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 4, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
----------------------------------------
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act. YES [X] NO [ ]
As of January 6, 2004 the Registrant had a total of 38,625,019 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
Nov. 29, 2003 Nov. 29, 2003
(As Restated (As Restated
Dec. 4, 2004 See Note 3) Dec. 4, 2004 See Note 3)
------------------ ------------------ ------------------ -----------------
Sales $ 2,523,759 $ 2,484,612 $ 8,294,617 $ 8,177,893
Cost of merchandise sold (1,827,221) (1,795,687) (5,982,570) (5,874,725)
------------ -------------- -------------- -------------
Gross margin 696,538 688,925 2,312,047 2,303,168
Store operating, general and administrative
expense (748,447) (771,367) (2,417,084) (2,416,262)
------------ -------------- --------------- -------------
Loss from operations (51,909) (82,442) (105,037) (113,094)
Interest expense (19,218) (18,383) (68,146) (61,212)
Interest income 485 80 2,094 1,434
Minority interest in earnings of consolidated
franchisees 2,815 (205) 1,097 (33)
------------ --------------- -------------- --------------
Loss from continuing operations before
income taxes (67,827) (100,950) (169,992) (172,905)
(Provision for) benefit from income taxes (4,924) 28,127 (8,768) 22,360
------------- -------------- --------------- -------------
Loss from continuing operations (72,751) (72,823) (178,760) (150,545)
Discontinued operations (Note 5):
Income (loss) from operations of discontinued
businesses, net of tax benefit of $0 and
$798 for the 12 weeks ended
12/4/04 and 11/29/03, respectively, and tax
benefit of $0 and $22,494 for the 40 weeks
ended 12/4/04 and 11/29/03, respectively 110 (1,102) (929) (31,064)
(Loss) gain on disposal of discontinued
operations, net of tax provision of $0 and
$35,235 for the 12 weeks ended
12/4/04 and 11/29/03, respectively, and
tax provision of $0 and $67,088 for the
40 weeks ended 12/4/04
and 11/29/03, respectively (2,702) 48,658 (2,702) 92,647
------------- -------------- --------------- -------------
(Loss) income from discontinued operations (2,592) 47,556 (3,631) 61,583
------------- -------------- -------------- -------------
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - - - (8,047)
------------ -------------- -------------- -------------
Net loss $ (75,343) $ (25,267) $ (182,391) $ (97,009)
============ ============== ============== =============
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.89) $ (1.89) $ (4.64) $ (3.90)
Discontinued operations (0.07) 1.23 (0.10) 1.60
Cumulative effect of a change in accounting
principle - FIN 46-R - - - (0.21)
------------- --------------- -------------- --------------
Net loss per share - basic and diluted $ (1.96) $ (0.66) $ (4.74) $ (2.51)
============= =============== ============== =============
Weighted average number of common shares
outstanding 38,553,356 38,517,218 38,530,519 38,516,489
Common stock equivalents 255,997 446,307 298,054 405,797
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 38,809,353 38,963,525 38,828,573 38,922,286
============= ============== ============== =============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
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
============ =========== =========== ============ =========== ===========
40 Week Period Ended
November 29, 2003
As Restated - See Note 3
- ------------------------
Balance at beginning of period,
as previously stated 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191
Add adjustment for the cumulative
effect on prior years of
applying retroactively the
new method of accounting
for inventory (LIFO to FIFO) 17,462 17,462
------------ ----------- ----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted 38,515,806 38,516 459,411 78,849 (61,123) 515,653
Net loss (97,009) (97,009)
Other comprehensive income 45,390 45,390
Stock options exercised 1,412 1 11 12
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,517,218 $ 38,517 $ 459,422 $ (18,160) $ (15,733) $ 464,046
============ =========== =========== =========== =========== ===========
Comprehensive loss
- ------------------
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
(As Restated (As Restated
See Note 3) See Note 3)
Dec. 4, 2004 Nov. 29, 2003 Dec. 4, 2004 Nov. 29, 2003
------------------ ------------------ ------------------ -----------------
Net loss $ (75,343) $ (25,267) $ (182,391) $ (97,009)
----------- ----------- ----------- -----------
Foreign currency translation adjustment 27,999 18,503 40,196 48,475
Net unrealized gain (loss) on derivatives,
net of tax 104 (418) 558 (3,085)
----------- ----------- ------------ -----------
Other comprehensive income 28,103 18,085 40,754 45,390
------------ ----------- ------------ -----------
Total comprehensive loss $ (47,240) $ (7,182) $ (141,637) $ (51,619)
=========== =========== =========== ===========
Accumulated Other Comprehensive Loss Balances
- ---------------------------------------------
Accumulated
Foreign Net Unrealized Minimum Other
Currency (Loss) Gain Pension Comprehensive
Translation on Derivatives Liability (Loss) Income
------------ -------------- ------------ -------------
Balance at February 28, 2004, As Restated - See Note 3 $ (23,892) $ (158) $ (3,189) $ (27,239)
Current period change 40,196 558 - 40,754
----------- ---------- ----------- -----------
Balance at December 4, 2004 $ 16,304 $ 400 $ (3,189) $ 13,515
=========== ========== ============ ===========
Balance at February 22, 2003 $ (62,496) $ 3,015 $ (1,642) $ (61,123)
Current period change, As Restated 48,475 (3,085) - 45,390
----------- ----------- ----------- -----------
Balance at November 29, 2003, As Restated $ (14,021) $ (70) $ (1,642) $ (15,733)
============ =========== ============ ============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
February 28, 2004
December 4, (As Restated
2004 See Note 3)
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 176,694 $ 297,008
Accounts receivable, net of allowance for doubtful accounts
of $5,772 and $6,316 at December 4, 2004 and
February 28, 2004, respectively 136,308 171,835
Inventories 816,497 694,120
Prepaid expenses and other current assets 60,904 33,796
------------- --------------
Total current assets 1,190,403 1,196,759
------------- --------------
Non-current assets:
Property:
Property owned 1,369,458 1,405,925
Property leased under capital leases 59,917 65,632
------------- --------------
Property - net 1,429,375 1,471,557
Other assets 128,535 115,500
------------- --------------
Total assets $ 2,748,313 $ 2,783,816
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,277 $ 2,271
Current portion of obligations under capital leases 10,311 15,901
Accounts payable 588,073 480,712
Book overdrafts 116,799 96,273
Accrued salaries, wages and benefits 171,050 177,142
Accrued taxes 70,663 74,698
Other accruals 220,539 236,238
------------- --------------
Total current liabilities 1,179,712 1,083,235
------------- --------------
Non-current liabilities:
Long-term debt 835,317 823,738
Long-term obligations under capital leases 74,859 73,980
Other non-current liabilities 401,690 402,932
Minority interest in consolidated franchisees 5,035 7,172
------------- --------------
Total liabilities 2,496,613 2,391,057
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000
shares; issued - none - -
Common stock--$1 par value; authorized - 80,000,000
shares; issued and outstanding - 38,557,579 and 38,518,905
shares at December 4, 2004 and February 28, 2004, respectively 38,557 38,519
Additional paid-in capital 460,119 459,579
Accumulated other comprehensive income (loss) 13,515 (27,239)
Accumulated deficit (260,491) (78,100)
-------------- --------------
Total stockholders' equity 251,700 392,759
------------- --------------
Total liabilities and stockholders' equity $ 2,748,313 $ 2,783,816
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
-------------------------------------------------
Nov. 29, 2003
(As Restated
Dec. 4, 2004 See Note 3)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (182,391) $ (97,009)
Adjustments to reconcile net loss to net cash used in
operating activities:
Midwest long lived asset / goodwill impairment charge 34,688 60,082
Other property impairments 2,048 466
Asset disposition initiative (1,709) (5,354)
Depreciation and amortization 206,373 214,953
Deferred income taxes 431 7,729
Loss (gain) on disposal of owned property 3,381 (138)
Loss (gain) on sale of discontinued operations 2,702 (159,735)
Minority interest (2,745) (874)
Cumulative effect of change in accounting principle - FIN 46-R - 8,047
Other changes in assets and liabilities:
Decrease in receivables 39,527 15,469
Increase in inventories (98,337) (31,944)
Increase in prepaid expenses and other current assets (26,523) (29,571)
(Increase) decrease in other assets (22,666) 8,879
Increase in accounts payable 79,389 9,144
(Decrease) increase in accrued salaries, wages, benefits and taxes (19,257) 5,263
(Decrease) increase in other accruals (25,835) 2,114
Decrease in other non-current liabilities (8,353) (21,297)
Other operating activities, net 3,777 (2,237)
----------- ------------
Net cash used in operating activities (15,500) (16,013)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (150,146) (109,124)
Proceeds from disposal of property 15,665 252,068
----------- -----------
Net cash (used in) provided by investing activities (134,481) 142,944
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on revolving lines of credit - (135,000)
Proceeds from long-term borrowings 19,321 16
Principal payments on long-term borrowings (5,883) (1,095)
Principal payments on capital leases (10,136) (10,406)
Increase in book overdrafts 19,677 22,230
Deferred financing fees (965) (539)
Proceeds from exercises of stock options 233 12
----------- -----------
Net cash provided by (used in) financing activities 22,247 (124,782)
Initial impact of FIN 46-R - 20,921
Effect of exchange rate changes on cash and cash equivalents 7,420 14,390
----------- -----------
Net (decrease) increase in cash and cash equivalents (120,314) 37,460
Cash and cash equivalents at beginning of period 297,008 199,014
----------- -----------
Cash and cash equivalents at end of period $ 176,694 $ 236,474
=========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
(Unaudited)
1. Basis of Presentation
The accompanying Statements of Consolidated Operations and Statements of
Consolidated Cash Flows of The Great Atlantic & Pacific Tea Company, Inc.
("We," "Our," "Us" or "Our Company") for the 12 and 40 weeks ended December 4,
2004 and November 29, 2003, and the Consolidated Balance Sheets at December 4,
2004 and February 28, 2004, are unaudited and, in the opinion of Management,
contain all adjustments that are of a normal and recurring nature necessary to
present fairly the financial position and results of operations for such
periods. The accompanying consolidated financial statements also include the
impact of adopting Financial Accounting Standards Board ("FASB") Interpretation
No. 46 ("FIN 46-R"), "Consolidation of Variable Interest Entities - an
interpretation of `Accounting Research Bulletin No. 51'," EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor, by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"), and the
change in our method of valuing certain of our inventories from the last-in,
first-out ("LIFO") method to the first-in, first-out ("FIFO") method. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2003
Annual Report on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries and franchise operations. Significant intercompany
accounts and transactions have been eliminated. Certain reclassifications have
been made to prior year amounts to conform to current year presentation.
2. Impact of New Accounting Pronouncements
In December 2003, the FASB issued SFAS 132-R, "Employer's Disclosure about
Pensions and Other Postretirement Benefits" ("SFAS 132-R"). SFAS 132-R requires
new annual disclosures about the type of plan assets, investments strategy,
measurement date, plan obligations, and cash flows as well as the components of
the net periodic benefit cost recognized in interim periods. The new annual
disclosure requirements apply to fiscal years ending after December 15, 2003,
except for the disclosure of expected future benefit payments, which must be
disclosed for fiscal years ending after June 15, 2004. Interim period
disclosures are generally effective for interim periods beginning after December
15, 2003. We have included the disclosures required by SFAS 132-R, including
expected future benefit payments, in our consolidated financial statements for
the year ended February 28, 2004. We have also included all newly required
interim period disclosures for the 12 and 40 weeks ended December 4, 2004 and
November 29, 2003 in Note 8 - Retirement Plans and Benefits.
In December 2003, the United States enacted into law the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act"). The Act establishes
a prescription drug benefit under Medicare, known as "Medicare Part D," and a
Federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB issued FASB Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"). Refer to Note 8 - Retirement Plans and
Benefits regarding the impact of adoption of FAS 106-2 in our consolidated
financial statements.
In December 2004, the FASB issued SFAS 123R (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which requires companies to expense the value of
employee stock options and similar awards. SFAS 123R is effective for all public
companies no later than the first interim or annual period beginning after June
15, 2005 (the quarter ended September 10, 2005 for our Company) and applies to
all outstanding and unvested share-based payment awards at a company's adoption
date. Our Company is currently assessing the impact of this statement on our
consolidated financial statements.
Refer to Note 3 - Restatement and Changes in Accounting regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our consolidated financial statements.
3. Restatement and Changes in Accounting
FIN 46-R
- --------
In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of `Accounting Research
Bulletin No. 51'". FIN 46-R addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at risk to allow the
entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46-R requires the
consolidation of these entities, known as variable interest entities ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns, or
both. FIN 46-R applies immediately to variable interests in VIE's created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46-R applies to VIE's no later than the end of the first
reporting period ending after March 15, 2004 (the quarter ended June 19, 2004
for our Company).
Based upon the new criteria for consolidation of VIE's, we have determined that
(i.) all of our franchised stores do not have sufficient equity at risk to allow
them to finance their own activities, (ii.) we absorb the expected losses of all
of our franchised stores, and (iii.) we have a de facto agency relationship with
the franchisees in which the franchisees cannot sell, transfer, or encumber its
interests in the franchise without our prior approval. Therefore, we are deemed
the primary beneficiary and accordingly have included the franchisee operations
in our consolidated financial statements as of February 23, 2003. As permitted
by FIN 46-R, our Company elected to restate fiscal 2003's consolidated financial
statements for the impact of adopting this interpretation for comparability
purposes.
As of December 4, 2004, we served 42 franchised stores in Canada. These
franchisees are required to purchase inventory from our Company, which acts as a
wholesaler to the franchisees. We had sales to these franchised stores of $161
million and $187 million for the 12 weeks ended December 4, 2004 and November
29, 2003, respectively, and $600 million and $615 million for the 40 weeks
December 4, 2004 and November 29, 2003, respectively. In addition, we sublease
the stores and lease the equipment in the stores to the franchisees. We also
provide merchandising, advertising, bookkeeping and other consultative services
to the franchisees for which we receive a fee, which primarily represents the
reimbursement of costs incurred to provide such services.
Prior to February 23, 2003, we held, as assets, inventory notes collateralized
by the inventory in the stores and equipment lease receivables collateralized by
the equipment in the stores. The current portion of the inventory notes and
equipment leases, net of allowance for doubtful accounts, had been included in
"Accounts receivable" on our Consolidated Balance Sheets, while the long-term
portion of the inventory notes and equipment leases had been included in "Other
assets" on our Consolidated Balance Sheets. The repayment of these inventory
notes and equipment leases had been dependent upon positive operating results of
the stores. To the extent that the franchisees incurred operating losses, we had
established an allowance for doubtful accounts. We assessed the sufficiency of
the allowance on a store by store basis based upon the operating results and the
related collateral underlying the amounts due from the franchisees. In the event
of default by a franchisee, we reserved the option to reacquire the inventory
and equipment at the store and operate the franchise as a corporate owned store.
The cumulative effect adjustment of $8.0 million primarily represents the
difference between consolidating these entities as of February 23, 2003 and the
allowance for doubtful accounts that was provided for these franchises at that
date.
Also refer to Note 11 - Commitments and Contingencies regarding our settlement
of a class action lawsuit relating to our Canadian franchise business.
EITF 03-10
- ----------
In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers". The
provisions of EITF 03-10 became effective for our Company in the first quarter
of fiscal 2004. EITF 03-10 provides guidance for the reporting of vendor
consideration received by a reseller as it relates to manufacturers' incentives,
such as rebates or coupons, tendered by consumers. Vendor incentives should be
included in revenues only if defined criteria are met. As such, our Company will
continue to record as part of revenues manufacturers' coupons that can be
presented at any retailer that accepts coupons. However, in the case of vendor
incentives that can only be redeemed at a Company retail store, such
consideration would be recorded as a decrease in cost of sales. As permitted by
the transition provisions of EITF 03-10, we have reclassified prior year's sales
and cost of sales for comparative purposes in this report. Implementation of
EITF 03-10 has no effect on gross margin dollars, net income or cash flows, but
certain vendor coupons or rebates that had been recorded in sales in the past
are currently being recognized as a reduction of cost of sales. The
implementation of EITF 03-10 has resulted in decreases in both sales and cost of
sales of $11.8 million and $9.5 million for the 12 weeks ended December 4, 2004
and November 29, 2003, respectively, and $39.4 million and $34.3 million for the
40 weeks ended December 4, 2004 and November 29, 2003, respectively.
Inventory
- ---------
At February 28, 2004, approximately 6% of our inventories, relating to all
merchandise sold in our Waldbaums and Farmer Jack banners, that were acquired
during the past two decades, were valued at the lower of cost or market using
the LIFO method. During the first quarter of fiscal 2004, we changed our method
of valuing these inventories from the LIFO method to the FIFO method. We believe
that the new method is preferable because the FIFO method produces an inventory
value on our Consolidated Balance Sheets that better approximates current costs.
In addition, under FIFO, the flow of costs is generally more consistent with our
physical flow of goods. The adoption of the FIFO method will enhance
comparability of our financial statements by conforming all of our inventories
to the same accounting method. Our Company applied this change by retroactively
restating our consolidated financial statements as required by Accounting
Principles Board Opinion No. 20, "Accounting Changes," which resulted in an
increase to retained earnings as of February 23, 2003 of approximately $17.5
million.
Overall Impact
- --------------
The following tables reflect the impact of the adoption of (i.) FIN 46-R on our
Canadian operations, including the impact of all elimination entries relating to
the consolidation of the franchisees, (ii.) EITF 03-10 on our U.S. ($7.0 million
and $21.8 million for the 12 and 40 weeks ended December 4, 2004, respectively,
as compared to $5.9 million and $24.1 million for the 12 and 40 weeks ended
November 29, 2003, respectively) and Canadian ($4.8 million and $17.6 million
for the 12 and 40 weeks ended December 4, 2004, respectively, as compared to
$3.5 million and $10.2 million for the 12 and 40 weeks ended November 29, 2003,
respectively) operations, and (iii.) the change in our method of valuing certain
of our inventories from the LIFO method to the FIFO method on our U.S.
operations in our Statements of Consolidated Operations and Consolidated Balance
Sheets for the periods presented. Note that the adoption of EITF 03-10 only
impacts our Statements of Consolidated Operations. Furthermore, the change in
our method of valuing certain of our inventories impacts our Consolidated
Balance Sheets and had a $0 and $1.1 million impact on our Statements of
Consolidated Operations for the 12 and 40 weeks ended November 29, 2003,
respectively.
Consolidated
A&P for the Consolidated
12 weeks ended Impact of Impact of A&P for the
Dec. 4, 2004 adoption of adoption of 12 weeks ended
prior to changes FIN 46-R EITF 03-10 Dec. 4, 2004
---------------- ------------- ------------- ---------------
Sales $ 2,493,587 $ 41,940 $ (11,768) $ 2,523,759
Cost of merchandise sold (1,828,670) (10,319) 11,768 (1,827,221)
------------- -------------- ------------- -------------
Gross margin 664,917 31,621 - 696,538
Store operating, general and administrative
expense (719,775) (28,672) - (748,447)
------------- ------------- ------------- -------------
(Loss) income from operations (54,858) 2,949 - (51,909)
Interest expense (19,218) - - (19,218)
Interest income 1,595 (1,110) - 485
Minority interest in earnings of consolidated
franchisees - 2,815 - 2,815
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (72,481) 4,654 - (67,827)
Provision for income taxes (4,759) (165) - (4,924)
-------------- ------------- ------------- --------------
(Loss) income from continuing operations (77,240) 4,489 - (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) income $ (79,832) $ 4,489 $ - $ (75,343)
============= ============= ============= =============
Depreciation $ (61,852) $ (1,002) $ - $ (62,854)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Restated for the
12 weeks ended adoption of adoption of 12 weeks ended
Nov. 29, 2003 FIN 46-R EITF 03-10 Nov. 29, 2003
---------------- --------------- ---------------- -----------------
Sales $ 2,465,295 $ 28,762 $ (9,445) $ 2,484,612
Cost of merchandise sold (1,809,234) 4,102 9,445 (1,795,687)
-------------- ------------- ------------- -------------
Gross margin 656,061 32,864 - 688,925
Store operating, general and
administrative expense (740,493) (30,874) - (771,367)
-------------- ------------- ------------- -------------
(Loss) income from operations (84,432) 1,990 - (82,442)
Interest expense (18,383) - - (18,383)
Interest income 1,384 (1,304) - 80
Minority interest in earnings
of consolidated franchisees - (205) - (205)
------------- -------------- ------------- --------------
(Loss) income from continuing
operations before income taxes (101,431) 481 - (100,950)
Benefit from (provision for)
income taxes 28,773 (646) - 28,127
------------- -------------- ------------- -------------
Loss from continuing operations (72,658) (165) - (72,823)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,102) - - (1,102)
Gain on disposal of discontinued
operations, net of tax 48,658 - - 48,658
------------- ------------- ------------- -------------
Income from discontinued operations 47,556 - - 47,556
------------- ------------- ------------- -------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - - - -
------------- ------------- ------------- -------------
Net loss $ (25,102) $ (165) $ - $ (25,267)
============== ============== ============= ==============
Depreciation $ (63,383) $ (1,239) $ - $ (64,622)
-------------- ------------- ------------- -------------
Consolidated
A&P for the Consolidated
40 weeks ended Impact of Impact of A&P for the
Dec. 4, 2004 adoption of adoption of 40 weeks ended
prior to changes FIN 46-R EITF 03-10 Dec. 4, 2004
---------------- -------------- ------------- ---------------
Sales $ 8,213,930 $ 120,112 $ (39,425) $ 8,294,617
Cost of merchandise sold (6,015,168) (6,827) 39,425 (5,982,570)
------------- -------------- ------------- -------------
Gross margin 2,198,762 113,285 - 2,312,047
Store operating, general and administrative
expense (2,315,175) (101,909) - (2,417,084)
------------- ------------- ------------- -------------
(Loss) income from operations (116,413) 11,376 - (105,037)
Interest expense (68,146) - - (68,146)
Interest income 5,698 (3,604) - 2,094
Minority interest in earnings of consolidated
franchisees - 1,097 - 1,097
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (178,861) 8,869 - (169,992)
Provision for income taxes (7,229) (1,539) - (8,768)
------------- ------------- ------------- -------------
(Loss) income from continuing operations (186,090) 7,330 - (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) income $ (189,721) $ 7,330 $ - $ (182,391)
============= ============= ============= =============
Depreciation $ (202,775) $ (3,598) $ - $ (206,373)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Change from Restated for the
40 weeks ended adoption of adoption of LIFO to 40 weeks ended
Nov. 29, 2003 FIN 46-R EITF 03-10 FIFO Nov. 29, 2003
--------------- ---------------- --------------- ---------------- -----------------
Sales $ 8,112,825 $ 99,347 $ (34,279) $ - $ 8,177,893
Cost of merchandise sold (5,918,669) 8,606 34,279 1,059 (5,874,725)
-------------- ------------- ------------- ------------- -------------
Gross margin 2,194,156 107,953 - 1,059 2,303,168
Store operating, general
and administrative expense (2,311,960) (104,302) - - (2,416,262)
-------------- ------------- ------------- ------------- -------------
(Loss) income from operations (117,804) 3,651 - 1,059 (113,094)
Interest expense (61,212) - - - (61,212)
Interest income 5,296 (3,862) - - 1,434
Minority interest in earnings
of consolidated franchisees - (33) - - (33)
------------- -------------- ------------- ------------- --------------
(Loss) income from continuing
operations before income taxes (173,720) (244) - 1,059 (172,905)
Benefit from (provision for)
income taxes 23,625 (1,265) - - 22,360
------------- -------------- ------------- ------------- -------------
(Loss) income from continuing
operations (150,095) (1,509) - 1,059 (150,545)
Discontinued operations:
Loss from operations of
discontinued businesses,
net of tax (31,064) - - - (31,064)
Gain on disposal of
discontinued operations,
net of tax 92,647 - - - 92,647
------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 61,583 - - - 61,583
------------- ------------- ------------- ------------- -------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - (8,047) - - (8,047)
------------- -------------- ------------- ------------- --------------
Net (loss) income $ (88,512) $ (9,556) $ - $ 1,059 $ (97,009)
============== ============== ============= ============= ==============
Depreciation $ (209,075) $ (4,327) $ - $ - $ (213,402)
-------------- ------------- ------------- ------------- -------------
Consolidated
A&P at Impact of Consolidated
December 4, 2004 adoption of A&P at
prior to adoption FIN 46-R December 4, 2004
-------------------- -------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 157,741 $ 18,953 $ 176,694
Accounts receivable 153,967 (17,659) 136,308
Inventories 795,747 20,750 816,497
Prepaid expenses and other current assets 60,595 309 60,904
------------------ ------------------ ------------------
Total current assets 1,168,050 22,353 1,190,403
------------------ ------------------ ------------------
Non-current assets:
Property:
Property owned 1,356,773 12,685 1,369,458
Property leased under capital leases, net 59,917 - 59,917
------------------ ------------------ ------------------
Property, net 1,416,690 12,685 1,429,375
Other assets 155,483 (26,948) 128,535
------------------ ------------------ ------------------
Total assets $ 2,740,223 $ 8,090 $ 2,748,313
================== ================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,277 $ - $ 2,277
Current portion of obligations under capital
leases 10,311 - 10,311
Accounts payable 587,501 572 588,073
Book overdrafts 116,799 - 116,799
Accrued salaries, wages and benefits 169,001 2,049 171,050
Accrued taxes 67,373 3,290 70,663
Other accruals 218,680 1,859 220,539
------------------ ------------------ ------------------
Total current liabilities 1,171,942 7,770 1,179,712
------------------ ------------------ ------------------
Non-current liabilities:
Long-term debt 835,317 - 835,317
Long-term obligations under capital leases 74,859 - 74,859
Other non-current liabilities 402,586 (896) 401,690
Minority interest in consolidated franchisees - 5,035 5,035
------------------ ------------------ ------------------
Total liabilities 2,484,704 11,909 2,496,613
------------------ ------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,557 - 38,557
Additional paid-in capital 460,119 - 460,119
Accumulated other comprehensive income (loss) 14,916 (1,401) 13,515
Accumulated deficit (258,073) (2,418) (260,491)
------------------ ------------------ ------------------
Total stockholders' equity 255,519 (3,819) 251,700
------------------ ------------------ ------------------
Total liabilities and stockholders'equity $ 2,740,223 $ 8,090 $ 2,748,313
================== ================== ==================
Consolidated
Consolidated Impact of Impact of A&P as
A&P at adoption of change from Restated at
February 28, 2004 FIN 46-R LIFO to FIFO February 28, 2004
----------------- ------------------ ------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,151 $ 20,857 $ - $ 297,008
Accounts receivable 190,737 (18,902) - 171,835
Inventories 654,344 22,491 17,285 694,120
Prepaid expenses and other current assets 33,651 145 - 33,796
----------- ----------- ----------- -----------
Total current assets 1,154,883 24,591 17,285 1,196,759
----------- ----------- ----------- -----------
Non-current assets:
Property:
Property owned 1,383,702 22,223 - 1,405,925
Property leased under capital leases, net 65,632 - - 65,632
----------- ----------- ----------- -----------
Property, net 1,449,334 22,223 - 1,471,557
Other assets 154,904 (39,404) - 115,500
----------- ----------- ----------- -----------
Total assets $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,271 $ - $ - $ 2,271
Current portion of obligations under capital
leases 15,901 - - 15,901
Accounts payable 477,536 3,176 - 480,712
Book overdrafts 96,273 - - 96,273
Accrued salaries, wages and benefits 176,812 330 - 177,142
Accrued taxes 69,217 5,481 - 74,698
Other accruals 235,910 328 - 236,238
----------- ----------- ----------- -----------
Total current liabilities 1,073,920 9,315 - 1,083,235
----------- ----------- ----------- -----------
Non-current liabilities:
Long-term debt 823,738 - - 823,738
Long-term obligations under capital leases 73,980 - - 73,980
Other non-current liabilities 401,659 1,273 - 402,932
Minority interest in consolidated franchisees - 7,172 - 7,172
----------- ----------- ----------- -----------
Total liabilities 2,373,297 17,760 - 2,391,057
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - - -
Common stock 38,519 - - 38,519
Additional paid-in capital 459,579 - - 459,579
Accumulated other comprehensive loss (26,637) (602) - (27,239)
Accumulated deficit (85,637) (9,748) 17,285 (78,100)
----------- ----------- ----------- -----------
Total stockholders' equity 385,824 (10,350) 17,285 392,759
----------- ------------ ----------- -----------
Total liabilities and stockholders'equity $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
4. Income Taxes
The income tax provision recorded for the 40 weeks ended December 4, 2004 and
November 29, 2003 reflects our estimated expected annual tax rates applied to
our respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax asset will not be realized. Based upon our continued assessment of the
realization of our U.S. deferred tax asset and our historic cumulative losses,
we concluded that it was appropriate to record a valuation allowance in an
amount that would reduce our U.S. deferred tax asset to the amount that is more
likely than not to be realized. For the 12 and 40 weeks ended December 4, 2004,
the valuation allowance was increased by $34.2 million and $74.5 million,
respectively. To the extent that our U.S. operations generate sufficient taxable
income in future periods, we will reverse the income tax valuation allowance. In
future periods, U.S. earnings or losses will not be tax effected until such time
as the certainty of future tax benefits can be reasonably assured.
Further, in accordance with SFAS 109, income from discontinued operations can be
tax effected under certain circumstances. As a result, we taxed the income from
discontinued operations for the 40 weeks ended November 29, 2003 at our
incremental statutory tax rate. The tax provision for discontinued operations of
$34.4 million and $44.6 million for the 12 and 40 weeks ended November 29, 2003,
respectively, was completely offset by a tax benefit from continuing operations.
For the third quarter of fiscal 2004, our effective income tax rate of 7.2%
changed from the effective income tax rate of (27.8%) in the third quarter of
fiscal 2003 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 4, 2004 November 29, 2003
--------------------------------- ---------------------------------
Effective Tax Benefit Effective
Tax Provision Tax Rate (Provision) Tax Rate
--------------- ---------------- -------------- ----------------
United States $ (1,035) 1.5% $ 33,060 (32.7%)
Canada (3,889) 5.7% (4,933) 4.9%
--------------- ---------------- -------------- ----------------
$ (4,924) 7.2% $ 28,127 (27.8%)
=============== ================ ============== =================
The change in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $34.4 million
of benefit was recognized in the third quarter of fiscal 2003 as compared to the
third quarter of fiscal 2004, where no benefit was recognized. The remaining
provisions recorded in the U.S. of $1.0 million and $1.4 million for the third
quarters of fiscal 2004 and 2003, respectively, represent state and local taxes.
For the 40 weeks ended December 4, 2004, our effective income tax rate of 5.1%
changed from the effective income tax rate of (12.9%) for the 40 weeks ended
November 29, 2003 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 4, 2004 November 29, 2003
--------------------------------- ---------------------------------
Effective Tax Benefit Effective
Tax Provision Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (3,450) 2.0% $ 40,967 (23.7%)
Canada (5,318) 3.1% (18,607) 10.8%
--------------- ---------------- --------------- ----------------
$ (8,768) 5.1% $ 22,360 (12.9%)
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $44.6 million
of benefit was recognized for 40 weeks ended November 29, 2003 as compared to
the 40 weeks ended December 4, 2004, where no benefit was recognized. The
remaining provisions recorded in the U.S. of $3.5 million and $3.6 million for
the 40 weeks ended December 4, 2004 and November 29, 2003, respectively,
represent state and local taxes. In addition, the change in our effective tax
rate was partially offset by the impact of the lower mix of Canadian income from
continuing operations as a percentage of our Company's loss from continuing
operations for the 40 weeks ended December 4, 2004 as compared to the 40 weeks
ended November 29, 2003.
At December 4, 2004 and February 28, 2004, we had a net current deferred tax
asset which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheet totaling $11.9 million and $8.9 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheet totaling $25.9
million and $22.5 million, respectively.
5. Valuation of Goodwill and Long Lived Assets
Goodwill
- --------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). As disclosed previously, goodwill will no longer be
amortized but will be subject to impairment tests on an annual basis and
whenever events or circumstances occur indicating that the goodwill may be
impaired. SFAS 142 was effective for our Company on February 24, 2002. We
completed our initial impairment review during the second quarter of fiscal 2002
and concluded a transitional impairment charge from the adoption of the standard
was not required.
In accordance with the standard, we selected our fiscal fourth quarter to
conduct our annual impairment test for goodwill. However, through the third
quarter of fiscal 2003, we experienced operating losses for the past two years
for one of our Midwest asset groups, which we believe is a triggering event
under SFAS 144 for potential impairment of the asset group's long lived assets.
In addition, the triggering event under SFAS 144 also triggered testing the
Midwest's goodwill for potential impairment under SFAS 142.
To assess the Midwest's goodwill for impairment under SFAS 142, we performed an
assessment of the carrying value of the reporting unit to determine if the fair
value of the reporting unit was below its carrying value. The fair value of the
Midwest reporting unit was determined through internal analysis and a
valuation performed by an independent third party appraiser, primarily using the
discounted cash flow approach based on forward looking information regarding
revenues and costs of the Midwest. This valuation was based on a number of
estimates and assumptions, including the projected future operating results of
the Midwest, discount rate, and long term growth rate. As a result of this
review, we determined that the fair value of the Midwest was below its carrying
value and that the carrying value of the reporting unit goodwill exceeded its
implied fair value (defined as the fair value of the reporting unit less the
fair value of all assets and liabilities other than goodwill). Further, based
upon the analysis, we concluded that the Midwest's goodwill was entirely
impaired and we recorded an impairment charge of $27.0 million as a component of
operating income in "Store operating, general and administrative expense" in our
Statements of Consolidated Operations for the 12 and 40 weeks ended November 29,
2003.
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 third quarter of fiscal 2003 and in connection with the goodwill
impairment test discussed above, we reviewed the carrying value of all of the
Midwest's long-lived assets for potential impairment under SFAS 144. We
estimated the Midwest's future cash flows from its long-lived assets, primarily
equipment and leasehold improvements, based on internal analysis and valuations
performed by an independent third party appraiser. For those asset groups for
which the carrying value was 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 the Midwest's long-lived assets of $33.1
million as a component of operating income in "Store operating, general and
administrative expense" in our Statements of Consolidated Operations for the 12
and 40 weeks ended November 29, 2003.
During the third quarter of fiscal 2004, we updated our review of the carrying
value of several of the Midwest's long-lived assets for potential impairment
under SFAS 144 as we experienced operating losses for the past two years for
several of our Midwest asset groups. We estimated the Midwest's future cash
flows from their long-lived assets, primarily equipment and leasehold
improvements, based on internal analysis and valuations performed by an
independent third party appraiser. For those asset groups for which the carrying
value was 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
impairment charges for the Midwest's long-lived assets of $34.7 million, which
are recorded as a component of operating income in "Store operating, general and
administrative expense" in our Statements of Consolidated Operations for 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
related to certain idle property that, based upon new information received about
such assets, including an appraisal and an offer, was impaired and written down
to its net realizable value. This amount was included in "Store operating,
general and administrative expense" in our Statements of Consolidated
Operations. There were no such amounts recorded during the 40 weeks ended
November 29, 2003.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During the 12 and 40 weeks ended December 4, 2004, we recorded impairment
losses on property, plant and equipment of $2.7 million and $3.5 million,
respectively, compared to nil and $19.4 million during the 12 and 40 weeks ended
November 29, 2003, respectively. Of these amounts, $0.4 million and $1.2 million
for the 12 and 40 weeks ended December 4, 2004, respectively, and $0.5 million
for the 40 weeks ended November 29, 2003 related to United States stores that
were or will be closed in the normal course of business, and $1.7 million for
the 12 and 40 weeks ended December 4, 2004 related to United States property
held as part of our 2001 Asset Disposition and are included in "Store operating,
general and administrative expense" in our Statements of Consolidated
Operations. The remaining impairment losses we recorded of $0.6 million for both
fiscal 2004 period presented and $18.9 million for the 40 weeks ended November
29, 2003 periods presented related to stores closed as a result of our exit of
the Kohl's business and are included in our Statements of Consolidated
Operations under the caption "Gain on disposal of discontinued operations, net
of tax" (see Note 6 of our Consolidated Financial Statements). The effects of
changes in estimates of useful lives were not material to ongoing depreciation
expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
6. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee,
Wisconsin market, where our remaining 23 Kohl's stores were located, as well as
our Eight O'Clock Coffee business, through the sale and/or disposal of these
assets.
Upon the decision to sell these stores, we applied the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered, where available, the binding sale agreements related to these
properties as an estimate of the assets' fair value.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. In determining whether a store or group
of stores qualifies as discontinued operations treatment, we include only those
stores for which (i.) the operations and cash flows will be eliminated from our
ongoing operations as a result of the disposal and (ii.) we will not have any
significant continuing involvement in the operations of the stores after the
disposal. In making this determination, we consider the geographic location of
the stores. If stores to be disposed of are replaced by other stores in the same
geographic district, we would not include the stores as discontinued operations.
Amounts in the financial statements and related notes for all periods shown have
been reclassified to reflect the discontinued operations. Summarized below are
the operating results for these discontinued businesses, which are included in
our Statements of Consolidated Operations, under the caption "Income (loss) from
operations of discontinued businesses, net of tax" for the 12 and 40 weeks
ending December 4, 2004 and November 29, 2003, and the results of disposing
these businesses which are included in "(Loss) gain on disposal of discontinued
operations, net of tax" on our Statements of Consolidated Operations for the 12
and 40 weeks ending December 4, 2004 and November 29, 2003.
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 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)
=============== ================ =============== ==============
12 Weeks ended November 29, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ - $ - $ 21,192 $ 21,192
Operating expenses (48) (3,663) (19,381) (23,092)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (48) (3,663) 1,811 (1,900)
Tax benefit (provision) 20 1,539 (761) 798
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (28) $ (2,124) $ 1,050 $ (1,102)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Occupancy related costs $ - $ (3,000) $ - $ (3,000)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Severance and benefits - 66 - 66
Non-accruable inventory costs (175) (318) - (493)
Non-accruable closing costs 130 (4,689) (2,391) (6,950)
Interest accretion on present value
of future occupancy costs (3) (180) - (183)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (48) $ (3,663) $ (2,391) $ (6,102)
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses
Gain on sale of fixed assets $ - $ 6,445 $ 77,448 $ 83,893
Fixed asset impairments - - - -
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses, before
tax - 6,445 77,448 83,893
Tax provision - (2,707) (32,528) (35,235)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ - $ 3,738 $ 44,920 $ 48,658
=============== ================ =============== ================
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 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)
=============== ================ =============== ==============
40 Weeks ended November 29, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (43,512) (179,528) (51,738) (274,778)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (10,786) (56,299) 13,527 (53,558)
Tax benefit (provision) 3,932 24,055 (5,493) 22,494
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (6,854) $ (32,244) $ 8,034 $ (31,064)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,307) - (2,482)
Non-accruable closing costs (2,984) (6,526) (3,834) (13,344)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,635) (8,349) - (10,984)
Interest accretion on present value
of future occupancy costs (3) (180) - (183)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (8,145) $ (47,791) $ (3,834) $ (59,770)
--------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 77,448 $ 178,703
Fixed asset impairments - (18,968) - (18,968)
------------- ------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses, before
tax 85,983 (3,696) 77,448 159,735
Tax provision (30,997) (3,563) (32,528) (67,088)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 54,986 $ (7,259) $ 44,920 $ 92,647
============= ================ =============== ================
Northern New England
- --------------------
As previously stated, as part of our strategic plan we decided, in February
2003, to exit the northern New England market by closing and/or selling 21
stores in that region in order to focus on our core geographic markets. As a
result of these sales, we generated proceeds of $117.5 million, resulting in a
gain of $86.0 million ($55.0 million after tax). This gain was included in
"(Loss) gain on disposal of discontinued operations, net of tax" on our
Statements of Consolidated Operations for the 40 weeks ended November 29, 2003.
In addition, as part of the exit of this business, we reported a loss of $10.8
million ($6.9 million after tax) for the 40 weeks ended November 29, 2003, which
was included in "Income (loss) from operations of discontinued businesses, net
of tax" on our Statements of Consolidated Operations for those periods. 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. This amount is included in "Income (loss) from operations of
discontinued businesses, net of tax" in our Statements of Consolidated
Operations.
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) (127) (384) (511)
-------- ------- --------
Balance at
December 4, 2004 $ 333 $ - $ 333
======= ====== ========
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
future expected occupancy costs such as rent, common area maintenance and
real estate taxes. The fiscal 2003 charge to severance and benefits of
$2.7 million related to severance to be paid to employees terminated as a
result of our exit from the northern New England market.
(2) The additions to occupancy represents the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(3) Occupancy utilization represents vacancy related payments for closed
locations. Severance and benefits utilization represents payments made to
terminated employees during the period.
As of December 4, 2004, we had paid approximately $3.0 million in severance and
benefits costs, which resulted from the termination of approximately 300
employees.
At December 4, 2004, $0.1 million of the northern New England exit reserves was
included in "Other accruals" and $0.2 million was included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $0.3 million as of December 4, 2004 based upon current available
information and have concluded that it is appropriate. We will continue to
monitor the status of the vacant properties and adjustments to the reserve
balance may be recorded in the future, if necessary.
Kohl's Market
- -------------
As previously stated, as part of our strategic plan we decided to exit the
Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner.
As a result of the Madison sales, we generated proceeds of $20.1 million,
resulting in a gain of $8.8 million ($5.6 million after tax). This gain was
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Statements of Consolidated Operations for the 40 weeks ended November 29,
2003.
As a result of the decision to exit Milwaukee, we estimated the assets' fair
market value using a probability weighted average approach based upon expected
proceeds and recorded impairment losses on the property, plant and equipment at
the remaining Kohl's locations of nil and $18.9 million during the 12 and 40
weeks ended November 29, 2003, respectively. Further, 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. This net loss is also included in "(Loss) gain on disposal of
discontinued operations, net of tax" on our Statements of Consolidated
Operations for those periods.
As a result of the closure and impending sale of certain Milwaukee locations, we
recorded exit costs net of the results of these businesses while they were open
of $3.7 million and $56.3 million for the 12 and 40 weeks ended November 29,
2003. These charges are detailed in the tables above and are included in "Income
(loss) from operations of discontinued businesses, net of tax" in our
Statements of Consolidated Operations for those periods. 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 residual benefits and costs of
winding down this business.
The following table summarizes the reserve activity since the charge was
recorded:
Severance
and Fixed
Occupancy Benefits Assets Total
--------- ----------- ----------- -----------
Fiscal 2003 charge (1) $25,487 $13,062 $18,968 $57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
-------- -------- ------- --------
Balance at
February 28, 2004 19,039 4,834 - 23,873
Additions (2) 538 52 602 1,192
Utilization (3) (2,512) (2,174) (602) (5,288)
Adjustments (4) (354) - - (354)
-------- -------- -------- -------
Balance at
December 4, 2004 $ 16,711 $ 2,712 $ - $19,423
======== ======== ======== =======
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related to
future occupancy costs such as rent, common area maintenance and real
estate taxes. The fiscal 2003 charge to severance and benefits of $13.1
million related to severance costs of $6.6 million and costs for future
obligations for early withdrawal from multi-employer union pension plans
and a health and welfare plan of $6.5 million. The fiscal 2003 charge to
property of $18.9 million represents the impairment losses at certain
Kohl's locations.
(2) The additions to occupancy 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 proceed 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 occupancy 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 the 12 and 40 weeks ended
December 4, 2004, we recorded a reversal of previously accrued occupancy
related costs due to favorable results of terminating leases.
As of December 4, 2004, we had paid approximately $10.4 million of the total
original severance and benefits charge recorded, which resulted from the
termination of approximately 2,000 employees. The remaining severance liability
relates to future obligations for early withdrawal from multi-employer union
pension plans which will be paid by mid-2006, and individual severance payments
which will be paid by the end of fiscal 2004.
At December 4, 2004, $5.7 million of the Kohl's exit reserves was included in
"Other accruals" and $13.7 million was included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $19.4 million as of December 4, 2004 based upon current available
information and have concluded that it is appropriate. We will continue to
monitor the status of the vacant properties and adjustments to the reserve
balance may be recorded in the future, if necessary.
Eight O'Clock Coffee
- --------------------
During the 12 and 40 weeks ended November 29, 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 $75.1 million ($43.5 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 November 29, 2003, we
incurred costs of $2.4 million and $3.8 million related to the sale, which was
included in "Income (loss) from operations of discontinued businesses, net of
tax" on our Statements of Consolidated Operations. 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 "(Loss) gain on disposal of discontinued operations, net of tax" in our
Statements of Consolidated Operations. Further, during the 40 weeks ended
December 4, 2004, we incurred costs of $0.6 million related to winding down this
business subsequent to its sale and included this amount in "Income (loss) from
operations of discontinued businesses, net of tax" in our Statements of
Consolidated Operations.
7. Asset Disposition Initiative
Overview
- --------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Statements of Consolidated Operations and Statements of
Consolidated Cash Flows for the 12 and 40 weeks ended December 4, 2004 and
November 29, 2003. Present value ("PV") interest represents interest accretion
on future occupancy costs which were recorded at present value at the time of
the original charge. Non-accruable items represent charges related to the
restructuring that are required to be expensed as incurred in accordance with
SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 Weeks Ended December 4, 2004 12 Weeks Ended November 29, 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
------- ----------- ------------- -------- ----------- ----------- ------------- --------
Balance Sheet accruals
----------------------
PV interest $ 418 $ 553 $ 154 $ 1,125 $ 655 $ 532 $ - $ 1,187
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total accrued to
balance sheets 418 553 154 1,125 655 532 - 1,187
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - - - -
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 535 - 535
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - (4,488) - (4,488) - 1,526 - 1,526
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
-------------
Property writedowns - 1,709 - 1,709 - - - -
Inventory markdowns - - - - - - - -
Closing costs - - - - - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 1,709 - 1,709 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (418) (553) (154) (1,125) (655) (532) - (1,187)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ----------
Total amount recorded on
Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (2,779) $ - $ (2,779) $ - $ 1,526 $ - $ 1,526
======== =========== =========== ========= =========== =========== =========== =========
40 Weeks Ended December 4, 2004 40 Weeks Ended November 29, 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ------------ ------------- -------- ----------- ------------ ------------- --------
Balance Sheet accruals
PV interest $ 1,494 $ 1,902 $ 534 $ 3,930 $ 2,075 $ 2,232 $ - $ 4,307
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total accrued to
balance sheets 1,494 1,902 534 3,930 2,075 2,232 - 4,307
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - (6,778) - (6,778)
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 1,490 - 1,490
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Adjustments to
balance sheets - (4,488) - (4,488) - (4,297) - (4,297)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - 1,709 90 1,799 - 422 - 422
Inventory markdowns - - 291 291 - - - -
Closing costs - - 689 689 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 1,709 1,070 2,779 - 422 - 422
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (1,494) (1,902) (534) (3,930) (2,075) (2,232) - (4,307)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (2,779) $ 1,070 $ (1,709) $ - $ (3,875) $ - $ (3,875)
======== =========== =========== ========= =========== =========== =========== =========
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 4, 2004, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,477 17 1,494 - - - 1,477 17 1,494
Utilization (2) (3,887) (177) (4,064) (526) - (526) (4,413) (177) (4,590)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
Dec. 4, 2004 $ 29,062 $ 292 $ 29,354 $ 1,631 $ - $ 1,631 $ 30,693 $ 292 $ 30,985
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $1.5 million
during the 40 weeks ended December 4, 2004 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $23.3 million, $13.6 million and $20.0 million for
fiscal 2001, 2002 and 2003, respectively, and $4.1 million during the 40
weeks ended December 4, 2004 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.5 million, $0.4
million and $0.3 million for fiscal 2001, 2002 and 2003, respectively, and
$0.5 million during the 40 weeks ended December 4, 2004 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $96.8 million of the total occupancy charges from the time of the
original charges through December 4, 2004 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.9 million of the total net severance charges from
the time of the original charges through December 4, 2004, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $29.4 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 $1.6 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out by 2020.
None of these stores were open during the 12 and 40 weeks ended December 4, 2004
and November 29, 2003. 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 4, 2004 and February 28, 2004, approximately $5.5 million and $6.5
million, respectively, of the reserve was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of December 4, 2004 of $31.0 million for this phase of the asset disposition
initiative and have concluded that they are appropriate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of December 4, 2004,
we had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Original charge $ 78,488 $ 1,968 $ 80,456 $ 15,688 $ 7,747 $ 23,435 $ 94,176 $ 9,715 $ 103,891
Addition (1) 1,653 20 1,673 - - - 1,653 20 1,673
Utilization (2) (1,755) (51) (1,806) (1,945) (946) (2,891) (3,700) (997) (4,697)
Adjustments (3) - - - - (584) (584) - (584) (584)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 1,902 - 1,902 - - - 1,902 - 1,902
Utilization (2) (3,804) (375) (4,179) (178) (58) (236) (3,982) (433) (4,415)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
--------- -------- --------- -------- -------- -------- ---------- --------- ---------
Balance at
Dec. 4, 2004 $ 33,194 $ - $ 33,194 $ 2,133 $ - $ 2,133 $ 35,327 $ - $ 35,327
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $1.7 million, $4.1 million and
$2.9 million during fiscal 2001, 2002 and 2003, respectively, and $1.9
million during the 40 weeks ended December 4, 2004 represent the
interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge. The addition to
severance of $3.5 million during fiscal 2002 related to retention and
productivity incentives that were expensed as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $4.2 million
during the 40 weeks ended December 4, 2004 represent payments made
during those periods for costs such as rent, common area maintenance,
real estate taxes and lease termination costs. Severance utilization of
$2.9 million, $19.5 million and $3.5 million during fiscal 2001, 2002
and 2003, respectively, and $0.2 million during the 40 weeks ended
December 4, 2004 represent payments made to terminated employees during
the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. Under Ontario provincial
law, employees to be terminated as part of a mass termination are
entitled to receive compensation, either worked or paid as severance,
for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained
in the aforementioned guarantee period. As a result, during fiscal
2001, we recorded an adjustment to severance and benefits of $0.6
million related to a reduction in the severance payments required to be
made to certain store employees in Canada. Further, during fiscal 2002,
we recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of $3.6
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during the
12 and 40 weeks ended December 4, 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.
We paid $38.3 million ($35.3 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 4, 2004 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$26.1 million ($17.1 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 4, 2004, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $33.2 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $2.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At December 4, 2004 and February 28, 2004 approximately $7.1 million and $12.0
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 4, 2004 and November 29, 2003 are the sales and operating results
of the 39 stores that were identified for closure as part of this asset
disposition. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Dec. 4, 2004 Nov. 29, 2003 Dec. 4, 2004 Nov. 29, 2003
------------ ------------- ------------- -------------
Sales $ - $ - $ - $ 316
============= ============= ============= =============
Operating loss $ - $ - $ - $ (72)
============= ============= ============= ==============
Based upon current available information, we evaluated the reserve balances as
of December 4, 2004 of $35.3 million for this phase of the asset disposition
initiative and have concluded that they are appropriate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. In addition to the charge of
$37.7 million related to the last phase of this initiative ($2.2 million in
"Cost of merchandise sold" and $35.5 million in "Store operating, general and
administrative expense" in our Statements of Consolidated Operations for fiscal
2003), excluding PV interest, we recorded costs in the 12 and 40 weeks ended
December 4, 2004 of nil and $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"), respectively, as follows:
12 Weeks Ended 40 Weeks Ended
December 4, 2004 December 4, 2004
---------------------- ------------------
Occupancy related $ - $ -
Severance and benefits - -
Property writedowns - 90
Inventory markdowns - 291
Nonaccruable closing costs - 689
-------------- --------------
Total charges $ - $ 1,070
============== ==============
As of December 4, 2004, we had closed all 6 stores and successfully completed
the conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writedowns as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 534 - 534
Utilization (2) (3,719) (4,775) (8,494)
------------ ------------- ----------
Balance at
Dec. 4, 2004 $ 16,777 $ 44 $ 16,821
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and the 40
weeks ended December 4, 2004 represent interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The original charge to severance during fiscal 2003 of
$8.9 million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $3.7 million during fiscal
2003 and the 40 weeks ended December 4, 2004, respectively, represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $4.1
million and $4.8 million during fiscal 2003 and 40 weeks ended December
4, 2004, respectively, represent payments made to terminated employees
during the period.
We paid $4.8 million of the total occupancy charges from the time of the
original charge through December 4, 2004 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 4, 2004, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $16.8 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2014. The remaining severance
liability of less than $0.1 million relates to expected future payments for
severance and benefits to individual employees and will be fully paid out by
mid-2005.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 4, 2004 and November 29, 2003 are the sales and operating results
of the 6 stores that were identified for closure as part of this phase of the
initiative. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Dec. 4, 2004 Nov. 29, 2003 Dec. 4, 2004 Nov. 29, 2003
-------------- ------------- ------------------------------
Sales $ - $ 12,588 $ 2,433 $ 41,944
============= ============= ============= =============
Operating loss $ - $ (1,877) $ (47) $ (6,626)
============= ============= ============== ==============
At December 4, 2004 and February 28, 2004, approximately $3.0 million and $9.0
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $16.8 million as of December 4, 2004
based upon current available information and have concluded that it is
appropriate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
8. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. The
components of net pension cost were as follows:
For the 12 Weeks Ended
-----------------------------------------------------
December 4, 2004 November 29, 2003
--------------------- -----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ----------
Service cost $ 1,309 $ 2,113 $ 742 $ 1,574
Interest cost 2,773 3,161 2,068 2,668
Expected return on plan assets (3,199) (4,090) (4,867) (3,428)
Amortization of unrecognized net transition asset (3) - (3) (100)
Amortization of unrecognized net prior service cost 39 117 34 76
Amortization of unrecognized net loss 78 464 2,510 132
Administrative expenses and other - 68 - 57
--------- --------- -------- ---------
Net pension cost $ 997 $ 1,833 $ 484 $ 979
========= ========= ======== =========
For the 40 Weeks Ended
---------------------------------------------------
December 4, 2004 November 29, 2003
------------------- --------------------
U.S. Canada U.S. Canada
------- --------- -------- ---------
Service cost $ 4,363 $ 6,662 $ 2,473 $ 5,248
Interest cost 9,243 9,964 6,896 8,893
Expected return on plan assets (10,662) (12,892) (16,225) (11,425)
Amortization of unrecognized net transition asset (9) - (10) (334)
Amortization of unrecognized net prior service cost 130 369 111 253
Amortization of unrecognized net loss 260 1,462 8,368 441
Administrative expenses and other * 2,825 212 - 191
--------- --------- -------- ---------
Net pension cost $ 6,150 $ 5,777 $ 1,613 $ 3,267
========= ========= ======== =========
* During fiscal 2004, it came to our attention that one of our Taft-Hartley U.S.
defined benefit pension plans that was previously recorded off balance sheet as
a multiemployer plan was entirely sponsored by our Company. In accordance with
SFAS 87, "Employers' Accounting for Pensions" ("SFAS 87"), the funded status of
single employer defined benefit plans is to be recorded on balance sheet with
net pension income or cost recorded each quarter since the adoption of SFAS 87.
Given (i.) the lack of employee data needed to calculate the funded status of
the plan at each balance sheet date since the adoption of SFAS 87, (ii.) the
inability to determine if the plan would have had unrecognized actuarial gains
and losses during the past several years in question, and (iii.) as the
difference between actual net pension cost recognized in our Statements of
Consolidated Operations and net pension cost that should have been recorded per
SFAS 87 was not significant to each of the past three years, an adjustment of
$2.8 million was made to record the plan's funded status (i.e., net liability)
at the latest measurement date on our Consolidated Balance Sheet. The impact of
this adjustment was not significant to the individual quarters in fiscal 2004 as
well as to the prior periods to which it relates.
Contributions
We previously disclosed in our consolidated financial statements for the year
ended February 28, 2004, that we expected to contribute $2.0 million in cash to
our defined benefit plans in fiscal 2004. During the 12 weeks ended December 4,
2004, we contributed approximately $0.6 million to our defined benefit plans.
We plan to contribute approximately $3.2 million to our plans in the fourth
quarter of fiscal 2004.
Postretirement Benefits
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. The components of net postretirement
benefits (income) cost are as follows:
For the 12 Weeks Ended
-----------------------------------------------------
December 4, 2004 November 29, 2003
---------------------- ----------------------
U.S. Canada U.S. Canada
---------- --------- -------- ---------
Service cost $ 66 $ 60 $ 54 $ 86
Interest cost 268 161 298 233
Prior service cost (311) (128) (305) (8)
Amortization of (gain) loss (110) 87 (83) 68
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (87) $ 180 $ (36) $ 379
========== ========= ========= =========
For the 40 Weeks Ended
-----------------------------------------------------
December 4, 2004 November 29, 2003
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- -------- ---------
Service cost $ 220 $ 189 $ 181 $ 286
Interest cost 927 509 993 776
Prior service cost (1,036) (405) (1,016) (28)
Amortization of (gain) loss (304) 273 (277) 227
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (193) $ 566 $ (119) $ 1,261
========== ========= ========= =========
In December 2003, the United States enacted into law the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act"). The Act establishes
a prescription drug benefit under Medicare, known as "Medicare Part D," and a
Federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB issued FASB Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"), which is effective for public
companies the first interim or annual period beginning after June 15, 2004 (the
quarter ended September 11, 2004 for our Company).
We performed a measurement of the effects of the Act on our accumulated
postretirement benefit obligation ("APBO") as of April 20, 2004 for a closed
group of retirees. Our Company and our actuarial advisors determined that, based
on regulatory guidance currently available, benefits provided by the plan were
at least actuarially equivalent to Medicare Part D, and, accordingly, we expect
to be entitled to the Federal subsidy in all years after 2005.
We are adopting the provisions of the Act prospectively beginning in our second
quarter of fiscal 2004 and have incorporated the required disclosure provisions
into our consolidated financial statements. As a result of the Act, our APBO as
of the beginning of the second quarter decreased by $1.9 million. This change in
the APBO due to the Act is treated as an actuarial gain. In measuring the $1.9
million APBO impact of the Act, we projected that the future Federal subsidies
we would receive approximates 25% of our Company's projected prescription drug
costs under our plan.
The effect of applying FAS 106-2 had no cumulative effect on our Company's
retained earnings as of February 28, 2004. Accordingly, we reported net
postretirement benefits income of $72 and $144 for the 12 and 40 weeks ended
December 4, 2004, respectively, representing the third quarter's and year to
date's portion of the annual reduction under the Act. Had the effect of FAS
106-2 been applied retroactively to the beginning of fiscal 2004, net
postretirement benefits income for the first quarter ended June 19, 2004 would
have increased by $96.
9. Stock Based Compensation
We apply the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB
25") with pro forma disclosure of compensation expense, net income or loss and
earnings or loss per share as if the fair value based method prescribed by SFAS
123, "Accounting for Stock-Based Compensation" ("SFAS 123") and SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") had been applied.
Had compensation cost for our stock options been determined based on the fair
value at the grant dates for awards under those plans consistent with the fair
value methods prescribed by SFAS 123 and SFAS 148, our net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
12 Weeks Ended 40 Weeks Ended
----------------------------------- -----------------------------------
Nov. 29, 2003 Nov. 29, 2003
Dec. 4, 2004 (As Restated) Dec. 4, 2004 (As Restated)
--------------- ---------------- --------------- -----------------
Net loss, as reported: $ (75,343) $ (25,267) $ (182,391) $ (97,009)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (836) (1,373) (2,981) (4,916)
--------------- ---------------- --------------- ---------------
Pro forma net loss $ (76,179) $ (26,640) $ (185,372) $ (101,925)
=============== ================ =============== ===============
Net loss per share - basic and diluted:
As reported $ (1.96) $ (0.66) $ (4.74) $ (2.51)
Pro forma $ (1.98) $ (0.69) $ (4.81) $ (2.65)
The pro forma effect on net loss and net loss per share may not be
representative of the pro forma effect in future years because it includes
compensation cost on a straight-line basis over the vesting periods of the
grants.
The fair value of the option grants was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
12 Weeks Ended 40 Weeks Ended
----------------------------------- -----------------------------------
Dec. 4, Nov. 29, Dec. 4, Nov. 29,
2004 2003 2004 2003
--------------- ---------------- --------------- ---------------
Expected life 7 years 7 years 7 years 7 years
Volatility 53% 52% 53% 50%
Risk-free interest rate range 3.89% 3.68%-4.00% 3.20%-4.41% 2.71%-4.01%
Refer to Note 1 - Impact of New Accounting Pronouncements regarding
discussion of the FASB's recent issuance of SFAS 123R on our consolidated
financial statements.
10. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our Chairman of the
Board and Chief Executive Officer.
We currently operate in two reportable segments: United States and Canada. The
segments are comprised of retail supermarkets in the United States and Canada.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in our Fiscal 2003 Annual
Report. We measure segment performance based upon income (loss) from operations.
Interim information on segments is as follows:
12 Weeks Ended 40 Weeks Ended
---------------------------------------- ---------------------------------------
Nov. 29, 2003 Nov. 29, 2003
Dec. 4, 2004 (As Restated) Dec. 4, 2004 (As Restated)
------------------ ------------------ ----------------- -----------------
Sales
United States $ 1,672,206 $ 1,703,888 $ 5,610,316 $ 5,679,046
Canada 851,553 780,724 2,684,301 2,498,847
------------------ ------------------ ----------------- -----------------
Total Company $ 2,523,759 $ 2,484,612 $ 8,294,617 $ 8,177,893
================== ================== ================= =================
Sales by category
Grocery (1) $ 1,677,798 $ 1,681,699 $ 5,457,961 $ 5,460,097
Meat (2) 527,035 506,191 1,731,513 1,654,417
Produce (3) 318,926 296,722 1,105,143 1,063,379
------------------ ------------------ ----------------- -----------------
Total Company $ 2,523,759 $ 2,484,612 $ 8,294,617 $ 8,177,893
================== ================== ================= =================
Depreciation and amortization
United States $ 46,964 $ 51,078 $ 157,328 $ 170,481
Canada 15,890 13,544 49,045 42,921
------------------ ------------------ ----------------- -----------------
Total Segments 62,854 64,622 206,373 213,402
Discontinued operations - - - 1,551
------------------ ------------------ ----------------- -----------------
Total Company $ 62,854 $ 64,622 $ 206,373 $ 214,953
================== ================== ================= =================
12 Weeks Ended 40 Weeks Ended
---------------------------------------- ---------------------------------------
Nov. 29, 2003 Nov. 29, 2003
Dec. 4, 2004 (As Restated) Dec. 4, 2004 (As Restated)
------------------ ------------------ ----------------- -----------------
(Loss) from operations
United States $ (60,188) $ (96,124) $ (110,968) $ (164,672)
Canada 8,279 13,682 5,931 51,578
------------------ ------------------ ----------------- -----------------
Total Company $ (51,909) $ (82,442) $ (105,037) $ (113,094)
================== =================== ================== ==================
(Loss) from continuing
operations before income taxes
United States $ (77,399) $ (112,890) $ (172,382) $ (219,369)
Canada 9,572 11,940 2,390 46,464
------------------ ------------------ ------------------ -----------------
Total Company $ (67,827) $ (100,950) $ (169,992) $ (172,905)
================== ================== ================= =================
Capital expenditures
United States $ 25,613 $ 17,987 $ 92,277 $ 64,301
Canada 27,091 15,273 57,869 44,823
------------------ ------------------ ----------------- -----------------
Total Company $ 52,704 $ 33,260 $ 150,146 $ 109,124
================== ================== ================= =================
(1) The grocery category includes grocery, frozen foods, dairy, general
merchandise/health and beauty aids, liquor, pharmacy and fuel.
(2) The meat category includes meat, deli, bakery and seafood.
(3) The produce category includes produce and floral.
February 28, 2004
December 4, (As Restated
2004 See Note 3)
----------------- -----------------
Total assets
United States $ 1,894,757 $ 2,011,165
Canada 853,556 772,651
----------------- -----------------
Total Company $ 2,748,313 $ 2,783,816
================= =================
11. Commitments and Contingencies
On October 1, 2004, our Company announced that we had reached a settlement,
subject to court approval, of the previously disclosed Canadian class action
lawsuit, captioned 1176560 Ontario Limited, 1184883 Ontario Inc. and 1205427
Ontario Limited vs. The Great Atlantic & Pacific Company of Canada Limited;
Ontario Superior Court of Justice, Court File No. 02 CV-227777CP, which was
filed by certain franchisees of our Food Basics discount grocery operations in
Ontario, Canada. The settlement was approved by the Canadian court on October 4,
2004. Under the terms of the settlement, A&P Canada agreed to make payment for
damages as well the repurchase of the franchise shares. In addition, A&P Canada
is required to pay other settlement expenses, including the calculated net book
value of the repurchased franchises, expected to be finalized during the fourth
quarter of fiscal 2004. The settlement and repurchase transaction closed during
the third quarter of this fiscal year and the recorded pre-tax loss was
approximately $26.1 million. Of this amount, $24.7 million was recorded in the
second quarter ended September 11, 2004, and $1.4 million was recorded in the
third quarter ended December 4, 2004. The additional $1.4 million mainly
represents legal and other professional fees incurred in the third quarter ended
December 4, 2004 as well as changes in estimate on the net settlement amount.
This estimate is subject to change based upon the finalization of the net
settlement amount expected during the fourth quarter of fiscal 2004.
As previously disclosed, the dismissal by the United States District Court for
the District of New Jersey of the amended securities class action Complaint
filed against our Company and certain of our officers and directors in In re The
Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674
(D.N.J.) (FSH), was affirmed in July 2004 by the United States Court of Appeals
for the Third Circuit. The deadline by which plaintiffs could have filed with
the United States Supreme Court a petition seeking a writ of certiorari
challenging the Third Circuit's ruling expired in early October 2004 without
plaintiffs having made such a filing.
We are subject to various other legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. While the outcome of these claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of our Company, including a discussion of the results
of continuing operations as well as liquidity and capital resources. These items
are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the
12 and 40 weeks ended December 4, 2004 and November 29, 2003.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2004 that Management wishes to share with the reader to
assist in understanding the business.
o Results of Continuing Operations and Liquidity and Capital Resources - a
discussion of the following:
- Results for the 12 weeks ended December 4, 2004 compared to the 12 weeks
ended November 29, 2003 and results for the 40 weeks ended December 4,
2004 compared to the 40 weeks ended November 29, 2003;
- The Company's Asset Disposition Initiative; and
- Current and expected future liquidity.
o Critical Accounting Estimates - a discussion of significant estimates made
by Management.
BASIS OF PRESENTATION
- ---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 12 and 40 weeks ended December 4, 2004 and
November 29, 2003 are unaudited and, in the opinion of Management, contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial position and results of operations for such periods. The
accompanying consolidated financial statements also include the impact of
adopting FIN 46-R, EITF 03-10, and the change in our method of valuing certain
of our inventories from the LIFO method to the FIFO method during the first
quarter of fiscal 2004. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in our Fiscal 2003 Annual Report on Form 10-K. Interim results are not
necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries, and franchise operations.
OVERVIEW
- --------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 10 U.S. states, the District of Columbia and Ontario,
Canada. The Company's business consists strictly of its retail operations, which
totaled 650 stores as of December 4, 2004.
U.S. retail operations consist of four regions: New York/New Jersey/southern New
England under the A&P, Waldbaum's, The Food Emporium and Food Basics banners;
Philadelphia/Baltimore/Washington, D.C. under the Super Fresh and Food Basics
banners; Detroit/Toledo under the Farmer Jack and Food Basics banners, and New
Orleans under the Sav-A-Center banner.
A&P Canada, based in Toronto, Ontario, operates five banner groups across the
Province, with stores operating under the A&P, Dominion, Food Basics, Ultra Food
& Drug and The Barn Market trade names. A&P Canada also serves as a franchisor
to certain Food Basics stores in Ontario.
The Company remained unprofitable overall in the third quarter, with essentially
flat sales resulting from a difficult business environment that affected our
business and most other retail sectors. Despite those conditions, we maintained
our market share.
While not satisfied with the overall results, we continue to focus on
merchandising and operating improvements in the U.S., our rigorous management of
expenses, and investment and liquidity throughout the Company.
A&P Canada achieved a solid quarter, driven by the growing consumer impact and
results of our fresh food marketing initiatives in mainstream stores, coupled
with the improving trend in our discount Food Basics operations. In addition,
during the quarter, we completed the acquisition of 24 previously franchised
Food Basics stores in Ontario, and look for those stores to improve going
forward under corporate management. A&P Canada's profits were down year on year
primarily due to an internal charge for Corporate and IT services which was
increased significantly during last year's fourth quarter.
Our U.S. banner operations maintained emphasis on improved merchandising and
store operating fundamentals, expense management and productivity measures, the
improvement of the U.S. Food Basics operation and the initial rollout of our new
Fresh Market concept, with stores opening with elements of that fresh format in
each of our banners.
On November 4, 2004, we announced the consolidation of the previous corporate
and U.S. business management teams into one unified organization affecting U.S.
operations only. That was followed in December by a major reorganization of the
Company's U.S. administration, support services and operating staff.
We believe these actions will strengthen central management control,
substantially reduce costs, and simplify our organizational structure. We hope
these changes will also remove barriers to achieving profitability.
On the financial side, we maintained close management of cash flow, capital
spending and debt levels, in order to ensure sufficient liquidity to operate and
invest strategically in the business. In particular, we continue to manage
capital spending closely and spent below our previously planned levels
consistent with our goal to preserve cash.
Along with the significant cost benefits we anticipate with the reorganization
of the Company, day-to-day expense reduction remains a high priority as we
continue seeking ways to improve labor productivity, administrative, advertising
and occupancy expenses, and the cost of merchandise, supplies and services.
OUTLOOK
- -------
Our short-term outlook remains conservative, with leading economic indicators
showing few signs of significant improvement, particularly in our markets. With
no major upturn in consumer confidence envisioned, our expectation is that
competition for consumer food dollars will remain intense, among both
conventional supermarket operators and other retail segments now marketing food.
Accordingly, we remain focused on the strategies and initiatives that we hope
will restore sustainable profitability in the U.S., and drive additional growth
in Canada, which are as follows:
o Move forward in the U.S. with an organization more focused on controlling
costs, strengthening mainstream banner operations with an improved Fresh
marketing format, and sharpening the merchandising and operating efficiency
of the U.S. Food Basics discount business;
o In Canada, sustain and grow our positive operating trends with continued
Fresh Box development in mainstream banners, and the renewed and more
aggressive discount impact of Food Basics, and
o Maintain focus on liquidity, emphasizing cash flow generation, and expense
control.
While we hope our profits will improve, various factors could cause us to fail
to achieve this goal. These include, among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandiser clubs,
warehouse stores, drug stores and restaurants. Our continued success is
dependent upon our ability to compete in this industry and to reduce
operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the nature
and extent of continued consolidation in the food industry and employment
and job growth in the markets in which we operate, may affect our ability
to hire and train qualified employees to operate our stores. This would
negatively affect earnings and sales growth. General economic changes may
also affect the shopping habits and buying patterns of our customers,
which could affect sales and earnings. We have assumed economic and
competitive situations will not change significantly for the balance of
fiscal 2004 and will not worsen in fiscal 2005 and 2006. However, we
cannot fully foresee the effects of changes in economic conditions,
inflation, population growth, customer shopping habits and the
consolidation of the food industry on A&P's business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, if development and
remodel costs vary from those budgeted, or if changes in financial markets
negatively affect our cost of capital or our ability to access capital. Our
present pace of spending indicates our capital expenditures will be
somewhat less than our original estimates for the year.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
shrink reduction in our stores, (iii.) our success in generating
efficiencies in our distribution centers and our administrative offices,
and (iv.) our ability to eliminate or maintain a minimum level of supply
and/or quality control problems with our vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In 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 as
well as the extent to which trustees of the plans reduce the costs of
future service benefits.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------
Our consolidated financial information presents the income related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focuses on
continuing operations.
12 WEEKS ENDED DECEMBER 4, 2004 COMPARED TO THE 12 WEEKS ENDED NOVEMBER 29,
2003
- ---------------------------------------------------------------------------
OVERALL
- -------
Sales for the third quarter of fiscal 2004 were $2.5 billion consistent with the
third quarter of fiscal 2003; comparable store sales, which includes stores that
have been in operation for two full fiscal years and replacement stores,
decreased (1.0%). Net loss per share - basic and diluted for the third quarter
of fiscal 2004 was $1.96 compared to $0.66 for the third quarter of fiscal 2003.
12 Weeks 12 Weeks
Ended Ended Favorable /
Dec. 4, 2004 Nov. 29, 2003 (Unfavorable) % Change
---------------- --------------- -------------- ----------------
Sales $ 2,523.8 $ 2,484.6 $ 39.2 1.6%
(Decrease) increase in comparable
store sales for Company-operated
stores (1.0%) 1.2% NA NA
Loss from continuing operations (72.8) (72.8) - 0%
(Loss) income from discontinued
operations (2.6) 47.6 (50.2) (105.5%)
Net loss (75.3) (25.3) (50.0) (197.6%)
Net loss per share (1.96) (0.66) (1.30) (197.0%)
SALES
- -----
Sales for the third quarter of fiscal 2004 of $2,523.8 million increased
$39.2 million or 1.6% from sales of $2,484.6 million for third quarter of fiscal
2003. The higher sales were due to an increase in Canadian sales of $70.9
million partially offset by a decrease in U.S. sales of $31.7 million. The
increase in Canadian sales was primarily due to the favorable impact of the
Canadian exchange rate. The following table presents sales for each of our
operating segments for the third quarter of fiscal 2004 and the third quarter of
fiscal 2003:
12 Weeks Ended 12 Weeks Ended
Dec. 4, 2004 Nov. 29, 2003 (Decrease) Increase % Change
----------------- -------------------- ------------------- ------------
United States $ 1,672.2 $ 1,703.9 $ (31.7) (1.9%)
Canada 851.6 780.7 70.9 9.1
----------------- ----------------- -------------------- ----------------
Total $ 2,523.8 $ 2,484.6 $ 39.2 1.6%
================= ================= ==================== ================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the third quarter of fiscal 2003 to the third
quarter of fiscal 2004:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- -----------
United States $ 71.2 $ (70.2) $ - $ (32.7) $ (31.7)
Canada 110.8 (112.2) 61.1 11.2 70.9
------------- -------------- ------------- ------------- ----------------
Total $ 182.0 $ (182.4) $ 61.1 $ (21.5) $ 39.2
============= ============== ============= ============= ================
The decrease in U.S. sales was primarily attributable to the closing of
22 stores since the beginning of the third quarter of fiscal 2003, of which 14
were closed in fiscal 2004, decreasing sales by $70.2 million, and the decrease
in comparable store sales for the third quarter of fiscal 2004 of $32.7 million
or -1.9% as compared with the third quarter of fiscal 2003. This decrease was
partially offset by the opening or re-opening of 18 new stores since the
beginning of the third quarter of fiscal 2003, of which 16 were opened or
re-opened in fiscal 2004, increasing sales by $71.2 million. Included in the 28
stores closed since the beginning of the third quarter of fiscal 2003 were 6
stores closed as part of the asset disposition initiative as discussed in Note 7
of our Consolidated Financial Statements.
The increase in Canadian sales was primarily attributable to the opening
or re-opening of 11 stores since the beginning of the third quarter of fiscal
2003, of which 5 were opened or re-opened in fiscal 2004, increasing sales by
$110.8 million, the favorable effect of the Canadian exchange rate, which
increased sales by $61.1 million, and the increase in comparable store sales for
the third quarter of fiscal 2004 of $11.2 million or 1.4% for Company-operated
stores and franchised stores combined, as compared to the third quarter of
fiscal 2003. These increases were partially offset by the closure of 16 stores
since the beginning of the third quarter of fiscal 2003, of which 11 were closed
in fiscal 2004, decreasing sales by $112.2 million.
Average weekly sales per supermarket for the U.S. were approximately $319,100
for the third quarter of fiscal 2004 versus $320,900 for the corresponding
period of the prior year, an decrease of 0.6% primarily due to the overall
decrease in comparable store sales. Average weekly sales per supermarket for
Canada were approximately $299,500 for the third quarter of fiscal 2004 versus
$265,100 for the corresponding period of the prior year, an increase of 13.0%.
This increase was primarily due to the increase in the Canadian exchange rate
and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin as a
percentage of sales by operating segment for the third quarter of fiscal 2004 as
compared to the third quarter of fiscal 2003. Gross margin as a percentage of
sales decreased 13 basis points to 27.60% for the third quarter of fiscal 2004
from 27.73% for the third quarter of fiscal 2003. This 13 basis point decrease
was caused primarily by the increase in Canadian sales as a percentage of our
total as Canada has a lower gross margin rate. We believe the impact on margin
for changes in costs and special reductions was not significant.
12 Weeks Ended 12 Weeks Ended
December 4, 2004 November 29, 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
United States $ 491.2 29.38% $ 500.5 29.38%
Canada 205.3 24.11 188.4 24.13
-------------- --------------- -------------- ---------------
Total $ 696.5 27.60% $688.9 27.73%
============== =============== ============== ===============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the third quarter of fiscal 2003 to
the third quarter of fiscal 2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ (9.3) $ - $ - $ (9.3)
Canada 1.5 0.5 14.9 16.9
---------------- ---------------- -------------- -------------
Total $ (7.8) $ 0.5 $ 14.9 $ 7.6
================ ================ ============== =============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and administrative expense
("SG&A"), by operating segment, in dollars and as a percentage of sales for the
third quarter of fiscal 2004 compared with the third quarter of fiscal 2003.
SG&A expense was $748.5 million or 29.66% for the third quarter of fiscal 2004
as compared to $771.4 million or 31.05% for the third quarter of fiscal 2003.
12 Weeks Ended 12 Weeks Ended
December 4, 2004 November 29, 2003
--------------------------------------- -----------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
-------------- --------------- -------------- -----------------
United States $ 551.5 32.98% $ 596.7 35.02%
Canada 197.0 23.13 174.7 22.38
-------------- --------------- -------------- -----------------
Total $ 748.5 29.66% $ 771.4 31.05%
============== =============== ============== ==============
The decrease in total SG&A as a percentage of sales is primarily driven by lower
Midwest impairment charges (refer to Note 5 - Valuation of Goodwill and Long
Lived Assets for further discussion of the charges) and strict cost containment
in the U.S.
The U.S. had overall favorability of 204 basis points. The favorability is
primarily driven by a lower Midwest goodwill and property impairment charge of
$25.4 million, a reduction in the vacation accrual of $8.6 million due to a
change in the vacation entitlement policy, and very tight cost controls.
Categories in which the U.S. experienced cost improvements include advertising
due to less spend, labor, and corporate administrative expenses due to increased
information technology charges to Canada. The favorability in the U.S. was
partially offset by $3.8 million of severance and other charges relating to the
previously noted administrative reorganization.
The increase in SG&A in Canada of $22.3 million is primarily due to an increase
in the Canadian exchange rate of $10.3 million and an increase in labor of $10.0
million mainly due to increased sales.
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 weeks ended December 4, 2004, we recorded impairment losses
on property, plant and equipment of $2.1 million compared to nil during the 12
weeks ended November 29, 2003. Of this amount, $0.4 million for the 12 weeks
ended December 4, 2004 related to United States stores that were or will be
closed in the normal course of business and $1.7 million for the 12 weeks ended
December 4, 2004 related to United States property held as part of our 2001
Asset Disposition and are included in "Store operating, general and
administrative expense" in our Statements of Consolidated 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.
INTEREST EXPENSE
- ----------------
Interest expense of $19.2 million for the third quarter of fiscal 2004
increased from the prior year amount of $18.4 million due primarily to higher
interest expense resulting from our on-balance sheet financing obligations (sale
leaseback of Company-owned properties) entered into in the fourth quarter of
fiscal 2003 of approximately $4.1 million. This impact was partially offset by
lower interest from lower borrowings of approximately $3.3 million.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for the third quarter
of fiscal 2004 was $4.9 million (a $1.0 million provision for our U.S.
operations and a $3.9 million provision for our Canadian operations) compared to
a $28.1 million benefit from income taxes from continuing operations for the
third quarter of fiscal 2003 (a $33.0 million benefit from our U.S. operations
and a $4.9 million provision for our Canadian operations). Our U.S. tax
provision for continuing operations for the third quarter of fiscal 2003 was
offset by a tax benefit provided on discontinued operations of $34.4 million in
accordance with Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes". Consistent with prior year, we continue to record a valuation
allowance in an amount that would reduce our U.S. deferred tax asset to the
amount that is more likely than not to be realized.
For the third quarter of fiscal 2004, our effective income tax rate of 7.2%
changed from the effective income tax rate of (27.8%) in the third quarter of
fiscal 2003 as follows:
12 Weeks Ended
--------------------------------------------------------------------
December 4, 2004 November 29, 2003
--------------------------------- ---------------------------------
Effective Tax Benefit Effective
Tax Provision Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,035) 1.5% $ 33,060 (32.7%)
Canada (3,889) 5.7% (4,933) 4.9%
--------------- ---------------- --------------- ----------------
$ (4,924) 7.2% $ 28,127 (27.8%)
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $34.4 million
of benefit was recognized in the third quarter of fiscal 2003 as compared to the
third quarter of fiscal 2004, where no benefit was recognized. The remaining
provisions recorded in the U.S. of $1.0 million and $1.4 million for the third
quarters of fiscal 2004 and 2003, respectively, represent state and local taxes.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
The income from operations of discontinued businesses, net of tax, for the third
quarter of fiscal 2004 was $0.1 million as compared to a loss from operations of
discontinued businesses, net of tax, of $1.1 million for the third quarter of
fiscal 2003 and is detailed by business as follows:
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 costs (2) (206) - (208)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 5 $ 137 $ (32) $ 110
--------------- ---------------- --------------- -------------
12 Weeks ended November 29, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ - $ - $ 21,192 $ 21,192
Operating expenses (48) (3,663) (19,381) (23,092)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (48) (3,663) 1,811 (1,900)
Tax benefit (provision) 20 1,539 (761) 798
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (28) $ (2,124) $ 1,050 $ (1,102)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Occupancy related costs $ - $ (3,000) $ - $ (3,000)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Severance and benefits - 66 - 66
Non-accruable inventory costs (175) (318) - (493)
Non-accruable closing costs 130 (4,689) (2,391) (6,950)
Interest accretion on present value
of future occupancy costs (3) (180) - (183)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (48) $ (3,663) $ (2,391) $ (6,102)
--------------- ---------------- --------------- --------------
The loss on disposal of discontinued operations, net of tax, was $2.7 million
for the third quarter of fiscal 2004 as compared to gain on disposal of
discontinued operations, net of tax, of $48.7 million for the third quarter of
fiscal 2003 and is detailed by business as follows:
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)
=============== ================ =============== ==============
12 Weeks ended November 29, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses
Gain on sale of fixed assets $ - $ 6,445 $ 77,448 $ 83,893
Fixed asset impairments - - - -
Gain on disposal of
--------------- ---------------- --------------- ----------------
discontinued businesses, before
tax - 6,445 77,448 83,893
Tax provision - (2,707) (32,528) (35,235)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ - $ 3,738 $ 44,920 $ 48,658
=============== ================ =============== ================
40 WEEKS ENDED DECEMBER 4, 2004 COMPARED TO THE 40 WEEKS ENDED NOVEMBER 29,
2003
- -----------------------------------------------------------------------------
OVERALL
- -------
Sales for the 40 weeks ended December 4, 2004 were $8.3 billion, compared with
$8.2 billion for the 40 weeks ended November 29, 2003; comparable store sales,
which includes stores that have been in operation for two full fiscal years and
replacement stores, decreased (0.1%). Net loss per share - basic and diluted for
the 40 weeks ended December 4, 2004 was $4.74 compared to $2.51 for the 40 weeks
ended November 29, 2003.
40 Weeks 40 Weeks
Ended Ended Favorable /
Dec. 4, 2004 Nov. 29, 2003 (Unfavorable) % Change
---------------- --------------- -------------- ----------------
Sales $ 8,294.6 $ 8,177.9 $ 116.7 1.4%
(Decrease) increase in comparable
store sales for Company- operated
stores (0.1%) 0.7% NA NA
Loss from continuing operations (178.8) (150.5) (28.3) (18.8%)
(Loss) income from discontinued
operations (3.6) 61.6 (65.2) (105.8%)
Cumulative effect of a change in
accounting principle - FIN 46-R - (8.0) 8.0 100%
Net loss (182.4) (97.0) (85.4) (88.0%)
Net loss per share (4.74) (2.51) (2.23) (88.8%)
SALES
- -----
Sales for the 40 weeks ended December 4, 2004 of $8,294.6 million
increased $116.7 million or 1.4% from sales of $8,177.9 million for 40 weeks
ended November 29, 2003. The higher sales were due to an increase in Canadian
sales of $185.5 million partially offset by a decrease in U.S. sales of $68.8
million. The increase in Canadian sales was primarily due to the favorable
impact of the Canadian exchange rate. The following table presents sales for
each of our operating segments for the 40 weeks ended December 4, 2004 and the
40 weeks ended November 29, 2003:
40 Weeks Ended 40 Weeks Ended
Dec. 4, 2004 Nov. 29 2003 (Decrease) Increase % Change
----------------- ----------------- ------------------------ -----------------
United States $ 5,610.3 $ 5,679.1 $ (68.8) (1.2%)
Canada 2,684.3 2,498.8 185.5 7.4
----------------- ----------------- ------------------------ ----------------
Total $ 8,294.6 $ 8,177.9 $ 116.7 1.4%
================= ================= ======================== ================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the 40 weeks ended November 29, 2003 to the
40 weeks ended December 4, 2004:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- -----------
United States $ 202.2 $ (231.8) $ - $ (39.2) $ (68.8)
Canada 268.8 (267.8) 151.9 32.6 185.5
------------- -------------- ------------- ------------- ----------------
Total $ 471.0 $ (499.6) $ 151.9 $ (6.6) $ 116.7
============= ============== ============= ============= ================
The decrease in U.S. sales was primarily attributable to the closing of 31
stores since the beginning of fiscal 2003, of which 14 were closed in fiscal
2004, decreasing sales by $231.8 million, and the decrease in comparable store
sales for the 40 weeks ended December 4, 2004 of $39.2 million or -0.7% as
compared with the 40 weeks ended November 29, 2003. These decreases were
partially offset by the opening or re-opening of 26 new stores since the
beginning of fiscal 2003, of which 16 were opened or re-opened in fiscal 2004,
increasing sales by $202.2 million. Included in the 37 stores closed since the
beginning of fiscal 2003 were 6 stores closed as part of the asset disposition
initiative as discussed in Note 7 of our Consolidated Financial Statements.
The increase in Canadian sales was primarily attributable to the opening or
re-opening of 17 stores since the beginning of fiscal 2003, of which 5 were
opened or re-opened in fiscal 2004, increasing sales by $268.8 million, the
favorable effect of the Canadian exchange rate, which increased sales by $151.9
million, and the increase in comparable store sales for the 40 weeks ended
December 4, 2004 of $32.6 million or 1.3% for Company-operated stores and
franchised stores combined, as compared to the 40 weeks ended November 29, 2003.
These increases were partially offset by the closure of 22 stores since the
beginning of 2003, of which 11 were closed in fiscal 2004, decreasing sales by
$267.8 million.
Average weekly sales per supermarket for the U.S. were approximately $322,100
for the 40 weeks ended December 4, 2004 versus $305,000 for the corresponding
period of the prior year, an increase of 5.6% primarily due to the impact of
openings and closings with net higher average weekly sales. Average weekly sales
per supermarket for Canada were approximately $282,200 for the 40 weeks ended
December 4, 2004 versus $252,900 for the corresponding period of the prior year,
an increase of 11.6%. This increase was primarily due to the increase in the
Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin as a
percentage of sales by operating segment for the 40 weeks ended December 4, 2004
as compared to the 40 weeks ended November 29, 2003. Gross margin as a
percentage of sales decreased 29 basis points to 27.87% for the 40 weeks ended
December 4, 2004 from 28.16% for the 40 weeks ended November 29, 2003. This 29
basis point decrease was caused by the increase in Canadian sales as a
percentage of our total (approximately 10 basis points) and from the increase in
U.S. Food Basics as a percentage of sales (approximately 19 basis points). We
believe the impact on margin for changes in costs and special reductions was not
significant.
40 Weeks Ended 40 Weeks Ended
December 4, 2004 November 29, 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
United States $ 1,664.6 29.67% $ 1,695.2 29.85%
Canada 647.4 24.12 608.0 24.33
-------------- --------------- -------------- --------------
Total $ 2,312.0 27.87% $ 2,303.2 28.16%
============== =============== =============== ==============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the 40 weeks ended November 29,
2003 to the 40 weeks ended December 4, 2004:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ (20.5) $ (10.1) $ - $ (30.6)
Canada 7.7 (5.2) 36.9 39.4
---------------- ---------------- -------------- -------------
Total $ (12.8) $ (15.3) $ 36.9 $ 8.8
================ ================ ============== =============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and administrative expense
by operating segment, in dollars and as a percentage of sales for the 40 weeks
ended December 4, 2004 compared with the 40 weeks ended November 29, 2003. SG&A
expense was $2,417.1 million or 29.14% for the 40 weeks ended December 4, 2004
as compared to $2,416.3 million or 29.55% for the 40 weeks ended November 29,
2003.
40 Weeks Ended 40 Weeks Ended
Dec. 4, 2004 Nov. 29, 2003
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 1,775.6 31.65% $ 1,859.9 32.75%
Canada 641.5 23.90 556.4 22.27
-------------- --------------- -------------- --------------
Total $ 2,417.1 29.14% $ 2,416.3 29.55%
============== =============== ============== ==============
The U.S. had overall favorability of 110 basis points. While part of the
improvement in the U.S. is due to the lower Midwest goodwill and property
impairment charges of $25.4 million and a reduction in the vacation accrual of
$8.6 million due to a change in the vacation entitlement policy, most of the
favorability is due to very tight cost controls. Categories in which the U.S.
experienced cost improvements include advertising due to less spend ($19.8
million), labor ($15.2 million), and corporate administrative expenses due to
increased information technology charges to Canada ($10.1 million). The
favorability in the U.S. was partially offset by $3.8 million of severance and
other charges relating to the previously noted administrative reorganization.
The increase in SG&A in Canada of $85.1 million is primarily due to the increase
in the Canadian exchange rate of $24.5 million, an increase in labor of $23.7
million due mainly to increased sales, an increase in occupancy of $13.1 million
as a result of the opening of new stores, and increased group overhead of $13.3
million mainly due to information technology costs previously charged to the
U.S. now charged to Canada, partially offset by a decrease in advertising costs
of $10.1 million due to less spend.
During the 40 weeks ended December 4, 2004, we recorded an impairment loss of
$0.9 million related to certain idle property that, based upon new information
received about such assets, including an appraisal and an offer, was impaired
and written down to its net realizable value. This amount was included in "Store
operating, general and administrative expense" in our Statements of Consolidated
Operations. There were no such amounts recorded during the 40 weeks ended
November 29, 2003.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During the 40 weeks ended December 4, 2004, we recorded impairment losses
on property, plant and equipment of $2.9 million compared $0.5 million during
the 40 weeks ended November 29, 2003. Of these amounts, $1.2 million for the 40
weeks ended December 4, 2004 and $0.5 million for the 40 weeks ended November
29, 2003 related to United States stores that were or will be closed in the
normal course of business and $1.7 million for the 40 weeks ended December 4,
2004 related to United States property held as part of our 2001 Asset
Disposition and are included in "Store operating, general and administrative
expense" in our Statements of Consolidated 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.
INTEREST EXPENSE
- ----------------
Interest expense of $68.1 million for the 40 weeks ended December 4, 2004
increased from the prior year amount of $61.2 million due primarily to higher
interest expense resulting from our on-balance sheet financing obligations (sale
leaseback of Company-owned properties) entered into in the fourth quarter of
fiscal 2003 of approximately $13.2 million. This impact was partially offset by
lower interest from lower borrowings of approximately $6.3 million.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for the 40 weeks ended
December 4, 2004 was $8.8 million (a $3.5 million provision for our U.S.
operations and a $5.3 million provision for our Canadian operations) compared to
a $22.4 million benefit from income taxes from continuing operations for the 40
weeks ended November 29, 2003 (a $41.0 million benefit from our U.S. operations
and a $18.6 million provision for our Canadian operations). Our U.S. tax benefit
from continuing operations for the 40 weeks ended November 29, 2003 was offset
by a tax provision provided on discontinued operations of $44.6 million in
accordance with Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes". Consistent with prior year, we continue to record a valuation
allowance in an amount that would reduce our U.S. deferred tax asset to the
amount that is more likely than not to be realized.
For the 40 weeks ended December 4, 2004, our effective income tax rate of 5.1%
changed from the effective income tax rate of (12.9%) for the 40 weeks ended
November 29, 2003 as follows:
40 Weeks Ended
--------------------------------------------------------------------
December 4, 2004 November 29, 2003
--------------------------------- ---------------------------------
Effective Tax Benefit Effective
Tax Provision Tax Rate (Provision) Tax Rate
United States $ (3,450) 2.0% $ 40,967 (23.7%)
Canada (5,318) 3.1% (18,607) 10.8%
--------------- ---------------- --------------- ----------------
$ (8,768) 5.1% $ 22,360 (12.9%)
=============== ================ =============== ================
The change in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $44.6 million
of benefit was recognized for 40 weeks ended November 29, 2003 as compared to
the 40 weeks ended December 4, 2004, where no benefit was recognized. The
remaining provisions recorded in the U.S. of $3.5 million and $3.6 million for
the 40 weeks ended December 4, 2004 and November 29, 2003, respectively,
represent state and local taxes. In addition, the change in our effective tax
rate was partially offset by the impact of the lower mix of Canadian income from
continuing operations as a percentage of our Company's loss from continuing
operations for the 40 weeks ended December 4, 2004 as compared to the 40 weeks
ended November 29, 2003.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for the 40
weeks ended December 4, 2004 was $0.9 million as compared to a loss from
operations of discontinued businesses, net of tax, of $31.1 million for the 40
weeks ended November 29, 2003 and is detailed by business as follows:
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 costs (8) (590) - (598)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 333 $ (637) $ (625) $ (929)
--------------- ---------------- --------------- -------------
40 Weeks ended November 29, 2003
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (43,512) (179,528) (51,738) (274,778)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (10,786) (56,299) 13,527 (53,558)
Tax benefit (provision) 3,932 24,055 (5,493) 22,494
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (6,854) $ (32,244) $ 8,034 $ (31,064)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,307) - (2,482)
Non-accruable closing costs (2,984) (6,526) (3,834) (13,344)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,635) (8,349) - (10,984)
Interest accretion on present value
of future occupancy costs (3) (180) - (183)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (8,145) $ (47,791) $ (3,834) $ (59,770)
--------------- ---------------- --------------- --------------
The loss on disposal of discontinued operations, net of tax, was $2.7 million
for the 40 weeks ended December 4, 2004 as compared to gain on disposal of
discontinued operations, net of tax, of $92.6 million for the 40 weeks ended
November 29, 2003 and is detailed by business as follows:
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)
=============== ================ =============== ==============
40 Weeks ended November 29, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 77,448 $ 178,703
Fixed asset impairments - (18,968) - (18,968)
Gain (loss) on disposal of
------------- ------------- --------------- ----------------
discontinued businesses, before
tax 85,983 (3,696) 77,448 159,735
Tax provision (30,997) (3,563) (32,528) (67,088)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 54,986 $ (7,259) $ 44,920 $ 92,647
============= ================ =============== ================
ASSET DISPOSITION INITIATIVE
- ----------------------------
Overview
- --------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Statements of Consolidated Operations and Statements of
Consolidated Cash Flows for the 12 and 40 weeks ended December 4, 2004 and
November 29, 2003. Present value ("PV") interest represents interest accretion
on future occupancy costs which were recorded at present value at the time of
the original charge. Non-accruable items represent charges related to the
restructuring that are required to be expensed as incurred in accordance with
SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 Weeks Ended December 4, 2004 12 Weeks Ended November 29, 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ----------- ------------- --------- ----------- ----------- ------------- -------
Balance Sheet accruals
----------------------
PV interest $ 418 $ 553 $ 154 $ 1,125 $ 655 $ 532 $ - $ 1,187
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 418 553 154 1,125 655 532 - 1,187
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - - - -
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 535 - 535
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - (4,488) - (4,488) - 1,526 - 1,526
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
-------------
Property writedowns - 1,709 - 1,709 - - - -
Inventory markdowns - - - - - - - -
Closing costs - - - - - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 1,709 - 1,709 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (418) (553) (154) (1,125) (655) (532) - (1,187)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (2,779) $ - $ (2,779) $ - $ 1,526 $ - $ 1,526
======== =========== =========== ========= =========== =========== =========== =========
40 Weeks Ended December 4, 2004 40 Weeks Ended November 29, 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ----------- ------------- --------- ----------- ----------- ------------- ---------
Balance Sheet accruals
PV interest $ 1,494 $ 1,902 $ 534 $ 3,930 $ 2,075 $ 2,232 $ - $ 4,307
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 1,494 1,902 534 3,930 2,075 2,232 - 4,307
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - (6,778) - (6,778)
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 1,490 - 1,490
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - (4,488) - (4,488) - (4,297) - (4,297)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - 1,709 90 1,799 - 422 - 422
Inventory markdowns - - 291 291 - - - -
Closing costs - - 689 689 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 1,709 1,070 2,779 - 422 - 422
-------- ----------- --------- --------- ----------- ----------- ----------- ---------
Less PV interest (1,494) (1,902) (534) (3,930) (2,075) (2,232) - (4,307)
--------- ----------- ------------ ---------- ------------ ----------- ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (2,779) $ 1,070 $ (1,709) $ - $ (3,875) $ - $ (3,875)
======== =========== =========== ========= =========== =========== =========== =========
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 4, 2004, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,477 17 1,494 - - - 1,477 17 1,494
Utilization (2) (3,887) (177) (4,064) (526) - (526) (4,413) (177) (4,590)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
Dec. 4, 2004 $ 29,062 $ 292 $ 29,354 $ 1,631 $ - $ 1,631 $ 30,693 $ 292 $ 30,985
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $1.5 million
during the 40 weeks ended December 4, 2004 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $23.3 million, $13.6 million and $20.0 million for
fiscal 2001, 2002 and 2003, respectively, and $4.1 million during the 40
weeks ended December 4, 2004 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.5 million, $0.4
million and $0.3 million for fiscal 2001, 2002 and 2003, respectively, and
$0.5 million during the 40 weeks ended December 4, 2004 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $96.8 million of the total occupancy charges from the time of the
original charges through December 4, 2004 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.9 million of the total net severance charges from
the time of the original charges through December 4, 2004, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $29.4 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 $1.6 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out by 2020.
None of these stores were open during the 12 and 40 weeks ended December 4, 2004
and November 29, 2003. 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 4, 2004 and February 28, 2004, approximately $5.5 million and $6.5
million, respectively, of the reserve was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of December 4, 2004 of $31.0 million for this phase of the asset disposition
initiative and have concluded that they are appropriate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of December 4, 2004,
we had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Original charge $ 78,488 $ 1,968 $ 80,456 $ 15,688 $ 7,747 $ 23,435 $ 94,176 $ 9,715 $ 103,891
Addition (1) 1,653 20 1,673 - - - 1,653 20 1,673
Utilization (2) (1,755) (51) (1,806) (1,945) (946) (2,891) (3,700) (997) (4,697)
Adjustments (3) - - - - (584) (584) - (584) (584)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 1,902 - 1,902 - - - 1,902 - 1,902
Utilization (2) (3,804) (375) (4,179) (178) (58) (236) (3,982) (433) (4,415)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
--------- -------- --------- -------- -------- -------- ---------- --------- ---------
Balance at
Dec. 4, 2004 $ 33,194 $ - $ 33,194 $ 2,133 $ - $ 2,133 $ 35,327 $ - $ 35,327
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $1.7 million, $4.1 million and
$2.9 million during fiscal 2001, 2002 and 2003, respectively, and $1.9
million during the 40 weeks ended December 4, 2004 represent the
interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge. The addition to
severance of $3.5 million during fiscal 2002 related to retention and
productivity incentives that were expensed as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $4.2 million
during the 40 weeks ended December 4, 2004 represent payments made
during those periods for costs such as rent, common area maintenance,
real estate taxes and lease termination costs. Severance utilization of
$2.9 million, $19.5 million and $3.5 million during fiscal 2001, 2002
and 2003, respectively, and $0.2 million during the 40 weeks ended
December 4, 2004 represent payments made to terminated employees during
the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. Under Ontario provincial
law, employees to be terminated as part of a mass termination are
entitled to receive compensation, either worked or paid as severance,
for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained
in the aforementioned guarantee period. As a result, during fiscal
2001, we recorded an adjustment to severance and benefits of $0.6
million related to a reduction in the severance payments required to be
made to certain store employees in Canada. Further, during fiscal 2002,
we recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of $3.6
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during the
12 and 40 weeks ended December 4, 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.
We paid $38.3 million ($35.3 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 4, 2004 which was primarily for occupancy related costs such as rent,
common area maintenance, real estate taxes and lease termination costs. We paid
$26.1 million ($17.1 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 4, 2004, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $33.2 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $2.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At December 4, 2004 and February 28, 2004 approximately $7.1 million and $12.0
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 4, 2004 and November 29, 2003 are the sales and operating results
of the 39 stores that were identified for closure as part of this asset
disposition. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Dec. 4, 2004 Nov. 29, 2003 Dec. 4, 2004 Nov. 29, 2003
------------ ------------- ------------- -------------
Sales $ - $ - $ - $ 316
============= ============= ============= =============
Operating loss $ - $ - $ - $ (72)
============= ============= ============= ==============
Based upon current available information, we evaluated the reserve balances as
of December 4, 2004 of $35.3 million for this phase of the asset disposition
initiative and have concluded that they are appropriate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. In addition to the charge of
$37.7 million related to the last phase of this initiative ($2.2 million in
"Cost of merchandise sold" and $35.5 million in "Store operating, general and
administrative expense" in our Statements of Consolidated Operations for fiscal
2003), excluding PV interest, we recorded costs in the 12 and 40 weeks ended
December 4, 2004 of nil and $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"), respectively, as follows:
12 Weeks Ended 40 Weeks Ended
December 4, 2004 December 4, 2004
---------------------- ----------------------
Occupancy related $ - $ -
Severance and benefits - -
Property writedowns - 90
Inventory markdowns - 291
Nonaccruable closing costs - 689
-------------- --------------
Total charges $ - $ 1,070
============== ==============
As of December 4, 2004, we had closed all 6 stores and successfully completed
the conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writedowns as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 534 - 534
Utilization (2) (3,719) (4,775) (8,494)
------------ ------------- ----------
Balance at
Dec. 4, 2004 $ 16,777 $ 44 $ 16,821
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and the 40
weeks ended December 4, 2004 represent interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The original charge to severance during fiscal 2003 of
$8.9 million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $3.7 million during fiscal
2003 and the 40 weeks ended December 4, 2004, respectively, represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $4.1
million and $4.8 million during fiscal 2003 and 40 weeks ended December
4, 2004, respectively, represent payments made to terminated employees
during the period.
We paid $4.8 million of the total occupancy charges from the time of the
original charge through December 4, 2004 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 4, 2004, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $16.8 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2014. The remaining severance
liability of less than $0.1 million relates to expected future payments for
severance and benefits to individual employees and will be fully paid out by
mid-2005.
Included in the Statements of Consolidated Operations for the 12 and 40 weeks
ended December 4, 2004 and November 29, 2003 are the sales and operating results
of the 6 stores that were identified for closure as part of this phase of the
initiative. The results of these operations are as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Dec. 4, 2004 Nov. 29, 2003 Dec. 4, 2004 Nov. 29, 2003
-------------- ------------- ------------ -------------
Sales $ - $ 12,588 $ 2,433 $ 41,944
============= ============= ============= =============
Operating loss $ - $ (1,877) $ (47) $ (6,626)
============= ============ ============= =============
At December 4, 2004 and February 28, 2004, approximately $3.0 million and $9.0
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $16.8 million as of December 4, 2004
based upon current available information and have concluded that it is
appropriate. We will continue to monitor the status of the vacant properties and
adjustments to the reserve balance may be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
- ----------
The following table presents excerpts from our Consolidated Statements of Cash
Flows:
Dec. 4, 2004 Nov. 29, 2003
----------------- -----------------
Net cash used in operating activities $ (15,500) $ (16,013)
----------------- -----------------
Net cash (used in) provided by investing activities $ (134,481) $ 142,944
----------------- -----------------
Net cash provided by (used in) financing activities $ 22,247 $ (124,782)
----------------- -----------------
Net cash flow used in operating activities of $15.5 million for the 40 weeks
ended December 4, 2004 primarily reflected our net loss of $182.4 million,
adjusted for non-cash charges of $206.4 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, and 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 $26.5 million, an increase in other assets of $22.7 million, and a
decrease in other accruals of $25.8 million . Refer to Working Capital below for
discussion of changes in working capital items. Net cash flow used in operating
activities of $16.0 million for the 40 weeks ended November 29, 2003 primarily
reflected our net loss of $97.0 million adjusted for non-cash charges of $60.1
million for the Midwest long lived asset/goodwill impairment charge,
$215.0 million for depreciation and amortization and $8.0 million for the
cumulative effect of a change in accounting principle - FIN 46-R, the decrease
in receivables of $15.5 million, and the increase in accounts payable of $9.1
million, partially offset by the gain on sale of discontinued operations of
$159.7 million, the increase in inventories of $31.9 million and the increase in
prepaid expenses and other current assets of $29.6 million.
Net cash flow used in investing activities of $134.5 million for the 40 weeks
ended December 4, 2004 primarily reflected property expenditures totaling $150.1
million, which included 11 new supermarkets and 16 major remodels partially
offset by cash received from the sale of our assets of $15.6 million. For the
remainder of fiscal 2004, we have planned capital expenditures of approximately
$40 to $50 million, which relate primarily to opening one new supermarket,
converting approximately 2 to 3 stores to new banners, and enlarging or
remodeling approximately 25 supermarkets. However, year-to-date we are spending
at a rate below our plan and we may choose not to complete all projects in this
fiscal year. We currently expect to close approximately 5 - 7 stores during the
remainder of fiscal 2004. Net cash flow provided by investing activities of
$142.9 million for the 40 weeks ended November 29, 2003 primarily reflected
$252.0 million in proceeds from property disposals (most of which related to
discontinued operations), partially offset by $109.1 million used for property
expenditures, which included 14 new supermarkets and 2 major remodels or
enlargements.
Net cash flow provided by financing activities of $22.2 million for the 40 weeks
ended December 4, 2004 primarily reflected an increase in book overdrafts of
$19.7 million and proceeds from long term borrowings of $19.3 million partially
offset by principal payments on capital leases of $10.1 million, payments on
long term borrowings of $5.9 million, and a decrease in deferred financing fees
of $1.0 million. Net cash flow used in financing activities of $124.8 million
for the 40 weeks ended November 29, 2003 primarily reflected $135.0 million in
payments on our revolving lines of credit and principal payments on capital
leases of $10.4 million partially offset by an increase in book overdrafts of
$22.2 million.
In the short term, we believe that our present cash resources, including
invested cash on hand, available borrowings from our revolving credit agreement
and other sources, are sufficient to meet our needs. We operate under an annual
operating plan which is reviewed and approved by our Board of Directors and
incorporates the specific initiatives we expect to pursue and the anticipated
financial results of our Company. The annual operating plan is generally
consistent with the first year of a longer term strategic plan that is approved
each year, and identifies specific initiatives and financial results, including
sales, profits and cash flow, to be achieved over a three year period.
The Fiscal 2004 annual operating plan anticipated limited profit growth from
Fiscal 2003, and called for increased capital investment to support a focused
program of remodeling existing conventional grocery stores in the U.S. and
Canada and converting certain stores to the Food Basics banner. We anticipated
that we would incur net losses and have negative operating cash flow as a result
of this plan. We also have $2.3 million of current debt maturities in Fiscal
2004. We believe that proceeds from asset sales completed in Fiscal 2003 and our
present financing plans, including, among other things, the 4 year revolving
credit agreement completed in Fiscal 2003 and planned sale-leaseback
transactions, will provide for sufficient cash availability to ensure that we
have the resources to pursue our Fiscal 2004 annual operating plan.
We are presently developing our plans for Fiscal 2005, with a strong focus on
ensuring that funding is sufficient to both pursue our plans and programs and to
refinance the $214 million bonds maturing in April 2007 which, under the terms
of our revolving credit agreement, must be refinanced six months prior to
maturity. While we believe that the funds currently available, combined with
additional funds from improved profitability and financing and operating
actions, which we believe we can pursue but which are uncertain at this time,
could be sufficient to pursue this plan, however, there is no assurance that
this will be so at this time.
Profitability and cash flow can be impacted by certain external factors such as
unfavorable economic conditions, competition, labor relations and fuel and
utility costs which could have a significant impact on cash generation. If our
profitability and cash flow do not improve in line with our plans or if they do
not otherwise provide sufficient resources to operate effectively, we anticipate
that we will be able to modify the plan, by reducing capital investments and
through other contingency actions, in order to ensure that we have appropriate
resources. However, there is no assurance that we will pursue such contingency
actions or that they will be successful in generating the resources necessary to
operate the business.
WORKING CAPITAL
- ---------------
We had working capital of $10.7 million at December 4, 2004 compared to working
capital of $113.5 million at February 28, 2004. We had cash and cash equivalents
aggregating $176.7 million at December 4, 2004 compared to $297.0 million at
February 28, 2004. The decrease in working capital was attributable primarily to
the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in accounts receivable due to the timing of receipts; and
o An increase in accounts payable (inclusive of book overdrafts) due to timing,
seasonality and the impact of the Canadian exchange rate.
Partially offset by the following:
o An increase in inventories mainly due to seasonality and the impact of the
Canadian exchange rate;
o An increase in prepaid expenses and other current assets mainly due to
timing as the unamortized portion of our prepaid rent balances at December
4, 2004 is greater than the unamortized portion of our prepaid rent
balances at February 28, 2004; and
o A decrease in other accruals mainly due to timing.
REVOLVING CREDIT AGREEMENT
- --------------------------
During fiscal 2003, we amended and restated our Secured Credit Agreement (the
"Amended and Restated Credit Agreement") and decreased our borrowing base to
$400 million. Thus, at December 4, 2004, we had a $400 million secured revolving
credit agreement with a syndicate of lenders enabling us to borrow funds on a
revolving basis sufficient to refinance short-term borrowings and provide
working capital as needed. This facility provides us with greater operating
flexibility and provides for increased capital spending. Under the terms of this
agreement, should availability fall below $50 million, a borrowing block will be
implemented which provides that no additional borrowings be made unless we are
able to maintain a fixed charge coverage ratio of 1.0 to 1.0. Although we do not
meet the required ratio at this time, it is not applicable as availability at
December 4, 2004 totaled $241.2 million. In the event that availability falls
below $50 million and we do not maintain the ratio required, unless otherwise
waived or amended, the lenders may, at their discretion, declare, in whole or in
part, all outstanding obligations immediately due and payable.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$83.4 million at December 4, 2004) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of December 4, 2004, there were no borrowings under these credit agreements.
As of December 4, 2004, after reducing availability for outstanding letters of
credit and borrowing base requirements, we had $241.2 million available under
the Amended and Restated Credit Agreement.
Under the Amended and Restated Credit Agreement, we are permitted to make bond
repurchases and may do so from time to time in the future.
PUBLIC DEBT OBLIGATIONS
- -----------------------
Outstanding notes totaling $631 million at December 4, 2004 consisted of $200
million of 9.375% Notes due August 1, 2039, $217 million of 9.125% Senior Notes
due December 15, 2011 and $214 million of 7.75% Notes due April 15, 2007.
Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes can be redeemed after August 11, 2004, and the 9.125%
Notes may be redeemed after December 15, 2006. All of the notes outstanding are
unsecured obligations and were issued under the terms of our senior debt
securities indenture, which contains among other provisions, covenants
restricting the incurrence of secured debt. In addition, the 9.125% Notes
contain additional covenants, including among other things, limitations on asset
sales, on the payment of dividends, and on the incurrence of liens and
additional indebtedness. Our notes are not guaranteed by any of our
subsidiaries. Our notes are effectively subordinate to our secured revolving
credit agreement and do not contain cross default provisions.
During the third quarter of fiscal 2004, we repurchased in the open market $6
million of our 7.75% Notes due April 15, 2007. The cost of this open market
repurchase resulted in a pretax gain due to the early extinguishment of debt of
$0.8 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections", this gain has been
classified within loss from operations for the 12 and 40 weeks ended December
4, 2004.
OTHER
- -----
We currently have active Registration Statements dated January 23, 1998 and June
23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities as of December 4, 2004 at terms contingent upon market conditions at
the time of sale.
Our Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in
fiscal 2004. In addition, our Company is prohibited, under the terms of our
Revolving Credit Agreement, to pay cash dividends on common shares.
We are the guarantor of a loan of $2.1 million related to a shopping center,
which will expire in 2011.
Our existing senior debt rating was Caa1 with negative implications with Moody's
Investors Service ("Moody's") and B- with negative implications with Standard &
Poor's Ratings Group ("S&P") as of December 4, 2004. Our liquidity rating was
SGL3 with Moody's as of December 4, 2004. Our recovery rating was 1 with S&P as
of December 4, 2004 indicating a high expectation of 100% recovery of our senior
debt to our lenders. Future rating changes could affect the availability and
cost of financing to our Company.
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
- -----------------------
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
- -----------------
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is primarily based upon groups of
assets and the undiscounted estimated future cash flows from such assets to
determine if the carrying value of such assets is recoverable from their
respective cash flows. If such review indicates an impairment exists, we measure
such impairment on a discounted basis using a probability weighted approach and
a risk free rate.
During the 12 and 40 weeks ended December 4, 2004, we recorded total impairment
losses on property, plant and equipment of $37.4 million and $39.1 million,
respectively. Refer to Note 5 - Valuation of Goodwill and Long-Lived Assets in
the Notes to our Consolidated Financial Statements for further discussion
relating to impairment charges recorded during the current fiscal year.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
Closed Store Reserves
- ---------------------
For stores closed that are under long-term leases, we record a discounted
liability using a risk free rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates. As of December
4, 2004, we had liabilities for future minimum lease payments of $118 million,
which related to 54 closed stores and 74 subleased or assigned stores. Of this
amount, $22 million relates to stores closed in the normal course of business,
$79 million relates to stores closed as part of the asset disposition initiative
(see Note 7 of our Consolidated Financial Statements), and $17 million relates
to stores closed as part of our exits of the northern New England and Kohl's
businesses (see Note 6 of our Consolidated Financial Statements).
Employee Benefit Plans
- ----------------------
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of increase in
compensation and health care costs. In accordance with U.S. GAAP, actual results
that differ from our Company's assumptions are accumulated and amortized over
future periods and, therefore, affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant
changes in our assumptions may materially affect our pension and other
post-retirement obligations and our future expense.
Inventories
- -----------
We evaluate inventory shrinkage throughout the year based on actual physical
counts in our stores and distribution centers and record reserves based on the
results of these counts to provide for estimated shrinkage between the store's
last inventory and the balance sheet date.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to such risk in the areas of
interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates primarily to
our debt obligations. We do not have cash flow exposure due to rate changes on
our $629.5 million in notes as of December 4, 2004 because they are at fixed
interest rates. However, we do have cash flow exposure on our committed bank
lines of credit due to our variable floating rate pricing. Accordingly, during
the 12 and 40 weeks ended December 4, 2004, a presumed 1% change in the variable
floating rate would not have impacted interest expense as there were minimal
borrowings on our committed bank lines of credit.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. During the 12 and 40 weeks ended December 4, 2004, a change
in the Canadian currency of 10% would have resulted in a fluctuation in net
income of $0.5 million and net loss of $0.4 million, respectively. We do not
believe that a change in the Canadian currency of 10% will have a material
effect on our financial position or cash flows.
ITEM 4 - Controls and Procedures
Our Company maintains a system of internal controls and procedures designed to
provide reasonable assurance as to the reliability of our Company's published
consolidated financial statements and other disclosures included in this report.
Within the 90-day period prior to the date of this report, the Company's
Chairman of the Board and Chief Executive Officer, and Executive Vice President,
Chief Financial Officer evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that
evaluation, the Company's Chairman of the Board and Chief Executive Officer, and
Executive Vice President, Chief Financial Officer concluded that our Company's
disclosure controls and procedures, which we designed to ensure that our Company
is able to collect, process and disclose required information within the time
periods specified in the Commission's rules and forms, were effective as of the
end of the period covered by this quarterly report on 10-Q.
Since the date of the most recent evaluation of our Company's internal controls
over financial reporting by our Chairman of the Board and Chief Executive
Officer, and Executive Vice President, Chief Financial Officer, there have been
no significant changes in such controls or in other factors that could have
significantly affected those controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.
CAUTIONARY NOTE
- ---------------
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
On October 1, 2004, our Company announced that we had reached a settlement,
subject to court approval, of the previously disclosed Canadian class action
lawsuit, captioned 1176560 Ontario Limited, 1184883 Ontario Inc. and 1205427
Ontario Limited vs. The Great Atlantic & Pacific Company of Canada Limited;
Ontario Superior Court of Justice, Court File No. 02 CV-227777CP, which was
filed by certain franchisees of our Food Basics discount grocery operations in
Ontario, Canada. The settlement was approved by the Canadian court on October 4,
2004. Under the terms of the settlement, A&P Canada agreed to make payment for
damages as well the repurchase of the franchise shares. In addition, A&P Canada
is required to pay other settlement expenses, including the calculated net book
value of the repurchased franchises, expected to be finalized during the fourth
quarter of fiscal 2004. The settlement and repurchase transaction closed during
the third quarter of this fiscal year and the recorded pre-tax loss was
approximately $26.1 million. Of this amount, $24.7 million was recorded in the
second quarter ended September 11, 2004, and $1.4 million was recorded in the
third quarter ended December 4, 2004. The additional $1.4 million mainly
represents legal and other professional fees incurred in the third quarter ended
December 4, 2004 as well as changes in estimate on the net settlement amount.
This estimate is subject to change based upon the finalization of the net
settlement amount expected during the fourth quarter of fiscal 2004.
As previously disclosed, the dismissal by the United States District Court for
the District of New Jersey of the amended securities class action Complaint
filed against our Company and certain of our officers and directors in In re The
Great Atlantic & Pacific Tea Company, Inc. Securities Litigation, No. 02 CV 2674
(D.N.J.) (FSH), was affirmed in July 2004 by the United States Court of Appeals
for the Third Circuit. The deadline by which plaintiffs could have filed with
the United States Supreme Court a petition seeking a writ of certiorari
challenging the Third Circuit's ruling expired in early October 2004 without
plaintiffs having made such a filing.
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
None
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION
3.1 Articles of Incorporation of The Great Atlantic
& Pacific Tea Company, Inc., as amended through
July 1987 (incorporated herein by reference to
Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea
Company, Inc., as amended through December 4,
2004 (incorporated herein by reference to
Exhibit 3.1 to Form 8-K filed on December 4,
2004)
4.1 Indenture, dated as of January 1, 1991 between
the Company and JPMorgan Chase Bank (formerly
The Chase Manhattan Bank as successor by merger
to Manufacturers Hanover Trust Company), as
trustee (the "Indenture") (incorporated herein
by reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of
December 4, 2001, to the Indenture, dated as of
January 1, 1991 between our Company and JPMorgan
Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4,
2001)
4.3 Second Supplemental Indenture, dated as of
December 20, 2001, to the Indenture between our
Company and JPMorgan Chase Bank, relating to the
9 1/8% Senior Notes due 2011 (incorporated herein
by reference to Exhibit 4.1 to Form 8-K filed on
December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by
reference to Exhibit 4.4 to Form 10-K filed on
May 9, 2003)
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q
filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as of
the 1st day of November, 2000, by and between the
Company and William P. Costantini (incorporated
herein by reference to Exhibit 10 to Form 10-Q
filed on January 16, 2001)
("Costantini Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4* Confidential Separation and Release Agreement by
and between William P. Costantini and The Great
Atlantic & Pacific Tea Company, Inc. dated
November 4, 2004, as filed herein
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 Employment Agreement, made and entered into as
of the 2nd day of October, 2002, by and between
our Company and Peter Jueptner (incorporated
herein by reference to Exhibit 10.26 to Form
10-Q filed on October 22, 2002)
10.8 Offer Letter dated the 18th day of September
2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January 10,
2003)
10.9 Employment Agreement, made and entered into as
of the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002)
10.10 Employment Agreement, made and entered into as of
the 28th day of October, 2002, by and between our
Company and Brian Piwek, and Offer Letter dated
the 23rd day of October, 2002 (incorporated
herein by reference to Exhibit 10.14 to Form 10-Q
filed on January 10, 2003)
10.11 Supplemental Executive Retirement Plan effective
as of September 30, 1991 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 28, 1993)
10.12 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)
10.13 Supplemental Retirement and Benefit Restoration
Plan effective as of January 1, 2001
(incorporated herein by reference to
Exhibit 10(j) to Form 10-K filed on May 23, 2001)
10.14 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.15 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)
10.16 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)
10.17 Credit Agreement dated as of February 23, 2001,
among our Company, The Great Atlantic & Pacific
Company of Canada, Limited and the other
Borrowers party hereto and the Lenders party
hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan
Bank of Canada, as Canadian Administrative Agent
("Credit Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-K filed on
May 23, 2001)
10.18 Amendment No. 1 and Waiver, dated as of November
16, 2001 to Credit Agreement (incorporated
herein by reference to Exhibit 10.23 to Form
10-K filed on July 5, 2002)
10.19 Amendment No. 2 dated as of March 21, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.24 to Form 10-K filed on
July 5, 2002)
10.20 Amendment No. 3 dated as of April 23, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.25 to Form 10-K filed on
July 5, 2002)
10.21 Waiver dated as of June 14, 2002 to Credit
Agreement (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on July 5, 2002)
10.22 Amendment No. 4 dated as of October 10, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.27 to Form 10-Q filed on
October 22, 2002)
10.23 Amendment No. 5 dated as of February 21, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on
March 7, 2003)
10.24 Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.28 to Form 10-K filed on
May 9, 2003)
18 Preferability Letter Issued by
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 18 to Form 10-Q filed on
July 29, 2004)
23 Consent of Independent Accountants from
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 23.1 to Form 10-K filed
on May 21, 2004)
31.1* Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2* Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32* Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed with this 10-Q
(b) Reports on Form 8-K
On December 9, 2004, our Company filed a Form 8-K pursuant to which (i) it
furnished the SEC with a copy of the December 9, 2004 press release, which
announced that in conjunction with the Company's next step of its
reorganization, the Company will reduce overhead costs in its U.S. business by
an estimated $50 million during fiscal 2005 and an additional $25 million in
fiscal 2006 and incur charges of up to $10 million over the next year, and (ii)
it announced that its Board of Directors had adopted certain amendments to the
Company's By-Laws in order to replace the position of General Counsel with the
position of Chief Legal Officer and to explicitly provide for the
indemnification of directors, officers and employees of the Company in certain
instances.
On November 12, 2004, our Company filed a Form 8-K pursuant to which it
announced its entry into a Confidential Separation and Release Agreement with
William P. Costantini, the Company's Senior Vice President, General Counsel and
Secretary, who will resign, effective December 31, 2004, from his positions with
the Company.
On November 4, 2004, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the November 4, 2004 press release, which announced the
promotion of Brian C. Piwek to President and Chief Operating Officer of the
Company and the resignation, in conjunction therewith, of Christian W. E. Haub
from the position of President. The Company also announced that Mr. Haub will
continue to serve as Chairman of the Board and Chief Executive Officer of the
Company.
On October 19, 2004, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the October 19, 2004 press release, which announced the
Company's financial results for the quarter ended September 11, 2004.
On October 14, 2004, our Company filed a Form 8-K pursuant to which it furnished
the SEC with a copy of the October 1, 2004 press release, which announced the
settlement of a class action by 29 operating and former franchisees of the
Company's Food Basics discount grocery operations in Ontario, Canada.
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 7, 2005 By: /s/ Brenda M. Galgano
-------------------------------------------
Brenda M. Galgano, Senior Vice President,
Corporate Controller (Chief Accounting Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Christian W.E. Haub, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Christian W. E. Haub Date: January 7, 2005
- ------------------------
Christian W. E. Haub
Chairman of the Board
and
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Mitchell P. Goldstein Date: January 7, 2005
- -------------------------
Mitchell P. Goldstein
Executive Vice President,
Chief Financial Officer
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W. E. Haub, Chairman of the Board and Chief Executive
Officer of The Great Atlantic & Pacific Tea Company, Inc. ("Company"), and
Mitchell P. Goldstein, Executive Vice President and Chief Financial Officer of
the Company, each hereby certifies that (1) the Quarterly Report of the Company
on Form 10-Q for the period ended December 4, 2004 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and (2) the
information contained in the Report fairly presents, in all material respects,
the financial condition and the results of operations of the Company.
Dated: January 7, 2005 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board
and
Chief Executive Officer
Dated: January 7, 2005 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Executive Vice President,
Chief Financial Officer