UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 18, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
----------------------------------------------
(Exact name of registrant as specified in charter)
Maryland 13-1890974
- -------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. YES [X] NO [ ]
As of July 18, 2005 the Registrant had a total of 40,210,966 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
---------------------------------------
June 19, 2004
(Restated -
June 18, 2005 See Note 2)
--------------- -----------------
Sales $ 3,383,633 $ 3,280,299
Cost of merchandise sold (2,445,675) (2,360,303)
--------------- ----------------
Gross margin 937,958 919,996
Store operating, general and administrative expense (976,687) (921,074)
--------------- ----------------
Loss from operations (38,729) (1,078)
Interest expense (36,123) (34,392)
Interest income 1,186 841
Minority interest in earnings of consolidated franchisees (1,536) (1,376)
---------------- ----------------
Loss from continuing operations before income taxes (75,202) (36,005)
Provision for income taxes (13,865) (5,458)
---------------- -----------------
Loss from continuing operations (89,067) (41,463)
Discontinued operations:
Loss from operations of discontinued businesses, net of tax benefit of $0
for both the 16 weeks ended June 18, 2005 and June 19, 2004,
respectively (168) (1,383)
--------------- ----------------
Loss from discontinued operations (168) (1,383)
--------------- -----------------
Net loss $ (89,235) $ (42,846)
=============== =================
Net loss per share - basic and diluted:
Continuing operations $ (2.27) $ (1.08)
Discontinued operations (0.01) (0.03)
--------------- -----------------
Net loss per share - basic and diluted $ (2.28) $ (1.11)
=============== =================
Weighted average number of common shares outstanding 39,201,114 38,520,018
Common stock equivalents 609,775 370,914
--------------- ----------------
Weighted average number of common and common equivalent
shares outstanding 39,810,889 38,890,932
=============== ================
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(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 Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
16 Week Period Ended
June 18, 2005
- -------------
Balance at beginning of period 38,764,999 $ 38,765 $ 464,543 $ (266,198) $ (3,308) $ 233,802
Net loss (89,235) (89,235)
Other comprehensive loss (4,020) (4,020)
Stock options exercised 1,255,170 1,255 10,632 11,887
Other share based awards 2,140 2,140
------------ ----------- ----------- ----------- ------------ -----------
Balance at end of period 40,020,169 $ 40,020 $ 477,315 $ (355,433) $ (7,328) $ 154,574
============ =========== =========== =========== ============ ===========
16 Week Period Ended
June 19, 2004
- -------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (42,846) (42,846)
Other comprehensive loss (5,938) (5,938)
Stock options exercised 1,625 1 6 7
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,520,530 $ 38,520 $ 459,585 $ (120,946) $ (33,177) $ 343,982
============ =========== =========== =========== ============ ============
Comprehensive Loss
- ------------------
16 Weeks Ended
----------------------------------
June 18, 2005 June 19, 2004
------------- -------------
Net loss $ (89,235) $ (42,846)
---------- -----------
Foreign currency translation adjustment (3,963) (6,773)
Net unrealized (loss) gain on derivatives, net of tax (57) 835
---------- ----------
Other comprehensive loss, net of tax (4,020) (5,938)
---------- -----------
Total comprehensive loss $ (93,255) $ (48,784)
========= ===========
Accumulated Other Comprehensive Loss Balances
- ---------------------------------------------
Accumulated
Foreign Net Unrealized Minimum Other
Currency Gain (Loss) Pension Comprehensive
Translation on Derivatives Liability Loss
------------ -------------- ----------- -------------
Balance at February 26, 2005 $ 3,035 $ 57 $ (6,400) $ (3,308)
Current period change (3,963) (57) - (4,020)
------------ ----------- ----------- ------------
Balance at June 18, 2005 $ (928) $ - $ (6,400) $ (7,328)
============ ========== ============ ============
Balance at February 28, 2004 $ (23,892) $ (158) $ (3,189) $ (27,239)
Current period change (6,773) 835 - (5,938)
------------ ---------- ----------- ------------
Balance at June 19, 2004 $ (30,665) $ 677 $ (3,189) $ (33,177)
============ ========== ============ ============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
June 18, 2005 February 26, 2005
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 171,431 $ 257,748
Accounts receivable, net of allowance for doubtful accounts of
$4,377 and $5,713 at June 18, 2005 and February 26, 2005,
respectively 93,949 145,507
Inventories 534,891 720,799
Prepaid expenses and other current assets 47,586 40,627
Assets held for sale 866,122 -
------------- --------------
Total current assets 1,713,979 1,164,681
------------- --------------
Non-current assets:
Property:
Property owned 978,062 1,476,574
Property leased under capital leases, net 25,415 39,126
------------- --------------
Property - net 1,003,477 1,515,700
Other assets 55,537 121,587
------------- --------------
Total assets $ 2,772,993 $ 2,801,968
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,270 $ 2,278
Current portion of obligations under capital leases 2,666 8,331
Accounts payable 313,178 543,481
Book overdrafts 78,400 83,306
Accrued salaries, wages and benefits 117,773 181,173
Accrued taxes 51,874 51,991
Other accruals 160,743 207,642
Liabilities held for sale 503,174 -
------------- --------------
Total current liabilities 1,230,078 1,078,202
------------- --------------
Non-current liabilities:
Long-term debt 618,879 634,028
Long-term obligations under capital leases 34,543 52,184
Long-term real estate liabilities 276,614 328,316
Other non-current liabilities 458,305 471,382
Minority interests in consolidated franchisees - 4,054
------------- --------------
Total liabilities 2,618,419 2,568,166
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000 shares;
issued - none - -
Common stock--$1 par value; authorized - 80,000,000 shares;
issued and outstanding - 40,020,169 and 38,764,999 shares
at June 18, 2005 and February 26, 2005, respectively 40,020 38,765
Additional paid-in capital 477,315 464,543
Accumulated other comprehensive loss (7,328) (3,308)
Accumulated deficit (355,433) (266,198)
------------- ---------------
Total stockholders' equity 154,574 233,802
------------- --------------
Total liabilities and stockholders' equity $ 2,772,993 $ 2,801,968
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
-------------------------------------------------
June 19, 2004
(Restated -
June 18, 2005 See Note 2)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (89,235) $ (42,846)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Asset disposition initiatives 15,425 1,061
Restructuring charge 48,549 -
Depreciation and amortization 71,875 80,846
Deferred income tax provision 5,430 1,012
(Gain) loss on disposal of owned property (15,352) 397
Other property impairments 506 588
Other share based awards 2,140 -
Other changes in assets and liabilities:
Decrease in receivables 16,477 24,840
Increase in inventories (20,747) (22,822)
Increase in prepaid expenses and other current assets (2,779) (14,887)
(Increase) decrease in other assets (434) 362
Increase in accounts payable 6,824 55,635
Decrease in accrued salaries, wages and benefits, and taxes (19,054) (6,813)
Decrease in other accruals (7,277) (27,899)
(Decrease) increase in minority interest (1,533) 727
Decrease in other non-current liabilities (11,689) (12,415)
Other operating activities, net 2,105 1,060
------------ -----------
Net cash provided by operating activities 1,231 38,846
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (69,820) (61,157)
Proceeds from disposal of property 31,573 6,140
----------- -----------
Net cash used in investing activities (38,247) (55,017)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term borrowings (14,512) 45
Net proceeds from long-term real estate liabilities 834 11,492
Principal payments on capital leases (2,238) (4,578)
Increase (decrease) in book overdrafts 1,463 (5,717)
Deferred financing fees (731) (813)
Proceeds from stock option exercise 11,774 7
----------- -----------
Net cash (used in) provided by financing activities (3,410) 436
Effect of exchange rate changes on cash and cash equivalents (3,098) (2,339)
----------- ------------
Net decrease in cash and cash equivalents (43,524) (18,074)
Cash and cash equivalents at beginning of period 257,748 297,008
----------- -----------
Cash and cash equivalents at end of period 214,224 278,934
=========== ===========
Cash included in "Assets held for sale" $ 42,793 -
Cash included in "Cash and cash equivalents" $ 171,431 $ 278,934
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation
The accompanying Consolidated Statements of Operations and Consolidated
Statements of Cash Flows of The Great Atlantic & Pacific Tea Company, Inc.
("We," "Our," "Us" or "Our Company") for the 16 weeks ended June 18, 2005 and
June 19, 2004, and the Consolidated Balance Sheets at June 18, 2005 and February
26, 2005, are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary for a fair
statement of financial position and results of operations for such periods. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Fiscal 2004
Annual Report on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company, 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.
On May 10, 2005, we announced plans for a major strategic restructuring that
would focus future effort and investment on our core operations in the
Northeastern United States. Therefore, we have initiated efforts to divest our
businesses in Canada and the Midwestern United States. As further discussed in
Note 4 - Assets Held for Sale and Liabilities Held for Sale, we have classified
our assets and liabilities relating to our Canadian business as held for sale as
of June 18, 2005. Although the Canadian operations have been classified as held
for sale at June 18, 2005, the criteria necessary to classify the Canadian
operations as discontinued have not been satisfied as our Company expects to
retain significant continuing involvement in the operations of this business
upon its sale. The assets and liabilities relating to our operations in the
Midwestern United States have not been classified as held for sale at June 18,
2005 as the criteria for such classification had not been met as of the balance
sheet date.
Restatement of Previously Issued Financial Statements
- -----------------------------------------------------
As discussed in Note 2 - Restatement of Previously Issued Financial Statements,
our Company has restated our Consolidated Statements of Operations and Cash
Flows for the 16 weeks ended June 19, 2004 for corrections in our accounting for
leases. Readers of the financial statements should read this restated
information as opposed to the previously filed information. All referenced
amounts for prior periods reflect the balances and amounts on a restated basis.
2. Restatement of Previously Issued Financial Statements
In connection with the preparation of our fiscal 2004 consolidated financial
statements, our Company completed a review of our historical lease accounting to
determine whether our accounting for leases was in accordance with generally
accepted accounting principles. As a result of our review, we corrected our
accounting for leases in fiscal 2004 and restated our historical annual
financial statements and certain financial information for prior periods in our
Fiscal 2004 Annual Report to Stockholders, primarily to correct our accounting
for landlord allowances.
In certain situations, we receive allowances from our landlords in the form of
direct cash reimbursements to offset the costs of structural improvements to the
leased space. Historically, we have netted these reimbursements against the
related leasehold improvement assets on the consolidated balance sheets and
against capital expenditures in investing activities on the consolidated
statements of cash flows. In accordance with SFAS 13, "Accounting Leases,"
Emerging Issues Task Force ("EITF") 97-10, "The Effect of Lessee Involvement in
Asset Construction" and Question 2 of FASB Technical Bulletin 88-1 ("FTB 88-1"),
"Issues Relating to Accounting for Leases," we should have accounted for our
landlord allowances as follows:
o In those situations where we did not meet the criteria of EITF
97-10 for being deemed the owner of the construction projects
during the construction period, we should have recorded the
landlord allowances as deferred credits as opposed to an offset to
leasehold improvements on the consolidated balance sheets and as a
component of operating activities as opposed to a component of
investing activities on the consolidated statements of cash flows.
In addition, the deferred credits should have been amortized over
the term of the lease as a decrease to rent expense as opposed to
an offset to depreciation expense.
o In those situations where we did meet the criteria of EITF 97-10
for being deemed the owner of the construction projects, we should
have been considered the owner of those construction projects
during the construction period and we should have recorded the
associated landlord allowances as long-term real estate
liabilities as opposed to an offset to leasehold improvements as
we had paid directly for a substantial portion of the structural
improvement costs. In all situations upon completion of the
construction, we were unable to meet the requirements under SFAS
98, "Accounting for Leases" to qualify for sale-leaseback
treatment; thus, the long-term real estate liabilities should have
been amortized based on rent payments designated in the lease
agreements as opposed to an offset to depreciation expense.
These adjustments resulted in a correction of an understatement of Property -
net, Long-term real estate liabilities and Other non-current liabilities on our
consolidated balance sheets, an overstatement of rent expense and an
understatement of interest on our consolidated statements of operations for the
related periods.
Consolidated Statement of Operations
Consolidated
A&P for the Consolidated
16 weeks ended A&P for the
June 19, 2004 Corrections 16 weeks ended
As Previously to lease June 19, 2004
Reported accounting As Restated
-------------- ------------- -----------------
Sales $ 3,280,299 $ - $ 3,280,299
Cost of merchandise sold (2,360,303) - (2,360,303)
------------- ------------- -----------------
Gross margin 919,996 - 919,996
Store operating, general and administrative expense (928,616) 7,542 (921,074)
------------- ------------- -----------------
(Loss) income from operations (8,620) 7,542 (1,078)
Interest expense (26,850) (7,542) (34,392)
Interest income 841 - 841
Minority interest in earnings of consolidated
franchisees (1,376) - (1,376)
------------- ------------- -----------------
Loss from continuing operations before
income taxes (36,005) - (36,005)
Provision for income taxes (5,458) - (5,458)
------------- ------------- -----------------
Loss from continuing operations (41,463) - (41,463)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,383) - (1,383)
Loss on disposal of discontinued
operations, net of tax - - -
------------- ------------- ----------------
Loss from discontinued operations (1,383) - (1,383)
------------ ------------- ----------------
Net loss $ (42,846) $ - $ (42,846)
============== ============= ================
Net loss - basic & diluted $ (1.11) $ - $ (1.11)
============== ============= ================
Depreciation $ (81,122) $ 276 $ (80,846)
------------- ------------- ----------------
Selected Consolidated Statement of Cash Flow data:
As Corrections Consolidated
Previously to Lease A&P
Reported Accounting As Restated
------------- -------------- --------------
Property impairments $ - $ 588 $ 588
Depreciation and amortization 81,122 (276) 80,846
(Increase) decrease in prepaid expenses and other current assets (14,933) 46 (14,887)
(Increase) decrease in other assets (433) 795 362
(Decrease) increase in other non-current liabilities (13,020) 605 (12,415)
Net cash provided by operating activities 37,088 1,758 38,846
Expenditures for property (55,491) (5,666) (61,157)
Net cash used in investing activities (49,351) (5,666) (55,017)
Proceeds from long-term borrowings 7,301 (7,256) 45
Net proceeds from long-term real estate liabilities - 11,492 11,492
Principal payments on capital leases (4,616) 38 (4,578)
Net cash (used in) provided by financing activities (3,838) 4,274 436
Effect of exchange rate changes on cash and cash equivalents (1,973) (366) (2,339)
3. Impact of New Accounting Pronouncements
In November 2004, the Financial Accounting Standard Board ("FASB") issued SFAS
151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS
151 requires that handling costs and waste material (spoilage) be recognized as
current-period charges regardless of whether they meet the previous requirement
of being abnormal. In addition, this Statement requires that allocations of
fixed overhead to the cost of inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for our 2006 fiscal year. We are
currently assessing the impact of this statement on our Consolidated Financial
Statements; however, we do not expect it to have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 153, "Exchanges of Nonmonetary Assets, an
Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. This pronouncement amends APB No. 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005 (the quarter
ended June 17, 2006 for our Company). We are currently evaluating the provisions
of SFAS 153 and do not believe that its adoption will have a material impact on
our Company's financial condition, results of operations or liquidity.
In December 2004, the FASB issued SFAS 123R (revised 2004), "Share-Based
Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB No. 25 and
related interpretations and amends SFAS No. 95, "Statement of Cash Flows." The
provisions of SFAS 123R are similar to those of SFAS 123; however, SFAS 123R
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements as compensation cost
based on their fair value on the date of grant. Fair value of share-based awards
will be determined using option-pricing models and assumptions that
appropriately reflect the specific circumstances of the awards. Compensation
cost will be recognized over the vesting period based on the fair value of
awards that actually vest.
SFAS 123R is effective for all public companies no later than the first annual
period beginning after June 15, 2005 (the quarter ended June 17, 2006 for our
Company) and applies to all outstanding and unvested share-based payment awards
at a company's adoption date. We have elected to early adopt this pronouncement
beginning in the first quarter of fiscal 2005 using the modified-prospective
transition method. Under this method, compensation cost will be recognized in
the financial statements issued subsequent to the date of adoption for all
shared-based payments granted, modified or settled after the date of adoption,
as well as for any unvested awards that were granted prior to the date of
adoption. As we previously adopted only the pro forma disclosures under SFAS
123, we recognized compensation cost relating to the unvested portion of awards
granted prior to the date of adoption using the same estimate of grant-date fair
value and the same option pricing model used to determine the pro forma
disclosures under SFAS 123.
In March 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107, "Share Based Payments" ("SAB 107") to provide
public companies additional guidance in applying the provisions of SFAS 123R.
Among other things, SAB 107 describes the SEC staff's expectations in
determining the assumptions that underlie the fair value estimates and discusses
the interaction of Statement 123R with certain existing SEC guidance. We have
adopted the provisions of SAB 107 in conjunction with the adoption of FAS 123R
beginning February 27, 2005. Refer to Note 10 - Stock Based Compensation for
further discussion and disclosure.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Contingent Asset Retirement Obligations" ("FIN 47"), an interpretation of FASB
Statement No. 143, "Asset Retirement Obligations" ("SFAS 143"). FIN 47 clarifies
that the term "conditional asset retirement obligation" as used in SFAS 143
refers to a legal obligation to perform an asset retirement activity in which
the timing and (or) method of settlement are conditional on a future event that
may or may not be within the control of the entity. An entity is required to
recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated, even
if conditional on a future event. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005, or our fiscal year ending February
25, 2006. For existing contingent asset retirement obligations which are
determined to be recognizable under FIN 47, the effect of applying FIN 47 would
be recognized as a cumulative effect of a change in accounting principle. We are
currently assessing the impact of adopting FIN 47 on our consolidated financial
statements.
4. Assets Held for Sale and Liabilities Held for Sale
During the first quarter ended June 18, 2005, we announced plans for a major
strategic restructuring that focuses future effort and investment on our core
operations in the Northeastern United States. Therefore, we have initiated
efforts to divest our businesses in Canada and the Midwestern United States.
Upon the decision to pursue selling these stores, we applied the provisions of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these businesses.
SFAS 144 requires that once properties are identified as held for sale, they are
no longer depreciated, valued on an asset-by-asset basis at the lower of
carrying amount or fair value less costs to sell, and reclassified as a current
asset to "Assets held for sale" on our Consolidated Balance Sheets. Similarly,
all other assets and liabilities relating to these properties held for sale are
reclassified as a current asset or as a current liability to "Assets held for
sale" or "Liabilities held for sale," respectively, on our Consolidated Balance
Sheets.
As of our balance sheet date, the criteria set forth by SFAS 144 to reclassify
these assets and liabilities as properties held for sale had been met for
Canada, but were not met for our operations in the Midwestern United States as
the sale of this business was not probable with transfer of these assets to the
buyer within one year of the balance sheet date. Thus, only the assets and
liabilities relating to Canada have been aggregated and presented on the
Consolidated Balance Sheet as Assets held for sale ($866.1 million) and
Liabilities held for sale ($503.2 million) at June 18, 2005. Although the
Canadian operations have been classified as held for sale at June 18, 2005, the
criteria necessary to classify the Canadian operations as discontinued have not
been satisfied as our Company expects to retain significant continuing
involvement in the operations of this business upon its sale.
An analysis of the Assets and Liabilities held for sale at June 18, 2005 is as
follows:
Assets held for sale:
Cash $ 42,793
Accounts receivable 31,583
Inventories 211,414
Prepaid expenses and other current
assets 10,950
Property owned, net 484,930
Property leased, net 18,680
Other assets 65,772
-----------------
$ 866,122
Liabilities held for sale:
Current portion of obligations under
capital leases $ 5,319
Accounts payable 238,966
Book overdrafts 6,419
Accrued salaries, wages and benefits 40,452
Accrued taxes 13,696
Other accruals 51,651
Long-term lease obligations 25,686
Long-term real estate liabilities 52,970
Deferred taxes 22,200
Other non-current liabilities 40,185
Minority interest in consolidated
franchisees 5,630
-----------------
$ 503,174
=================
5. Sale of our U.S. Distribution Operations and Warehouses
During the first quarter ended June 18, 2005, our Company held discussions to
sell our U.S. distribution operations and some warehouse facilities and related
assets to C&S Wholesale Grocers. The definitive agreements, including an Asset
Purchase Agreement and a Supply Agreement, were signed on June 27, 2005,
subsequent to our balance sheet date. The transition of our owned warehouses and
operations in Dunmore, Pennsylvania, Baltimore, Maryland, Central Islip, New
York and New Orleans, Louisiana is expected to begin in the second quarter of
fiscal 2005 and be completed during the third quarter of fiscal 2005.
Due to the scope of C&S Wholesale Grocers' distribution network, our owned
warehouses in Edison, New Jersey and the Bronx, New York will not be sold as
part of the transaction and have been closed. As a result of this decision, we
recorded a charge of $48.0 million relating to the closing of these facilities
($1.0 million in "Cost of merchandise sold" and $47.0 million in "Store,
operating, general and administrative expense" in our Consolidated Statement of
Operations) during the first quarter of fiscal 2005.
These costs are detailed as follows:
16 weeks ended
June 18, 2005
-------------------
Severance and benefits $ 7,663
Pension withdrawal costs 32,754
Property write-downs 5,811
Inventory markdowns 1,030
Non-accruable closing costs 701
------------------
$ 47,959
==================
We are pursuing the sale of our Midwest warehouses separately as part of the
divestiture of our Midwestern U.S. business.
6. Valuation of Long-Lived Assets
In accordance with 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 16 weeks ended June 18, 2005 and June 19, 2004, we recorded
impairment losses on long-lived assets as follows:
16 weeks ended June 18, 2005 16 weeks ended June 19, 2004
------------------------------- -------------------------------
U.S. Canada Total U.S. Canada Total
------- --------- --------- ------ --------- ---------
Impairments due to closure or conversion in the
normal course of business $ - $ 0.5 $ 0.5 $ - $ - $ -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 0.1 - 0.1 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 5.8 - 5.8 - - -
------- ------- ------ ------ ------- ------
Total impairments $ 5.9 $ 0.5 $ 6.4 $ - $ - $ -
======= ======= ====== ====== ======= ======
(1) Refer to Note 8 - Asset Disposition Initiatives
(2) Refer to Note 5 - Sale of our U.S. Distribution Operations and Warehouses
Impairments due to closure or conversion in the normal course of business
- -------------------------------------------------------------------------
We review assets in stores planned for closure or conversion for impairment upon
determination that such assets will not be used for their intended useful life.
During the 16 weeks ended June 18, 2005 and June 19, 2004, we recorded
impairment losses on property, plant and equipment of $0.5 million and nil,
respectively, related to stores that were or will be closed in the normal course
of business. This amount was included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations.
Impairments related to the divestiture of the Midwestern U.S. business
- ----------------------------------------------------------------------
During the 16 weeks ended June 18, 2005, we recorded impairment losses on
property, plant and equipment of $0.1 million, related to property write-downs
as a result of the divestiture of a portion of our Midwestern U.S. business as
discussed in Note 8 - Asset Disposition Initiatives. These amounts were included
in "Store operating, general and administrative expense" in our Consolidated
Statements of Operations for the 16 weeks ended June 18, 2005. There were no
such amounts recorded during the 16 weeks ended June 19, 2004.
Impairments related to the sale of U.S. distribution operations and warehouses
- ------------------------------------------------------------------------------
During the 16 weeks ended June 18, 2005, we recorded impairment losses on
property, plant and equipment of $5.8 million, related to property write-downs
as a result of our decision to sell our U.S. distribution operations and
warehouses to C&S Wholesale Grocers as discussed in Note 5 - Sale of Our U.S.
Distribution Operations and Warehouses. These amounts were included in "Store
operating, general and administrative expense" in our Consolidated Statements of
Operations for the 16 weeks ended June 18, 2005. There were no such amounts
recorded during the 16 weeks ended June 19, 2004.
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
7. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee,
Wisconsin market, where our remaining 23 Kohl's stores were located, as well as
our Eight O'Clock Coffee business, through the sale and/or disposal of these
assets.
Upon the decision to sell these stores, we applied the provisions of SFAS 144 to
these properties held for sale. SFAS 144 requires properties held for sale to be
classified as a current asset and valued on an asset-by-asset basis at the lower
of carrying amount or fair value less costs to sell. In applying those
provisions, we considered, where available, the binding sale agreements related
to these properties as an estimate of the assets' fair value.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. In determining whether a store or group
of stores qualifies as discontinued operations treatment, we include only those
stores for which (i.) the operations and cash flows will be eliminated from our
ongoing operations as a result of the disposal and (ii.) we will not have any
significant continuing involvement in the operations of the stores after the
disposal. In making this determination, we consider the geographic location of
the stores. If stores to be disposed of are replaced by other stores in the same
geographic district, we would not include the stores as discontinued operations.
Amounts in the financial statements and related notes for all periods shown have
been reclassified to reflect the discontinued operations. Summarized below are
the operating results for these discontinued businesses, which are included in
our Consolidated Statements of Operations, under the caption "Loss from
operations of discontinued businesses, net of tax" for the 16 weeks ending June
18, 2005 and June 19, 2004.
16 Weeks Ended June 18, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses (27) (131) (10) (168)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (27) (131) (10) (168)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (27) $ (131) $ (10) $ (168)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Non-accruable closing costs $ (27) $ 75 $ (10) $ 38
Interest accretion on present value
of future occupancy costs - (206) - (206)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (27) $ (131) $ (10) $ (168)
--------------- ---------------- --------------- ----------------
16 Weeks Ended June 19, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses (371) (422) (590) (1,383)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (371) (422) (590) (1,383)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (371) $ (422) $ (590) $ (1,383)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Severance and benefits $ (326) $ - $ - $ (326)
Non-accruable closing costs (42) (198) (590) (830)
Interest accretion on present value
of future occupancy costs (3) (224) - (227)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (371) $ (422) $ (590) $ (1,383)
--------------- ---------------- --------------- ----------------
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 ($49.9 million after tax). This gain was included in "Gain
on disposal of discontinued operations, net of tax" on our Consolidated
Statements of Operations for fiscal 2003. During the first quarters of fiscal
2005 and fiscal 2004, we incurred additional costs to wind down our operations
in this region subsequent to the sale of these stores of $0.03 million and $0.4
million, respectively, primarily related to non-accruable closing costs and
additional severance costs, respectively, which were included in "Loss from
operations of discontinued businesses, net of tax" on our Consolidated
Statements of Operations.
The following table summarizes the reserve activity related to the exit of the
northern New England market since the charge was recorded:
Severance
and
Occupancy Benefits Total
------------ -------------- ---------------
Fiscal 2003 charge (1) $ 3,993 $ 2,670 $ 6,663
Additions (2) 6 - 6
Utilization (3) (3,547) (2,612) (6,159)
------------- -------------- ---------------
Balance at
February 28, 2004 $ 452 $ 58 $ 510
Additions (2) 8 326 334
Utilization (3) (460) (384) (844)
------------ ------------- ---------------
Balance at
February 26, 2005 $ - $ - $ -
Additions (2) - - -
Utilization (3) - - -
------------ ------------- --------------
Balance at
June 18, 2005 $ - $ - $ -
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
future occupancy costs such as rent, common area maintenance and real
estate taxes. The fiscal 2003 charge to severance and benefits of $2.7
million related to severance to be paid to employees terminated as a
result of our exit from the northern New England market.
(2) The additions to occupancy presented represent the interest accretion
on future occupancy costs which were recorded at present value at the
time of the original charge. The fiscal 2004 charge to severance and
benefits of $0.3 million related to additional severance required to be
paid to employees terminated in accordance with a union contract as a
result of our exit from the northern New England market.
(3) Occupancy utilization represents vacancy related payments for closed
locations. Severance and benefits utilization represents payments made
to terminated employees during the period.
As of June 18, 2005, we paid approximately $3.0 million in severance and benefit
costs, which resulted from the termination of approximately 300 employees.
As of June 18, 2005, we have disposed of all locations in the northern New
England market. We will continue to monitor the status of the vacant properties
and adjustments to the reserve balance may be recorded in the future, if
necessary.
Kohl's Market
- -------------
As previously stated, as part of our strategic plan we decided to exit the
Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner.
As a result of the Madison sales, we generated proceeds of $20.1 million,
resulting in a gain of $8.8 million ($5.6 million after tax). This gain was
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for fiscal 2003.
During the first quarters of fiscal 2005 and fiscal 2004, we recorded costs of
$0.1 million and $0.4 million primarily due to the costs of winding down this
business.
The following table summarizes the reserve activity related to the exit of the
Kohl's market since the charge was recorded through the 16 weeks ended June 18,
2005:
Severance
and Fixed
Occupancy Benefits Assets Total
------------- ------------- --------------- ----------------
Fiscal 2003 charge (1) $ 25,487 $ 13,062 $ 18,968 $ 57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
------------ ------------- ------------- ------------
Balance at February 28, 2004 19,039 4,834 - 23,873
Additions (2) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) - - (354)
----------- ------------- ------------- ------------
Balance at February 26, 2005 $ 17,455 $ 2,685 $ - $ 20,140
Additions (2) 191 15 - 206
Utilization (3) (1,062) (1,081) - (2,143)
------------ ------------- ------------- -------------
Balance at June 18, 2005 $ 16,584 $ 1,619 $ - $ 18,203
============ ============= ============= ============
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related
to future occupancy costs such as rent, common area maintenance and
real estate taxes. The fiscal 2003 charge to severance and benefits of
$13.1 million related to severance costs of $6.6 million and costs for
future obligations for early withdrawal from multi-employer union
pension plans and a health and welfare plan of $6.5 million. The fiscal
2003 charge to property of $18.9 million represents the impairment
losses at certain Kohl's locations.
(2) The fiscal 2003, fiscal 2004 and the first quarter of fiscal 2005
additions to occupancy and severance and benefits represent the
interest accretion on future occupancy costs and future obligations for
early withdrawal from multi-employer union pension plans which were
recorded at present value at the time of the original charge. The
addition to fixed assets represents additional impairment losses
recorded as a result of originally estimated proceeds on the disposal
of these assets not being achieved.
(3) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization
represents payments made to terminated employees during the period and
payments for pension withdrawal.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million. During fiscal 2004, we
recorded a reversal of previously accrued occupancy related costs due
to favorable results of terminating leases.
We paid $8.3 million of the total occupancy charges from the time of the
original charge through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $11.5 million of the total original severance and
benefits charges from the time of the original charges through June 18, 2005,
which resulted from the termination of approximately 2,000 employees. The
remaining occupancy liability of $16.6 million relates to expected future
payments under long term leases and is expected to be paid out in full by 2020.
The remaining severance liability of $1.6 million relates to future obligations
for early withdrawal from multi-employer union pension plans, and individual
severance payments, which will be paid by mid-2006.
At June 18, 2005 and February 26, 2005, $6.2 million and $5.9 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$12.0 million and $14.2 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $18.2 million as of June 18, 2005 based upon current
available information and have concluded that it is adequate. We will continue
to monitor the status of the vacant properties and adjustments to the reserve
balance may be recorded in the future, if necessary.
Eight O'Clock Coffee
- --------------------
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee business,
generating gross proceeds of $107.5 million and a net gain after transaction
related costs of $85.0 million ($49.3 million after tax). The sale of the coffee
business also included a contingent note for up to $20.0 million, the value and
payment of which is based upon certain elements of the future performance of the
Eight O'Clock Coffee business and therefore is not included in the gain.
Additional costs incurred to wind down our operations in this business
subsequent to the sale of $0.01 million and $0.6 million were included in "Loss
from operations of discontinued businesses, net of tax" on our Consolidated
Statements of Operations for 16 weeks ended June 18, 2005 and June 19, 2004,
respectively.
Other
- -----
Although the Canadian operations have been classified as held for sale at June
18, 2005, the criteria necessary to classify the Canadian operations as
discontinued have not been satisfied as our Company expects to retain
significant continuing involvement in the operations of this business upon its
sale.
8. Asset Disposition Initiatives
Overview
- --------
In fiscal 1998 and fiscal 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring). During the first quarter of fiscal 2005,
we have initiated efforts to divest our business in the Midwestern United States
and closed 8 of those stores (Divestiture of the Midwestern U.S. Business).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 18, 2005 and June 19, 2004.
Present value ("PV") interest represents interest accretion on future occupancy
costs which were recorded at present value at the time of the original charge.
Non-accruable items represent charges related to the restructuring that are
required to be expensed as incurred in accordance with SFAS 146 "Accounting for
Costs Associated with Exit or Disposal Activities".
16 Weeks Ended June 18, 2005
-------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ------------ ------------- ------------- -----------
Balance Sheet accruals
Vacancy $ - $ - $ - $ 14,766 $ 14,766
PV interest 525 713 194 - 1,432
Severance - - - 1,337 1,337
Total accrued to
-------- ----------- ----------- --------- -----------
balance sheets 525 713 194 16,103 17,535
-------- ----------- ----------- --------- -----------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - - 126 126
Inventory markdowns - - - 586 586
Gain on sale of property - - - (952) (952)
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 432 432
-------- ----------- ----------- ---------- ------------
Total non-accruable items - - - (678) (678)
-------- ----------- ----------- --------- ------------
Less PV interest (525) (713) (194) - (1,432)
-------- ----------- ----------- --------- ------------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - - 15,425 15,425
======== =========== =========== ========= ===========
16 Weeks Ended June 19, 2004
------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
Balance Sheet accruals
PV interest $ 630 $ 781 $ 222 $ 1,633
Total accrued to
-------- ----------- ----------- ---------
balance sheets 630 781 222 1,633
-------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - 90 90
Inventory markdowns - - 291 291
Closing costs - - 680 680
-------- ----------- ----------- ---------
Total non-accruable items - - 1,061 1,061
-------- ----------- ----------- ---------
Less PV interest (630) (781) (222) (1,633)
-------- ----------- ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - 1,061 1,061
======== =========== =========== =========
Project Great Renewal
- ---------------------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets. As of June 18, 2005, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 522 3 525 - - - 522 3 525
Utilization (2) (2,092) (74) (2,166) (59) - (59) (2,151) (74) (2,225)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 18, 2005 $ 26,394 $ 179 $ 26,573 $ 1,601 $ - $ 1,601 $ 27,995 $ 179 $ 28,174
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and
$1.9 million during fiscal 2002, 2003 and 2004, respectively, and $0.5
million during the 16 weeks ended June 18, 2005 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge.
(2) Occupancy utilization of $13.6 million, $20.0 million, and $5.6 million
for fiscal 2002, 2003 and 2004, respectively, and $2.1 million during
the 16 weeks ended June 18, 2005 represents payments made during those
periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $0.4
million, $0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004,
respectively, and $0.1 million during the 16 weeks ended June 18, 2005
represents payments to individuals for severance and benefits, as well
as payments to pension funds for early withdrawal from multi-employer
union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2002, we recorded a reduction of $3.6 million in
occupancy accruals related to this phase of the initiative. Further, we
increased our reserve for future minimum pension liabilities by $0.6
million to better reflect expected future payouts under certain
collective bargaining agreements.
We paid $100.5 million of the total occupancy charges from the time of the
original charges through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.0 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $26.6 million relates to expected future payments under long term leases and
is expected to be paid in full by 2020. The remaining severance liability of
$1.6 million primarily relates to expected future payments for early withdrawals
from multi-employer union pension plans and will be fully paid out in 2020.
None of these stores were open during either of the first quarters of fiscal
2004 or 2005. As such, there was no impact on the Statements of Consolidated
Operations from the 166 stores included in this phase of the initiative.
At June 18, 2005 and February 26, 2005, approximately $5.7 million and $5.4
million, respectively, of the reserve was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of June 18, 2005 of $28.2 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of June 18, 2005, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 713 - 713 - - - 713 - 713
Utilization (2) (1,457) - (1,457) (30) - (30) (1,487) - (1,487)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 18, 2005 $ 31,155 $ - $ 31,155 $ 84 $ - $ 84 $ 31,239 $ - $ 31,239
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and
$2.4 million during fiscal 2002, 2003 and 2004, respectively, and $0.7
million during the 16 weeks ended June 18, 2005 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during
fiscal 2002, 2003 and 2004, respectively, and $1.5 million during the
16 weeks ended June 18, 2005 represent payments made during those
periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $19.5
million, $3.5 million, and $2.3 million during fiscal 2002, 2003 and
2004, respectively, and $0.03 million during the 16 weeks ended June
18, 2005 represent payments made to terminated employees during the
period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2002, we
recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during
fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals
and subleases of locations at more favorable terms than originally
anticipated at the time of the original charge.
We paid $40.6 million ($37.6 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through June
18, 2005 which was primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes and lease termination costs. We paid $28.1
million ($19.1 million in the U.S. and $9.0 million in Canada) of the total net
severance charges from the time of the original charges through June 18, 2005,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $31.2 million primarily relates to expected
future payments under long term leases through 2017. The remaining severance
liability of $0.1 million relates to expected future payments for severance and
benefits payments to individual employees and will be fully paid out by 2006.
At June 18, 2005 and February 26, 2005, approximately $7.2 million and $7.1
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
None of these stores were open during either of the first quarters of fiscal
2004 or 2005. As such, there was no impact on the Statements of Consolidated
Operations from the 39 stores that were identified for closure as part of this
asset disposition.
Based upon current available information, we evaluated the reserve balances as
of June 18, 2005 of $31.2 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. During fiscal 2003, we recorded
a charge of $37.7 million related to the last phase of this initiative ($2.2
million in "Cost of merchandise sold" and $35.5 million in "Store operating,
general and administrative expense" in our Consolidated Statement of Operations
for fiscal 2003), excluding PV interest. During fiscal 2004, we recorded costs
excluding PV interest of $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"). There were no costs recorded during the first quarter of fiscal 2005.
As of June 18, 2005, we had closed all 6 stores and successfully completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for this
initiative all of which were in the U.S. The table does not include property
writeoffs as they are not part of any reserves maintained on the balance sheet.
It also does not include non-accruable closing costs and inventory markdowns
since they are expensed as incurred in accordance with generally accepted
accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 194 - 194
Utilization (2) (976) (6) (982)
------------ ------------- ----------
Balance at
June 18, 2005 $ 15,120 $ - $ 15,120
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal
2004 and the 16 weeks ended June 18, 2005 represent interest accretion
on future occupancy costs which were recorded at present value at the
time of the original charge. The original charge to severance during
fiscal 2003 of $8.9 million related to individual severings as a result
of the store closures, as well as a voluntary termination plan
initiated in the Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million, $4.7 million and $1.0 million
during fiscal 2003, fiscal 2004 and the 16 weeks ended June 18, 2005,
respectively, represents payments made for costs such as rent, common
area maintenance, real estate taxes and lease termination costs.
Severance utilization of $4.1 million, $4.8 million and $0.01 million
during fiscal 2003, fiscal 2004 and the 16 weeks ended June 18, 2005,
respectively, represent payments made to terminated employees during
the period.
We paid $6.8 million of the total occupancy charges from the time of the
original charge through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$15.1 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2014. The severance liability has been fully
utilized as of June 18, 2005 and no additional future payments for severance and
benefits to individual employees will be paid out.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2005 and 2004 are the sales and operating results of the 6 stores that
were identified for closure as part of this phase of the initiative. The results
of these operations are as follows:
16 Weeks Ended
-----------------------------------
June 18, June 19,
2005 2004
---------------- ---------------
Sales $ - $ 2,433
=============== ==============
Loss from operations $ - $ (43)
=============== ==============
At June 18, 2005 and February 26, 2005, approximately $2.0 million and $2.1
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $15.1 million as of June 18, 2005
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
Divestiture of the Midwestern U.S. Business
- -------------------------------------------
During the first quarter ended June 18, 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we have initiated
efforts to divest our businesses in the Midwestern United States. Although this
planned divestiture includes the closing of a total of 30 stores, we have closed
8 of these stores as of June 18, 2005.
During the first quarter ended June 18, 2005, we recorded a charge of $15.4
million related to these closures ($0.6 million in "Cost of merchandise sold"
and $14.8 million in "Store operating, general and administrative expense" in
our Consolidated Statement of Operations for fiscal 2003), excluding PV
interest.
16 Weeks Ended
June 18, 2005
--------------
Occupancy related $ 14,766
Severance and benefits 1,337
Property writeoffs 126
Gain on the sale of fixed assets (952)
Sale of pharmacy scripts (870)
Inventory markdowns 586
Nonaccruable closing costs 432
--------------
Total charges $ 15,425
==============
The following table summarizes the activity to date related to the charges
recorded for this divestiture. The table does not include property writeoffs as
they are not part of any reserves maintained on the balance sheet. It also does
not include non-accruable closing costs and inventory markdowns since they are
expensed as incurred in accordance with generally accepted accounting
principles.
Severance
and
Occupancy Benefits Total
------------ ------------- -----------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Utilization (2) (275) (59) (334)
------------ ------------- ----------
Balance at
June 18, 2005 $ 14,491 $ 1,278 $ 15,769
============ ============= ==========
(1) The original charge to occupancy during the first quarter ended
June 18, 2005 represents charges related to closures in
conjunction with our decision to divest our Midwestern business
of $14.7 million. The original charge to severance during the
first quarter ended June 18, 2005 of $1.3 million related to
individual severings as a result of these store closures.
(2) Occupancy utilization of $0.3 million for 16 weeks ended June 18,
2005, represents payments made for costs such as rent, common
area maintenance, real estate taxes and lease termination costs.
Severance utilization of $0.1 million for the 16 weeks ended June
18, 2005, respectively, represent payments made to terminated
employees during the period.
We paid $0.3 million of the total occupancy charges from the time of the
original charge through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $0.1 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 125 employees. The remaining occupancy liability of
$14.5 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
$1.3 million relates to expected future payments for severance and benefits to
individual employees and will be fully paid out by February 25, 2006.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2005 and 2004 are the sales and operating results of the 8 stores that
were closed as part of this divestiture. The results of these operations are as
follows:
16 Weeks Ended
-----------------------------------
June 18, June 19,
2005 2004
---------------- ---------------
Sales $ 15,344 $ 18,016
=============== ==============
Loss from operations $ (2,002) $ (3,628)
=============== ==============
At June 18, 2005, approximately $6.0 million of the liability was included in
"Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $15.8 million as of June 18, 2005
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
9. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. The
components of net pension cost were as follows:
For the 16 Weeks Ended
------------------------------------------------------
June 18, 2005 June 19, 2004
---------------------- ----------------------
U.S. Canada U.S. Canada
---------- --------- --------- ---------
Service cost $ 1,846 $ 3,039 $ 1,115 $ 2,573
Interest cost 3,657 4,329 2,617 3,848
Expected return on plan assets (4,130) (5,557) (3,043) (4,979)
Amortization of unrecognized net transition asset - - (4) -
Amortization of unrecognized net prior service (gain) cost (91) 190 29 143
Amortization of unrecognized net loss (gain) 18 598 (40) 565
Administrative expenses and other - 92 - 81
--------- --------- -------- ---------
Net pension cost $ 1,300 $ 2,691 $ 674 $ 2,231
========= ========= ======== =========
Contributions
We previously disclosed in our consolidated financial statements for the year
ended February 26, 2005, that we expected to contribute $5.8 million in cash to
our defined benefit plans in fiscal 2005. As of June 18, 2005, we contributed
approximately $1.2 million to our defined benefit plans. We plan to contribute
approximately $4.6 million to our plans during the remainder of fiscal 2005.
Postretirement Benefits
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. We use a December 31 measurement date
for both our U.S. and Canadian postretirement benefits. The components of net
postretirement benefits (income) cost were:
For the 16 Weeks Ended
-----------------------------------------------------
June 18, 2005 June 19, 2004
----------------------- ----------------------
U.S. Canada U.S. Canada
---------- ---------- --------- ---------
Service cost $ 104 $ 50 $ 88 $ 72
Interest cost 370 179 391 197
Amortization of (loss) gain (86) 78 (84) 105
Prior service cost (414) (98) (414) (156)
---------- ---------- --------- ----------
Net postretirement benefits (income) cost $ (26) $ 209 $ (19) $ 218
========== ========= ========= =========
10. Stock Based Compensation
In December 2004, the FASB issued FAS 123R. FAS 123R is a revision of FAS No.
123, as amended, "Accounting for Stock-Based Compensation" ("FAS 123") and
supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees." FAS 123R eliminates the alternative to use the
intrinsic value method of accounting that was provided in FAS 123, which
generally resulted in no compensation expense recorded in the financial
statements related to the issuance of equity awards to employees. FAS 123R
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements. FAS 123R establishes fair value as the
measurement objective in accounting for share-based payment arrangements and
requires all companies to apply a fair-value-based measurement method in
accounting for generally all share-based payment transactions with employees.
On February 27, 2005 (the first day of our fiscal 2005 fiscal year), our Company
adopted FAS 123R. While the provisions of FAS 123R are not required to be
effective until the first annual reporting period that begins after June 15,
2005, we elected to adopt FAS 123R before the required effective date. Our
Company adopted FAS 123R using a modified prospective application, as permitted
under FAS 123R. Accordingly, prior period amounts have not been restated. Under
this application, we are required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption.
Prior to the adoption of FAS 123R, we applied APB 25 to account for our
stock-based awards. Under APB 25, we generally only recorded stock-based
compensation expense for our performance stock options issued under our 1998
Long Term Incentive and Share Award Plan and common stock issued under our 2004
Non-Employee Director Compensation Plan. Under the provisions of APB 25, we were
not required to recognize compensation expense for the cost of stock options.
Beginning with our fiscal 2005 year, with the adoption of FAS 123R, we recorded
stock-based compensation expense for the cost of stock options.
The following table details the effect on net income and earnings per share had
stock-based compensation expense been recorded for each quarter of fiscal 2004
based on the fair value method under FAS 123R. Net loss for the year ended
February 26, 2005 would have been $2.6 million higher, at $190.7 million, had
share-based compensation expense been accounted for under SFAS 123R, and net
loss per basic & diluted share for the year ended February 26, 2005 would have
been $4.94 under FAS 123R, rather than $4.88.
Quarter Ended Year Ended
------------------------------------------------------------------- -------------
June 19, 2004 Sept. 11, 2004 Dec. 4, 2004 Feb. 26, 2005 Feb. 26, 2005
------------- -------------- ------------ -------------- -------------
Net loss, as reported $ (42,846) $ (64,202) $ (75,343) $ (5,707) $ (188,098)
Add: Share-based compensation
expense included in net loss under
APB 25, net of tax - - - 1,617 1,617
Deduct: Net impact of SFAS 123R,
net of tax (1,287) (858) (836) (1,199) (4,180)
-------------- ------------- ------------- ------------- -------------
Pro-forma net loss $ (44,133) $ (65,060) $ (76,179) $ (5,289) $ (190,661)
============== ============= ============= ============= =============
Net loss per common share:
Basic & diluted, as reported $ (1.11) $ (1.67) $(1.96) $(0.15) $(4.88)
Basic & diluted, pro-forma $ (1.15) $ (1.69) $(1.98) $(0.14) $(4.94)
During the first quarter of fiscal 2005, compensation expense related to
share-based incentive plans was $2.2 million, after tax, compared to nil during
the first quarter of fiscal 2004. Included in share-based compensation expense
recorded during the first quarter of fiscal 2005 was $0.9 million related to
expensing of stock options, $1.2 million relating to expensing of restricted
stock, and $0.1 million relating to expensing of common stock to be granted to
our Board of Directors at the Annual Meeting of Stockholders. There was no
effect on the Consolidated Statement of Cash Flows from the adoption of FAS 123R
as we adopted FAS 123R using the modified prospective application and did not
grant any new stock options during the 16 weeks ended June 18, 2005.
At June 18, 2005, we had two stock-based compensation plans. The general terms
of each plan, the method of estimating fair value for each plan and fiscal 2005
activity is reported below.
I. The 1998 Long Term Incentive and Share Award Plan: This plan provides for
the granting of 5,000,000 shares in the form of options, SAR's, performance
units or stock awards to our Company's officers and key employees. Options
and SAR's issued under this plan vest 25% on each anniversary date of
issuance over a four year period. Performance restricted stock units issued
under this plan are earned based on our Company achieving in Fiscal 2007 a
profit after taxes, after adjusting for specific matters which our Company
considers to be of a non-operating nature, with an outlook for continued,
sustainable profitability on the same basis. The shares will vest 50% based
on achievement of a net profit in fiscal 2007 and 50% based on achievement
of a net profit in fiscal 2008. However, if our Company achieves
profitability in fiscal 2006, the shares will be earned and vesting will
commence in fiscal 2006 in one-third increments, based on achievement of
profitability in each year and the outlook for continued, sustainable
profitability.
The stock option awards under The 1998 Long Term Incentive and Share Award
Plan are granted at the fair market value of the Company's common stock at
the date of grant. Fair value calculated under SFAS 123 is used to
recognize expense upon adoption of SFAS 123R. Fair values for each grant
were estimated using a Black-Scholes valuation model which utilized
assumptions as detailed in the following table for expected life based upon
historical option exercise patterns, historical volatility for a period
equal to the stock option's expected life, and risk-free rate based on the
U.S. Treasury constant maturities in effect at the time of grant. During
the first quarter ended June 18, 2005, our Company did not grant any stock
options under this plan. The following assumptions were in place during the
16 weeks ended June 19, 2004:
16 weeks ended
June 19, 2004
--------------
Expected life 7 years
Volatility 53%
Risk-free interest rate range 3.20% - 3.38%
The SAR awards under The 1998 Long Term Incentive and Share Award Plan were
granted at the fair market value of the Company's common stock at the date
of grant.
Performance restricted stock units issued under The 1998 Long Term
Incentive and Share Award Plan are granted at the fair market value of the
Company's common stock at the date of grant, adjusted by an estimated
forfeiture rate.
Stock options
-------------
The following is a summary of the stock option activity during the first
quarter ended June 18, 2005:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term (years) Value
------------- ------------- ------------ -------------
Outstanding at February 26, 2005 4,464,134 $ 14.53
Granted - -
Canceled or expired (211,405) 18.95
Exercised (1,255,170) 9.44
------------- ----------
Outstanding at June 18, 2005 2,997,559 $ 16.28 5.8 $ 32,137
============= ========== ============= ===========
Exercisable at:
June 18, 2005 1,949,269 $ 20.34 4.8 $ 12,979
============= ===========
Nonvested at:
June 18, 2005 1,048,290 $ 8.72 7.6 $ 19,158
============= ===========
The total intrinsic value of options exercised during the first quarter
ended June 18, 2005 was $21.6 million.
As of June 18, 2005, approximately $3.1 million, after tax, of total
unrecognized compensation expense related to unvested stock option awards
will be recognized over a weighted average period of 1.6 years.
The amount of cash received from the exercise of stock options was
approximately $11.8 million. There was no related tax benefit recorded in
the first quarter of fiscal 2005 as we adopted FAS 123R using the modified
prospective application and did not grant any new stock options during the
16 weeks ended June 18, 2005.
SAR's
-----
The following is a summary of the SAR's activity during the first quarter
ended June 18, 2005:
Weighted
Average
Exercise
Shares Price
------------- -------------
Outstanding at February 26, 2005 12,500 $ 31.63
Granted - -
Canceled or expired (12,500) 31.63
Exercised - -
------------- -------------
Outstanding at June 18, 2005 - $ -
============= =============
Performance Restricted Stock Units
----------------------------------
During the first quarter ended June 18, 2005, our Company granted
1,600,000 shares of performance restricted stock units to selected
employees, for a total grant date fair value of $17.9 million.
Approximately $12.3 million of unrecognized fair value compensation
expense relating to these performance restricted stock units is expected
to be recognized through fiscal 2008 based on estimates of attaining
vesting criteria.
The following is a summary of the performance restricted stock units
activity during the first quarter ended June 18, 2005:
Weighted
Average
Exercise
Shares Price
--------- ---------
Nonvested at February 26, 2005 - $ -
Granted 1,600,000 11.19
Canceled or expired (10,000) 11.12
Exercised - -
--------- ---------
Nonvested at June 18, 2002 1,590,000 $ 11.19
========= =========
II. 2004 Non-Employee Director Compensation Plan: This plan provides for the
annual grant of Company common stock equivalent to $45 to members of our
Board of Directors. The $45 grant of common stock shall be made on the
first business day following the Annual Meeting of Stockholders. The number
of shares of our Company's $1.00 common stock granted annually to each
non-employee Director will be based on the closing price of the common
stock on the New York Stock Exchange, as reported in the Wall Street
Journal on the date of grant. Only whole shares will be granted; any
remaining amounts will be paid in cash as promptly as practicable following
the date of grant. This plan replaced The 1994 Stock Option Plan for the
Board of Directors which provided for the granting of 100,000 stock options
at the fair value of our common stock at the date of grant to members of
our Board of Directors. One-third of the options granted under The 1994
Stock Option Plan for the Board of Directors on a given date vested on each
anniversary date of issuance over a 3 year period.
11. Income Taxes
The income tax provision recorded for the 16 weeks ended June 18, 2005 and June
19, 2004 reflects our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the
deferred tax asset will not be realized. Based upon our continued assessment of
the realization of our U.S. net deferred tax asset and our historic cumulative
losses, we concluded that it was appropriate to record a valuation allowance in
an amount that would reduce our net U.S. deferred tax asset to zero. For the 16
weeks ended June 18, 2005, and June 19, 2004, the valuation allowance was
increased by $3.5 million and $20.5 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, we will
continue to record a valuation allowance against net deferred tax assets that
are created by U.S. losses until such time as the certainty of future tax
benefits can be reasonably assured.
At June 18, 2005, we recorded deferred income taxes of $43.0 million and a
corresponding reduction in our valuation allowance attributable to the
undistributed earnings of our foreign subsidiaries because our Company no
longer considers those earnings to be permanently invested. At June 18, 2005
and February 26, 2005, the undistributed earnings of the foreign subsidiaries
amounted to approximately $198.3 million and $178.1 million, respectively.
In October 2004, the U.S. government passed the "Homeland Investment Act" (the
"Act") which allows companies to repatriate cash balances from their controlled
foreign subsidiaries at a reduced tax rate. Our Company is considering the
implications of this Act.
For the first quarter of fiscal 2005, our effective income tax rate provision of
18.4% increased from the effective income tax rate provision of 15.1% in the
first quarter of fiscal 2004 as follows:
16 Weeks Ended
--------------------------------------------------------------------
June 18, 2005 June 19, 2004
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Provision Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,384) 1.8% $ (1,380) 3.8%
Canada (12,481) 16.6% (4,078) 11.3%
--------------- ---------------- --------------- ----------------
$ (13,865) 18.4% $ (5,458) 15.1%
=============== ================ =============== ================
The increase in our effective tax rate was primarily due to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations in the first quarter of fiscal 2005 as
compared to the first quarter of fiscal 2004 partially offset by the impact of
the U.S state and local taxes as a percentage of our Company's loss from
continuing operations in the first quarter of fiscal 2005 as compared to the
first quarter of fiscal 2004.
At June 18, 2005 and February 26, 2005, we had a net current deferred tax asset
which is included in "Prepaid expenses and other current assets" on our
Consolidated Balance Sheet totaling $19.7 million and $10.7 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheets totaling
$19.7 million and $22.9 million, respectively. At June 18, 2005, we had a net
current deferred tax asset which is included in "Assets held for sale" on our
Consolidated Balance Sheet totaling $4.6 million, and a net non-current
deferred tax liability which is included in "Liabilities held for sale" on our
Consolidated Balance Sheet totaling $22.2 million relating to our Canadian
operations that are held for sale.
12. Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our Chairman of the
Board, President and Chief Executive Officer.
We currently operate in two reportable segments: United States and Canada. The
segments are comprised of retail supermarkets in the United States and Canada.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in our Fiscal 2004 Annual
Report. We measure segment performance based upon (loss) income from operations.
Interim information on segments is as follows:
16 Weeks Ended
---------------------------------------
June 19, 2004
(Restated -
June 18, 2005 See Note 2)
----------------- -----------------
Sales
United States $ 2,229,918 $ 2,229,650
Canada 1,153,715 1,050,649
----------------- -----------------
Total Company $ 3,383,633 $ 3,280,299
================= =================
Sales by category
Grocery (1) $ 2,200,702 $ 2,154,957
Meat (2) 696,287 673,490
Produce (3) 486,644 451,852
----------------- -----------------
Total Company $ 3,383,633 $ 3,280,299
================= =================
o The grocery category includes grocery, frozen foods, dairy,
general merchandise/health and beauty aids, liquor, pharmacy and
fuel.
o The meat category includes meat, deli, bakery and seafood.
o The produce category includes produce and floral.
Depreciation and amortization
United States $ 60,980 $ 61,953
Canada 10,895 18,893
----------------- -----------------
Total Company $ 71,875 $ 80,846
================= =================
(Loss) income from operations
United States $ (78,426) $ (18,432)
Canada 39,697 17,354
----------------- -----------------
Total Company $ (38,729) $ (1,078)
================== ==================
(Loss) income from continuing operations before income taxes
United States $ (107,973) $ (46,895)
Canada 32,771 10,890
----------------- -----------------
Total Company $ (75,202) $ (36,005)
================== ==================
Capital expenditures
United States $ 39,634 $ 42,941
Canada 30,186 18,216
----------------- -----------------
Total Company $ 69,820 $ 61,157
================= =================
June 18, 2005 February 26, 2005
----------------- ------------------
Total assets
United States $ 1,906,871 $ 1,958,566
Canada * 866,122 843,402
----------------- -----------------
Total Company $ 2,772,993 $ 2,801,968
================= =================
* As discussed in Note 4 - Assets Held for Sale and Liabilities Held for Sale,
we have classified the assets and liabilities of our Canadian segment as held
for sale as of June 18, 2005.
13. Hedge of Net Investment in Foreign Operations
From time to time, we may enter hedging agreements in order to manage risks
incurred in the normal course of business including forward exchange contracts
to manage our exposure to fluctuations in foreign exchange rates.
During the first quarter of fiscal 2005, we entered into a six month currency
exchange forward contract totaling $900 million Canadian dollar notional value
to hedge our net investment in our Canadian foreign operation against adverse
movements in exchange rates. Our Company measures ineffectiveness based upon the
change in forward exchange rates.
The effective portion of this net investment hedge contract resulted in a loss
of approximately $8.3 million, after tax, as of June 18, 2005, and was
recognized in our Consolidated Balance Sheet in the accumulated other
comprehensive loss (cumulative translation adjustment) component of
stockholders' equity. In addition, the amount excluded from the measure of
effectiveness on this net investment hedge amounted to $2.9 million, before
income taxes, and was recorded as "Store operating, general and administrative
expense" in our Consolidated Statements of Operations for the first quarter
ended June 18, 2005.
14. Commitments and Contingencies
We are subject to various legal proceedings and claims, either asserted or
unasserted, which arise in the ordinary course of business. We are also subject
to certain environmental claims. While the outcome of these claims cannot be
predicted with certainty, Management does not believe that the outcome of any of
these legal matters will have a material adverse effect on our consolidated
results of operations, financial position or cash flows.
15. Subsequent Events
On July 19, 2005, we announced that our Company's Board of Directors had
approved the sale of A&P Canada and that we entered into an agreement to sell
our subsidiary to Metro, Inc., a supermarket and pharmaceutical operator in the
Provinces of Quebec and Ontario, Canada, for $1.475 billion, which includes
cash, stock and certain debt to be assumed by Metro, Inc. The completion of this
sale is subject to customary conditions and reviews; however, we anticipate that
this transaction will close prior to our fiscal year end.
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of our Company, including a discussion of the results
of continuing operations as well as liquidity and capital resources. These items
are presented as follows:
o Basis of Presentation - a discussion of our Company's results during the
first quarter of fiscal 2005.
o Restatement of Previously Issued Financial Statements - a discussion of our
Company's restatement of previously issued
financial statements resulting from a correction in our accounting for
leases.
o Overview - a general description of our business; the value drivers of our
business; measurements; opportunities; challenges and risks; and
initiatives.
o Outlook - a discussion of certain trends or business initiatives for the
remainder of fiscal 2005 that Management wishes to share with the reader to
assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources -- a
discussion of the following:
- Results for the 16 weeks ended June 18, 2005 compared to the 16 weeks
ended June 19, 2004;
- Our Company's Asset Disposition Initiatives; and
- Current and expected future liquidity.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
o Critical Accounting Estimates -- a discussion of significant estimates
made by Management.
BASIS OF PRESENTATION
- ---------------------
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. for the 16 weeks ended June 18, 2005 and June 19, 2004
are unaudited and, in the opinion of management, contain all adjustments that
are of a normal and recurring nature necessary to present fairly the financial
position and results of operations for such periods. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in our Fiscal 2004 Annual Report to
Stockholders on Form 10-K. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries, and franchise operations.
Restatement of Previously Issued Financial Statements
- -----------------------------------------------------
As discussed in Note 2 - Restatement of Previously Issued Financial Statements,
our Company has restated our Consolidated Statements of Operations and Cash
Flows for the 16 weeks ended June 19, 2004 for corrections in our accounting for
leases. Readers of the financial statements should read this restated
information as opposed to the previously filed information. All referenced
amounts for prior periods reflect the balances and amounts on a restated basis.
OVERVIEW
- --------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New Jersey,
operates conventional supermarkets, combination food and drug stores and
discount food stores in 10 U.S. states, the District of Columbia, and Ontario,
Canada. Our Company's business consists strictly of its retail grocery
operations, which include 637 stores as of June 18, 2005.
United States 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.
Although our Company remained unprofitable overall in the first quarter, we
continued to execute our strategic initiatives and made progress despite a
continued challenging business environment. A&P Canada maintained its profitable
results in the first quarter, driven by the positive impact of our fresh food
marketing, and the ongoing improvement of the discount Food Basics operations.
In the U.S., we converted 19 locations to the new fresh format, while
maintaining emphasis on improved merchandising and store operating fundamentals
and productivity initiatives. Comparable store sales results were strong in the
Food Basics operations in the Northeast, as management continues to fine-tune
merchandising and operating standards in this discount format.
Our U.S. turnaround effort continued to benefit from the centralized management
framework established in November of 2004, with improved merchandising and
promotional programs emanating from the Central leadership organization, and
local banner managements focused on execution. This has resulted in more
effective weekly sales programs covering all banners, enabling us to maintain
sales and market share despite strong competition in our markets.
After a comprehensive review of strategic alternatives for the future, we
announced on May 10, 2005, a plan to restructure our Company. Elements include:
o a strategic transaction to unlock the value of A&P Canada;
o the planned divestiture of our Midwest operations;
o ongoing focus on fresh and discount store development in our
core Northeast markets, in the corridor extending from southern
Connecticut to Washington, D.C., and,
o pursuit of initiatives to improve productivity and produce
additional, significant reductions in operating, supply chain
and administrative costs.
We believe the proceeds of a transaction involving A&P Canada, executed at a
full and fair price, would significantly improve our balance sheet and
liquidity, and provide a more solid footing from which to achieve and sustain
improved profitability and accelerated growth in our core U.S. business.
Although the majority of the U.S. Midwest operations have improved and have
profitable growth potential, our decision to focus investment in the Northeast
does not permit the allocation of resources needed to realize that potential;
thus motivating our decision to divest all Michigan and Ohio operations.
In summary, it is our belief that successful execution of this restructuring
plan will help us to achieve our overarching objective, which is to build the
long-term value of A&P for our customers, employees and business partners, and
in turn, for all A&P shareholders.
OUTLOOK
- -------
Our primary focus for the second quarter (and beyond) will be the continued
development of the retail formats and operating fundamentals that have been
driving our strong performance in Canada and our improvement in the U.S.; the
successful execution of our strategic restructuring plan, and the continued
rigorous management of expenses and liquidity.
To that end, on June 29, 2005, we announced an agreement for the sale of all
U.S. distribution operations and some warehouse facilities and related assets to
C&S Wholesale Grocers ("C&S"), expanding our longstanding supply relationship
with C&S. By virtue of C&S's logistics expertise, state of the art facilities
and volume purchasing power, the change will produce an estimated $40 million in
annualized savings for A&P, and enable us to focus exclusively on retail
development and expansion. The transition of assets and operations began on July
10, 2005, and we expect to complete that process in the fall.
Alongside the benefits of these major initiatives, day-to-day expense reduction
remains a high priority as we continue to address additional opportunities to
improve labor productivity and lower administrative, advertising, occupancy and
operating expenses.
Various factors could cause us to fail to achieve these goals. These include,
among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandiser clubs,
warehouse stores, drug stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the nature and
extent of continued consolidation in the food industry and employment and
job growth in the markets in which we operate, may affect our ability to
hire and train qualified employees to operate our stores. This would
negatively affect earnings and sales growth. General economic changes may
also affect the shopping habits and buying patterns of our customers, which
could affect sales and earnings. We have assumed economic and competitive
situations will not worsen in fiscal 2005 and 2006. However, we cannot
fully foresee the effects of changes in economic conditions, inflation,
population growth, customer shopping habits and the consolidation of the
food industry on A&P's business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, if development and
remodel costs vary from those budgeted, or if changes in financial markets
negatively affect our cost of capital or our ability to access capital.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
shrink reduction in our stores, (iii.) our success in generating
efficiencies in our supporting activities, and (iv.) our ability to
eliminate or maintain a minimum level of supply and/or quality control
problems with our vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our employees are
satisfactory, we operate under collective bargaining agreements which
periodically must be renegotiated. In the coming year, we have several
contracts expiring and under negotiation. In each of these negotiations
rising health care and pension costs will be an important issue, as will
the nature and structure of work rules. We are hopeful, but cannot be
certain, that we can reach satisfactory agreements without work stoppages
in these markets. However, the actual terms of the renegotiated collective
bargaining agreements, our future relationships with our employees and/or a
prolonged work stoppage affecting a substantial number of stores could have
a material effect on our results.
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans, the
extent to which trustees of the plans reduce the costs of future service
benefits as well as our internal execution of our overall company strategic
initiatives which could lead to further pension withdrawal liabilities.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
RESULTS OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------------------
Our consolidated financial information presents the loss related to our
operations of discontinued businesses separate from the results of our
continuing operations. The discussion and analysis that follows focus on
continuing operations.
16 WEEKS ENDED JUNE 18, 2005 COMPARED TO THE 16 WEEKS ENDED JUNE 19, 2005
- -------------------------------------------------------------------------
OVERALL
- -------
Sales for the first quarter of fiscal 2005 were $3.4 billion, compared with $3.3
billion in the first quarter of fiscal 2004; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, decreased 0.3%. Loss from continuing operations increased
from $41.4 million for the first quarter of fiscal 2004 to $89.0 million for the
first quarter of fiscal 2005. Net loss per share - basic for the first quarter
of fiscal 2005 was $2.28 compared to net income per share - basic & diluted of
$1.11 for the first quarter of fiscal 2004.
16 Weeks 16 Weeks
Ended Ended Favorable /
June 18, 2005 June 19, 2004 (Unfavorable) % Change
---------------------- -------------------- ----------------- -----------------
Sales $ 3,383.6 $ 3,280.3 $ 103.3 3.1%
(Decrease) increase in comparable
store sales (0.3%) 0.4% NA NA
Loss from continuing operations (89.0) (41.4) (47.6) (115.0%)
Loss from discontinued operations (0.2) (1.4) 1.2 85.7%
Net loss (89.2) (42.8) (46.4) (108.4%)
Net loss per share (2.28) (1.11) (1.17) 105.4%
SALES
- -----
Sales for the first quarter of fiscal 2005 of $3,383.6 million increased
$103.3 million or 3.1% from sales of $3,280.3 million for first quarter of
fiscal 2004. The higher sales were due to an increase in Canadian sales of
$103.1 million and an increase in U.S. sales of $0.2 million. The increase in
Canadian sales was primarily due to the favorable impact of the Canadian
exchange rate. The following table presents sales for each of our operating
segments for the first quarter of fiscal 2005 and the first quarter of fiscal
2004:
16 Weeks Ended 16 Weeks Ended
June 18, 2005 June 19, 2004 Increase % Change
----------------- ------------------- ------------------- ------------------
United States $ 2,229.9 $ 2,229.7 $ 0.2 -
Canada 1,153.7 1,050.6 103.1 9.8%
----------------- ----------------- -------------------- ------------------
Total $ 3,383.6 $ 3,280.3 $ 103.3 3.1%
================= ================= ==================== ==================
The following details the dollar impact of several items affecting the increase
in sales by operating segment from the first quarter of fiscal 2004 to the first
quarter of fiscal 2005:
Impact of Impact of Foreign Comparable
New Closed Exchange Store
Stores Stores Rate Sales Total
------------- -------------- ------------- ------------- ----------------
United States $ 49.8 $ (42.4) $ - $ (7.2) $ 0.2
Canada 36.4 (27.5) 96.8 (2.6) 103.1
------------- -------------- ------------- ------------- ----------------
Total $ 86.2 $ (69.9) $ 96.8 $ (9.8) $ 103.3
============= ============== ============= ============= ================
The increase in U.S. sales was primarily attributable to the opening or
reopening of 16 new stores since the beginning of fiscal 2004, of which none
were opened in the first quarter of fiscal 2005, increasing sales by $49.8
million. This increase was partially offset by the closing of 28 stores since
the beginning of fiscal 2004, of which 10 were closed in the first quarter of
fiscal 2005, decreasing sales by $42.4 million, and the decrease in comparable
store sales for the first quarter of fiscal 2005 of $7.2 million or -0.3% as
compared with the first quarter of fiscal 2004. Included in the 28 stores closed
since the beginning of fiscal 2004 were 10 stores closed as part of the asset
disposition initiative as discussed in Note 8 of our Consolidated Financial
Statements.
The increase in Canadian sales was primarily attributable to the opening
of 9 stores since the beginning of fiscal 2004, of which 1 was opened in the
first quarter of fiscal 2005, increasing sales by $36.4 million, and the
favorable effect of the Canadian exchange rate, which increased sales by $96.8
million. These increases were partially offset by the closure of 14 stores since
the beginning of 2004, of which 1 was closed in the first quarter of 2005,
decreasing sales by $27.5 million, and the decrease in comparable store sales
for the first quarter of fiscal 2005 of $2.6 million or -0.2% for both
Company-operated and franchised stores combined, as compared to the first
quarter of fiscal 2004.
Average weekly sales per supermarket for the U.S. were approximately $322,800
for the first quarter of fiscal 2005 versus $321,800 for the corresponding
period of the prior year, an increase of 0.3% primarily due to the impact of
openings and closing with net higher average weekly sales. Average weekly sales
per supermarket for Canada were approximately $298,600 for the first quarter of
fiscal 2005 versus $272,300 for the corresponding period of the prior year, an
increase of 9.7%. This increase was primarily due to the increase in the
Canadian exchange rate.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin as a
percentage of sales by operating segment for the first quarter of fiscal 2005 as
compared to the first quarter of fiscal 2004. Gross margin as a percentage of
sales decreased 33 basis points to 27.72% for the first quarter of fiscal 2005
from 28.05% for the first quarter of fiscal 2004. This 33 basis point decrease
was caused by the increase in Canadian sales as a percentage of our total
(approximately 12 basis points) and from continued competitive pressures to
drive sales volume and protect market share in the current market. We believe
the impact on margin for changes in costs and special reductions was not
significant.
16 Weeks Ended 16 Weeks Ended
June 18, 2005 June 19, 2004
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
-------------- -------------- ------------- ---------------
United States $ 653.7 29.32% $ 666.5 29.89%
Canada 284.3 24.64 253.5 24.13
-------------- --------------- -------------- ---------------
Total $ 938.0 27.72% $920.0 28.05%
============== =============== ============== ===============
The following table details the dollar impact of several items affecting the
gross margin dollar increase (decrease) from the first quarter of fiscal 2004 to
the first quarter of fiscal 2005:
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
United States $ 0.1 $ (12.9) $ - $ (12.8)
Canada 14.4 5.7 10.7 30.8
---------------- ---------------- -------------- -------------
Total $ 14.5 $ (7.2) $ 10.7 $ 18.0
================ ================ ============== =============
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and administrative expense
("SG&A"), by operating segment, in dollars and as a percentage of sales for the
first quarter of fiscal 2005 compared with the first quarter of fiscal 2004.
SG&A expense was $976.7 million or 28.87% for the first quarter of fiscal 2005
as compared to $921.1 million or 28.08% for the first quarter of fiscal 2004.
16 Weeks Ended 16 Weeks Ended
June 18, 2005 June 19, 2004
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
United States $ 732.1 32.83% $ 685.0 30.72%
Canada 244.6 21.20 236.1 22.47
-------------- --------------- -------------- -----------------
Total $ 976.7 28.87% $ 921.1 28.08%
============== =============== ============== ==============
The increase in SG&A for the U.S. of 211 basis points for the first quarter
ended June 18, 2005 as compared to June 19, 2004 primarily related to costs we
recorded in connection with the closing of our owned warehouses in Edison, New
Jersey and the Bronx, New York of $47.0 million (210 basis points). These
warehouses will not be sold as part of the sale of our U.S. distribution
operations and some warehouse facilities and related assets to C&S Wholesale
Grocers as discussed in Note 5 - Sale of Our U.S. Distribution Operations and
Warehouses. In addition, we recorded costs of $14.8 million (67 basis
points) relating to the divestiture of our Midwestern U.S. business as discussed
in Note 8 - Asset Disposition Initiative. These increases in SG&A were partially
offset by gains on the sale of certain of our assets of $15.4 million (69 basis
points).
The increase in SG&A in Canada of $8.5 million is primarily due to the increase
in the Canadian exchange rate of $16.0 million, an increase in occupancy of
$11.6 million as a result of the opening of new stores, and an increase in labor
of $13.8 million due mainly to increased sales, partially offset by (i.) lower
depreciation expense of $10.4 million as the Canadian assets were classified as
held for sale during the first quarter of fiscal 2005 and no longer depreciated
in accordance with SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" and (ii.) lower costs relating to our franchise operations of
$10.0 million.
During the 16 weeks ended June 18, 2005 and June 19, 2004, we also recorded
impairment losses on long-lived assets as follows:
16 weeks ended June 18, 2005 16 weeks ended June 19, 2004
------------------------------- -------------------------------
U.S. Canada Total U.S. Canada Total
------- --------- --------- ------ --------- ---------
Impairments due to closure or conversion in the
normal course of business $ - $ 0.5 $ 0.5 $ - $ - $ -
Impairments related to the divestiture of the Midwestern
U.S. business (1) 0.1 - 0.1 - - -
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 5.8 - 5.8 - - -
------- ------- ------ ------ ------- ------
Total impairments $ 5.9 $ 0.5 $ 6.4 $ - $ - $ -
======= ======= ====== ====== ======= ======
(1) Refer to Note 8 - Asset Disposition Initiatives
(2) Refer to Note 5 - Sale of Our U.S. Distribution Operations and Warehouses
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
INTEREST EXPENSE
- ----------------
Interest expense of $36.1 million for the first quarter of fiscal 2005
increased from the prior year amount of $34.4 million due primarily to (i.)
higher interest expense resulting from our on-balance sheet long-term real
estate liabilities, which includes sale leaseback of Company-owned properties
entered into in the fourth quarter of fiscal 2003, of approximately $0.4 million
and sale leaseback of locations for which we received landlord allowances of
$0.8 million, and (ii.) a decrease in capitalized interest of $0.5 million due
to mainly a reduction in new store builds.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for the first quarter
of fiscal 2005 was $13.9 million (a $1.4 million provision for our U.S.
operations and a $12.5 million provision for our Canadian operations) compared
to $5.4 million (a $1.4 million provision for our U.S. operations and a $4.0
million provision for our Canadian operations). Consistent with prior year, we
continue to record a valuation allowance against our U.S. net deferred tax
assets.
For the first quarter of fiscal 2005, our effective income tax rate provision of
18.4% increased from the effective income tax rate provision of 15.1% in the
first quarter of fiscal 2004 as follows:
16 Weeks Ended
--------------------------------------------------------------------
June 18, 2005 June 19, 2004
--------------------------------- ---------------------------------
Tax Effective Tax Effective
Provision Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,384) 1.8% $ (1,380) 3.8%
Canada (12,481) 16.6% (4,078) 11.3%
--------------- ---------------- --------------- ----------------
$ (13,865) 18.4% $ (5,458) 15.1%
=============== ================ =============== ================
The increase in our effective tax rate was primarily due to the impact of the
higher mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations in the first quarter of fiscal 2005 as
compared to the first quarter of fiscal 2004 partially offset by the impact of
the U.S state and local taxes as a percentage of our Company's loss from
continuing operations in the first quarter of fiscal 2005 as compared to the
first quarter of fiscal 2004.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early part of the
first quarter of fiscal 2003, we decided to sell our operations located in
Northern New England and Wisconsin, as well as our Eight O'Clock Coffee
business. These asset sales are now complete.
Although the Canadian operations have been classified as held for sale at June
18, 2005, the criteria necessary to classify the Canadian operations as
discontinued have not been satisfied as our Company expects to retain
significant continuing involvement in the operations of this business upon its
sale.
The loss from operations of discontinued businesses, net of tax, for the first
quarter of fiscal 2005 was $0.2 million as compared to a loss from operations of
discontinued businesses, net of tax, of $1.4 million for the first quarter of
fiscal 2004 and is detailed by business as follows:
16 Weeks Ended June 18, 2005
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses (27) (131) (10) (168)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (27) (131) (10) (168)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (27) $ (131) $ (10) $ (168)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
- ------------------------------------------------------------
Non-accruable closing costs $ (27) $ 75 $ (10) $ 38
Interest accretion on present value
of future occupancy costs - (206) - (206)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (27) $ (131) $ (10) $ (168)
--------------- ---------------- --------------- ----------------
16 Weeks Ended June 19, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses (371) (422) (590) (1,383)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (371) (422) (590) (1,383)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (371) $ (422) $ (590) $ (1,383)
=============== ================ =============== ================
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Severance and benefits $ (326) $ - $ - $ (326)
Non-accruable closing costs (42) (198) (590) (830)
Interest accretion on present value
of future occupancy costs (3) (224) - (227)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (371) $ (422) $ (590) $ (1,383)
--------------- ---------------- --------------- ----------------
ASSET DISPOSITION INITIATIVES
- -----------------------------
Overview
- --------
In fiscal 1998 and fiscal 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring). During the first quarter of fiscal 2005,
we have initiated efforts to divest our businesses in the Midwestern United
States and closed 8 of those stores (Divestiture of the Midwestern U.S.
Business).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 18, 2005 and June 19, 2004.
Present value ("PV") interest represents interest accretion on future occupancy
costs which were recorded at present value at the time of the original charge.
Non-accruable items represent charges related to the restructuring that are
required to be expensed as incurred in accordance with SFAS 146 "Accounting for
Costs Associated with Exit or Disposal Activities".
16 Weeks Ended June 18, 2005
------------------------------------------------------------------------------------
Project 2001 Farmer Divestiture
Great Asset Jack of Midwest
Renewal Disposition Restructuring Operations Total
----------- ---------------- --------------- ------------- -----------
Balance Sheet accruals
----------------------
Vacancy $ - $ - $ - $ 14,766 $ 14,766
PV interest 525 713 194 - 1,432
Severance - - - 1,337 1,337
Total accrued to
-------- ----------- ----------- --------- -----------
balance sheets 525 713 194 16,103 17,535
-------- ----------- ----------- --------- -----------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - - 126 126
Inventory markdowns - - - 586 586
Gain on sale of property - - - (952) (952)
Gain on sale of pharmacy
scripts - - - (870) (870)
Closing costs - - - 432 432
-------- ----------- ----------- --------- -----------
Total non-accruable items - - - (678) (678)
-------- ----------- ----------- --------- -----------
Less PV interest (525) (713) (194) - (1,432)
-------- ----------- ----------- --------- -----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - - 15,425 15,425
========= =========== =========== ========= ===========
16 Weeks Ended June 19, 2004
-----------------------------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
Balance Sheet accruals
----------------------
PV interest $ 630 $ 781 $ 222 $ 1,633
-------- ----------- ----------- ---------
Total accrued to
balance sheets 630 781 222 1,633
-------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - 90 90
Inventory markdowns - - 291 291
Closing costs - - 680 680
-------- ----------- ----------- ---------
Total non-accruable items - - 1,061 1,061
-------- ----------- ----------- ---------
Less PV interest (630) (781) (222) (1,633)
-------- ----------- ------------ ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - 1,061 1,061
======== =========== =========== =========
Project Great Renewal
- ---------------------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets. As of June 18, 2005, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- -------- -------- -------- --------- ---------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
Addition (1) 522 3 525 - - - 522 3 525
Utilization (2) (2,092) (74) (2,166) (59) - (59) (2,151) (74) (2,225)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 18, 2005 $ 26,394 $ 179 $ 26,573 $ 1,601 $ - $ 1,601 $ 27,995 $ 179 $ 28,174
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million, and
$1.9 million during fiscal 2002, 2003 and 2004, respectively, and $0.5
million during the 16 weeks ended June 18, 2005 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge.
(2) Occupancy utilization of $13.6 million, $20.0 million, and $5.6 million
for fiscal 2002, 2003 and 2004, respectively, and $2.1 million during
the 16 weeks ended June 18, 2005 represents payments made during those
periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $0.4
million, $0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004,
respectively, and $0.1 million during the 16 weeks ended June 18, 2005
represents payments to individuals for severance and benefits, as well
as payments to pension funds for early withdrawal from multi-employer
union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result,
during fiscal 2002, we recorded a reduction of $3.6 million in
occupancy accruals related to this phase of the initiative. Further, we
increased our reserve for future minimum pension liabilities by $0.6
million to better reflect expected future payouts under certain
collective bargaining agreements.
We paid $100.5 million of the total occupancy charges from the time of the
original charges through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $30.0 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $26.6 million relates to expected future payments under long term leases and
is expected to be paid in full by 2020. The remaining severance liability of
$1.6 million primarily relates to expected future payments for early withdrawals
from multi-employer union pension plans and will be fully paid out in 2020.
None of these stores were open during either of the first quarters of fiscal
2004 or 2005. As such, there was no impact on the Statements of Consolidated
Operations from the 166 stores included in this phase of the initiative.
At June 18, 2005 and February 26, 2005, approximately $5.7 million and $5.4
million, respectively, of the reserve was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve balances as
of June 18, 2005 of $28.2 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of June 18, 2005, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets over the last three
fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
Addition (1) 713 - 713 - - - 713 - 713
Utilization (2) (1,457) - (1,457) (30) - (30) (1,487) - (1,487)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 18, 2005 $ 31,155 $ - $ 31,155 $ 84 $ - $ 84 $ 31,239 $ - $ 31,239
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and
$2.4 million during fiscal 2002, 2003 and 2004, respectively, and $0.7
million during the 16 weeks ended June 18, 2005 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 during
fiscal 2002, 2003 and 2004, respectively, and $1.5 million during the
16 weeks ended June 18, 2005 represent payments made during those
periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $19.5
million, $3.5 million, and $2.3 million during fiscal 2002, 2003 and
2004, respectively, and $0.03 million during the 16 weeks ended June
18, 2005 represent payments made to terminated employees during the
period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2002, we
recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during
fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals
and subleases of locations at more favorable terms than originally
anticipated at the time of the original charge.
We paid $40.6 million ($37.6 million in the U.S. and $3.0 million in Canada) of
the total occupancy charges from the time of the original charges through June
18, 2005 which was primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes and lease termination costs. We paid $28.1
million ($19.1 million in the U.S. and $9.0 million in Canada) of the total net
severance charges from the time of the original charges through June 18, 2005,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $31.2 million primarily relates to expected
future payments under long term leases through 2017. The remaining severance
liability of $0.1 million relates to expected future payments for severance and
benefits payments to individual employees and will be fully paid out by 2006.
At June 18, 2005 and February 26, 2005, approximately $7.2 million and $7.1
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
None of these stores were open during either of the first quarters of fiscal
2004 or 2005. As such, there was no impact on the Statements of Consolidated
Operations from the 39 stores that were identified for closure as part of this
asset disposition.
Based upon current available information, we evaluated the reserve balances as
of June 18, 2005 of $31.2 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. During fiscal 2003, we recorded
a charge of $37.7 million related to the last phase of this initiative ($2.2
million in "Cost of merchandise sold" and $35.5 million in "Store operating,
general and administrative expense" in our Consolidated Statement of Operations
for fiscal 2003), excluding PV interest. During fiscal 2004, we recorded costs
excluding PV interest of $1.1 million ($0.3 million in "Cost of merchandise
sold" and $0.8 million in "Store operating, general and administrative
expense"). There were no costs recorded during the first quarter of fiscal 2005.
As of June 18, 2005, we had closed all 6 stores and successfully completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for this
initiative all of which were in the U.S. The table does not include property
writeoffs as they are not part of any reserves maintained on the balance sheet.
It also does not include non-accruable closing costs and inventory markdowns
since they are expensed as incurred in accordance with generally accepted
accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- -----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
Addition (1) 194 - 194
Utilization (2) (976) (6) (982)
------------ ------------- ----------
Balance at
June 18, 2005 $ 15,120 $ - $ 15,120
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003, fiscal
2004 and the 16 weeks ended June 18, 2005 represent interest accretion
on future occupancy costs which were recorded at present value at the
time of the original charge. The original charge to severance during
fiscal 2003 of $8.9 million related to individual severings as a result
of the store closures, as well as a voluntary termination plan
initiated in the Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million, $4.7 million and $1.0 million
during fiscal 2003, fiscal 2004 and the 16 weeks ended June 18, 2005,
respectively, represents payments made for costs such as rent, common
area maintenance, real estate taxes and lease termination costs.
Severance utilization of $4.1 million, $4.8 million and $0.01 million
during fiscal 2003, fiscal 2004 and the 16 weeks ended June 18, 2005,
respectively, represent payments made to terminated employees during
the period.
We paid $6.8 million of the total occupancy charges from the time of the
original charge through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$15.1 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2014. The severance liability has been fully
utilized as of June 18, 2005 and no additional future payments for severance and
benefits to individual employees will be paid out.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2005 and 2004 are the sales and operating results of the 6 stores that
were identified for closure as part of this phase of the initiative. The results
of these operations are as follows:
16 Weeks Ended
-----------------------------------
June 18, June 19,
2005 2004
---------------- ---------------
Sales $ - $ 2,433
=============== ==============
Loss from operations $ - $ (43)
=============== ==============
At June 18, 2005 and February 26, 2005, approximately $2.0 million and $2.1
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $15.1 million as of June 18, 2005
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
Divestiture of the Midwestern U.S. Business
- -------------------------------------------
During the first quarter ended June 18, 2005, we announced plans for a major
strategic restructuring that would focus future effort and investment on our
core operations in the Northeastern United States. Thus, we have initiated
efforts to divest our businesses in the Midwestern United States. Although this
planned divestiture includes the closing of a total of 30 stores, we have closed
8 of these stores as of June 18, 2005.
During the first quarter ended June 18, 2005, we recorded a charge of $15.4
million related to these closures ($0.6 million in "Cost of merchandise sold"
and $14.8 million in "Store operating, general and administrative expense" in
our Consolidated Statement of Operations for fiscal 2003), excluding PV
interest.
16 Weeks Ended
June 18, 2005
---------------
Occupancy related $ 14,766
Severance and benefits 1,337
Property writeoffs 126
Gain on the sale of fixed assets (952)
Sale of pharmacy scripts (870)
Inventory markdowns 586
Nonaccruable closing costs 432
--------------
Total charges $ 15,425
==============
The following table summarizes the activity to date related to the charges
recorded for this divestiture. The table does not include property writeoffs as
they are not part of any reserves maintained on the balance sheet. It also does
not include non-accruable closing costs and inventory markdowns since they are
expensed as incurred in accordance with generally accepted accounting
principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ------------
Original charge (1) $ 14,766 $ 1,337 $ 16,103
Utilization (2) (275) (59) (334)
------------- --- --------- ------------
Balance at
June 18, 2005 $ 14,491 $ 1,278 $ 15,769
============ ============= ============
(1) The original charge to occupancy during the first quarter ended June
18, 2005 represents charges related to closures in conjunction with our
decision to divest our Midwestern business of $14.7 million. The
original charge to severance during the first quarter ended June 18,
2005 of $1.3 million related to individual severings as a result of
these store closures.
(2) Occupancy utilization of $0.3 million for 16 weeks ended June 18, 2005,
represents payments made for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $0.1 million for the 16 weeks ended June 18, 2005,
respectively, represent payments made to terminated employees during
the period.
We paid $0.3 million of the total occupancy charges from the time of the
original charge through June 18, 2005 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $0.1 million of the total net severance charges from
the time of the original charges through June 18, 2005, which resulted from the
termination of approximately 125 employees. The remaining occupancy liability of
$14.5 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
$1.3 million relates to expected future payments for severance and benefits to
individual employees and will be fully paid out by February 25, 2006.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2005 and 2004 are the sales and operating results of the 8 stores that
were closed as part of this divestiture. The results of these operations are as
follows:
16 Weeks Ended
-----------------------------------
June 18, June 19,
2005 2004
---------------- ---------------
Sales $ 15,344 $ 18,016
=============== ==============
Loss from operations $ (2,002) $ (3,628)
=============== ==============
At June 18, 2005, approximately $6.0 million of the liability was included in
"Other accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $15.8 million as of June 18, 2005
based upon current available information and have concluded that it is adequate.
We will continue to monitor the status of the vacant properties and adjustments
to the reserve balance may be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
- ----------
The following table presents excerpts from our Consolidated Statement of Cash
Flows:
16 weeks ended
-------------------------------------------
June 18, 2005 June 19, 2004
----------------- -----------------
Net cash provided by operating activities $ 1,231 $ 38,846
----------------- -----------------
Net cash used in investing activities $ (38,247) $ (55,017)
----------------- -----------------
Net cash (used in) provided by financing activities $ (3,410) $ 436
----------------- -----------------
Net cash flow provided by operating activities of $1.2 million for the 16 weeks
ended June 18, 2005 primarily reflected our net loss of $89.2 million, adjusted
for non-cash charges for (i.) depreciation and amortization of $71.9 million,
(ii.) our asset disposition initiatives of $15.4 million, and (iii.)
restructuring charges of $48.5 million, partially offset by (iv.) gains on the
disposal of owned property of $15.4 million, a decrease in accounts receivable
of $16.5 million partially offset by an increase in inventories of $20.7
million, a decrease in accrued salaries, wages and benefits, and taxes of $19.1
million and a decrease in non-current liabilities of $11.7 million due mainly to
an increase in closed store accruals. Refer to Working Capital below for
discussion of changes in working capital items. Net cash flow provided by
operating activities of $38.8 million for the 16 weeks ended June 19, 2004
primarily reflected our net loss of $42.8 million adjusted for non-cash charges
of $80.8 million for depreciation and amortization, a decrease in accounts
receivable of $24.8 million and an increase in accounts payable of $55.6
million, partially offset by an increase in inventories of $22.8 million, a
decrease in other accruals of $27.9 million, an increase in prepaid expenses and
other current assets of $14.9 million, and a decrease in non-current liabilities
of $12.4 million due mainly to a decrease in closed store accruals.
Net cash flow used in investing activities of $38.2 million for the 16 weeks
ended June 18, 2005 primarily reflected property expenditures totaling $69.8
million, which included 1 new supermarkets and 25 major remodels partially
offset by cash received from the sale of certain of our assets of $31.6 million.
For the remainder of fiscal 2005, we have planned capital expenditures of
approximately $125 to $150 million, which relate primarily to opening
approximately 5 to 10 new supermarkets, converting approximately 1 to 3 stores
to new banners, and enlarging or remodeling approximately 65 supermarkets. We
currently expect to close approximately 25 - 30 stores during the remainder of
fiscal 2005. Net cash flow used in investing activities of $55.0 million for the
16 weeks ended June 19, 2004 primarily reflected property expenditures totaling
$61.2 million, which included 11 new supermarkets and 1 major remodels,
partially offset by cash received from the sale of certain of our assets of $6.1
million.
Net cash flow used in financing activities of $3.4 million for the 16 weeks
ended June 18, 2005 primarily reflected payments on long term borrowings of
$14.5 million and principal payments on capital leases of $2.2 million partially
offset by proceeds from the exercise of stock options of $11.8 million. Net cash
flow used in financing activities of $0.4 million for the 16 weeks ended June
19, 2004 primarily reflected principal payments on capital leases of $4.6
million, a decrease in book overdrafts of $5.7 million, and deferred financing
fees of $0.8 million partially offset by net proceeds from long-term real estate
liabilities of $11.5 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 operating initiatives we expect to pursue and the
anticipated financial results of our Company.
We reviewed our Company's strategy during the fourth quarter of fiscal 2004 and
into early 2005 to establish and sustain a profitable business with long-range
growth potential. That review concluded with the plan that future effort and
investment should be focused on our core operations in the Northeastern United
States, which account for half of current total sales, our strongest market
positions, and we believe, the best potential for profitable growth going
forward. Therefore, we initiated efforts to divest our businesses in Canada and
the Midwestern U.S. During the first quarter ended June 18, 2005, we concluded
that it was probable that we would sell our Canadian operations with transfer of
those assets to the buyer within one year of the balance sheet date and
therefore, classified the assets and liabilities relating to Canada as held for
sale. On July 19, 2005, we announced that our Company's Board of Directors had
approved the sale of A&P Canada and that we entered into an agreement to sell
our subsidiary to Metro, Inc., a supermarket and pharmaceutical operator in the
Provinces of Quebec and Ontario, Canada, for $1.475 billion, which includes
cash, stock and certain debt to be assumed by Metro, Inc. The completion of this
sale is subject to customary conditions and reviews; however, we anticipate that
this transaction will close prior to our fiscal year end. We are continuing to
pursue the divestiture of our Midwestern U.S. business, but at this time, there
can be no assurance that we will be successful.
Planned use of the proceeds from the sale of our Canadian operations includes
open market purchases and or tender for the $199 million of our senior notes
outstanding maturing in April 2007, which under the terms of our revolving
credit agreement must be refinanced six months prior to maturity, and the $217
million of our senior notes outstanding maturing in December 2011.
Profitability, cash flow, asset sale proceeds and timing can be impacted by
certain external factors such as unfavorable economic conditions, competition,
labor relations and fuel and utility costs which could have a significant impact
on cash generation. If our profitability and cash flow do not improve in line
with our plans or if they do not otherwise provide sufficient resources to
operate effectively or if we are unsuccessful in the closing of the Canadian
business or the selling of the Midwest business, we anticipate that we will be
able to modify the operating plan, by reducing capital investments and through
other contingency actions and financings, 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 $483.9 million at June 18, 2005 compared to working
capital of $86.5 million at February 26, 2005. We had cash and cash equivalents
aggregating $171.4 million at June 18, 2005 compared to $257.7 million at
February 26, 2005. The increase in working capital was attributable primarily to
the increase in net assets held for sale as of June 18, 2005, of $362.9 million.
The remaining increase was primarily due to the following:
o An increase in inventories;
o An increase in prepaid expenses and other current assets mainly due to the
timing of payments; and
o A decrease in accrued salaries, wages and benefits due to timing;
Partially offset by the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in accounts receivable due to the timing of receipts; and
o An increase in accounts payable (inclusive of book overdrafts) due to timing
and seasonality.
REVOLVING CREDIT AGREEMENT
- --------------------------
At June 18, 2005, we had a $400 million secured revolving credit agreement (the
"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. Under the terms of this agreement, should
availability fall below $50 million, a borrowing block will be implemented which
provides that no additional borrowings be made unless we are able to maintain a
fixed charge coverage ratio of 1.0 to 1.0. Although we do not meet the required
ratio at this time, it is not applicable as availability at June 18, 2005
totaled $204.3 million. In the event that availability falls below $50 million
and we do not maintain the ratio required, unless otherwise waived or amended,
the lenders may, at their discretion, declare, in whole or in part, all
outstanding obligations immediately due and payable.
The Credit Agreement is comprised of a U.S. credit agreement amounting to $330
million and a Canadian credit agreement amounting to $70 million (C$86.0 million
at June 18, 2005) and is collateralized by inventory, certain accounts
receivable and certain pharmacy scripts. Borrowings under the Credit Agreement
bear interest based on LIBOR and Prime interest rate pricing. This agreement
expires in December 2007.
As of June 18, 2005, there were no borrowings under these credit agreements. As
of June 18, 2005, after reducing availability for outstanding letters of credit
and borrowing base requirements, we had $204.3 million available under the
Credit Agreement. Combined with the cash we held in short-term investments of
$74.0 million, we had total cash availability of $278.3 million at June 18,
2005.
Under the 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 $616 million at June 18, 2005 consisted of $200
million of 9.375% Notes due August 1, 2039, $217 million of 9.125% Senior Notes
due December 15, 2011 and $199 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 are now callable at par ($25 per bond) and the 9.125%
Notes may be called at a premium to par after December 15, 2006. 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 the Credit Agreement and
do not contain cross default provisions.
During the first quarter of fiscal 2005, we repurchased in the open market $14.5
million of our 7.75% Notes due April 15, 2007. The cost of this open market
repurchase resulted in a pretax loss due to the early extinguishment of debt of
$0.5 million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4,
44 and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this
loss has been classified within loss from operations.
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 February 26, 2005 at terms contingent upon market conditions at
the time of sale.
Our Company's policy is to not pay dividends. As such, we have not made dividend
payments in the previous three years and do not intend to pay dividends in the
normal course of business in fiscal 2005. In addition, our Company is
prohibited, under the terms of our Revolving Credit Agreement, to pay cash
dividends on common shares.
We are the guarantor of a loan of $1.9 million related to a shopping center,
which will expire in 2011.
In the normal course of business, we have assigned to third parties various
leases related to former operating stores (the "Assigned Leases"). When the
Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of June 18, 2005, 156 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $371.4 million, which could be partially or
totally offset by reassigning or subletting such leases.
Our existing senior debt rating was Caa1 with developing outlook with Moody's
Investors Service ("Moody's") and B- with developing outlook with Standard &
Poor's Ratings Group ("S&P") as of June 18, 2005. Our liquidity rating was SGL3
with Moody's as of June 18, 2005. Our recovery rating was 1 with S&P as of June
18, 2005 indicating a high expectation of 100% recovery of our senior debt to
our lenders. Future rating changes could affect the availability and cost of
financing to our Company.
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
Critical accounting estimates are those accounting estimates that we believe are
important to the portrayal of our financial condition and results of operations
and require our most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Self-Insurance Reserves
- -----------------------
Our Consolidated Balance Sheets include liabilities with respect to self-insured
workers' compensation and general liability claims. We estimate the required
liability of such claims on a discounted basis, utilizing an actuarial method,
which is based upon various assumptions, which include, but are not limited to,
our historical loss experience, projected loss development factors, actual
payroll and other data. The required liability is also subject to adjustment in
the future based upon the changes in claims experience, including changes in the
number of incidents (frequency) and changes in the ultimate cost per incident
(severity).
Long-Lived Assets
- -----------------
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is based upon groups of assets and
the undiscounted estimated future cash flows from such assets to determine if
the carrying value of such assets is recoverable from their respective cash
flows. If such review indicates an impairment exists, we measure such impairment
on a discounted basis using a probability weighted approach and a risk free
rate.
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 16 weeks ended June 18, 2005, we recorded impairment losses on
long-lived assets as follows:
U.S. Canada Total
------- -------- --------
Impairments due to closure or conversion in the
normal course of business $ - $ 0.5 $ 0.5
Impairments related to the divestiture of the Midwestern
U.S. business (1) 0.1 - 0.1
Impairments related to the sale of U.S. distribution
operations and warehouses (2) 5.8 - 5.8
------- ------- ------
Total impairments $ 5.9 $ 0.5 $ 6.4
======= ======= ======
(1) Refer to Note 8 - Asset Disposition Initiatives
(2) Refer to Note 5 - Sale of Our U.S. Distribution Operations and Warehouses
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be future impairments
on long-lived assets, including the potential for impairment of assets that are
held and used.
Closed Store Reserves
- ---------------------
For closed stores that are under long-term leases, we record a discounted
liability using a risk free rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates. As of June 18,
2005, we had recorded liabilities for estimated probable obligations of $122
million. Of this amount, $18 million relates to stores closed in the normal
course of business, $87 million relates to stores closed as part of the asset
disposition initiatives (see Note 8 of our Consolidated Financial Statements)
and $17 million relates to stores closed as part of our exit of the northern New
England and Kohl's businesses (see Note 7 of our Consolidated Financial
Statements).
Employee Benefit Plans
- ----------------------
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions include, among other things, the discount rate, the expected
long-term rate of return on plan assets and the rates of increase in
compensation and health care costs. In accordance with U.S. GAAP, actual results
that differ from our Company's assumptions are accumulated and amortized over
future periods and, therefore, affect our recognized expense and recorded
obligation in such future periods. While we believe that our assumptions are
appropriate, significant differences in our actual experience or significant
changes in our assumptions may materially affect our pension and other
post-retirement obligations and our future expense.
Inventories
- -----------
We evaluate inventory shrinkage throughout the year based on actual physical
counts and record reserves based on the results of these counts to provide for
estimated shrinkage between the store's last inventory and the balance sheet
date.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that may
impact our consolidated financial position, results of operations or cash flows.
Among other possible market risks, we are exposed to such risk in the areas of
interest rates and foreign currency exchange rates.
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 $621.1 million in total indebtedness as of June 18, 2005 because they are at
fixed interest rates. However, we do have cash flow exposure on our committed
bank lines of credit due to our variable floating rate pricing. Accordingly,
during the first quarters of fiscal 2005 and fiscal 2004, a presumed 1% change
in the variable floating rate would not have impacted interest expense as there
were no borrowings on our committed bank lines of credit.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse fluctuations in
the Canadian dollar. During the first quarters of fiscal 2005 and fiscal 2004, a
change in the Canadian currency of 10% would have resulted in a fluctuation in
net loss of $2.0 million and income of $0.7 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.
In addition, during the first quarter of fiscal 2005, we entered into a six
month currency exchange forward contract totaling $900 million Canadian notional
value to hedge our net investment in our Canadian foreign operations against
adverse movements in exchange rates. A 100 basis point strengthening in the
foreign currency forward rate would decrease the fair market value of our
foreign currency forward contract held at June 18, 2005, by $7.3 million. A 100
basis point weakening in the foreign currency forward rate would increase the
fair market value of our foreign currency forward contract held at June 18,
2005, by $7.1 million.
ITEM 4 - Controls and Procedures
We have established and maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our Company's management, including our
Chairman of the Board and Chief Executive Officer and Executive Vice President,
Chief Financial Officer and Secretary, as appropriate, to allow timely decisions
regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation
of our Company's management, including our Company's Chairman of the Board and
Chief Executive Officer along with our Company's Executive Vice President, Chief
Financial Officer and Secretary, of the effectiveness of the design and
operation of our Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15(b). Based upon the foregoing, as of June 18, 2005, our
Company's Chairman of the Board and Chief Executive Officer along with our
Company's Executive Vice President, Chief Financial Officer and Secretary,
concluded that our Company's disclosure controls and procedures were effective
as of June 18, 2005.
There has been no change during our Company's fiscal quarter ended June 18, 2005
in our Company's internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, our Company's internal
control over financial reporting.
CAUTIONARY NOTE
- ---------------
This presentation may contain forward-looking statements about the future
performance of our Company, and is based on our assumptions and beliefs in light
of information currently available. We assume no obligation to update this
information. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
None
ITEM 2 - Changes in Securities
None
ITEM 3 - Defaults Upon Senior Securities
None
ITEM 4 - Submission of Matters to a Vote of Security Holders
None
ITEM 5 - Other Information
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 (incorporated herein by
reference to Exhibit 10.4 to Form 10-Q filed on
January 7, 2005)
10.5 Employment Agreement, made and entered into as
of the 16th day of June, 2003, by and between our
Company and Brenda Galgano (incorporated herein
by reference to Exhibit 10.9 to Form 10-Q filed
on October 17, 2003)
10.6 Employment Agreement, made and entered into as
of the 24th day of February, 2002, by and between
our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit
10.8 to Form 10-K filed on July 5, 2002)
10.7 Employment Agreement, made and entered into as of
the 2nd day of October, 2002, by and between our
Company and Peter Jueptner (incorporated herein
by reference to Exhibit 10.26 to Form 10-Q filed
on October 22, 2002) ("Jueptner Agreement")
10.8 Amendment to Jueptner Agreement dated November
10, 2004 (incorporated herein by reference to
Exhibit 10.8 to Form 10-K filed on May 10, 2005)
10.9 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)
10.10 Employment Agreement, made and entered into as
of the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July 5, 2002)
("Metzger Agreement")
10.11 Amendment to John E. Metzger Agreement dated
September 13, 2004 (incorporated herein by
reference to Exhibit 10.11 to Form 10-K filed on
May 10, 2005)
10.12 Amendment to John E. Metzger Agreement dated
October 25, 2004 (incorporated herein by
reference to Exhibit 10.12 to Form 10-K filed on
May 10, 2005)
10.13 Employment Agreement, made and entered into as
of the 1st day of March 2005, by and between our
Company and William J. Moss (incorporated herein
by reference to Exhibit 10.13 to Form 10-K filed
on May 10, 2005)
10.14 Employment Agreement, made and entered into as of
the 28th day of October, 2002, by and between our
Company and Brian Piwek, and Offer Letter dated
the 23rd day of October, 2002 (incorporated
herein by reference to Exhibit 10.14 to Form 10-Q
filed on January 10, 2003) ("Piwek Agreement")
10.15 Amendment to Brian Piwek Agreement dated
February 4, 2005 (incorporated herein by
reference to Exhibit 10.15 to Form 10-K filed on
May 10, 2005)
10.16 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)
10.17 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)
10.18 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.19 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)
10.20 Form of Stock Option Grant (incorporated herein
by reference to Exhibit 10.20 to Form 10-K filed
on May 10, 2005)
10.21 Description of 2005 Turnaround Incentive
Compensation Program (incorporated herein by
reference to Exhibit 10.21 to Form 10-K filed on
May 10, 2005)
10.22 Form of Restricted Share Unit Award Agreement
(incorporated herein by reference to Exhibit
10.22 to Form 10-K filed on May 10, 2005)
10.23 1994 Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to Exhibit
10(f) to Form 10-K filed on May 24, 1995)
10.24 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)
10.25 Description of Management Incentive Plan
(incorporated herein by reference to Exhibit
10.26 to Form 10-K filed on May 10, 2005)
10.26 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)
10.27 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)
10.28 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)
10.29 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)
10.30 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)
10.31 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)
10.32 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)
10.33 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)
14 Code of Business Conduct and Ethics
(incorporated herein by reference to Exhibit 14
to Form 10-K filed on May 21, 2004)
16 Letter on Change in Certifying Accountant
(incorporated herein by reference to Forms 8-K
filed on September 18, 2002 and September 24,
2002, and Form 8-K/A filed on September 24, 2002)
18 Preferability Letter Issued by
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 18 to Form 10-Q filed on
July 29, 2004)
23 Consent of Independent Registered Public
Accounting Firm (incorporated herein by reference
to Exhibit 23 to Form 10-K filed on May 10, 2005)
31.1* Certification of the Chief Executive Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
31.2* Certification of the Chief Financial Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
32* Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed with this 10-Q
The Great Atlantic & Pacific Tea Company, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
Dated: July 22, 2005 By: /s/ Brenda M. Galgano
------------------------------------------------
Brenda M.Galgano, Senior Vice President,
Corporate Controller (Chief Accounting Officer)
Exhibit 31.1
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Christian W. E. Haub Date: July 22, 2005
- ------------------------
Christian W. E. Haub
Chairman of the Board and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusion about
the effectiveness of the disclosure controls and procedures, as of the
end of the period covered by this quarterly report based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or
is likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Mitchell P. Goldstein Date: July 22, 2005
- -------------------------
Mitchell P. Goldstein
Executive Vice President, Chief
Financial Officer & Secretary
Exhibit 32
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, 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, Chief Financial Officer &
Secretary of the Company, each hereby certifies that (1) the Quarterly Report of
the Company on Form 10-Q for the period ended June 18, 2005 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Company.
Dated: July 22, 2005 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board
and
Chief Executive Officer
Dated: July 22, 2005 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Executive Vice President,
Chief Financial Officer &
Secretary