- ----------- ------------ -----------
Total cash, restricted cash, cash equivalents and marketable
securities $ 518,636 $ 2 $ (806) $ 517,832
=========== =========== ============ ===========
SECURITIES AVAILABLE-FOR-SALE:
Maturing within one year $ 182,004 $ 181,953
=========== ===========
Maturing greater than one year $ 85,357 $ 84,604
=========== ===========
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 following table provides the breakdown of the investments with unrealized
losses at December 3, 2005. There were no investments with unrealized losses at
February 26, 2005.
Less than 12 Months 12 Months or Longer Total
------------------------ ------------------------ -------------------------
Gross Gross Gross
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- ----------
Corporate bonds $11,975 $ (53) $39,513 $ (361) $51,488 $ (414)
Securities of the U.S.
government and
its agencies - - 45,091 (392) 45,091 (392)
------- ------- ------- ------- ------- -------
Total $11,975 $ (53) $84,604 $ (753) $96,579 $ (806)
======= ======= ======= ======= ======= =======
17
Corporate bonds: Our unrealized losses on investments in corporate bonds were
caused by interest rate increases by the Federal Reserve. The contractual terms
of those investments do not permit the issuer to settle the security at a price
less than the amortized cost of the investment. We do not believe it is probable
that we will be unable to collect all amounts due according to the contractual
terms of these investments. Therefore, it is expected that the debentures would
not be settled at a price less than the amortized cost of the investment.
Because we have the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, we do not consider those
investments to be other-than-temporarily impaired at December 3, 2005.
Securities of the U.S. government and its agencies: The unrealized losses on our
investments in securities of the U.S. government and its agencies were caused by
interest rate increases by the Federal Reserve. The contractual terms of those
investments do not permit the issuer to settle the securities at a price less
than the amortized cost of the investment. Because we have the ability and
intent to hold those investments until a recovery of fair value, which may be
maturity, we do not consider those investments to be other-than-temporarily
impaired at December 3, 2005.
There were no gross realized gains or losses on sales of investments for the 12
and 40 weeks ended December 3, 2005.
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 40 weeks ended December 3, 2005 and December 4, 2004, we
recorded impairment losses on long-lived assets as follows:
12 weeks ended Dec. 3, 2005 12 weeks ended Dec. 4, 2004
--------------------------- ---------------------------
U.S. Canada Total U.S. Canada Total
------- ------ ------- ------- ------ -------
Impairments due to closure or conversion in the
normal course of business $ 3,760 $ - $ 3,760 $ 360 $ - $ 360
Impairments due to unrecoverable assets 8,116 - 8,116 34,688 - 34,688
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (2) 12 - 12 - - -
Impairments related to property held as part of the 2001
Asset Disposition (2) - - - 1,709 - 1,709
Impairments related to the closure of the Kohl's business (4) - - - 602 - 602
------- ------- ------- ------- ------ -------
Total impairments $17,978 $ - $17,978 $37,359 $ - $37,359
======= ======= ======= ======= ====== =======
18
40 weeks ended Dec. 3, 2005 40 weeks ended Dec. 4, 2004
--------------------------- ---------------------------
U.S. Canada Total U.S. Canada Total
------- ------ ------- ------- ------ -------
Impairments due to closure or conversion in the
normal course of business $ 4,784 $ 506 $ 5,290 $ 2,039 $ - $ 2,039
Impairments due to unrecoverable assets 17,728 - 17,728 34,688 - 34,688
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (2) 6,873 - 6,873 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (3) 8,590 - 8,590 - - -
Impairments related to property held as part of the 2001
Asset Disposition (2) - - - 1,709 - 1,709
Impairments related to the closure of the Kohl's business (4) - - - 602 - 602
------- ------- ------- ------- ----- -------
Total impairments $44,065 $ 506 $44,571 $39,038 $ - $39,038
======= ======= ======= ======= ===== =======
(1) Refer to Note 7 - Hurricane Katrina and Impact on U.S. Business
(2) Refer to Note 11 - Asset Disposition Initiatives
(3) Refer to Note 6 - Sale of our U.S. Distribution Operations and
Warehouses
(4) Refer to Note 10 - Discontinued Operations
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 40 weeks ended December 3, 2005, we recorded impairment losses
on property, plant and equipment of $3.8 million and $5.3 million, respectively,
related to stores that were or will be closed in the normal course of business
as compared to $0.4 million and $1.2 million, respectively, in impairment losses
on property, plant and equipment related to stores that were or will be closed
in the normal course of business during the 12 and 40 weeks ended December 4,
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 40
weeks ended December 4, 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 40 weeks ended December 3, 2005.
These amounts were included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations.
19
Impairments due to unrecoverable assets
Through the 12 and 40 weeks ended December 3, 2005, we experienced operating
losses for two of the past three years for two of our United States' asset
groups, located in the Northeast, which we believe was a triggering event under
SFAS 144 for potential impairment of the asset groups' long-lived assets. Thus,
we reviewed the carrying value of these asset groups for potential impairment,
and based upon internal analysis, we estimated the asset groups' future cash
flows from their long-lived assets, which primarily consisted of equipment and
leasehold improvements. As these asset groups' carrying value were not
recoverable from their 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
these asset groups' long-lived assets of $8.1 million and $17.8 million,
respectively, as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the 12
and 40 weeks ended December 3, 2005.
During both the 12 and 40 weeks ended December 4, 2004, we recorded an
impairment charge of $34.7 million relating to certain of our United States
asset groups, located in the Midwest, as a component of operating loss in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations.
Impairments related to closure of stores impacted by Hurricane Katrina
During both the 12 and 40 weeks ended December 3, 2005, we recorded impairment
losses on property, plant and equipment that was not covered by insurance of
$6.1 million as discussed in Note 7 - Hurricane Katrina and Impact on U.S.
Business. This amount was included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the 12
and 40 weeks ended December 3, 2005. There were no such amounts recorded during
the 12 and 40 weeks ended December 4, 2004.
Impairments related to the divestiture of the Midwestern U.S. business
During the 12 and 40 weeks ended December 3, 2005, we recorded impairment losses
on property, plant and equipment of $0.01 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 40 weeks ended December 3, 2005. There were no such amounts
recorded during the 12 and 40 weeks ended December 4, 2004.
Impairments related to the sale of U.S. distribution operations and warehouses
During the 12 and 40 weeks ended December 3, 2005, we recorded impairment losses
on property, plant and equipment of nil 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 40 weeks ended December 3,
2005. There were no such amounts recorded during the 12 and 40 weeks ended
December 4, 2004.
20
Impairments related to property held as part of the 2001 Asset Disposition
During the 12 and 40 weeks ended December 4, 2004, we recorded impairment losses
on property, plant and equipment of $1.7 million related to property held as
part of the 2001 Asset Disposition as discussed in Note 11 - Asset Disposition
Initiatives. This amount was included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations. There were
no such amounts recorded during the 12 and 40 weeks ended December 3, 2005.
Impairments related to the closure of the Kohl's business
During the 12 and 40 weeks ended December 4, 2004, we recorded impairment losses
on property, plant and equipment of $0.6 million related to stores closed as a
result of our exit of the Kohl's business as discussed in Note 10 - Discontinued
Operations. This amount was included in "Gain (loss) on disposal of discontinued
operations, net of tax" in our Consolidated Statements of Operations. There were
no such amounts recorded during the 12 and 40 weeks ended December 3, 2005.
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.
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 captions "Income (loss)
from operations of discontinued businesses, net of tax" and "Gain (loss) on
disposal of discontinued operations, net of tax" for the 12 and 40 weeks ending
December 3, 2005 and December 4, 2004.
21
12 Weeks Ended December 3, 2005
-------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- ------- --------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (10) 3,546 (136) 3,400
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, before
tax (10) 3,546 (136) 3,400
Tax benefit (provision) 4 (1,489) 57 (1,428)
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, net
of tax $ (6) $ 2,057 $ (79) $ 1,972
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (10) $ (26) $ (136) $ (172)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (145) - (145)
------- ------- ------- -------
Total disposal related costs $ (10) $ 3,546 $ (136) $ 3,400
------- ------- ------- -------
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 994 $ - $ 994
------- ------- ------- -------
Gain on disposal of discontinued
businesses, before tax - 994 - 994
Tax provision - (417) - (417)
------- ------- ------- -------
Gain on disposal of discontinued
businesses, net of tax $ - $ 577 $ - $ 577
======= ======= ======= =======
22
12 Weeks ended December 4, 2004
-------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- ------- --------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 5 137 (32) 110
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, before
tax 5 137 (32) 110
Tax provision - - - -
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, net of
tax $ 5 $ 137 $ (32) $ 110
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ 7 $ (11) $ (32) $ (36)
Reversal of previously accrued
occupancy related costs - 354 - 354
Interest accretion on present value of
future occupancy and
severance costs (2) (206) - (208)
------- ------- ------- -------
Total disposal related costs $ 5 $ 137 $ (32) $ 110
------- ------- ------- -------
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
------- ------- ------- -------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
------- ------- ------- -------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $(2,100) $(2,702)
======= ======= ======= =======
23
40 Weeks ended December 3, 2005
-------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- ------- --------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (47) 3,170 (187) 2,936
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, before
tax (47) 3,170 (187) 2,936
Tax benefit (provision) 20 (1,331) 79 (1,232)
------- ------- ------- -------
(Loss) income from operations of
discontinued businesses, net
of tax $ (27) $ 1,839 $ (108) $ 1,704
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (47) $ (44) $ (187) $ (278)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (503) - (503)
------- ------- ------- -------
Total disposal related costs $ (47) $ 3,170 $ (187) $ 2,936
------- ------- ------- -------
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 994 $ - $ 994
------- ------- ------- -------
Gain on disposal of discontinued
businesses, before tax - 994 - 994
Tax provision - (417) - (417)
------- ------- ------- -------
Gain on disposal of discontinued
businesses, net of tax $ - $ 577 $ - $ 577
======= ======= ======= =======
24
40 Weeks ended December 4, 2004
-------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
----------- ------- ------- --------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 333 (637) (625) (929)
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, before
tax 333 (637) (625) (929)
Tax provision - - - -
------- ------- ------- -------
Income (loss) from operations of
discontinued businesses, net of
tax $ 333 $ (637) $ (625) $ (929)
======= ======= ======= =======
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 667 (401) (625) (359)
Interest accretion on present value
of future occupancy and
severance costs (8) (590) - (598)
------- ------- ------- -------
Total disposal related costs $ 333 $ (637) $ (625) $ (929)
------- ------- ------- -------
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
------- ------- ------- -------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
------- ------- ------- -------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $(2,100) $(2,702)
======= ======= ======= =======
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
December 3, 2005, we have closed all locations in the northern New England
market.
During the 12 and 40 weeks ended December 3, 2005, we incurred additional pretax
costs to wind down our operations in this region subsequent to the sale of these
stores of $0.01 million and $0.05 million, respectively, primarily related to
non-accruable closing costs. During the 12 and 40 weeks ended December 4, 2004,
we recorded gains of nil and $0.3 million, respectively, primarily due to
favorable results of winding down this business. These amounts were included in
"Income (loss) from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for the 12 and 40 weeks ended December 3,
2005 and December 4, 2004.
25
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
December 3, 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 December 3, 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 40 weeks ended December 3, 2005, we recorded a pretax gain of
$3.5 million and $3.2 million, respectively, primarily due to the reversal of
previously accrued occupancy related costs offset by the costs of winding down
this business. During the 12 and 40 weeks ended December 4, 2004, we recorded a
gain of $0.1 million and a charge of $0.6 million, respectively, primarily due
to the residual benefits and costs of winding down this business. These amounts
were included in "Income (loss) from operations of discontinued businesses, net
of tax" on our Consolidated Statements of Operations for the 12 and 40 weeks
ended December 3, 2005 and December 4, 2004.
Further, during the 12 and 40 weeks ended December 3, 2005, we recorded a pretax
gain on the sale of property of $1.0 million. During the 12 and 40 weeks ended
December 4, 2004, we recorded additional impairment losses of $0.6 million as a
result of originally estimated proceeds on the disposal of these assets not
being achieved. These amounts were included in "Gain (loss) on disposal of
discontinued operations, net of tax" on our Statements of Consolidated
Operations for those periods.
26
The following table summarizes the reserve activity related to the exit of the
Kohl's market since the charge was recorded through the 40 weeks ended December
3, 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) 466 37 - 503
Utilization (3) (2,447) (2,088) - (4,535)
Adjustments (4) (4,299) 582 - (3,717)
------------- ------------- ------------- -------------
Balance at December 3, 2005 $ 11,175 $ 1,216 $ - $ 12,391
============ ============= ============= ============
(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 third 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. During the third quarter of
fiscal 2005, we recorded adjustments relating to (i.) a reversal of
previously accrued occupancy related costs of $3.7 million due to
favorable results of terminating the Kohl's warehouse lease and (ii.)
the reclassification of $0.6 million between the liabilities for
occupancy and severance and benefits to properly state their respective
ending balances at December 3, 2005.
We paid $9.7 million of the total occupancy charges from the time of the
original charge through December 3, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $12.5 million of the total original severance and
benefits charges from the time of the original charges through December 3, 2005,
which resulted from the termination of approximately 2,000 employees. The
remaining occupancy liability of $11.2 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 $1.2 million relates to future obligations
for early withdrawal from multi-employer union pension plans which will be paid
by mid-2006.
27
At December 3, 2005 and February 26, 2005, $3.7 million and $5.9 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$8.7 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 $12.4 million as of December 3, 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.
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 40 weeks ended December 3, 2005, we incurred pretax costs of
$0.1 million and $0.2 million to wind down our operations in this business
subsequent to the sale. Similarly, we incurred pretax costs of $0.03 million and
$0.6 million during the 12 and 40 weeks ended December 4, 2004, respectively,
related to winding down this business subsequent to the sale. These amounts were
included in "Income (loss) from operations of discontinued businesses, net of
tax" on our Consolidated Statements of Operations for the 12 and 40 weeks ended
December 3, 2005 and December 4, 2004. During the 12 and 40 weeks ended December
4, 2004, we incurred costs of $2.1 million which consisted of a post-sale
working capital settlement between the buyer and our Company for which the
amount was not determinable at the time of the sale. This amount is included in
"Gain (loss) on disposal of discontinued operations, net of tax" in our
Statements of Consolidated Operations.
OTHER
Although the Canadian operations have been sold as of December 3, 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, second and
third quarters of fiscal 2005, we initiated efforts to divest our businesses in
the Midwestern United States and closed 35 of those stores (Divestiture of the
Midwestern U.S. Business).
28
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 40 weeks ended December 3, 2005 and
December 4, 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".
12 Weeks Ended December 3, 2005
----------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- ------------- ------------- --------
BALANCE SHEET ACCRUALS
Vacancy $ - $ (1,689) $ 302 $ 16,925 $ 15,538
PV interest 328 471 184 646 1,629
Severance - - - 591 591
Total accrued to
balance sheets
-------- -------- -------- -------- --------
328 (1,218) 486 18,162 17,758
-------- -------- -------- -------- --------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 12 12
Inventory markdowns - - - 138 138
Closing costs - - - 1,059 1,059
-------- -------- -------- -------- --------
Total non-accruable items - - - 621 621
-------- -------- -------- -------- --------
Less PV interest (328) (471) (184) (646) (1,629)
-------- -------- -------- -------- --------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST - (1,689) 302 18,137 16,750
======== ======== ======== ======== ========
29
12 Weeks Ended December 4, 2004
-------------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
------- ----------- ------------- -------
BALANCE SHEET ACCRUALS
PV interest $ 418 $ 553 $ 154 $ 1,125
------- ------- ------- -------
Total accrued to
balance sheets 418 553 154 1,125
------- ------- ------- -------
Occupancy reversals - (4,488) - (4,488)
------- ------- ------- -------
Adjustments to
balance sheets - (4,488) - (4,488)
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 1,709 - 1,709
------- ------- ------- -------
Total non-accruable items - 1,709 - 1,709
------- ------- ------- -------
Less PV interest (418) (553) (154) (1,125)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST $ - $(2,779) $ - $(2,779)
======= ======= ======= =======
30
40 Weeks Ended December 3, 2005
----------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
--------- ----------- --------------- ------------ ---------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ (1,689) $ 3,662 $ 88,443 $ 87,846
PV interest 1,228 1,703 521 782 4,234
Severance - - - 2,710 2,710
--------- --------- --------- --------- ---------
Total accrued to
balance sheets (1,342) 14 4,183 91,935 94,790
--------- --------- --------- --------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 6,873 6,873
Inventory markdowns - - - 1,268 1,268
Loss on sale of property - - - 2,263 2,263
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 4,016 4,016
--------- --------- --------- --------- ---------
Total non-accruable items - - - 12,962 12,962
--------- --------- --------- --------- ---------
Less PV interest (1,228) (1,703) (521) (782) (4,234)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (2,570) (1,689) 3,662 104,115 103,518
--------- --------- --------- --------- ---------
Less Gain on sale
of pharmacy
scripts - - - 870 870
Less closing costs - - - (4,016) (4,016)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS (2,570) (1,689) 3,662 100,969 100,372
========= ========= ========= ========= =========
31
40 Weeks Ended December 4, 2004
-------------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
------- ----------- ------------- -------
BALANCE SHEET ACCRUALS
PV interest $ 1,494 $ 1,902 $ 534 $ 3,930
------- ------- ------- -------
Total accrued to
balance sheets 1,494 1,902 534 3,930
------- ------- ------- -------
Occupancy reversals - (4,488) - (4,488)
------- ------- ------- -------
Adjustments to
balance sheets - (4,488) - (4,488)
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 1,709 90 1,799
Inventory markdowns - - 291 291
Closing costs - - 689 689
------- ------- ------- -------
Total non-accruable items - 1,709 1,070 2,779
------- ------- ------- -------
Less PV interest (1,494) (1,902) (534) (3,930)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST $ - $(2,779) $ 1,070 $(1,709)
======= ======= ======= =======
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 December 3, 2005, we had
closed all stores and facilities related to this phase of the initiative.
32
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) 1,228 7 1,235 - - - 1,228 7 1,235
Utilization (2) (4,352) (167) (4,519) (171) - (171) (4,523) (167) (4,690)
Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660)
--------- --------- --------- -------- -------- -------- --------- ---------- ---------
Balance at
December 3, 2005 $ 22,270 $ - $ 22,270 $ 1,489 $ - $ 1,489 $ 23,759 $ - $ 23,759
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.2 million
during the 40 weeks ended December 3, 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 $4.5 million during the 40
weeks ended December 3, 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 40 weeks ended December 3, 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 40 weeks ended December 3, 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 December 3,
2005.
We paid $102.9 million of the total occupancy charges from the time of the
original charges through December 3, 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 December 3, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $22.3 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.
33
None of these stores were open during either of the first, second or third
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 December 3, 2005 and February 26, 2005, approximately $5.6 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 December 3, 2005 of $23.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 ASSET DISPOSITION
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of December 3, 2005,
we had closed all stores and facilities related to this phase of the initiative.
34
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) 1,703 - 1,703 - - - 1,703 - 1,703
Utilization (2) (3,640) - (3,640) (75) - (75) (3,715) - (3,715)
Adjustments (3) (1,689) - (1,689) - - - (1,689) - (1,689)
-------- -------- -------- -------- -------- -------- ---------- --------- ---------
Balance at
December 3, 2005 $ 28,273 $ - $ 28,273 $ 39 $ - $ 39 $ 28,312 $ - $ 28,312
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.7
million during the 40 weeks ended December 3, 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 $3.6 million during the
40 weeks ended December 3, 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 40 weeks ended December
3, 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.
35
During fiscal 2005, we recorded adjustments of $1.7 million related to the
reversals of previously accrued occupancy costs due to a favorable result
of subleasing one of the closed properties.
We paid $42.8 million ($39.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
December 3, 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
December 3, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $28.3 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.04 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At December 3, 2005 and February 26, 2005, approximately $6.6 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, second or third
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 December 3, 2005 of $28.3 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. Our 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 December 3, 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.
36
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) 521 - 521
Utilization (2) (2,220) (6) (2,226)
Adjustment (3) 3,662 - 3,662
------------ ------------- ----------
Balance at
December 3, 2005 $ 17,865 $ - $ 17,865
============ ============= ==========
(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 40 weeks ended December 3, 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 $2.2 million
during fiscal 2003, fiscal 2004 and the 40 weeks ended December 3,
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 40 weeks ended December 3,
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 40 weeks ended December 3,
2005, we recorded an increase of $3.7 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 $8.1 million of the total occupancy charges from the time of the
original charge through December 3, 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 December 3, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $17.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of December 3, 2005 and no additional future payments
for severance and benefits to individual employees will be paid out.
37
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 3, 2005 and December 4, 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 40 Weeks Ended
----------------------------------- -----------------------------------
December 3, December 4, December 3, December 4,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ - $ - $ - $ 2,433
============== ============== =============== ==============
Loss from operations $ - $ - $ - $ (47)
============== ============== =============== ==============
At December 4, 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 $17.9 million as of December 3, 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 MIDWEST OPERATIONS
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 business in the Midwestern United States. This planned divestiture
included the closing of a total of 35 stores, all of which have been closed as
of December 3, 2005. The remaining business located in the Midwestern United
States will continue to operate as part of our core business going forward.
During the 12 and 40 weeks ended December 3, 2005, we recorded charges of $18.1
million and $104.1 million, respectively, related to these closures ($0.2
million and $1.3 million in "Cost of merchandise sold," respectively, and $17.9
million and $102.8 million, respectively, in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations), excluding
PV interest.
12 Weeks Ended 40 Weeks Ended
December 3, 2005 December 3, 2005
---------------- ---------------
Occupancy related $ 16,925 $ 88,443
Severance and benefits 591 2,710
Capital lease termination (588) (588)
Property writeoffs 12 6,873
Loss on the sale of fixed assets - 2,263
Sale of pharmacy scripts - (870)
Inventory markdowns 138 1,268
Nonaccruable closing costs 1,059 4,016
-------------- ---------------
Total charges $ 18,137 $ 104,115
============== ===============
38
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) 74,459 1,373 75,832
Utilization (3) (5,663) (1,837) (7,500)
---------- ---------- ----------
Balance at
December 3, 2005 $ 83,562 $ 873 $ 84,435
========== ========== ==========
(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 40 weeks ended December 3, 2005
represents charges related to the closures of an additional 27 stores
in the amount of $73.7 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 $0.8 million. The additional charge to
severance during the 40 weeks ended December 3, 2005 of $1.4 million
related to individual severings as a result of these store closures.
(3) Occupancy utilization of $5.7 million for 40 weeks ended December 3,
2005, represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $1.8 million for the 40 weeks ended December 3, 2005
represents payments made to terminated employees during the period.
We paid $5.7 million of the total occupancy charges from the time of the
original charge through December 3, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $1.8 million of the total net severance charges from
the time of the original charges through December 3, 2005, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $83.6 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 $0.9 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 40 weeks
ended December 3, 2005 and December 4, 2004 are the sales and operating results
of the 35 stores that were closed as part of this divestiture. The results of
these operations are as follows:
12 Weeks Ended 40 Weeks Ended
----------------------------------- -----------------------------------
December 3, December 4, December 3, December 4,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ 2,994 $ 78,412 $ 110,882 $ 263,857
============== ============== =============== ==============
Loss from operations $ (3,602) $ (8,773) $ (24,768) $ (29,094)
============== ============== =============== ==============
At December 3, 2005, approximately $17.8 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.
39
We have evaluated the liability balance of $84.4 million as of December 3, 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
-----------------------------------------------------
December 3, 2005 December 4, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 1,384 $ - $ 1,309 $ 2,113
Interest cost 2,743 - 2,773 3,161
Expected return on plan assets (3,097) - (3,199) (4,090)
Amortization of unrecognized net transition asset - - (3) -
Amortization of unrecognized net prior service (gain) cost (68) - 39 117
Amortization of unrecognized net loss (gain) 13 - 78 464
Administrative expenses and other - - - 68
--------- --------- -------- ---------
Net pension cost $ 975 $ - $ 997 $ 1,833
========= ========= ======== =========
For the 40 Weeks Ended
-----------------------------------------------------
December 3, 2005 December 4, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 4,614 $ 4,576 $ 4,363 $ 6,662
Interest cost 9,144 6,519 9,243 9,964
Expected return on plan assets (10,325) (8,369) (10,662) (12,892)
Amortization of unrecognized net transition asset - - (9) -
Amortization of unrecognized net prior service (gain) cost (226) 286 130 369
Amortization of unrecognized net loss (gain) 44 900 260 1,462
Administrative expenses and other - 138 2,825 212
--------- --------- -------- ---------
Net pension cost $ 3,251 $ 4,050 $ 6,150 $ 5,777
========= ========= ======== =========
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 December 3, 2005, we contributed
approximately $3.3 million to our defined benefit plans. We plan to contribute
approximately $2.5 million to our plans in the remainder of fiscal 2005.
40
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
-----------------------------------------------------
December 3, 2005 December 4, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 78 $ - $ 66 $ 60
Interest cost 276 - 268 161
Amortization of (gain) loss (64) - (110) 87
Prior service gain (311) - (311) (128)
--------- --------- -------- ---------
Net postretirement benefits (income) cost $ (21) $ - $ (87) $ 180
========== ========= ========= =========
For the 40 Weeks Ended
-----------------------------------------------------
December 3, 2005 December 4, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 260 $ 75 $ 220 $ 189
Interest cost 922 270 927 509
Amortization of (gain) loss (214) 118 (304) 273
Prior service gain (1,036) (148) (1,036) (405)
--------- --------- -------- ---------
Net postretirement benefits (income) cost $ (68) $ 315 $ (193) $ 566
========== ========= ========= =========
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.
41
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 40 weeks ended December 3, 2005, compensation expense related
to share-based incentive plans was $2.1 million and $7.0 million, after tax,
respectively, compared to nil during the 12 and 40 weeks ended December 4, 2004.
Included in share-based compensation expense recorded during the 12 and 40 weeks
ended December 3, 2005 was $0.6 and $2.0 million, respectively, related to
expensing of stock options, $1.3 million and $3.5 million, respectively,
relating to expensing of restricted stock, nil and $1.1 million, respectively,
relating to the immediate vesting of certain stock options, and $0.2 million and
$0.4 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 40 weeks ended December 3, 2005.
At December 3, 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.
42
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 40 weeks ended December 3, 2005, our Company did not grant any
stock options under this plan. The following assumptions were in place
during the 12 and 40 weeks ended December 4, 2004:
12 weeks ended 40 weeks ended
Dec. 4, 2004 Dec. 4, 2004
-------------- ---------------
Expected life 7 years 7 years
Volatility 53% 53%
Risk-free interest rate range 3.89% 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 40
weeks ended December 3, 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 (461,585) 17.67
Exercised (2,209,963) 10.55
------------- ----------
Outstanding at Dec. 3, 2005 1,792,586 $ 18.64 5.1 $ 22,464
============= ========== ============= ===========
Exercisable at:
Dec. 3, 2005 1,319,357 $ 22.49 4.3 $ 11,449
============= ===========
Nonvested at:
Dec. 3, 2005 473,229 $ 7.89 7.3 $ 11,015
============= ===========
The total intrinsic value of options exercised during the 40 weeks ended
December 3, 2005 was $45.4 million.
As of December 3, 2005, approximately $1.6 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards will
be recognized over a weighted average period of 1.0 year.
The amount of cash received from the exercise of stock options was approximately
$23.4 million. There was no related tax benefit recorded in the first, second
and third quarters 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 40 weeks ended December 3, 2005.
43
SAR's
The following is a summary of the SAR's activity during the 40 weeks ended
December 3, 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 Dec. 3, 2005 - $ -
============= =============
Performance Restricted Stock Units
During the 12 and 40 weeks ended December 3, 2005, our Company granted 115,000
and 1,865,000 shares of performance restricted stock units to selected
employees, respectively, for a total grant date fair value of $24.9 million.
Approximately $15.4 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 40 weeks ended December 10, 2005:
Weighted
Average
Grant Date
Shares Fair Value
------------- -------------
Nonvested at February 26, 2005 - $ -
Granted 1,865,000 13.36
Canceled or expired (527,500) 11.12
Exercised - -
------------- -------------
Nonvested at Dec. 3, 2005 1,337,500 $ 14.24
============= =============
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.
44
14. INCOME TAXES
The income tax provision recorded for the 40 weeks ended December 3, 2005 and
December 4, 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 40 weeks ended December 3, 2005, the valuation allowance was decreased by
$14.9 million and $242.1 million, respectively, as compared to increased by
$34.2 million and $74.5 million during the 12 and 40 weeks ended December 4,
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 $119.6 million for the potential
disallowance of the 85% dividend received deduction. This amount was recorded in
"Benefit from (provision for) income taxes" on our Consolidated Statements of
Operations for the 40 weeks ended December 3, 2005 and in "Other non-current
liabilities" in our Consolidated Balance Sheet at December 3, 2005.
For the third quarter of fiscal 2005, our effective income tax rate of 22.2%
changed from the effective income tax rate of 7.2% in the second quarter of
fiscal 2004 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 3, 2005 December 4, 2004
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Benefit Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 21,083 (22.2%) $ (1,035) 1.5%
Canada - - (3,889) 5.7%
--------------- ---------------- -------------- ----------------
$ 21,083 (22.2%) $ (4,924) 7.2%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended December 3, 2005 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, and (ii.) the absence of a tax provision
that was recorded for our Canadian operations during the 12 weeks ended December
4, 2004 that was not recorded during the 12 weeks ended December 3, 2005 due to
the sale of our Canadian operations during the second quarter of fiscal 2005.
45
For the 40 weeks ended December 3, 2005, our effective income tax rate of 26.3%
changed from the effective income tax rate of 5.1% for the 40 weeks ended
December 4, 2004 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 3, 2005 December 4, 2004
--------------------------------- ---------------------------------
Effective Effective
Tax Provision Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (134,346) 23.1% $ (3,450) 2.0%
Canada (18,539) 3.2% (5,318) 3.1%
--------------- ---------------- --------------- ----------------
$ (152,885) 26.3% $ (8,768) 5.1%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we
recorded in the U.S. 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 40 weeks ended December 3, 2005.
At December 3, 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 $46.8 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
$46.8 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 40 weeks ended December 3, 2005 and December 4, 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.
46
Interim information on segments is as follows:
12 Weeks Ended 40 Weeks Ended
---------------------------------------- ---------------------------------------
December 3, December 4, December 3, December 4,
2005 2004 2005 2004
------------------ ------------------ ----------------- -----------------
Sales
United States $ 1,580,942 $ 1,672,206 $ 5,408,945 $ 5,610,316
Canada * - 851,553 1,723,879 2,684,301
------------------ ------------------ ----------------- -----------------
Total Company $ 1,580,942 $ 2,523,759 $ 7,132,824 $ 8,294,617
================== ================== ================= =================
Sales by category
Grocery (1) $ 1,087,448 $ 1,677,798 $ 4,698,601 $ 5,457,961
Meat (2) 309,866 527,035 1,455,643 1,731,513
Produce (3) 179,722 318,926 973,376 1,105,143
Other (4) 3,906 - 5,204 -
------------------ ------------------ ----------------- -----------------
Total Company $ 1,580,942 $ 2,523,759 $ 7,132,824 $ 8,294,617
================== ================== ================= =================
(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 $ 46,274 $ 46,545 $ 153,100 $ 155,930
Canada * - 16,102 10,942 49,753
------------------ ------------------ ----------------- -----------------
Total Company $ 46,274 $ 62,647 $ 164,042 $ 205,683
================== ================== ================= =================
(Loss) income from operations
United States $ (81,557) $ (56,991) $ (321,987) $ (100,310)
Canada * - 10,738 57,224 14,127
------------------ ------------------ ----------------- -----------------
Total Company $ (81,557) $ (46,253) $ (264,763) $ (86,183)
================== =================== ================== ==================
Income (loss) from continuing
operations before income taxes
United States $ (98,235) $ (77,399) $ 530,736 $ (172,382)
Canada * - 9,572 48,201 2,390
Equity investment in Metro, Inc. 3,397 - 3,397 -
------------------ ------------------ ----------------- -----------------
Total Company $ (94,838) $ (67,827) $ 582,334 $ (169,992)
=================== ================== ================= =================
Capital expenditures
United States $ 25,185 $ 27,669 $ 87,561 $ 99,131
Canada * - 29,285 47,201 65,180
------------------ ------------------ ----------------- -----------------
Total Company $ 25,185 $ 56,954 $ 134,762 $ 164,311
================== ================== ================= =================
December 3, February 26,
2005 2005
----------------- -----------------
Total assets
United States $ 2,176,376 $ 1,958,566
Canada - 843,402
Equity investment in Metro, Inc. 331,699 -
----------------- -----------------
Total Company $ 2,508,075 $ 2,801,968
================= =================
47
* 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 of fiscal 2005; thus, we have included the operating results of our
Canadian subsidiary through the date of the sale.
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 $21.1 million during the 40
weeks ended December 3, 2005 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 40 weeks ended December 3, 2005.
In addition, the amount excluded from the measure of effectiveness on this net
investment hedge amounted to $15.4 million, before income taxes, and was
recorded as "Store operating, general and administrative expense" in our
Consolidated Statements of Operations for the 40 weeks ended December 3, 2005.
17. INDEBTEDNESS
During the second quarter of fiscal 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 ("Revolving Credit Agreement") was amended, eliminating the Canadian
portion of the agreement by $65 million. As of the end of the second quarter of
fiscal 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.
During the third quarter of fiscal 2005, the Revolving Credit Agreement was
terminated. Concurrently, we entered into a new, cash collateralized, Letter of
Credit Agreement that enables us to issue letters of credit up to $200 million.
We also negotiated an additional $150 million Revolving Credit Agreement
("Revolver") with four lenders enabling us to borrow funds on a revolving basis
for working capital loans and letters of credit. The Revolver also includes a
$100 million accordion feature which gives us the ability to increase borrowings
from $150 million to $250 million. Under the terms of this agreement, should
availability fall below $25.0 million and should cash on hand fall below $50.0
million, a borrowing block will be implemented which provides that no additional
loans be made unless we are able to maintain a minimum consolidated EBITDA
covenant on a trailing twelve month basis. In the event that availability falls
below $25.0 million, cash on hand falls below $50.0 million, and we do not
maintain the required minimum EBITDA covenant, unless otherwise waived or
amended, the lenders may, at their discretion, declare, in whole or in part, all
outstanding obligations immediately due and payable.
48
The Revolver is collateralized by inventory, certain accounts receivable and
pharmacy scripts. Borrowings under the Revolver bear interest based on LIBOR or
Prime interest rate pricing. This agreement expires in November 2010. As of
December 3, 2005, there were no loans outstanding under this agreement. As of
December 3, 2005, after reducing availability for outstanding letters of credit
and borrowing base requirements, we had $150.0 million available under the
Revolver. Combined with cash we held in short-term investments and marketable
securities of $266.6 million, we had total cash availability of $416.6 million
at December 3, 2005.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares up to $150 million as well as make bond repurchases which we may do from
time to time in the future.
18. COMMITMENTS AND CONTINGENCIES
Antitrust Class Action Litigation
In connection with a settlement reached in the VISA/Mastercard antitrust class
action litigation, our Company is entitled to a portion of the settlement fund
that will be distributed to class members. Pursuant to our initial review of our
historical records as well as estimates provided by the Claims Administrator, we
recorded an estimated pretax recovery of $1.5 million as a credit to "Selling,
general and administrative expense" in our Consolidated Statements of Operations
during the 12 and 40 weeks ended December 3, 2005. During the fourth quarter of
fiscal 2005 and into fiscal 2006, we will continue to work with the Claims
Administrator to ensure that all monies owed to our Company in connection with
this litigation are received. This process may result in additional recoveries
being recorded in future periods.
Other
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.
49
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 40 weeks ended December 3, 2005 and December 4, 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 December 3, 2005 compared to the 12
weeks ended December 4, 2004 and results for the 40 weeks ended
December 3, 2005 compared to the 40 weeks ended December 4, 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 40 weeks ended December 3, 2005 and
December 4, 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 40 weeks ended December 4, 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.
50
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 407 stores as of December 3, 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.
Our company achieved progress in the third quarter, reflecting the first
results of our new strategies to reduce costs, drive revenue and improve the
condition and customer appeal of our stores.
Though just underway, more effective operating, merchandising and promotional
practices took hold as the quarter progressed, resulting in strong comparable
store sales growth through the latter stages, highlighted by a robust year-end
holiday sales performance. This developing sales momentum, and the significant
overhead reduction resulting from our nearly-completed corporate and field
reorganization - produced anticipated improvement in our operating results.
We are pleased with the top and bottom line traction achieved so soon after the
initiation of the new strategies, and gratified by the response of our
management and associates in executing the initial stage of the plan - despite
the challenge of working through the many transitional aspects underway
throughout the quarter.
A major example was the ongoing transfer of our supply and logistics operations
to C&S Wholesale Grocers, Inc. The changeover has progressed according to plan,
and as we continue working with C&S to fine-tune distribution operations, we
expect to achieve optimal service levels to support our store network. In
addition to the improved efficiencies that we are realizing this fiscal year,
we expect the new framework will yield significant annualized savings in Fiscal
2006.
Another important achievement was the new labor agreement reached with the union
representing our Michigan store employees, which will foster our ability to
complete the turnaround of the Farmer Jack operations in and around Detroit. The
cooperation of our union associates combined with our ongoing operating
improvements now make continued ownership of Farmer Jack a viable
alternative.
In the third quarter, we accomplished the majority of our administrative and
operating reorganization, producing significant overhead cost reductions, a
fully centralized leadership structure, and a leaner and more responsive
organization overall. We anticipate the completion of that activity by the end
of the present quarter and fiscal year.
51
We also completed the new Executive Management Team reporting directly to Eric
Claus, President & Chief Executive Officer. On October 28, 2005, Brenda Galgano
became Senior Vice President & Chief Financial Officer, succeeding Mitchell P.
Goldstein. And on November 28, 2005, Jennifer MacLeod joined A&P in the new
position of Senior Vice President, Marketing and Communications.
OUTLOOK
With our commitment to, and focus on sales, reduced overheads and the additional
efficiencies we anticipate, we believe that we can sustain and accelerate our
year over year improvement, and proceed on track toward the goal of reaching
overall profitability in Fiscal 2007.
We remain on course with our strategies to:
o Continue reducing our operating loss by lowering costs system-wide. Key
elements will be the completion of our distribution transfer to C&S
Wholesale Grocers, Inc. and the continued execution of our organizational
restructuring, to bring administration and other overheads fully in line
with the needs of our smaller retail business;
o Drive sales growth chain-wide, through the further improvement of
operations, merchandising and marketing strategies.
o Accelerate the renewal of our store facilities, through capital investment
to convert locations to our recently improved Fresh and Discount
prototypes. Examples of both formats will be launched during the fourth
quarter in the Northeast, and ongoing development will continue in Fiscal
2006 as per our capital plan.
Beyond those strategies, general attention to cost reduction throughout the
business remains a top priority. We continue to seek additional
means of improving labor productivity through ongoing communication and
cooperation with the trade unions in all of our operating territories, and by
lowering administrative, advertising and occupancy and operating expenses.
We are confident that our improving operations and merchandising, lower cost
structure and strong balance sheet and financial position will enable us to
continue elevating our competitive profile and operating results in the fourth
quarter and beyond.
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.
52
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.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, or 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.
53
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 12 weeks during
the third quarter ended December 4, 2004, and 24 weeks and 40 weeks during the
year to date periods ended December 3, 2005 and December 4, 2004, respectively.
12 WEEKS ENDED DECEMBER 3, 2005 COMPARED TO THE 12 WEEKS ENDED DECEMBER 4, 2004
OVERALL
Sales for the third quarter of fiscal 2005 were $1.6 billion compared to $2.5
billion with the third quarter of fiscal 2004; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, decreased -0.3%. 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 increased from $72.8 million for the third quarter of
fiscal 2004 to loss from continuing operations of $73.8 million for the third
quarter of fiscal 2005. Net loss per share - basic and diluted for the third
quarter of fiscal 2005 was $1.74 compared to a net loss per share - basic and
diluted of $1.96 for the third quarter of fiscal 2004.
12 Weeks 12 Weeks
Ended Ended (Unfavorable) /
Dec. 3, 2005 Dec. 4, 2004 Favorable % Change
---------------- --------------- --------------- ----------------
Sales $ 1,580.9 $ 2,523.8 $ (942.9) (37.4%)
Decrease in comparable store sales (0.3%) (1.0%) NA NA
Loss from continuing operations (73.7) (72.7) (1.0) (1.4%)
Income (loss) from discontinued
operations 2.5 (2.6) 5.1 >100.0%
Net (loss) income (71.2) (75.3) 4.1 5.4%
Net (loss) income per share - basic &
diluted (1.74) (1.96) 0.22 11.2%
54
SALES
Sales for the third quarter of fiscal 2005 of $1,580.9 million decreased $942.9
million or 37.4% from sales of $2,523.8 million for third quarter of fiscal
2004. The lower sales were due to a decrease in U.S. sales of $91.3 million and
a decrease in Canadian sales of $851.6 million. The following table presents
sales for each of our reportable operating segments for the third quarter of
fiscal 2005 and the third quarter of fiscal 2004:
12 Weeks Ended 12 Weeks Ended
Dec. 3, 2005 Dec. 4, 2004 Decrease % Change
----------------- ----------------- -------------------- ----------------
United States $ 1,580.9 $ 1,672.2 $ (91.3) (5.5%)
Canada - 851.6 (851.6) (100.0)
----------------- ----------------- -------------------- ----------------
Total $ 1,580.9 $ 2,523.8 $ (942.9) (37.4%)
================= ================= ==================== ================
The following details the dollar impact of several items affecting the decrease
in sales by reportable operating segment from the third quarter of fiscal 2004
to the third quarter of fiscal 2005:
Impact of Impact of Comparable Impact of
New Closed Store Hurricane
Stores Stores Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- -----------
United States $ 11.3 $ (99.9) $ (4.1) $ (2.5) $ 3.9 $ (91.3)
Canada - - - - (851.6) (851.6)
------------- ------------- -------------- ------------- ------------ --------------
Total $ 11.3 $ (99.9) $ (4.1) $ (2.5) $ (847.7) $ (942.9)
============= ============= ============== ============= ============= ==============
The decrease in U.S. sales was primarily attributable to the closing of 56
stores since the beginning of the third quarter of fiscal 2004, of which 47 were
closed in fiscal 2005 primarily in the Midwest, decreasing sales by $99.9
million, the decrease in comparable store sales for the third quarter of fiscal
2005 of $4.1 million or -0.3% as compared with the third quarter of fiscal 2004,
and the decrease in sales caused by the overall impact of Hurricane Katrina of
$2.5 million. These decreases were partially offset by the opening or re-opening
of 3 new stores since the beginning of the third quarter of fiscal 2004, of
which 2 were opened or re-opened in fiscal 2005, increasing sales by $11.3
million, and the increase in sales relating to an information technology
services agreement with Metro, Inc. of $3.9 million.
The decrease in Canadian sales of $851.6 million was due to the sale of our
Canadian operations during the second quarter of fiscal 2005 which resulted in
the inclusion of zero weeks of sales during the third quarter of fiscal 2005 as
compared to 12 weeks during the third quarter of fiscal 2004.
Average weekly sales per supermarket for the U.S. were approximately $333,400
for the third quarter of fiscal 2005 versus $319,100 for the corresponding
period of the prior year, an increase of 4.5% primarily due to the impact of
closing smaller stores partially offset by the negative comparable store sales.
GROSS MARGIN
The following table presents gross margin dollar results and gross margin as a
percentage of sales by reportable operating segment for the third quarter of
fiscal 2005 as compared to the third quarter of fiscal 2004. Gross margin as a
percentage of sales increased 178 basis points to 29.38% for the third quarter
of fiscal 2005 from 27.60% for the third quarter of fiscal 2004. This 178 basis
point increase was caused primarily by the sale of our Canadian operations which
had a lower gross margin rate. Although we lowered our prices in the U.S. during
the third quarter of fiscal 2005, which was generally funded by a reduction in
cost of sales, there was not a significant impact on gross margin rate.
55
12 Weeks Ended 12 Weeks Ended
December 3, 2005 December 4, 2004
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 464.5 29.38% $ 491.2 29.38%
Canada - - 205.3 24.11
-------------- --------------- -------------- ---------------
Total $ 464.5 29.38% $ 696.5 27.60%
============== =============== ============== ===============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the third quarter of fiscal 2004 to
the third quarter of fiscal 2005:
Gross Margin
Sales Volume Rate Other Total
--------------- --------------- ---------------- --------------
United States $ (26.8) $ 0.1 $ - $ (26.7)
Canada - - (205.3) (205.3)
--------------- --------------- ---------------- ---------------
Total $ (26.8) $ 0.1 $ (205.3) $(232.0)
=============== =============== ================ ===============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative expense
("SG&A"), by reportable operating segment, in dollars and as a percentage of
sales for the third quarter of fiscal 2005 compared with the third quarter of
fiscal 2004. SG&A expense was $546.1 million or 34.54% for the third quarter of
fiscal 2005 as compared to $742.8 million or 29.43% for the third quarter of
fiscal 2004.
12 Weeks Ended 12 Weeks Ended
Dec. 3, 2005 Dec. 4, 2004
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 546.1 34.54% $ 548.2 32.78%
Canada - - 194.6 22.85
-------------- --------------- -------------- --------------
Total $ 546.1 34.54% $ 742.8 29.43%
============== =============== ============== ==============
Included in SG&A in the U.S. for the third quarter of fiscal 2005 were certain
charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and the Bronx, New York of $2.7 million (17 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;
o costs relating to the divestiture of our Midwestern U.S. business as
discussed in Note 11 - Asset Disposition Initiatives of $18.6 million (118
basis points);
o costs relating to future occupancy costs for four stores closed in
connection with Hurricane Katrina in addition to the write-off of an asset
for a favorable lease that was recorded for one of these stores that is now
closed of $13.2 million (84 basis points) as discussed in Note 7 -
Hurricane Katrina and Impact on U.S. Business;
56
o costs relating to the impairment of unrecoverable assets of $8.1 million
(51 basis points) as discussed in Note 9 - Valuation of Long-Lived Assets;
o costs relating to an administrative reorganization during the third quarter
of fiscal 2005 of $6.7 million (42 basis points); and
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $5.6 million (35 basis points).
SG&A in the U.S. for the third quarter of fiscal 2004 also included certain
charges as follows:
o costs relating to the impairment of unrecoverable assets of $34.7 million
(208 basis points); and
o costs relating to severance and other charges of $3.8 million (23 basis
points) relating to an administrative reorganization.
Partially offset by:
o a reduction in the vacation accrual of $8.6 million (51 basis points) due
to a change in the vacation entitlement policy.
SG&A within our core U.S. operations increased by 7 basis points during the
third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004
primarily due to an increase in utility costs of $4.6 million (38 basis points)
partially offset by a reduction in advertising costs of $7.0 million (36 basis
points).
The decrease in SG&A in Canada of $194.6 million (2,285 basis points) was due to
the sale of our Canadian operations during the second quarter of fiscal 2005
which resulted in the inclusion of zero weeks of costs in the third quarter of
fiscal 2005 as compared to 12 weeks in the third quarter of fiscal 2004.
During the 12 weeks ended December 3, 2005 and December 4, 2004, we recorded
impairment losses on long-lived assets as follows:
12 weeks ended Dec. 3, 2005 12 weeks ended Dec. 4, 2004
------------------------------- ----------------------------
U.S. Canada Total U.S. Canada Total
--------- --------- -------- -------- ---------- --------
Impairments due to closure or conversion in the
normal course of business $ 3,760 $ - $ 3,760 $ 360 $ - $ 360
Impairments due to unrecoverable assets 8,116 - 8,116 34,688 - 34,688
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (2) 12 - 12 - - -
Impairments related to property held as part of the 2001
Asset Disposition (2) - - - 1,709 - 1,709
Impairments related to the closure of the Kohl's business (3) - - - 602 - 602
--------- --------- --------- -------- ---------- --------
Total impairments $ 17,978 $ - $ 17,978 $ 37,359 $ - $ 37,359
========= ========= ========= ======== ========== ========
(1) Refer to Note 7 - Hurricane Katrina and Impact on U.S. Business
(2) Refer to Note 11 - Asset Disposition Initiatives
(3) Refer to Note 10 - Discontinued Operations
57
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
additional costs of $6.1 million during the 12 weeks ended December 3, 2005.
INTEREST EXPENSE
Interest expense of $15.4 million for the third quarter of fiscal 2005 decreased
from the prior year amount of $24.9 million primarily due to (i.) the repurchase
of the majority of our 7.75% Notes due April 15, 2007 and our 9.125% Senior
Notes due December 15, 2011 resulting in a reduction in interest expense of $7.6
million, and (ii.) lower interest expense of $3.9 million relating to our
Canadian operations due to the inclusion of its operating results for zero weeks
in the third quarter of fiscal 2005 as compared to 12 weeks in the third quarter
of 2004 as a result of its sale.
INCOME TAXES
The benefit from income taxes from continuing operations for the third quarter
of fiscal 2005 was $21.1 million (a $21.1 million benefit from our U.S.
operations) compared to a provision for income taxes for the third quarter of
fiscal 2004 of $4.9 million (a $1.0 million provision for our U.S. operations
and a $3.9 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 third quarter of fiscal 2005, our effective income tax rate of 22.2%
changed from the effective income tax rate of 7.2% in the second quarter of
fiscal 2004 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 3, 2005 December 4, 2004
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Benefit Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ 21,083 (22.2%) $ (1,035) 1.5%
Canada - - (3,889) 5.7%
--------------- ---------------- -------------- ----------------
$ 21,083 (22.2%) $ (4,924) 7.2%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to (i.) the recognition
of tax benefits during the 12 weeks ended December 3, 2005 as we continue to
experience operating losses and these operating losses decrease the overall tax
provision previously recorded during the second quarter of fiscal 2005 in
connection with our Company's Domestic Reinvestment Plan as discussed above and
the sale of our Canadian operations, and (ii.) the absence of a tax provision
that was recorded for our Canadian operations during the 12 weeks ended December
4, 2004 that was not recorded during the 12 weeks ended December 3, 2005 due to
the sale of our Canadian operations during the second quarter of fiscal 2005.
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 December 3, 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.
The income from operations of discontinued businesses, net of tax, for the third
quarter of fiscal 2005 was $2.0 million as compared to $0.1 million for the
third quarter of fiscal 2004 and is detailed by business as follows:
12 Weeks Ended December 3, 2005
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (10) 3,546 (136) 3,400
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, before
tax (10) 3,546 (136) 3,400
Tax benefit (provision) 4 (1,489) 57 (1,428)
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (6) $ 2,057 $ (79) $ 1,972
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (10) $ (26) $ (136) $ (172)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (145) - (145)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (10) $ 3,546 $ (136) $ 3,400
--------------- ---------------- --------------- ----------------
59
12 Weeks ended December 4, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 5 137 (32) 110
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses, before
tax 5 137 (32) 110
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 5 $ 137 $ (32) $ 110
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ 7 $ (11) $ (32) $ (36)
Reversal of previously accrued
occupancy related costs - 354 - 354
Interest accretion on present value of
future occupancy and
severance costs (2) (206) - (208)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ 5 $ 137 $ (32) $ 110
--------------- ---------------- --------------- ----------------
The gain on disposal of discontinued operations, net of tax, was $0.6 million
for the third quarter of fiscal 2005 as compared to a loss on disposal of
discontinued operations, net of tax, of $2.7 million for the third quarter of
fiscal 2004 and is detailed by business as follows:
12 Weeks Ended December 3, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 994 $ - $ 994
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, before tax - 994 - 994
Tax provision - (417) - (417)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ - $ 577 $ - $ 577
=============== ================ =============== ================
60
12 Weeks ended December 4, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - (2,100) (2,100)
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== ================
40 WEEKS ENDED DECEMBER 3, 2005 COMPARED TO THE 40 WEEKS ENDED DECEMBER 4, 2004
OVERALL
Sales for the 40 weeks ended December 3, 2005 were $7.1 billion, compared with
$8.3 billion for the 40 weeks ended December 4, 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 reversed from $178.8 million for the 40 weeks ended
December 4, 2004 to income from continuing operations of $429.4 million for the
40 weeks ended December 3, 2005. Net income per share - basic and diluted for
the 40 weeks ended December 3, 2005 was $10.77 and $10.62, respectively,
compared to a net loss per share - basic and diluted of $4.74 for the 40 weeks
ended December 4, 2004.
40 Weeks 40 Weeks
Ended Ended (Unfavorable) /
Dec. 3, 2005 Dec. 4, 2004 Favorable % Change
---------------- --------------- --------------- ----------------
Sales $ 7,132.8 $ 8,294.6 $ (1,161.8) (14.0%)
Decrease in comparable store sales (0.6%) (0.1%) NA NA
Income (loss) from continuing
operations 429.4 (178.8) 608.2 >100.0%
Income (loss) from discontinued
operations 2.3 (3.6) 5.9 >100.0%
Net income (loss) 431.7 (182.4) 614.1 >100.0%
Net income (loss) per share - basic 10.77 (4.74) 15.51 >100.0%
Net income (loss) per share - diluted 10.62 (4.74) 15.36 >100.0%
SALES
Sales for the 40 weeks ended December 3, 2005 of $7,132.8 million decreased
$1,161.8 million or 14.0% from sales of $8,294.6 million for 40 weeks ended
December 4, 2004. The lower sales were due to a decrease in U.S. sales of $201.4
million and a decrease in Canadian sales of $960.4 million. The following table
presents sales for each of our reportable operating segments for the 40 weeks
ended December 3, 2005 and the 40 weeks ended December 4, 2004:
61
40 Weeks Ended 40 Weeks Ended
Dec. 3, 2005 Dec. 4, 2004 Decrease % Change
----------------- ----------------- -------------------- ----------------
United States $ 5,408.9 $ 5,610.3 $ (201.4) (3.6%)
Canada 1,723.9 2,684.3 (960.4) (35.8)
----------------- ----------------- ---------------- ------------
Total $ 7,132.8 $ 8,294.6 $ (1,161.8) (14.0%)
================= ================= ================ ===========
The following details the dollar impact of several items affecting the decrease
in sales by reportable operating segment from the 40 weeks ended December 4,
2004 to the 40 weeks ended December 3, 2005:
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store Hurricane
Stores Stores Rate Sales Katrina Other Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
United States $ 53.7 $ (232.0) $ - $ (28.9) $ 0.6 $ 5.2 $ (201.4)
Canada 47.6 (65.1) 162.0 1.6 - (1,106.5) (960.4)
------------- ------------- -------------- ------------- ------------- ------------ -------------
Total $ 101.3 $ (297.1) $ 162.0 $ _(27.3) $ _0.6 $ (1,101.3) $ (1,161.8)
============= ============= ============== ============= ============= ============ =============
The decrease in U.S. sales was primarily attributable to the closing of 65
stores since the beginning of fiscal 2004, of which 47 were closed in fiscal
2005 primarily in the Midwest, decreasing sales by $232.0 million, and the
decrease in comparable store sales for the 40 weeks ended December 3, 2005 of
$28.9 million or -0.6% as compared with the 40 weeks ended December 4, 2004.
These decreases were partially offset by the opening or re-opening of 18 new
stores since the beginning of fiscal 2004, of which 2 were opened or re-opened
in fiscal 2005, increasing sales by $53.7 million, the increase in sales caused
by the overall impact of Hurricane Katrina of $0.6 million, and the increase in
sales relating to an information technology services agreement with Metro, Inc.
of $5.2 million.
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 40 weeks ended
December 3, 2005 as compared to 40 weeks during the 40 weeks ended December 4,
2004, decreasing sales by $1,106.5 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 40 weeks ended December 3, 2005 of $1.6 million or 0.1% for
Company-operated stores and franchised stores combined, as compared to the 40
weeks ended December 4, 2004.
Average weekly sales per supermarket for the U.S. were approximately $326,400
for the 40 weeks ended December 3, 2005 versus $322,100 for the corresponding
period of the prior year, an increase of 1.3% primarily due to the impact of
closing smaller stores partially offset by the negative comparable store sales.
Average weekly sales per supermarket for Canada were approximately $298,600 for
the 40 weeks ended December 3, 2005 versus $282,200 for the corresponding period
of the prior year, an increase of 5.8%. This increase was primarily due to the
increase in the Canadian exchange rate and higher comparable store sales.
62
GROSS MARGIN
The following table presents gross margin dollar results and gross margin as a
percentage of sales by reportable operating segment for the 40 weeks ended
December 3, 2005 as compared to the 40 weeks ended December 4, 2004. Gross
margin as a percentage of sales increased 44 basis points to 28.31% for the 40
weeks ended December 3, 2005 from 27.87% for the 40 weeks ended December 4, 2004
primarily caused by the sale of our Canadian operations which had a lower gross
margin rate. We believe the impact on margin for changes in costs and special
reductions was not significant.
40 Weeks Ended 40 Weeks Ended
December 3, 2005 December 4, 2004
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 1,598.4 29.55% $ 1,664.6 29.67%
Canada 420.7 24.40 647.4 24.12
-------------- --------------- -------------- -----------------
Total $ 2,019.1 28.31% $ 2,312.0 27.87%
============== =============== ============== =================
The following table details the dollar impact of several items affecting the
gross margin dollar decrease from the 40 weeks ended December 4, 2004 to the 40
weeks ended December 3, 2005:
Gross Margin
Sales Volume Rate Exchange Rate Other Total
--------------- --------------- --------------- --------------- --------------
United States $ (59.8) $ (6.4) $ - $ - $ (66.2)
Canada (58.8) 4.5 32.9 (205.3) (226.7)
---------------- ------------------- ------------ ------------- ------------
Total $ (118.6) $ (1.9) $ 32.9 $ (205.3) $ (292.9)
================ ================ ============ ============= ============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
The following table presents store operating, general and administrative expense
by reportable operating segment, in dollars and as a percentage of sales for the
40 weeks ended December 3, 2005 compared with the 40 weeks ended December 4,
2004. SG&A expense was $2,283.9 million or 32.02% for the 40 weeks ended
December 3, 2005 as compared to $2,398.2 million or 28.91% for the 40 weeks
ended December 4, 2004.
40 Weeks Ended 40 Weeks Ended
Dec. 3, 2005 Dec. 4, 2004
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 1,920.4 35.50% $ 1,764.9 31.46%
Canada 363.5 21.09 633.3 23.59
-------------- --------------- -------------- --------------
Total $ 2,283.9 32.02% $ 2,398.2 28.91%
============== =============== ============== ==============
Included in SG&A in the U.S. for the 40 weeks ended December 3, 2005 were
certain charges as follows:
o costs relating to the closing of our owned warehouses in Edison, New Jersey
and the Bronx, New York of $67.3 million (124 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;
63
o costs relating to the divestiture of our Midwestern U.S. business as
discussed in Note 11 - Asset Disposition Initiatives of $103.6 million (192
basis points);
o costs relating to future occupancy costs for four stores closed in
connection with Hurricane Katrina, the write-off of an asset for a
favorable lease that was recorded for one of these stores that is now
closed, and our insurance deductible of $18.2 million (34 basis
points);
o costs relating to the impairment of unrecoverable assets of $17.7 million
(33 basis points) as discussed in Note 9 - Valuation of Long-Lived Assets;
o costs relating to an administrative reorganization during the 40 weeks
ended December 3, 2005, of $13.8 million (26 basis points);
o costs relating to the consolidation of our operating offices in line with
our smaller operations in the U.S. of $5.6 million (10 basis points);
o costs relating to the cash tender offer completed during the 40 weeks ended
December 3, 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 (55
basis points); and
o costs 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
(29 basis points).
Partially offset by:
o higher gains on the sale of certain of our assets of $28.2 million (52
basis points) during the 40 weeks ended December 3, 2005.
SG&A in the U.S. for the 40 weeks ended December 4, 2004 also included certain
charges as follows:
o costs relating to the impairment of unrecoverable assets of $34.7 million
(62 basis points); and
o costs relating to severance and other charges of $3.8 million (7 basis
points) relating to an administrative reorganization.
Partially offset by:
o a reduction in the vacation accrual of $8.6 million (15 basis points) due
to a change in the vacation entitlement policy.
SG&A within our core U.S. operations increased by 8 basis points during the 40
weeks ended December 3, 2005 as compared to the 40 weeks ended December 4, 2004
primarily due to an increase in utility costs of $11.0 million (26 basis points)
partially offset by a reduction in advertising costs of $9.4 million (13 basis
points).
The decrease in SG&A in Canada of $269.8 million (250 basis points) is primarily
due to the inclusion of 24 weeks of costs during the 40 weeks ended December 3,
2005 as compared to 40 weeks during the 40 weeks ended December 4, 2004, in
addition to (i.) lower depreciation expense of $21.6 million as the Canadian
assets were sold during the 40 weeks ended December 3, 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 which were included in the 40 weeks ended December 4,
2004.
64
During the 40 weeks ended December 3, 2005 and December 4, 2004, we recorded
impairment losses on long-lived assets as follows:
40 weeks ended Dec. 3, 2005 40 weeks ended Dec. 4, 2004
------------------------------- ------------------------------
U.S. Canada Total U.S. Canada Total
--------- --------- --------- -------- ---------- --------
Impairments due to closure or conversion in the
normal course of business $ 4,784 $ 506 $ 5,290 $ 2,039 $ - $ 2,039
Impairments due to unrecoverable assets 17,728 - 17,728 34,688 - 34,688
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090 - - -
Impairments related to the divestiture of the Midwestern
U.S. business (2) 6,873 - 6,873 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (3) 8,590 - 8,590 - - -
Impairments related to property held as part of the 2001
Asset Disposition (2) - - - 1,709 - 1,709
Impairments related to the closure of the Kohl's business (4) - - - 602 - 602
--------- --------- --------- -------- ---------- --------
Total impairments $ 44,065 $ 506 $ 44,571 $ 39,038 $ - $ 39,038
========= ========= ========= ======== ========== ========
(1) Refer to Note 7 - Hurricane Katrina and Impact on U.S. Business
(2) Refer to Note 11 - Asset Disposition Initiatives
(3) Refer to Note 6 - Sale of our U.S. Distribution Operations and
Warehouses
(4) Refer to Note 10 - Discontinued Operations
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
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 $912.5 million (gain of $780.4 million after tax) during the 40
weeks ended December 3, 2005.
INTEREST EXPENSE
Interest expense of $76.8 million for the 40 weeks ended December 3, 2005
decreased from the prior year amount of $87.0 million due primarily to (i.) the
repurchase of the majority of our 7.75% Notes due April 15, 2007 and our 9.125%
Senior Notes due December 15, 2011 resulting in a reduction in interest expense
of $8.3 million, (ii.) a decrease in capitalized interest of $0.9 million due to
mainly a reduction in new store builds, and (iii.) lower interest expense of
$4.2 million relating to our Canadian operations due to the inclusion of its
operating results for 24 weeks for the 40 weeks ended December 3, 2005 as
compared to 40 weeks for the 40 weeks ended December 4, 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 $1.0 million and sale leaseback of locations for which we received
landlord allowances of $0.6 million.
65
INCOME TAXES
The provision for income taxes from continuing operations for the 40 weeks ended
December 3, 2005 was $152.9 million (a $134.3 million provision for our U.S.
operations and a $18.6 million provision for our Canadian operations) compared
to a provision for income taxes from continuing operations for the 40 weeks
ended December 4, 2004 of $8.8 million (a $3.5 million provision for our U.S.
operations and a $5.3 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 40 weeks ended December 3, 2005, our effective income tax rate of 26.3%
changed from the effective income tax rate of 5.1% for the 40 weeks ended
December 4, 2004 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 3, 2005 December 4, 2004
--------------------------------- ---------------------------------
Effective Effective
Tax Provision Tax Rate Tax Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (134,346) 23.1% $ (3,450) 2.0%
Canada (18,539) 3.2% (5,318) 3.1%
--------------- ---------------- --------------- ----------------
$ (152,885) 26.3% $ (8,768) 5.1%
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the tax provisions we
recorded in the U.S. 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 40 weeks ended December 3, 2005.
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 December 3, 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.
66
The income from operations of discontinued businesses, net of tax, for the 40
weeks ended December 3, 2005 was $1.7 million as compared to a loss from
operations of discontinued businesses, net of tax, of $0.9 million for the 40
weeks ended December 4, 2004 and is detailed by business as follows:
40 Weeks Ended December 3, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(LOSS) INCOME FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses (47) 3,170 (187) 2,936
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, before
tax (47) 3,170 (187) 2,936
Tax benefit (provision) 20 (1,331) 79 (1,232)
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (27) $ 1,839 $ (108) $ 1,704
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
Non-accruable closing costs $ (47) $ (44) $ (187) $ (278)
Reversal of previously accrued
occupancy related costs - 3,717 - 3,717
Interest accretion on present value
of future occupancy and
severance costs - (503) - (503)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (47) $ 3,170 $ (187) $ 2,936
--------------- ---------------- --------------- ----------------
67
40 Weeks ended December 4, 2004
---------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
INCOME (LOSS) FROM OPERATIONS OF
DISCONTINUED BUSINESSES
Sales $ - $ - $ - $ -
Operating expenses 333 (637) (625) (929)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 333 (637) (625) (929)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 333 $ (637) $ (625) $ (929)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 667 (401) (625) (359)
Interest accretion on present value
of future occupancy and
severance costs (8) (590) - (598)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 333 $ (637) $ (625) $ (929)
--------------- ---------------- --------------- -------------
The gain on disposal of discontinued operations, net of tax, was $0.6 million
for the third quarter of fiscal 2005 as compared to a loss on disposal of
discontinued operations, net of tax, of $2.7 million for the third quarter of
fiscal 2004 and is detailed by business as follows:
40 Weeks Ended December 3, 2005
---------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
GAIN ON DISPOSAL OF DISCONTINUED
BUSINESSES
Gain on sale of property $ - $ 994 $ - $ 994
--------------- ---------------- --------------- -------------
Gain on disposal of discontinued
businesses, before tax - 994 - 994
Tax provision - (417) - (417)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ - $ 577 $ - $ 577
=============== ================ =============== ================
68
40 Weeks ended December 4, 2004
---------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
LOSS ON DISPOSAL OF DISCONTINUED
BUSINESSES
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - (2,100) (2,100)
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== ================
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, second and
third quarters of fiscal 2005, we initiated efforts to divest our businesses in
the Midwestern United States and closed 35 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 40 weeks
ended December 3, 2005 and December 4, 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".
69
12 Weeks Ended December 3, 2005
-------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ------------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ - $ (1,689) $ 302 $ 16,925 $ 15,538
PV interest 328 471 184 646 1,629
Severance - - - 591 591
Total accrued to
-------- ----------- ----------- --------- -----------
balance sheets 328 (1,218) 486 18,162 17,758
-------- ----------- ----------- --------- -----------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 12 12
Inventory markdowns - - - 138 138
Closing costs - - - 1,059 1,059
-------- ----------- ----------- --------- -----------
Total non-accruable items - - - 621 621
-------- ----------- ----------- --------- -----------
Less PV interest (328) (471) (184) (646) (1,629)
-------- ----------- ----------- --------- -----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST - (1,689) 302 18,137 16,750
======== =========== =========== ========= ===========
12 Weeks Ended December 4, 2004
----------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------ ---------
BALANCE SHEET ACCRUALS
PV interest $ 418 $ 553 $ 154 $ 1,125
Total accrued to
-------- ----------- ----------- ---------
balance sheets 418 553 154 1,125
-------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488)
Adjustments to
-------- ----------- ----------- ---------
balance sheets - (4,488) - (4,488)
-------- ----------- ----------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 1,709 - 1,709
-------- ----------- ----------- ---------
Total non-accruable items - 1,709 - 1,709
-------- ----------- ----------- ---------
Less PV interest (418) (553) (154) (1,125)
--------- ----------- ------------ ----------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST $ - $ (2,779) $ - $ (2,779)
======== =========== =========== =========
70
40 Weeks Ended December 3, 2005
------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ----------- --------------- ------------- -----------
BALANCE SHEET ACCRUALS
Vacancy $ (2,570) $ (1,689) $ 3,662 $ 88,443 $ 87,846
PV interest 1,228 1,703 521 782 4,234
Severance - - - 2,710 2,710
Total accrued to
--------- --------- --------- --------- ---------
balance sheets (1,342) 14 4,183 91,935 94,790
--------- --------- --------- --------- ---------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Capital lease termination - - - (588) (588)
Property writeoffs - - - 6,873 6,873
Inventory markdowns - - - 1,268 1,268
Loss on sale of property - - - 2,263 2,263
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 4,016 4,016
--------- --------- --------- --------- ---------
Total non-accruable items - - - 12,962 12,962
--------- --------- --------- --------- ---------
Less PV interest (1,228) (1,703) (521) (782) (4,234)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS EXCLUDING
PV INTEREST (2,570) (1,689) 3,662 104,115 103,518
--------- --------- --------- --------- ---------
Less Gain on sale
of pharmacy
scripts - - - 870 870
Less closing costs - - - (4,016) (4,016)
--------- --------- --------- --------- ---------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
CASH FLOWS (2,570) (1,689) 3,662 100,969 100,372
========= ========= ========= ========= =========
71
40 Weeks Ended December 4, 2004
-------------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
--------- ----------- ------------- ------
BALANCE SHEET ACCRUALS
PV interest $ 1,494 $ 1,902 $ 534 $ 3,930
Total accrued to
------- ------- ------- -------
balance sheets 1,494 1,902 534 3,930
------- ------- ------- -------
Occupancy reversals - (4,488) - (4,488)
Adjustments to
------- ------- ------- -------
balance sheets - (4,488) - (4,488)
------- ------- ------- -------
NON-ACCRUABLE ITEMS
RECORDED ON STATEMENTS
OF OPERATIONS
Property writeoffs - 1,709 90 1,799
Inventory markdowns - - 291 291
Closing costs - - 689 689
------- ------- ------- -------
Total non-accruable items - 1,709 1,070 2,779
------- ------- ------- -------
Less PV interest (1,494) (1,902) (534) (3,930)
------- ------- ------- -------
TOTAL AMOUNT RECORDED
ON STATEMENTS OF
OPERATIONS
EXCLUDING PV INTEREST $ - $(2,779) $ 1,070 $(1,709)
======= ======= ======= =======
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 December 3, 2005, we had
closed all stores and facilities related to this phase of the initiative.
72
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) 1,228 7 1,235 - - - 1,228 7 1,235
Utilization (2) (4,352) (167) (4,519) (171) - (171) (4,523) (167) (4,690)
Adjustments (3) (2,570) (90) (2,660) - - - (2,570) (90) (2,660)
--------- --------- --------- -------- -------- -------- --------- ---------- ---------
Balance at
Dec. 3, 2005 $ 22,270 $ - $ 22,270 $ 1,489 $ - $ 1,489 $ 23,759 $ - $ 23,759
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.2
million during the 40 weeks ended December 3, 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 $4.5 million during
the 40 weeks ended December 3, 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 40 weeks ended December 3,
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 40 weeks ended December 3,
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 December 3, 2005.
We paid $102.9 million of the total occupancy charges from the time of the
original charges through December 3, 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 December 3, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $22.3 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.
73
None of these stores were open during either of the first, second or third
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 December 3, 2005 and February 26, 2005, approximately $5.6 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 December 3, 2005 of $23.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 ASSET DISPOSITION
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of December 3, 2005,
we had closed all stores and facilities related to this phase of the initiative.
74
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) 1,703 - 1,703 - - - 1,703 - 1,703
Utilization (2) (3,640) - (3,640) (75) - (75) (3,715) - (3,715)
Adjustments (3) (1,689) - (1,689) - - - (1,689) - (1,689)
-------- -------- -------- -------- -------- -------- ---------- --------- ---------
Balance at
Dec. 3, 2005 $ 28,273 $ - $ 28,273 $ 39 $ - $ 39 $ 28,312 $ - $ 28,312
======== ======== ======== ======== ======== ======== ========= ========= =========
(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 $1.7
million during the 40 weeks ended December 3, 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 $3.6 million during the
40 weeks ended December 3, 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 40 weeks ended December
3, 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.
75
During fiscal 2005, we recorded adjustments of $1.7 million related to
the reversals of previously accrued occupancy costs due to a favorable
result of subleasing one of the closed properties.
We paid $42.8 million ($39.8 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through
December 3, 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
December 3, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $28.3 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.04 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At December 3, 2005 and February 26, 2005, approximately $6.6 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, second or third
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 December 3, 2005 of $28.3 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. Our 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 December 3, 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.
76
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) 521 - 521
Utilization (2) (2,220) (6) (2,226)
Adjustment (3) 3,662 - 3,662
------------ ------------- ----------
Balance at
Dec. 3, 2005 $ 17,865 $ - $ 17,865
============ ============= ==========
(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 40 weeks ended December 3, 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 $2.2 million
during fiscal 2003, fiscal 2004 and the 40 weeks ended December 3,
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 40 weeks ended December 3,
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 40 weeks ended December 3,
2005, we recorded an increase of $3.7 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 $8.1 million of the total occupancy charges from the time of the
original charge through December 3, 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 December 3, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $17.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2022. The severance liability
has been fully utilized as of December 3, 2005 and no additional future payments
for severance and benefits to individual employees will be paid out.
77
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 3, 2005 and December 4, 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 40 Weeks Ended
----------------------------------- -----------------------------------
December 3, December 4, December 3, December 4,
2005 2004 2005 2005
--------------- --------------- ---------------- ---------------
Sales $ - $ - $ - $ 2,433
============== ============== =============== ==============
Loss from operations $ - $ - $ - $ (47)
============== ============== =============== ==============
At December 4, 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 $17.9 million as of December 3, 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 MIDWEST OPERATIONS
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 business in the Midwestern United States. This planned divestiture
included the closing of a total of 35 stores, all of which have been closed as
of December 3, 2005. The remaining business located in the Midwestern United
States will continue to operate as part of our core business going forward.
During the 12 and 40 weeks ended December 3, 2005, we recorded charges of $18.1
million and $104.1 million, respectively, related to these closures ($0.2
million and $1.3 million in "Cost of merchandise sold," respectively, and $17.9
million and $102.8 million, respectively, in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations), excluding
PV interest.
12 Weeks Ended 40 Weeks Ended
December 3, 2005 December 3, 2005
---------------------- ----------------------
Occupancy related $ 16,925 $ 88,443
Severance and benefits 591 2,710
Capital lease termination (588) (588)
Property writeoffs 12 6,873
Loss on the sale of fixed assets - 2,263
Sale of pharmacy scripts - (870)
Inventory markdowns 138 1,268
Nonaccruable closing costs 1,059 4,016
-------------- ---------------
Total charges $ 18,137 $ 104,115
============== ===============
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.
78
Severance
and
Occupancy Benefits Total
----------- ------------- ------------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Additions (2) 74,459 1,373 75,832
Utilization (3) (5,663) (1,837) (7,500)
--------------- --------------- ------------
Balance at
Dec. 3, 2005 $ 83,562 $ 873 $ 84,435
============ ============= ==========
(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 40 weeks ended December 3, 2005
represents charges related to the closures of an additional 27 stores
in the amount of $73.7 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 $0.8 million. The additional charge to
severance during the 40 weeks ended December 3, 2005 of $1.4 million
related to individual severings as a result of these store closures.
(3) Occupancy utilization of $5.7 million for 40 weeks ended December 3,
2005, represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $1.8 million for the 40 weeks ended December 3, 2005
represents payments made to terminated employees during the period.
We paid $5.7 million of the total occupancy charges from the time of the
original charge through December 3, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $1.8 million of the total net severance charges from
the time of the original charges through December 3, 2005, which resulted from
the termination of approximately 125 employees. The remaining occupancy
liability of $83.6 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 $0.9 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 40 weeks
ended December 3, 2005 and December 4, 2004 are the sales and operating results
of the 35 stores that were closed as part of this divestiture. The results of
these operations are as follows:
12 Weeks Ended 40 Weeks Ended
----------------------------------- -----------------------------------
December 3, December 4, December 3, December 4,
2005 2004 2005 2004
--------------- --------------- ---------------- ---------------
Sales $ 2,994 $ 78,412 $ 110,882 $ 263,857
============== ============== =============== ==============
Loss from operations $ (3,602) $ (8,773) $ (24,768) $ (29,094)
================= =============== =============== ==============
At December 3, 2005, approximately $17.8 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.
79
We have evaluated the liability balance of $84.4 million as of December 3, 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:
Dec. 3, 2005 Dec. 4, 2004
----------------- -----------------
Net cash used in operating activities $ (160,523) $ (11,107)
----------------- -----------------
Net cash provided by (used in) investing activities $ 432,838 $ (148,646)
----------------- -----------------
Net cash (used in) provided by financing activities $ (402,634) $ 32,933
----------------- -----------------
Net cash flow used in operating activities of $160.5 million for the 40 weeks
ended December 3, 2005 primarily reflected our net income of $431.7 million,
adjusted for non-cash charges for (i.) depreciation and amortization of $164.0
million, (ii.) asset disposition initiatives of $100.4 million, (iii.)
restructuring charges of $62.7 million, (iv.) non-current income taxes of $119.6
million, and (v.) other property impairments of $23.0 million, partially offset
by the non-cash gain on sale of Canadian operations of $912.5 million, and a
decrease in inventories of $33.4 million partially offset by an increase in
receivables of $25.8 million, a decrease in accounts payable of $89.7 million
and a decrease in other non-current liabilities of $59.7 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 used in operating
activities of $11.1 million for the 40 weeks ended December 4, 2004 primarily
reflected our net loss of $182.4 million, adjusted for a non-cash charges of
$205.7 million for depreciation and amortization and $34.7 million for the
Midwest long lived assets / goodwill impairment, a decrease in accounts
receivable of $39.5 million, an increase in accounts payable of $79.4 million
partially offset by an increase in inventories of $98.3 million, an increase in
prepaid assets and other current assets of $26.4 million, an increase in other
assets of $20.7 million and a decrease in other accruals of $25.8 million.
Net cash flow provided by investing activities of $432.8 million for the 40
weeks ended December 3, 2005 primarily reflected proceeds from the sale of our
Canadian operations of $960.7 million, proceeds received from the sale of
certain of our assets of $62.5 million partially offset by property expenditures
totaling $134.8 million, which included 1 new supermarket and 30 major remodels,
disposal related expenditures for sale of the Canadian operations of $53.5
million, payments for derivatives of $15.4 million, the increase in restricted
cash of $146.7 million, and the net purchases of marketable securities of $243.0
million. For the remainder of fiscal 2005, we have planned capital expenditures
of approximately $30 to $60 million, which relate primarily to enlarging or
remodeling approximately 25 to 35 supermarkets. We currently expect to close
approximately 1 or 2 stores during the remainder of fiscal 2005. Net cash flow
used in investing activities of $148.6 million for the 40 weeks ended December
4, 2004 primarily reflected property expenditures totaling $164.3 million, which
included 11 new supermarkets and 16 major remodels partially offset by cash
received from the sale of certain of our assets of $15.7 million.
80
Net cash flow used in financing activities of $402.6 million for the 40 weeks
ended December 3, 2005 primarily reflected principal payments on long term
borrowings and other fees of $413.9 million and principal payments on capital
leases of $9.6 million partially offset by proceeds from the exercise of stock
options of $23.4 million. Net cash flow provided by financing activities of
$32.9 million for the 40 weeks ended December 4, 2004 primarily reflected an
increase in book overdrafts of $19.7 million and net proceeds from long term
real estate liabilities of $29.9 million partially offset by principal payments
on capital leases of $10.0 million and principal payments on long-term
borrowings and other fees of $5.9 million.
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 35 of the 101 stores in the Midwest at this time and as we have not
identified a buyer for our remaining operations in the Midwestern United States,
our current plan is to operate this business as part of our core business going
forward.
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 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 $622.3 million at December 3, 2005 compared to working
capital of $86.5 million at February 26, 2005. We had cash and cash equivalents
aggregating $127.5 million at December 3, 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 restricted cash that can only be used as collateral for our
new Letter of Credit Agreement that we entered into during the third
quarter of fiscal 2005;
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;
81
o A decrease in accounts payable (inclusive of book overdrafts) due to the
sale of our Canadian operations and timing;
o A decrease in accrued salaries, wages and benefits due primarily to the
sale of our Canadian operations and timing of payments; and
o A decrease in other accruals mainly due to the sale of our Canadian
operations.
Partially offset by the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows; and
o A decrease in inventories mainly due to the sale of our Canadian
operations.
REVOLVING CREDIT AGREEMENT
During the second quarter of fiscal 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 ("Revolving Credit Agreement") was amended, eliminating the Canadian
portion of the agreement by $65 million. As of the end of the second quarter of
fiscal 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.
During the third quarter of fiscal 2005, the Revolving Credit Agreement was
terminated. Concurrently, we entered into a new, cash collateralized, Letter of
Credit Agreement that enables us to issue letters of credit up to $200 million.
We also negotiated an additional $150 million Revolving Credit Agreement
("Revolver") with four lenders enabling us to borrow funds on a revolving basis
for working capital loans and letters of credit. The Revolver also includes a
$100 million accordion feature which gives us the ability to increase borrowings
from $150 million to $250 million. Under the terms of this agreement, should
availability fall below $25.0 million and should cash on hand fall below $50.0
million, a borrowing block will be implemented which provides that no additional
loans be made unless we are able to maintain a minimum consolidated EBITDA
covenant on a trailing twelve month basis. In the event that availability falls
below $25.0 million, cash on hand falls below $50.0 million, and we do not
maintain the required minimum EBITDA covenant, unless otherwise waived or
amended, the lenders may, at their discretion, declare, in whole or in part, all
outstanding obligations immediately due and payable.
The Revolver is collateralized by inventory, certain accounts receivable and
pharmacy scripts. Borrowings under the Revolver bear interest based on LIBOR or
Prime interest rate pricing. This agreement expires in November 2010. As of
December 3, 2005, there were no loans outstanding under this agreement. As of
December 3, 2005, after reducing availability for outstanding letters of credit
and borrowing base requirements, we had $150.0 million available under the
Revolver. Combined with cash we held in short-term investments and marketable
securities of $266.6 million, we had total cash availability of $416.6 million
at December 3, 2005.
Under the Revolver, we are permitted to pay cumulative cash dividends on common
shares up to $150 million as well as make bond repurchases which we may do from
time to time in the future.
82
PUBLIC DEBT OBLIGATIONS
Outstanding notes totaling $244.7 million at December 3, 2005 consisted of $31.9
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.
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.
During the third quarter of fiscal 2005, we repurchased in the open market $0.4
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
$0.1 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.
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 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. However, our Company is permitted,
under the terms of our Revolver, to pay cash dividends on common shares.
We are the guarantor of a loan of $1.8 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 December 3, 2005, 146 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 $357.8 million, which could be partially or
totally offset by reassigning or subletting such leases.
83
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 December 3, 2005. Our liquidity rating was
SGL3 with Moody's as of December 3, 2005. Our recovery rating was 1 with S&P as
of December 3, 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.
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.
84
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 40 weeks ended December 3, 2005, we recorded impairment
losses on long-lived assets as follows:
12 weeks ended Dec. 3, 2005 40 weeks ended Dec. 3, 2005
----------------------------- -----------------------------
U.S. Canada Total U.S. Canada Total
--------- --------- --------- -------- ---------- -------
Impairments due to closure or conversion in the
normal course of business $ 3,760 $ - $ 3,760 $ 4,784 $ 506 $ 5,290
Impairments due to unrecoverable assets 8,116 - 8,116 17,728 - 17,728
Impairments due to closure of stores impacted by Hurricane
Katrina (1) 6,090 - 6,090 6,090 - 6,090
Impairments related to the divestiture of the Midwestern
U.S. business (2) 12 - 12 6,873 - 6,873
Impairments related to the sale of U.S. distribution
operations and warehouses (3) - - - 8,590 - 8,590
--------- --------- --------- -------- ---------- -------
Total impairments $ 17,978 $ - $ 17,978 $ 44,065 $ 506 $44,571
========= ========= ========= ======== ========== =======
(1) Refer to Note 7 - Hurricane Katrina and Impact on U.S. Business
(2) Refer to Note 11 - Asset Disposition Initiatives
(3) 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 December
3, 2005, we had recorded liabilities for estimated probable obligations of $186
million. Of this amount, $23 million relates to stores closed in the normal
course of business, $152 million relates to stores closed as part of the asset
disposition initiatives (see Note 11 of our Consolidated Financial Statements)
and $11 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.
85
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.
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 $247.0 million in total indebtedness as of December 3, 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 40 weeks ended December 3, 2005 and December 4, 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. A change in the Canadian currency of 10% would have
resulted in a fluctuation in our investment in Metro, Inc. of $33.2 million at
December 3, 2005. We do not believe that a change in the Canadian currency of
10% will have a material effect on our statements of operations 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.
86
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 Senior Vice President, Chief Financial
Officer, 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 Senior Vice President, Chief
Financial Officer, 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 December 3, 2005, our Company's
President and Chief Executive Officer along with our Company's Senior Vice
President, Chief Financial Officer, concluded that our Company's disclosure
controls and procedures were effective as of December 3, 2005.
In the fourth 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 will no longer maintains internal controls over
financial reporting relating to these warehouse physical inventories and the
related reconciliations. We have evaluated and identified our key controls
associated with the revised process and we are in the process of implementing
and testing those key controls.
There have been no other changes during our Company's fiscal quarter ended
December 3, 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.
87
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
None
ITEM 5 - OTHER INFORMATION
ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On January 4, 2006, the Company entered into an Employment Agreement with Ms.
Melissa E. Sungela, Vice President, Corporate Controller of the Company (the
"Sungela Employment Agreement"). Under the Sungela Employment Agreement, Ms.
Sungela will earn an annual salary of $200,000 and be eligible for a cash bonus
as determined by the Board of Directors or an authorized committee thereof. In
addition, Ms. Sungela is entitled to participate in the Company's benefit
programs and services, facilities and perquisites appropriate to her position.
In the event that the Company terminates Ms. Sungela other than for Cause (as
defined therein), Ms. Sungela will be entitled to certain benefits, including
severance for a period of twelve (12) months.
The foregoing description of the Sungela Employment Agreement is qualified in
its entirety by reference to the full text of the Sungela Employment Agreement,
filed as Exhibit 10.17 to this Form 10-Q, and incorporated herein by reference.
88
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)
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)
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4.7 Credit Agreement dated as of November 15, 2005
between the Company and Bank of America, N.A. as
Administrative Agent and Collateral Agent,
JPMorgan Chase Bank, N.A. as Syndication Agent,
Wachovia Bank, National Association as
Documentation Agent and Banc of America
Securities LLC as Lead Arranger (incorporated
herein by reference to Exhibit 4.1 to Form 8-K
filed on November 18, 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)
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)
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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")
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
4th of January 2006, by and between our Company and
Melissa E. Sungela, as filed herein
10.18 Employment Agreement, made and entered into as of the
12th of September 2005, by and between our Company and
Paul Wiseman (incorporated herein by reference to
Exhibit 10.17 to Form 10-Q filed on October 18, 2005)
10.19 Employment Agreement, made and entered into as of the
2nd of December 2004, by and between our Company and
Allan Richards (incorporated herein by reference to
Exhibit 10.18 to Form 10-Q filed on October 18, 2005)
10.20 Employment Agreement, made and entered into as of the
2nd of December 2004, by and between our Company and
Stephen Slade (incorporated herein by reference to
Exhibit 10.19 to Form 10-Q filed on October 18, 2005)
10.21 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)
10.22 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)
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10.23 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on May
24, 1995)
10.24 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)
10.25 Form of Stock Option Grant (incorporated herein by
reference to Exhibit 10.20 to Form 10-K filed on May
10, 2005)
10.26 Description of 2005 Turnaround Incentive Compensation
Program (incorporated herein by reference to Exhibit
10.21 to Form 10-K filed on May 10, 2005)
10.27 Form of Restricted Share Unit Award Agreement
(incorporated herein by reference to Exhibit 10.22 to
Form 10-K filed on May 10, 2005)
10.28 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)
10.29 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)
10.30 Description of Management Incentive Plan (incorporated
herein by reference to Exhibit 10.26 to Form 10-K
filed on May 10, 2005)
10.31 Asset Purchase Agreement, dated as of June 27, 2005,
by and between the Company, Ocean Logistics LLC and
C&S Wholesale Grocers, Inc. (incorporated herein by
reference to Exhibit 10.38 to Form 10-Q filed on
October 18, 2005)
10.32 Supply Agreement, dated as of June 27, 2005, by and
between the Company and C&S Wholesale Grocers, Inc.
(incorporated herein by reference to Exhibit 10.39 to
Form 10-Q filed on October 18, 2005)
10.33 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
(incorporated herein by reference to Exhibit
10.40 to Form 10-Q filed on October 18, 2005)
10.34 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
(incorporated herein by reference to Exhibit 10.41 to
Form 10-Q filed on October 18, 2005)
10.35 Letter of Credit Agreement, dated as of October 14,
2005 between the Company and Bank of America, N.A., as
Issuing Bank, (incorporated herein by reference to
Exhibit 10.42 to Form 10-Q filed on October 18, 2005)
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14 Code of Business Conduct and Ethics (incorporated
herein by reference to Exhibit 14 to Form 10-K filed
on May 21, 2004)
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
93
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: January 6, 2006 By: /s/ Melissa E. Sungela
------------------------------------------------
Melissa E. Sungela, Vice President,
Corporate Controller (Chief Accounting Officer)
94