The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2003
Annual Report to Stockholders
Table of Contents
CEO Letter to Stockholders........................................... 3
Management's Discussion and Analysis................................. 6
Consolidated Statements of Operations................................ 42
Consolidated Statements of Stockholders' Equity
And Comprehensive (Loss) Income............................... 43
Consolidated Balance Sheets.................... ..................... 44
Consolidated Statements of Cash Flows................................ 45
Notes to Consolidated Financial Statements........................... 46
Management's Report on Consolidated Financial Statements ............ 90
Report of Independent Accountants.................................... 91
Five Year Summary of Selected Financial Data......................... 92
Executive Officers................................................... 94
Board of Directors................................................... 94
Stockholder Information.............................................. 95
Company Profile
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our
Company"), based in Montvale, New Jersey, operates combination food and drug
stores, conventional supermarkets and limited assortment food stores in 10 U.S.
states, the District of Columbia and Ontario, Canada, under the A&P(R),
Waldbaum's(TM), Super Foodmart, The Food Emporium(R), Super Fresh(R), Farmer
Jack(R), Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food Basics(R) and
The Barn Markets(R) trade names.
CEO LETTER TO STOCKHOLDERS
- --------------------------
To Our Stockholders:
Fiscal 2003 was a pivotal year of transition for A&P, in which we took
decisive actions to build a solid platform for the turnaround of our business.
Although we have not yet restored profitability, we took critical steps
toward that goal by restructuring our organization, improving our cost structure
and financial position, reversing the negative trend of our U.S. business and
maintaining the profitability of our Canadian operations.
The stabilization of the U.S. business following a serious decline the
previous year, and our continued profitability in Canada despite difficult
economic and competitive conditions, underlined the effectiveness of the new
operating structure and leadership we installed in the latter part of fiscal
2002.
In addition to empowering new and experienced operating leadership, our
establishment of the A&P U.S. and A&P Canada business units improved efficiency
by eliminating redundant positions and unnecessary operating layers. Combined
with our Company-wide focus on expense reduction, this resulted in a decrease of
administrative costs.
We strengthened our balance sheet and overall financial position in
fiscal 2003, generating approximately $425 million in proceeds through the
divestiture of non-strategic retail operations in northern New England and
Wisconsin and the Eight O'Clock Coffee business, and sale/leaseback transactions
involving Company properties. These difficult decisions were necessary to ensure
the Company's ongoing viability, and enable A&P U.S. management to focus
attention and resources on the turnaround of its retail businesses.
That focus, and a strong emphasis on operating and customer service
fundamentals, enabled A&P U.S. to halt the previous decline of its top and
bottom line results, and meet or exceed internal operating targets throughout
the year.
A specific priority in 2003 was the revitalization of the Farmer Jack
operations in Michigan and Ohio. Last June marked the relaunch of that banner
with heightened emphasis on fresh foods, customer service and better pricing,
and the addition of several new and remodeled stores. Customer response has been
enthusiastic, and results thus far are on track. Another key objective was the
fine-tuning of our discount Food Basics concept for expansion beyond our test
markets in metropolitan New York and Philadelphia. That process, completed in
2003, resulted in the successful opening of 10 Food Basics units in the Detroit
market on March 30, 2004.
The powerful consumer franchise and strong operations of A&P Canada
were tested in fiscal 2003, as the SARS outbreak, Mad Cow disease concern and
other events played havoc with Canada's tourism industry and overall economy for
most of the year. Despite those challenges, the Canadian Company delivered
another solid profit performance.
The refinement of our two-tier marketing offer in Ontario continued in
2003. Evolving mainstream stores emphasizing superior fresh and prepared food
offerings emerged under the Dominion and A&P banners; while the no frills Food
Basics stores, well established in Ontario over the past several years, further
sharpened their discount impact to meet competition. The customer appeal of
those formats, sound merchandising and operating execution and aggressive cost
management enabled us to succeed last year despite the turbulence of the Ontario
marketplace.
In summary, despite our poor results in absolute terms, we did achieve
all of our strategic objectives for fiscal 2003. Given our previous trend and
the nature of the economic and competitive landscape, we did not expect full
recovery within the year. Rather our aim was to lay the groundwork for
turnaround of the Company. That mission was successfully accomplished.
Going forward, our near-term expectations are conservative, due to the
considerable work still ahead of us in turning our business around and the
continued weakness of some leading economic indicators. However in terms of our
ultimate prospect for recovery, I remain confident for several reasons.
One is the fundamental operating improvement achieved across our U.S.
banners in fiscal 2003. Our positive comparable store sales trend underlined
vital progress not yet reflected on our bottom line, but clearly noted by our
customers. This was confirmed by the results of objective, third party shopper
surveys conducted in our stores all year, and also by our high customer ratings
in an independent shopper satisfaction study published by a national trade
journal, which included major competitors in most of our markets.
Secondly, last year's successful financial initiatives and operating
improvements will enable us to resume meaningful capital investment in the
business in 2004. This will accelerate the improvement of our store facilities,
and enable us to take advantage of unique opportunities, such as our recent
agreement to purchase four stores in New Orleans to expand our Sav-A-Center
operation.
Third is the developing impact of our supply chain and business process
infrastructure. This critical information platform will be instrumental in the
improvement of our distribution, category management, merchandising and store
operations. We anticipate substantial benefits as we fully utilize these
advanced tools to deliver the best possible offer to our customers, at the
lowest possible cost to the Company.
Last but certainly not least is the commitment and capability of our
people at all levels, demonstrated throughout the year even as we challenged
them with significant changes in the structure and scope of the organization.
A dramatic illustration was their exemplary performance during the
massive power blackout last August that affected the majority of our operations,
some for several days. Under those difficult circumstances, our people worked
diligently to maintain food safety, serve customer needs however possible, and
swiftly reestablish normal operations once power was restored.
More than any other factor, people are driving the recovery and renewal
of our business. Their commitment to our customers and our Company solidifies my
belief that A&P will persevere, and prevail. In closing, I salute all of our
associates for their dedication and hard work throughout fiscal 2003, and also
extend sincere thanks to our customers, suppliers and investors for their
continuing support.
Christian Haub
Chairman of The Board,
President & Chief Executive Officer
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
- ------------
The following Management's Discussion and Analysis is intended to help
the reader understand the financial position, operating results, and cash flows
of The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's fiscal year-end.
o Overview -- a general description of our business; the value drivers of
our business; measurements; opportunities; challenges and risks; and
initiatives.
o 2004 Outlook -- a discussion of certain trends or business initiatives
for the upcoming year that Management wishes to share with the reader
to assist in understanding the business.
o Review of Operations and Liquidity and Capital Resources - a discussion
of results for fiscal 2003 and 2002, significant business initiatives,
current and expected future liquidity and the impact of various market
risks on our Company.
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.
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
BASIS OF PRESENTATION
- ---------------------
Our fiscal year ends on the last Saturday in February. Fiscal 2003 ended
February 28, 2004, fiscal 2002 ended February 22, 2003 and fiscal 2001 ended
February 23, 2002. Fiscal 2003 was comprised of 53 weeks, and fiscal 2002 and
fiscal 2001 were each comprised of 52 weeks. Except where noted, all amounts are
presented in millions, and all net income (loss) per share data presented is
both basic and diluted.
OVERVIEW
- --------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale,
New Jersey, operates conventional supermarkets, combination food and drug
stores and discount food stores in 10 U.S. states, the District of Columbia, and
Ontario, Canada.
Our Company's business consists of retail grocery operations, which
include 633 directly managed stores and 63 franchised stores as of February 28,
2004. Operations are managed by two strategic business units ("SBUs") within the
Company, A&P U.S. and A&P Canada, which are supported by central corporate
functions. The chief executives of both SBUs, and the executives leading
corporate functions, report directly to the Chairman of the Board, President &
Chief Executive Officer of our Company.
o A&P U.S., based in Paterson, New Jersey, oversees all operations in the
United States. Our conventional operations include the A&P, Waldbaum's
and Food Emporium banners, which serve Metro New York, Super Fresh,
which serves Philadelphia and Baltimore, Farmer Jack, which serves the
greater Detroit area and Sav-A-Center, which serves the New Orleans
area. We also operate the Food Basics discount banner in several of our
areas. The stores are supported by eight regional distribution centers
located in the various markets in which we operate.
o A&P Canada, based in Toronto, Ontario, oversees operations across
Ontario, with stores operating under the A&P, Dominion, Food Basics,
Ultra Food & Drug and The Barn Market banners. A&P Canada also serves
as a franchisor to certain Food Basics stores in Ontario. The stores
are supported by four distribution centers.
Fiscal 2003 was a year of transition for our Company, as the first full year
operating under the current organizational structure, which was implemented in
the latter part of fiscal 2002. In addition to creating the two SBUs, we
installed new leadership in both units, positioned experienced operating
management closer to the retail businesses, and shifted selected support
functions from the Corporate organization into the business units.
Key initiatives were implemented during Fiscal 2003 along three major fronts:
1. Fortifying our Company's financial condition;
2. Halting the declining trend in our U.S. operations; and,
3. Strengthening our already-profitable Canadian operations.
Specific actions and outcomes were as follows:
o Fortifying our Company's financial condition: We generated
approximately $425 million in net cash proceeds during Fiscal 2003
through an asset divestiture program which led to the sale of store
operations in New England and Wisconsin and the Eight O'Clock Coffee
business as well as sale-leaseback transactions involving a number of
our properties. Financially, completing these sales enabled us to
reduce our debt burden and increase liquidity; managerially, they
enabled us to devote resources and attention to the businesses with the
best potential for profitable growth.
o In addition, we extended and amended our senior secured revolving
credit facility, putting in place a new $400 million facility to
provide an additional 2-1/2 years of term, until December 2007. The
amended facility also provides our Company with greater operating
flexibility, and makes possible increased capital spending which we
believe is a necessary part of our turnaround.
o Further, our Company-wide emphasis on cost reduction resulted in lower
overall administrative expenses as a percentage of sales. In addition
to heightened awareness and enforcement of cost control disciplines
throughout the organization, specific expense reduction measures
included a general administrative salary and hiring freeze in our
Corporate office and across the U.S. business, which remained in effect
throughout fiscal 2003.
o We also continued to develop and expand our Strategic Sourcing program.
This chainwide system for the purchase of supplies, equipment and
services needed to operate the business has generated approximately $40
million in savings to our Company over the past three years.
o Halting the decline in our US operations: The A&P U.S. business unit
made substantial progress in the effort to turn its operations around
and restore a profitable growth trend. Through tighter management of
results against budgeted targets, more disciplined merchandising and
promotional activity and heightened emphasis of store operating and
customer service fundamentals, management was able to stabilize the
business in the first half of fiscal 2003. The improvement trend built
steadily through the second half, resulting in comparable store sales
and operating profit results that exceeded internal targets for the
year.
o Two specific operating initiatives were afforded highest priority by
the U.S. business in fiscal 2003 - the turnaround of the Farmer Jack
operations in Michigan and Ohio, and preparation of the discount Food
Basics concept for expansion throughout the U.S. operating territories.
o Farmer Jack: In June of 2003, we relaunched Farmer Jack with a
new merchandising and marketing campaign emphasizing fresh foods,
customer service and better pricing. Those improvements have
begun to generate growth in sales and customer count, reversing
the previous decline of Farmer Jack's leading share of the
Detroit market. Thus far, results are consistent with
expectations, though we continue to have more progress to make to
restore a sufficient level of profitability.
o Food Basics: The Company's U.S. discount Food Basics format
continued to evolve last year, moving from test mode to the
beginning of a gradual roll-out in our operating territories. We
made changes in merchandising and product mix, daily store
operations and banner leadership to prepare for a growth-oriented
future. Food Basics, pioneered by our Company in Ontario several
years ago, has undergone extensive evaluation and refinement in
test locations in metropolitan New York and New Jersey and in
Philadelphia over the past two years. That process was completed
in fiscal 2003 and has since resulted in the successful opening
of 10 Food Basics units in the Detroit market on March 31, 2004.
o Other banners: Our other banners in the U.S. also stabilized during
Fiscal 2003. In particular, our Super Fresh banner maintained its
prior year trend of relatively rapid comparable store sales growth
and improved profit performance. We believe the performance of our
A&P, Waldbaum's and The Food Emporium banners will also provide a
solid base for improvement initiatives we plan for Fiscal 2004 and
beyond.
o During Fiscal 2003, A&P U.S. began to more fully use the capabilities
we built during the Supply Chain and Business Process initiative
which we completed in 2002. Our managers are now able to take better
advantage of advanced supply and logistics, category management,
merchandising and store operations tools and systems. Our Company is
now positioned to more fully leverage purchasing scale, drive
operating efficiency and enhance store product assortments throughout
the U.S. and Canada.
o Strengthening our already-profitable Canadian operations: A&P Canada
delivered a solid performance in fiscal 2003, despite the detrimental
impact of the SARS and Mad Cow Disease issues on Ontario's economy, and
the intense competitive environment that resulted. Our Company's
results were aided by management's response to these challenges, with
aggressive cost containment, and tight adherence to marketing and
merchandising strategies that produced profit without sacrificing
critical market share.
o Further, A&P Canada continued to refine and develop its marketing, by
further elevating the quality and appeal of its fresh and prepared food
offers, while also sharpening the low cost, discount Food Basics
stores. These activities provide a good base for maintaining
profitability in 2004, despite a continuing challenging competitive
environment. In particular, we continued to evolve our leading-edge
fresh store merchandising and product mix, in our Dominion, A&P and The
Barn Markets banners, and we made changes to our Food Basics stores and
merchandising program, already well established, to reflect the changed
environment.
2004 OUTLOOK
- ------------
We believe that the financial and operating improvements we achieved in
Fiscal 2003 strengthen our potential to improve profitability in the face of a
difficult market environment. We have taken a conservative outlook with regard
to results in fiscal 2004, based on both external and internal factors.
Externally, despite some positive signs regarding the economy overall,
we remain concerned that the indicators that traditionally impact food
retailers, most notably employment and new job creation forecasts, in both the
U.S. and Canada, do not provide a basis for significant increases in consumer
optimism in the foreseeable future.
Internally, a primary consideration is the turnaround of the U.S.
business, which remains a work in progress. A return to profitability is our
chief objective, but we recognize that achieving that result requires long range
success of the Farmer Jack initiative, substantive improvements throughout all
the U.S. banner operations, and successful development of a sizeable Food Basics
offering. We expect, over the course of the year, that we will continue to see
sustained progress on each of these initiatives.
Moreover, as a catalyst for those improvements, our Company's strategic
plan calls for a substantially increased capital investment in the store network
compared to the level of recent years. Although this is a positive and
encouraging development made possible by last year's financial initiatives and
operating improvements, it nevertheless represents reinvestment in the business
that is likely to affect profitability and cash flow for several years.
Our Company's key focal points and objectives for fiscal 2004 are
parallel to those of Fiscal 2003, as follows:
o In the U.S., continue to strengthen each conventional banner, behind
stronger marketing, merchandising and store operations; and gradually
rollout the Food Basics discount banner;
o In Canada, enhance an already strong operating and market position; and
o Centrally, maintain our strong liquidity with continued focus on cash
flow generation and efficient support operations.
REVIEW OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- --------------------------------------------------------
Our consolidated financial information presents the income related to
our operations of discontinued businesses separate from the results of our
continuing operations. Both the discussion and analysis that follows focus on
continuing operations.
FISCAL 2003 COMPARED WITH FISCAL 2002
- -------------------------------------
OVERALL
- -------
Sales for fiscal 2003 were $10.8 billion, compared with $10.1 billion for
fiscal 2002; comparable store sales, which include stores that have been in
operation for two full fiscal years and replacement stores, increased 0.9%. Net
loss per share for fiscal 2003 was $3.82 compared to a net loss per share of
$5.03 for fiscal 2002, a decrease of $1.21 per share.
Favorable /
Fiscal 2003 Fiscal 2002 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
Sales $ 10,812.5 $ 10,096.8 $ 715.7 7.1%
Increase in same store sales 0.9% 0.4% NA NA
Loss from continuing
operations (211.3) (201.1) (10.2) (5.1)
Income from discontinued
operations 64.3 7.6 56.7 NM
Net loss (147.0) (193.5) 46.5 24.0
Net loss per share (3.82) (5.03) 1.21 24.1
NM = not meaningful
Included in our results for fiscal 2003 was a $37.7 million charge ($0.98
per share) relating to our Farmer Jack restructuring program as described in
Notes 3 and 4 of our Consolidated Financial Statements, a $4.2 million net gain
($0.11 per share) relating to reversals of previously accrued vacancy related
costs as described in Note 4 of our Consolidated Financial Statements, and a
$60.1 million charge ($1.56 per share) relating to our Farmer Jack goodwill and
long-lived asset impairments as described in Note 3 of our Consolidated
Financial Statements.
The following table details the adjustments from "as reported" to "as
adjusted" results for fiscal 2003:
Fiscal 2003 Fiscal 2002
-------------------------------------------------------------------- ---------------
Adjustments to be
(added) subtracted
--------------------------------
Goodwill/
Fiscal 2003 Asset long-lived Fiscal 2003 Fiscal 2002
results as disposition asset results as results as
(In Millions) reported initiative impairment adjusted adjusted
---------------- --------------- --------------- --------------- ---------------
Sales $ 10,812.5 $ - $ - $ 10,812.5 $ 10,096.8
Cost of merchandise sold (7,882.7) (2.2) - (7,880.5) (7,250.0)
---------------- ---------------- --------------- ----------------- ------------
Gross margin 2,929.8 (2.2) - 2,932.0 2,846.8
Rate to sales 27.10% 27.12% 28.19%
Store operating, general and
administrative expense (3,098.3) (31.3) (60.1) (3,006.9) (2,860.8)
Rate to sales 28.65% 27.81% 28.33%
---------------- --------------- --------------- --------------- --------------
Loss from operations (168.5) (33.5) (60.1) (74.9) (14.0)
Interest expense (81.8) - - (81.8) (84.7)
Interest income 7.3 - - 7.3 7.9
---------------- --------------- --------------- --------------- --------------
Loss from continuing operations
before income taxes (243.0) (33.5) (60.1) (149.4) (90.8)
Benefit from income taxes 31.7 - - 31.7 0.6
---------------- --------------- --------------- --------------- --------------
Loss from continuing operations (211.3) (33.5) (60.1) (117.7) (90.2)
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of tax (30.2) - - (30.2) 7.6
Gain on disposal of discontinued
operations, net of tax 94.5 - - 94.5 -
---------------- --------------- --------------- --------------- --------------
Income from discontinued
operations 64.3 - - 64.3 7.6
---------------- --------------- --------------- ---------------- --------------
Net loss $ (147.0) $ (33.5) $ (60.1) $ (53.4) $ (82.6)
================ =============== =============== ================ ==============
The following table details the adjustments from "as reported" to
"as adjusted" results for fiscal 2002:
Fiscal 2002
------------------------------------------------------------------------------------------
Adjustments to be (added) subtracted
-----------------------------------------------------------
Gain on
proceeds
from the
Gain on demutual-
Fiscal early Deferred ization Fiscal
2002 Asset extinguish- tax asset of a mutual 2002
results as disposition ment valuation insurance results as
(In Millions) reported initiative of debt allowance company adjusted
------------- ------------- ------------- ---------- ------------- -------------
Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8
Cost of merchandise
sold (7,251.3) (1.3) - - - (7,250.0)
-------------- ------------- ------------- ---------- ------------ ---------------
Gross margin 2,845.5 (1.3) - - - 2,846.8
Rate to sales 28.18% 28.19%
Store operating, general
and administrative
expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8)
Rate to sales 28.12% 28.33%
------------- ------------- ------------- ------------- ------------- --------------
Income (loss) from
operations 6.3 6.4 12.2 - 1.7 (14.0)
Interest expense (84.7) - - - - (84.7)
Interest income 7.9 - - - - 7.9
------------- ------------- ------------- ------------- ------------- --------------
(Loss) income from
continuing operations
before income
taxes (70.5) 6.4 12.2 - 1.7 (90.8)
(Provision for) benefit
from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6
--------------- ----------- ------------- ------------ ------------- -------------
(Loss) income from
continuing
operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2)
Discontinued operations:
Income from operations
of discontinued
businesses, net of tax 7.6 - - - - 7.6
Gain on disposal of
discontinued
operations, net of tax - - - - - -
------------- ------------- ------------- ------------- ------------- -------------
Income from
discontinued
operations 7.6 - - - - 7.6
------------- ------------- ------------- ------------- ------------- -------------
Net loss $ (193.5) $9.6 $12.5 $(134.0) $ 1.0 $ (82.6)
============= ============= ============= ============= ============= ==============
SALES
- -----
Sales for fiscal 2003 of $10.8 billion increased $715.7 million or 7.1%
from sales of $10.1 billion for fiscal 2002. The higher sales were due to an
increase in U.S. Retail sales of $136.0 million, an increase in Canada Retail
sales of $478.4 million, and an increase in Canada Wholesale sales of $101.3
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 fiscal 2003 and fiscal 2002:
Fiscal 2003 Fiscal 2002 Inc (Dec) % Change
----------------- ----------------- -------------------- ----------------
U.S. Retail $ 7,563.0 $ 7,427.0 $ 136.0 1.8%
Canada Retail 2,435.7 1,957.3 478.4 24.4
Canada Wholesale 813.8 712.5 101.3 14.2
----------------- ----------------- -------------------- ----------------
Total $ 10,812.5 $ 10,096.8 $ 715.7 7.1%
================= ================= ==================== ================
The following details the dollar impact of several items affecting the
increase in sales by operating segment from fiscal 2002 to fiscal 2003:
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Sales Store 53rd
Stores Stores Rate Volume Sales Week Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
U.S. Retail $ 51.9 $ (83.2) $ - $ - $ 34.7 $ 132.6 $ 136.0
Canada Retail 106.5 (28.7) 305.5 - 48.2 46.9 478.4
Canada Wholesale - - 100.8 (14.8) - 15.3 101.3
------------- ------------- -------------- ------------- ------------- ------------- ---------
Total $ 158.4 $ (111.9) $ 406.3 $ (14.8) $ 82.9 $ 194.8 $715.7
============= ============= ============== ============= ============= ============= ==========
The increase in U.S. Retail sales was primarily attributable to the opening
of 28 stores since the beginning of fiscal 2002, of which 10 were opened in
fiscal 2003, increasing sales by $51.9 million, the increase in comparable store
sales for fiscal 2003 on a 52 week basis of 0.5% as compared to fiscal 2002, and
the favorable impact of the 53rd week included in fiscal 2003 which increased
sales by $132.6 million. These increases were partially offset by the closure or
sale of 108 stores since the beginning of 2002, of which 75 were closed or sold
in 2003, decreasing sales by $83.2 million. Included in the 108 stores closed or
sold since the beginning of fiscal 2002 were 21 stores closed as part of the
asset disposition initiative as discussed in Note 4 of our Consolidated
Financial Statements.
The increase in Canada Retail sales was primarily attributable to the
opening or transfer from franchise operations of 22 stores since the beginning
of fiscal 2002, of which 9 were opened in fiscal 2003, increasing sales by
$106.5 million, the favorable effect of the Canadian exchange rate, which
increased sales by $305.5 million, the increase in comparable store sales for
fiscal 2003 on a 52 week basis of 2.0% as compared to fiscal 2002, and the
favorable impact of the 53rd week included in fiscal 2003 which increased sales
by $46.9 million. These increases were partially offset by the closure of 19
stores since the beginning of 2002, of which 10 were closed in 2003, decreasing
sales by $28.7 million.
The increase in Canada Wholesale sales was attributable to the favorable
effect of the Canadian exchange rate of $100.8 million and the favorable impact
of the 53rd week included in fiscal 2003, which increased sales by $15.3
million, partially offset by lower sales volume of $14.8 million as we converted
several stores from franchise to corporate operations.
Average weekly sales per supermarket for U.S. Retail were approximately
$332,100 for fiscal 2003 versus $320,500 for the corresponding period of the
prior year, an increase of 3.6% due primarily to higher comparable store sales.
Average weekly sales per supermarket for Canada Retail were approximately
$259,600 for fiscal 2003 versus $222,000 for the corresponding period of the
prior year, an increase of 16.9%. This increase was primarily due to the
increase in the Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin
as a percentage of sales by operating segment for fiscal 2003 as compared to
fiscal 2002. Gross margin as a percentage of sales decreased 108 basis points to
27.10% for fiscal 2003 from 28.18% for fiscal 2002. This 108 basis point
decrease was caused by continued competitive pressures to drive sales volume and
protect market share in the current market.
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
U.S. Retail $ 2,256.3 29.83% $ 2,268.9 30.55%
Canada Retail 658.6 27.04 559.2 28.57
Canada Wholesale 14.9 1.83 17.4 2.44
-------------- --------------- -------------- --------------
Total $ 2,929.8 27.10% $ 2,845.5 28.18%
============== =============== ============== ==============
The following table details the dollar impact of several items affecting
the gross margin dollar increase by operating segment from fiscal 2002 to
fiscal 2003:
Sales Volume Gross Margin Rate Exchange Rate Total
------------ ----------------- ------------- --------------
U.S. Retail $ 41.5 $ (54.1) $ - $ (12.6)
Canada Retail 49.4 (32.3) 82.3 99.4
Canada Wholesale - (4.3) 1.8 (2.5)
------------ ------------------ --------------- -------------
Total $ 90.9 $ (90.7) $ 84.1 $ 84.3
============ ================== =============== =============
The U.S. Retail gross margin decrease of $12.6 million resulted from a
decrease of $54.1 million due to a lower gross margin rate partially offset by
an increase of $41.5 million due to higher sales volume. The Canadian Retail
gross margin increase of $99.4 million resulted from increases of $49.4 million
due to higher sales volume and $82.3 million from fluctuations in the Canadian
exchange rate, partially offset by a decrease of $32.3 million due to a lower
gross margin rate. The Canadian Wholesale gross margin decrease of $2.5 million
resulted from a decrease of $4.3 million due to a lower gross margin rate
partially offset by $1.8 million from fluctuations in the Canadian exchange
rate.
Included in our U.S. Retail gross margin for fiscal 2003 and fiscal 2002
were costs related to our asset disposition initiative of $2.2 million and $1.3
million, respectively, which were incurred to mark down inventory in stores
announced for closure.
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 fiscal 2003 compared to fiscal 2002. SG&A expense was $3.1 billion or 28.65%
for fiscal 2003 as compared to $2.8 billion or 28.12% for fiscal 2002.
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
U.S. Retail $ 2,453.9 32.45% $ 2,329.5 31.37%
Canada Retail 654.0 26.85 522.7 26.71
Canada Wholesale (9.6) (1.18) (13.0) (1.83)
------------- --------------- ------------- --------------
Total $ 3,098.3 28.65% $ 2,839.2 28.12%
============ =============== ============ ==============
Included in SG&A for fiscal 2003 was a $35.5 million charge relating to
our Farmer Jack restructuring program as described in Note 4 of our Consolidated
Financial Statements, a $4.2 million net gain relating to reversals of
previously accrued vacancy related costs as described in Note 4 of our
Consolidated Financial Statements, and a $60.1 million charge relating to our
Farmer Jack goodwill and long-lived asset impairments as described in Note 3 of
our Consolidated Financial Statements. In addition, included in SG&A for fiscal
2002 were net gains of $7.7 million relating to our asset disposition initiative
as described in Note 2 of our Consolidated Financial Statements included in our
Fiscal 2002 Annual Report to Stockholders, a gain of $12.2 million relating to
the early extinguishment of $50.7 million of our 7.75% Notes due April 15, 2007
and $44.5 million of our 9.125% Notes due December 15, 2011 as described in Note
6 of our Consolidated Financial Statements included in our Fiscal 2002 Annual
Report to Stockholders, and a gain of $1.7 million related to the sale of
securities received as part of the demutualization of The Prudential Insurance
Company as described in Note 15 of our Consolidated Financial Statements
included in our Fiscal 2002 Annual Report to Stockholders. Excluding these
charges, SG&A as a percentage of sales for fiscal 2003 as compared to fiscal
2002 would have decreased 52 basis points.
The major items impacting this decrease in SG&A as a percentage of sales
include:
o Higher mix of sales in Canada which has a lower SG&A rate;
o Lower costs related to our business process initiative; and
o Lower severance and employee buy-out costs in the U.S.
Partially offset by a $17.5 million increase in our workers' compensation and
general liability reserves in response to both adverse development of prior
years' costs and other developments including a continuing trend of rising
costs.
Also included in SG&A for fiscal 2002 were $60.5 million relating to our
business process initiative. Such costs primarily included professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative.
We also review individual 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 fiscal 2003 and fiscal 2002, we recorded
impairment losses on property, plant and equipment of $4.4 million and $15.7
million, respectively, related to U.S. Retail stores that were or will be closed
in the normal course of business. Similarly, we recorded impairment losses on
property, plant and equipment of $1.7 million and $3.2 million, respectively,
related to Canada Retail stores that were or will be closed in the normal course
of business. These amounts were included in SG&A in our Consolidated Statements
of Operations. 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 $81.8 million for fiscal 2003 decreased from the
prior year amount of $84.7 million due primarily to lower interest expense
resulting from our open market purchase of $50.7 million of our 7.75% Notes due
April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011,
primarily during the fourth quarter of fiscal 2002.
INCOME TAXES
- ------------
The benefit from income taxes from continuing operations for fiscal 2003
was $31.7 million (a $42.3 million benefit from our U.S. operations and a $10.6
million provision for our Canadian operations) compared to $130.6 million
provision for income taxes from continuing operations for fiscal 2002 (a $104.6
million provision for our U.S. operations and a $26.0 million provision for our
Canadian operations). Our U.S. tax benefit from continuing operations was offset
by a tax provision provided on discontinued operations in accordance with
Statement of Financial Accounting Standards 109, "Accounting for Income Taxes".
Consistent with prior year, we continue to record a valuation allowance against
our U.S. net deferred tax assets.
(LOSS) INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- --------------------------------------------------------------------
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.
Loss from operations of discontinued businesses, net of tax, for fiscal
2003 was $30.2 million as compared to income from operations of discontinued
businesses, net of tax, of $7.6 million for fiscal 2002. During fiscal 2003, we
recorded the following pretax items related to these discontinued businesses:
o impairment losses on the property, plant and equipment relating to these
operations of $18.9 million;
o pension expense relating to early withdrawal from various multi-employer
union pension plans we participate in of $6.5 million;
o net rent vacancy charges of $23.6 million;
o severance charges of $5.8 million; and
o inventory markdowns of $1.4 million.
The remaining amounts for each period represent the operating results of
the stores in these locations as well as results from our Eight O'Clock Coffee
business.
FISCAL 2002 COMPARED WITH FISCAL 2001
- -------------------------------------
OVERALL
- -------
Sales for fiscal 2002 were $10.1 billion, compared with $10.2 billion for
fiscal 2001; comparable store sales, which includes stores that have been in
operation for two full fiscal years and replacement stores, increased 0.4%. Net
loss per share for fiscal 2002 was $5.03 compared to a net loss per share of
$1.88 for fiscal 2001, an increase of $3.15 per share.
Favorable /
Fiscal 2002 Fiscal 2001 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
Sales $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)%
Increase in same store sales 0.4% 2.6% NA NA
Loss from continuing
operations (201.1) (83.4) (117.7) (141.1)
Income from discontinued
operations 7.6 11.5 (3.9) (33.9)
Net loss (193.5) (71.9) (121.6) (169.1)
Net loss per share (5.03) (1.88) (3.15) (167.6)
Included in the results for fiscal 2002 was a pretax $6.4 million gain
($9.6 million after tax or $0.25 per share) relating to our asset disposition
initiative (see Note 2 of our Consolidated Financial Statements included in our
Fiscal 2002 Annual Report to Stockholders), a pretax gain of $12.2 million
($12.5 million after tax or $0.32 per share) for the cost of repurchasing $50.7
million of our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125%
Notes due December 15, 2011 (see Note 6 of our Consolidated Financial Statements
included in our Fiscal 2002 Annual Report to Stockholders), a $134.0 million
provision for income taxes related to our U.S. net deferred tax asset valuation
allowance ($3.48 per share; see Note 9 of our Consolidated Financial Statements
included in our Fiscal 2002 Annual Report to Stockholders), and a nonrecurring
pretax gain of $1.7 million ($1.0 million after tax or $0.03 per share) from
proceeds received as a result of the sale of securities received as part of the
demutualization of The Prudential Insurance Company (see Note 15 of our
Consolidated Financial Statements included in our Fiscal 2002 Annual Report to
Stockholders). The following table details the adjustments from "as reported" to
"as adjusted" results for fiscal 2002:
Fiscal 2002 Fiscal 2001
------------------------------------------------------------------------------------------ ------------
Adjustments to be (added) subtracted
--------------------------------------------------------------
Gain on proceeds
Gain on from the
Fiscal early Deferred demutualization Fiscal Fiscal
2002 Asset extinguish- tax asset of a mutual 2002 2001
results as disposition ment valuation insurance results as results as
(In Millions) reported initiative of debt allowance company adjusted adjusted
------------- ------------- ------------- ---------- ------------- ------------- -------------
Sales $ 10,096.8 $ - $ - $ - $ - $ 10,096.8 $10,206.2
Cost of merchandise
sold (7,251.3) (1.3) - - - (7,250.0) (7,284.7)
------------- ------------- ------------- ------------- ------------- ------------- ------------
Gross margin 2,845.5 (1.3) - - - 2,846.8 2,921.5
Rate to sales 28.18% 28.19% 28.62%
Store operating,
general and
administrative
expense (2,839.2) 7.7 12.2 - 1.7 (2,860.8) (2,832.0)
Rate to sales 28.12% 28.33% 27.75%
------------- ------------- ------------- ------------- ------------- ------------- ------------
Income (loss) from
operations 6.3 6.4 12.2 - 1.7 (14.0) 89.5
Interest expense (84.7) - - - - (84.7) (91.7)
Interest income 7.9 - - - - 7.9 7.0
------------- ------------- ------------- ------------- ------------- ------------- ------------
(Loss) income from
continuing
operations before
income taxes (70.5) 6.4 12.2 - 1.7 (90.8) 4.8
(Provision for) benefit
from income taxes (130.6) 3.2 0.3 (134.0) (0.7) 0.6 (3.8)
------------- ------------- ------------- ------------- ------------ ------------- -----------
(Loss) income from
continuing
operations (201.1) 9.6 12.5 (134.0) 1.0 (90.2) 1.0
Discontinued operations:
Income from operations
of discontinued
businesses, net of tax 7.6 - - - - 7.6 11.5
Gain on disposal of
discontinued
operations, net of tax - - - - - - -
------------- ------------- ------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 7.6 - - - - 7.6 11.5
------------- ------------- ------------- ------------- ------------- ------------- ------------
Net loss $ (193.5) $ 9.6 $ 12.5 $ (134.0) $ 1.0 $ (82.6) $ 12.5
============= ============= ============= ============= ============= ============= ==========
The following table details the adjustments from "as reported" to "as
adjusted" results for fiscal 2001:
Fiscal 2001
----------------------------------------------------------------------------
Adjustments to be (added) subtracted
------------------------------------------
Gain on
proceeds
from the
Loss on demutual-
early ization
Fiscal 2001 Asset extinguish- of a mutual Fiscal 2001
results as disposition ment insurance results as
(In Millions) reported initiative of debt company adjusted
------------- ------------- ------------- ------------- -------------
Sales $ 10,206.2 $ - $ - $ - $ 10,206.2
Cost of merchandise sold (7,288.6) (3.9) - - (7,284.7)
--------------- ------------ ------------- ------------- -------------
Gross margin 2,917.6 (3.9) - - 2,921.5
Rate to sales 28.59% 28.62%
Store operating, general and
administrative expense (3,034.0) (189.6) (12.4) - (2,832.0)
Rate to sales 29.73% 27.75%
Gain on proceeds from the
demutualization of a
mutual insurance company 60.6 - - 60.6 -
--------------- ------------ ------------ ------------ -------------
(Loss) income from operations (55.8) (193.5) (12.4) 60.6 89.5
Interest expense (91.7) - - - (91.7)
Interest income 7.0 - - - 7.0
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income
taxes (140.5) (193.5) (12.4) 60.6 4.8
Benefit from (provision for)
income taxes 57.1 81.2 5.2 (25.5) (3.8)
------------- ----------- ------------- ------------- -------------
(Loss) income from
continuing operations (83.4) (112.3) (7.2) 35.1 1.0
Discontinued operations:
Income from operations of
discontinued businesses,
net of tax 11.5 - - - 11.5
Gain on disposal of discontinued
operations, net of tax - - - - -
------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 11.5 - - - 11.5
------------- ------------- ------------- ------------- -------------
Net loss $ (71.9) $ (112.3) $ (7.2) $ 35.1 $ 12.5
============= ============= ============= ============= =============
SALES
- -----
Sales for fiscal 2002 of $10.1 billion decreased $109.4 million or 1.1%
from sales of $10.2 billion for fiscal 2001. The lower sales were due to a
decrease in U.S. Retail sales of $296.0 million, partially offset by increases
in Canada Retail sales of $150.6 million and in Canada Wholesale sales of $36.0
million. The following table presents sales for each of our operating segments
for fiscal 2002 and fiscal 2001:
Fiscal 2002 Fiscal 2001 Inc (Dec) % Change
---------------- ----------------- -------------------- ----------------
U.S. Retail $ 7,427.0 $ 7,723.0 $ (296.0) (3.8)%
Canada Retail 1,957.3 1,806.7 150.6 8.3
Canada Wholesale 712.5 676.5 36.0 5.3
---------------- ----------------- -------------------- ----------------
Total $ 10,096.8 $ 10,206.2 $ (109.4) (1.1)%
================ ================= ==================== ================
The following table details the dollar impact of several items affecting
the decrease in sales by operating segment from fiscal 2001 to fiscal 2002:
Impact of Impact of Foreign Comparable
New Closed Exchange Sales Store
Stores Stores Rate Volume Sales Total
------------- -------------- ------------- ------------- ------------- -------------
U.S. Retail $ 83.6 $ (334.3) $ - $ - $ (45.3) $ (296.0)
Canada Retail 100.5 (46.7) 2.5 - 94.3 150.6
Canada Wholesale - - 0.9 35.1 - 36.0
------------- -------------- ------------- ------------- ------------- -------------
Total $ 184.1 $ (381.0) $ 3.4 $ 35.1 $ 49.0 $ (109.4)
============= ============== ============= ============= ============= =============
The decrease in U.S. Retail sales was primarily attributable to the
closure of 94 stores since the beginning of fiscal 2001, of which 33 were closed
in fiscal 2002, decreasing sales by $334.3 million, and lower comparable store
sales for fiscal 2002 of 1.0% as compared to fiscal 2001. Included in the 94
stores closed since the beginning of fiscal 2001 were 37 stores closed as part
of the asset disposition initiative discussed in Note 2 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders.
This decrease was partially offset by the opening of 36 new stores since the
beginning of fiscal 2001, of which 18 were opened in fiscal 2002, increasing
sales by $83.6 million.
The increase in Canada Retail sales was primarily attributable to the
opening of 16 stores since the beginning of fiscal 2001, of which 13 were opened
in fiscal 2002, which increased sales by $100.5 million, the favorable effect of
the Canadian exchange rate, which increased sales by $2.5 million, and an
increase in comparable store sales for fiscal 2002 of 6.6% as compared to fiscal
2001. These increases were partially offset by the closure of 20 stores since
the beginning of fiscal 2001, of which 9 stores were closed in fiscal 2002,
decreasing sales by $46.7 million.
The increase in Canada Wholesale sales of $36.0 million was attributable
to higher sales volume of $35.1 million and the favorable effect of the Canadian
exchange rate of $0.9 million.
Average weekly sales per supermarket for U.S. Retail were approximately
$320,500 for fiscal 2002 versus $312,600 for the corresponding period of the
prior year, an increase of 2.5%. Average weekly sales per supermarket for Canada
Retail were approximately $222,000 for fiscal 2002 versus $200,400 for the
corresponding period of the prior year, an increase of 10.8%. These increases
were primarily due to:
o Closure of smaller stores with lower average weekly sales;
o Closure of underperforming stores; and
o Opening and remodeling of larger stores.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross margin
as a percentage of sales by operating segment for fiscal 2002 as compared to
fiscal 2001. Gross margin as a percentage of sales decreased 41 basis points to
28.18% for fiscal 2002 from 28.59% for fiscal 2001.
Fiscal 2002 Fiscal 2001
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
U.S. Retail $ 2,268.9 30.55% $ 2,364.5 30.62%
Canada Retail 559.2 28.57 537.7 29.76
Canada Wholesale 17.4 2.44 15.4 2.28
-------------- --------------- ------------ --------------
Total $ 2,845.5 28.18% $ 2,917.6 28.59%
============== ================ ============ ==============
The following details the dollar impact of several items affecting the
gross margin dollar decrease by operating segment from fiscal 2001 to fiscal
2002.
Sales Volume Gross Margin Rate Exchange Rate Total
------------ ----------------- ------------- ------------------
U.S. Retail $ (90.6) $ (4.9) $ - $ (95.5)
Canada Retail 44.1 (23.3) 0.7 21.5
Canada Wholesale 0.8 1.1 - 1.9
------------- -------------------- --------------- -------------
Total $ (45.7) $ (27.1) $ 0.7 $ (72.1)
============= ==================== =============== =============
The U.S. Retail gross margin decrease of $95.5 million resulted from
decreases of $90.6 million due to lower sales volume and $4.9 million due to a
lower gross margin rate. The Canadian Retail gross margin increase of $21.5
million resulted from increases of $44.1 million in sales volume and $0.7
million from fluctuations in the Canadian exchange rate, partially offset by a
decrease of $23.3 million due to a lower gross margin rate. The Canadian
Wholesale gross margin increase of $1.9 million resulted from an increase of
$1.1 million due to a higher gross margin rate and an increase in sales volume
of $0.8 million.
This 41 basis point decrease was caused primarily by the following:
o More aggressive promotional activity during the current period in order
to drive sales volume and protect market share; and
o Increased inventory shrink losses during the current year period compared
to the prior year period.
Included in gross margin for fiscal 2002 and fiscal 2001 were costs
related to our asset disposition initiative of $1.3 million and $3.9 million,
respectively, which were incurred to mark down inventory in stores announced for
closure.
Gross margin for fiscal 2001 also included costs of $6.3 million incurred
as part of our business process initiative. These costs were incurred to mark
down inventory to be discontinued as a result of detailed category management
studies.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents SG&A, by operating segment, in dollars and as
a percentage of sales for fiscal 2002 as compared to fiscal 2001. SG&A was $2.8
billion or 28.12% for fiscal 2002 compared to $3.0 billion or 29.73% for fiscal
2001.
Fiscal 2002 Fiscal 2001
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
U.S. Retail $ 2,329.5 31.37% $ 2,528.7 32.74%
Canada Retail 522.7 26.71 516.4 28.58
Canada Wholesale (13.0) (1.83) (11.1) (1.65)
------------- --------------- ------------- --------------
Total $ 2,839.2 28.12% $ 3,034.0 29.73%
============= =============== ============= ==============
Included in SG&A for fiscal 2002 and fiscal 2001 were net gains of $7.7
million and net costs of $189.6 million, respectively, relating to our asset
disposition initiative as described in Note 2 of our Consolidated Financial
Statements included in our Fiscal 2002 Annual Report to Stockholders. Also
included in SG&A for fiscal 2002 and fiscal 2001 was a gain of $12.2 million
relating to the early extinguishment of $50.7 million of our 7.75% Notes due
April 15, 2007 and $44.5 million of our 9.125% Notes due December 15, 2011 and a
loss of $12.4 million relating to the early extinguishment of $20.0 million of
our 7.75% Notes due April 15, 2007, respectively, as described in Note 6 of our
Consolidated Financial Statements included in our Fiscal 2002 Annual Report to
Stockholders, and a gain of $1.7 million in fiscal 2002 related to the sale of
securities received as part of the demutualization of The Prudential Insurance
Company as described in Note 15 of our Consolidated Financial Statements
included in our Fiscal 2002 Annual Report to Stockholders. Excluding these
items, SG&A as a percentage of sales for fiscal 2002 as compared to fiscal 2001
would have increased 58 basis points.
The major items impacting this increase include:
o Higher severance costs in the U.S.;
o Increased labor costs as a percentage of sales in the U.S.;
o Higher consulting costs due to a non-merchandise product and service
sourcing initiative; and
o Higher closed store expenses for stores closed during the normal course
of business.
Partially offset by:
o Lower costs related to our business process initiative;
o Higher gains on the sale of property and equipment during fiscal 2002;
o Lower management incentive bonus expenses; and
o A $7 million reduction of accruals for occupancy costs primarily related
to a change in estimate.
Included in SG&A for fiscal 2002 and fiscal 2001 were $60.5 million and
$91.6 million, respectively, relating to our business process initiative. Such
costs primarily included professional consulting fees and salaries, including
related benefits, of employees working full-time on the initiative.
We also review individual 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 fiscal 2002, we recorded impairment
losses on property, plant and equipment of $15.7 million related to U.S. Retail
stores that were or will be closed in the normal course of business. Similarly,
we recorded impairment losses on property, plant and equipment of $3.2 million
related to Canada Retail stores that were or will be closed in the normal course
of business. During fiscal 2001, there were $91.4 million in impairment losses
relating to U.S. Retail stores, of which $80.9 million relates to the asset
disposition initiative as discussed in Note 2 of our Consolidated Financial
Statements included in our Fiscal 2002 Annual Report to Stockholders, and $5.0
million in impairment losses relating to Canada Retail stores closed in the
normal course of business. These amounts were included in SG&A in our
Consolidated Statements of Operations.
GAIN ON PROCEEDS FROM THE DEMUTUALIZATION OF A MUTUAL INSURANCE COMPANY
- -----------------------------------------------------------------------
During fiscal 2001, we received cash and common stock totaling $60.6
million from the demutualization of The Prudential Insurance Company. This
amount was recorded as a nonrecurring gain and included in the determination of
pretax income for fiscal 2001.
INTEREST EXPENSE
- ----------------
Interest expense of $84.7 million for fiscal 2002 decreased from the
prior year amount of $91.7 million due primarily to the following:
o Lower interest expense on our Secured Credit Agreement during fiscal
2002 compared to fiscal 2001 due to decreased rates and borrowings; and
o The impact of interest rate swaps which commenced in the fourth quarter
of fiscal 2001.
Partially offset by:
o Higher interest expense on the $275 million 9.125% Senior Notes due
December 15, 2011 which were issued to refinance $178 million of the $200
million 7.70% Senior Notes due January 15, 2004.
The decreased borrowing requirement on our Secured Credit Agreement was
primarily caused by the following:
o Cash generated from operating activities;
o Proceeds received from the refinancing of $178 million of the $200
million 7.70% Senior Notes due January 15, 2004 with the issuance of $275
million 9.125% Senior Notes due December 15, 2011; and
o Proceeds received as a result of the demutualization of The Prudential
Insurance Company as described in Note 15 of our Consolidated Financial
Statements included in our Fiscal 2002 Annual Report to Stockholders.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for fiscal 2002
was $130.6 million (a $104.6 million provision from our U.S. operations and a
$26.0 million provision for our Canadian operations) compared to a benefit from
income taxes from continuing operations of $57.1 million in fiscal 2001 (a $77.2
million benefit from our U.S. operations and a $20.1 million provision for our
Canadian operations). The change in the provision for income taxes relates to
the absence of the tax benefit of U.S. losses that would have been recorded had
a valuation allowance of $133.7 million not been recorded and offset against our
net U.S. deferred tax asset during the second quarter of fiscal 2002. During the
remainder of fiscal 2002, the valuation allowance was increased by $27.8
million. Statement of Financial Accounting Standards ("SFAS") 109 "Accounting
for Income Taxes" requires that a valuation allowance be created and offset
against the net deferred tax asset if, based on existing facts and
circumstances, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized (see Note 9 of our Consolidated
Financial Statements included in our Fiscal 2002 Annual Report to Stockholders).
INCOME FROM OPERATIONS OF DISCONTINUED BUSINESSES, NET OF TAX
- -------------------------------------------------------------
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.
Income from operations of discontinued businesses, net of tax for fiscal
2002 was $7.6 million as compared to $11.5 million for fiscal 2001. These
amounts for each fiscal year represent the operating results of the stores in
these locations as well as results from our Eight O'Clock Coffee business.
ASSET DISPOSITION INITIATIVE
- ----------------------------
In fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores including the exit of the Richmond, Virginia and Atlanta, Georgia
markets. 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 would be closed and/or sold, and certain
administrative streamlining would take place. During the fourth quarter of
fiscal 2003, we announced an initiative to close 5 stores and convert 13 stores
to our Food Basics format in the Detroit, Michigan and Toledo, Ohio markets. As
a result, we recorded a charge of $37.7 million ($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) as follows:
Fiscal 2003
--------------
Occupancy related $ 20,999
Severance and benefits 8,930
Fixed asset writeoffs 4,129
Nonaccruable closing costs 1,449
Inventory markdowns 2,244
---------------
Total charges $ 37,751
===============
As of February 28, 2004, we had closed all of the above stores and
facilities. The following table summarizes the activity related to the charges
recorded for the aforementioned initiatives since the beginning of fiscal 2002:
Severance
and
Occupancy Benefits Fixed Assets Total
------------- -------------- --------------- -------------
Balance at
February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837
Addition (1) 7,249 3,544 - 10,793
Utilization (2) (34,003) (19,830) 776 (53,057)
Adjustments (3) (13,825) 889 (776) (13,712)
------------- ------------- --------------- ------------
Balance at
February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861
Addition (1) 26,553 8,930 4,129 39,612
Utilization (2) (32,053) (7,883) (4,129) (44,065)
Adjustments (3) (5,776) 1,558 - (4,218)
------------ ------------- -------------- ------------
Balance at
February 28, 2004 $ 91,845 $ 9,345 $ - $ 101,190
============ ============= ============== ============
(1) The additions to occupancy during fiscal 2003 represent charges related
to closures and conversions in the Detroit, Michigan market of $21.0
million and the present value of accrued interest related to lease
obligations of $5.6 million. The addition to severance during fiscal
2002 related to retention and productivity incentives that were accrued
as earned, and the addition in fiscal 2003 related to a voluntary
termination plan initiated in the Detroit, Michigan market.
(2) Occupancy utilization represents vacancy related payments for closed
locations. Severance utilization represents payments made to terminated
employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $4.2 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations. During fiscal 2002, we
recorded net adjustments of $13.7 million primarily related to
reversals of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of $7.2
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 $3.2
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.
As described above, during fiscal 2003, we recorded a net charge of $33.5
million to our Consolidated Statements of Operations reflecting a $37.7 million
charge relating to our Farmer Jack restructuring program offset by a $4.2
million net gain relating to reversals of previously accrued vacancy related
costs. During fiscal 2002, we recorded a net gain of $6.4 million to our
Consolidated Statement of Operations reflecting a $13.7 million gain primarily
relating to reversals of previously accrued vacancy related costs offset by a
$7.3 million charge for non-accruable store inventory markdowns and closing
costs.
As of February 28, 2004, we had paid approximately $59.3 million of the
total original severance and benefits charge recorded, which resulted from the
termination of approximately 4,800 employees. The remaining severance liability
primarily relates to future obligations for early withdrawal from multi-employer
union pension plans, and individual severance payments which will be paid by the
end of fiscal 2005.
At February 28, 2004, approximately $26.8 million of the liability was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations for fiscal 2003,
2002 and 2001 are the sales and operating results of the aforementioned
permanently closed stores while they were open during the periods presented. The
results of these operations are as follows:
Fiscal 2003 Fiscal 2002 Fiscal 2001
-------------- ---------------- ---------------
Sales $ 41,810 $ 68,776 $306,220
========== =========== =========
Operating loss $ (8,034) $ (5,371) $(25,556)
========== =========== =========
We have evaluated the liability balance of $101 million as of February 28,
2004 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 Statements of
Cash Flows:
Fiscal 2003 Fiscal 2002 Fiscal 2001
--------------- --------------- -------------
Net cash (used in) provided by operating activities $ (14,978) $ 191,046 $ 325,898
--------------- --------------- ------------
Net cash provided by (used in) investing activities $ 129,923 $ (162,799) $ (140,374)
--------------- --------------- -----------
Net cash used in financing activities $ (46,012) $ (608) $ (147,617)
--------------- --------------- ------------
Net cash flow used in operating activities of $15.0 million for fiscal
2003 primarily reflected our net loss of $147.0 million adjusted for non-cash
charges of $60.1 million related to our Farmer Jack long lived asset / goodwill
impairment, $33.5 million related to our Farmer Jack restructuring program, and
depreciation and amortization of $268.8 million, partially offset by the gain
from the sale of the discontinued operations of $162.9 million, a decrease in
accounts payable of $58.1 million and a decrease in other non-current
liabilities of $35.4 million. Net cash flow provided by operating activities of
$191.0 million for fiscal 2002 primarily reflected our net loss of $193.5
million adjusted for non-cash charges of $263.6 million for depreciation and
amortization and $157.6 million related to our income tax provision. Net cash
flow provided by operating activities of $325.9 million for fiscal 2001
primarily reflected our net loss of $71.9 million adjusted for non-cash charges
of $201.1 million related to restructuring and $262.6 million related to
depreciation and amortization, partially offset by $47.3 million related to our
income tax benefit.
Net cash flow provided by investing activities of $129.9 million for
fiscal 2003 primarily reflected cash received from the sale of our assets of
$264.6 million (most of which related to our discontinued operations), partially
offset by property expenditures totaling $134.7 million, which included 19 new
supermarkets and 2 major remodels. Net cash flow used in investing activities of
$162.8 million for fiscal 2002 primarily reflected $219.5 million used for
property expenditures, which included 31 new supermarkets, 38 major remodels or
enlargements and capital expenditures related to the business process
initiative, partially offset by $56.7 million in proceeds from property
disposals. Net cash flow used in investing activities of $140.4 million for
fiscal 2001 primarily reflected $246.2 million used for property expenditures,
which included 21 new supermarkets, 26 major remodels or enlargements, and
capital expenditures related to the business process initiative, partially
offset by $105.8 million in proceeds from property disposals.
For fiscal 2004, we have planned capital expenditures of approximately
$275.0 to $300.0 million, which will be funded primarily from existing working
capital. These expenditures relate primarily to opening approximately 10 to 15
new supermarkets, converting 30 to 35 stores to new formats, and enlarging or
remodeling 100 - 125 supermarkets. We currently expect to close approximately
5 - 10 stores during fiscal 2004.
Net cash used in financing activities of $46.0 million for fiscal 2003
primarily reflected $135.0 million in payments on our revolving lines of credit,
$47.1 million in payments on long term borrowings, and $13.6 million in
principal payments on capital leases, partially offset by $166.5 million in
long-term borrowings. Net cash flow used in financing activities of $0.6 million
for fiscal 2002 primarily reflected $178.3 million in payments on our revolving
lines of credit, $95.0 million in payments on long-term borrowings, $25.6
million in decreased book overdrafts, $5.7 million paid in deferred financing
fees, and $12.2 million in principal payments on capital leases, partially
offset by $313.3 million in borrowings under revolving lines of credit. Net cash
flow used in financing activities of $147.6 million for fiscal 2001 primarily
reflected $1.3 billion in payments on revolving lines of credit, $223.9 million
in payments on long-term borrowings, and $11.7 million in principal payments on
capital leases, partially offset by $1.1 billion in proceeds under revolving
lines of credit and $277.0 million in long-term borrowings.
WORKING CAPITAL
- ---------------
We had working capital of $72.4 million at February 28, 2004 compared to
working capital of $9.0 million at February 22, 2003. We had cash and cash
equivalents aggregating $276.2 million at February 28, 2004 compared to $199.0
million at the end of fiscal 2002. The increase in working capital was
attributable primarily to the following:
o An increase in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in current portion of long term debt due to the repayment of our
7.70% Notes due January 15, 2004; and
o A decrease in accounts payable (inclusive of book overdrafts).
Partially offset by the following:
o A decrease in inventories, prepaid expenses and other current assets mainly
due to the sale of assets held for sale; and
o An increase in other accruals.
REVOLVING CREDIT AGREEMENT
- --------------------------
During fiscal 2003, we amended and restated our Secured Credit Agreement
(the "Amended and Restated Credit Agreement") and decreased our borrowing base
to $400 million. Thus, at February 28, 2004, we had a $400 million secured
revolving credit agreement with a syndicate of lenders enabling us to borrow
funds on a revolving basis sufficient to refinance short-term borrowings and
provide working capital as needed. This amended facility provides us with
greater operating flexibility and provides for increased capital spending. Under
the Amended and Restated Credit Agreement, there are no financial covenants as
long as availability under the agreement exceeds $50 million.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$93.5 million at February 28, 2004) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of February 28, 2004, there were no borrowings under these credit
agreements. As of February 28, 2004, after reducing availability for outstanding
letters of credit and borrowing base requirements, we had $213.0 million
available under the Amended and Restated Credit Agreement.
OTHER
- -----
During fiscal 2003, we repurchased in the open market $9.8 million of our
7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within income from operations in accordance with SFAS 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections".
During fiscal 2002, we repurchased in the open market $50.7 million of
our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $12.2 million. In accordance with SFAS 145,
this gain has been reclassified within income from operations for fiscal 2002.
Under the Amended and Restated Credit Agreement, we are permitted to make bond
repurchases and may do so from time to time in the future.
On February 27, 2004, we sold 13 properties and simultaneously leased
them back from the purchaser. However, due to our Company's continuing
involvement with these properties, the sale did not qualify for sale-leaseback
accounting in accordance with SFAS 98, "Accounting for Leases" but rather
qualified as a financing under the provisions of SFAS 66, "Accounting for Sales
of Real Estate." In accordance with SFAS 66, the carrying value of these
properties of approximately $73.6 million remained on our Consolidated Balance
Sheet and no sale was recognized. Instead, the sales price of these properties
of $166.5 million was recorded as a financing obligation with a maturity of 20
years, with the exception of one property that has a maturity of 22 years,
within "Long term debt" on our Consolidated Balance Sheet at February 28, 2004.
In addition, all lease payments are being expensed to "Interest expense" in our
Consolidated Statements of Operations. Of the 13 properties sold, all were sold
for a profit resulting in a gain, after deducting expenses, which has been
deferred and will not be recognized until the end of the respective leases when
our continuing involvement ceases. We expect to enter into similar transactions
for other owned properties from time to time in the future.
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 28, 2004 at terms contingent upon market conditions at
the time of sale.
We do not expect to pay dividends during fiscal 2004.
As of February 28, 2004, we have the following contractual obligations
and commitments:
Payments Due by Period (in millions)
---------------------------------------------------------------------------------------------
Contractual Less than
Obligations Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- ------------------ ------------------ ----------
Debt (1) $ 826.0 $ 2.3 $ 4.5 $ 220.0 $ 599.2
Capital Leases (2) 176.5 24.4 28.3 22.1 101.7
Operating Leases (2) 3,281.9 246.1 479.1 444.2 2,112.5
Pension Obligations (3) 52.8 4.5 4.9 4.7 38.7
Postretirement
Obligations (4) 23.0 2.1 4.3 4.4 12.2
Occupancy Payments (5) 143.6 30.0 40.3 28.6 44.7
Severance (6) 15.5 12.0 1.7 0.3 1.5
Purchase Commitments(7):
Equipment Purchases 6.6 6.4 0.2 - -
Equipment Rentals 58.1 43.9 8.4 4.5 1.3
Suppliers 1,494.2 404.6 772.0 317.6 -
Manufacturers/Vendors 54.8 33.9 20.4 0.5 -
Service Contracts 26.6 19.6 6.9 0.1 -
Consulting 30.1 23.6 6.5 - -
------------- ------------- -------------- ------------- -----------
Total $ 6,189.7 $ 853.4 $ 1,377.5 $ 1,047.0 $ 2,911.8
============= ============= ============== ============= ===========
(1) Amounts represent contractual amounts due. Refer to Note 8 of our
Consolidated Financial Statements for information regarding long-term debt.
We expect to settle such long-term debt by several methods, including cash
flows from operations.
(2) Amounts represent contractual amounts due. Refer to Note 10 of our
Consolidated Financial Statements for information regarding capital and
operating leases.
(3) Amounts represent future benefit payments for our unfunded defined benefit
pension plans as well as future contributions to our funded defined benefit
pension plans. Refer to Note 12 of our Consolidated Financial Statements for
information regarding our defined benefit pension plans.
(4) Amounts represent future benefit payments for our unfunded postretirement
benefit obligation. Refer to Note 12 of our Consolidated Financial
Statements for information regarding our postretirement benefits.
(5) Amounts represent our future occupancy payments primarily relating to our
asset disposition initiatives. Refer to Note 4 of our Consolidated Financial
Statements for information regarding our occupancy obligations.
(6) Amounts represent our future severance obligations primarily relating to our
asset disposition initiatives. Refer to Note 4 of our Consolidated Financial
Statements for information regarding our severance obligations.
(7) The purchase commitments include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. We expect to fund these commitments
with cash flows from operations.
Expiration of Commitments (in millions)
----------------------------------------------------------------------------------------------
Other Less than
Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- ------------------ --------------- ---------------
Guarantees $ 2.2 $ 0.2 $ 0.4 $ 0.5 $ 1.1
========== ========= ========= ========= ==========
We are the guarantor of a loan of $2.2 million related to a shopping
center, which will expire in 2011.
Our existing senior debt rating was B3 with negative implications with
Moody's Investors Service ("Moody's") and B with negative implications with
Standard & Poor's Ratings Group ("S&P") as of February 28, 2004. Our liquidity
rating was SGL2 with Moody's as of February 28, 2004. Our recovery rating was 1
with S&P as of February 28, 2004 indicating a high expectation of 100% recovery
of our senior debt to our lenders. Future rating changes could affect the
availability and cost of financing to our Company.
We believe that our present level of invested cash and cash generated
from operations will be sufficient for our capital expenditure programs and
mandatory scheduled debt repayments for the next twelve months. However, certain
external factors such as unfavorable economic conditions, competition, labor
relations and fuel and utility costs could have a significant impact on cash
generation. We believe our contingency plans would mitigate the potential risk;
however, there can be no assurance that such actions will be pursued or
successful.
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes that
may impact our consolidated financial position, results of operations or cash
flows. Among other possible market risks, we are exposed to such risk in the
areas of interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. We do not have cash flow exposure due to rate
changes on our $635.3 million in notes as of February 28, 2004 because they are
at fixed interest rates. However, we do have cash flow exposure on our committed
bank lines of credit due to our variable floating rate pricing. Accordingly,
during fiscal 2003, a presumed 1% change in the variable floating rate would
have impacted interest expense by $0.2 million.
During fiscal 2002, we had three interest rate swaps with commercial
banks with an aggregate notional amount of $150 million maturing on April 15,
2007, designated as fair value hedging instruments, to effectively convert a
portion of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating
rate debt. In January 2003, these hedging instruments were terminated, resulting
in a gain of $10.2 million. This gain has been deferred and is being amortized
as an offset to interest expense over the life of the underlying debt
instrument. Such amount is classified as "Long term debt" in our Consolidated
Balance Sheets.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. During fiscal 2003, a change in the
Canadian currency of 10% would have resulted in a fluctuation in net income of
$1.7 million. 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.
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 total current and non-current liability for
self-insurance reserves recorded at February 28, 2004 related to our U.S. Retail
segment was $98.5 million, which includes a $17.5 million increase in our
workers' compensation and general liability reserves in response to both adverse
development of prior years' costs and other developments including a continuing
trend of rising costs. As of February 28, 2004, the self-insurance reserves
relating to our Canada Retail and Canada Wholesale segments were not
significant. The discount rate used at February 28, 2004 was 2.7% and was based
on the timing of the projected cash flows of future payments to be made for
claims. A 1% increase in the discount rate would decrease the required liability
by $2.1 million. Conversely, a 1% decrease in the discount rate would increase
the required liability by $2.2 million. 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.
During fiscal 2003, we recorded total impairment losses on U.S. Retail
segment property, plant and equipment of $37.2 million relating to our Farmer
Jack stores. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill and
Note 4 - Asset Disposition Initiative in the Notes to Consolidated Financial
Statements for further discussion relating to impairment charges recorded during
the current fiscal year.
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 fiscal 2003, we recorded impairment losses on
property, plant and equipment of $25.0 million ($23.3 million in our U.S. Retail
segment and $1.7 million in our Canada Retail segment). Of this amount, $4.4
million related to U.S. Retail stores and $1.7 million related to Canada Retail
stores that were or will be closed in the normal course of business and are
included in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations. The remaining impairment losses we
recorded of $18.9 million during fiscal 2003 related to stores closed as a
result of our exit of the Kohl's business and are included in our Consolidated
Statements of Operations under the caption "(Loss) income from operations of
discontinued businesses, net of tax" (see Note 2 of our Consolidated Financial
Statements).
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.
Excess of Cost over Net Assets Acquired
In accordance with SFAS 142 "Goodwill and Other Intangible Assets," the
excess of cost over fair value of net assets acquired is no longer required to
be amortized, but tested for impairment at least annually by reassessing the
appropriateness of the goodwill balance based on forecasts of cash flows from
operating results on a discounted basis in comparison to the carrying value of
such operations. If the results of such comparison indicate that an impairment
may exist, we determine the implied fair market value of the goodwill using a
purchase price allocation approach and compare this value to the balance sheet
amount. If such comparison indicates that an impairment exists, we recognize a
charge to operations at that time based upon the differences between the implied
fair market value of the goodwill and the balance sheet amount. During fiscal
2003, we determined that goodwill relating to the Farmer Jack reporting unit was
entirely impaired; thus, we recorded an impairment charge of $27.0 million as a
component of operating income in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations. Refer to Note 3 -
Valuation of Long Lived Assets and Goodwill in the Notes to Consolidated
Financial Statements for further discussion relating to the impairment charges
recorded. As of February 28, 2004, our remaining goodwill balance is $5.9
million.
Closed Store Reserves
For stores closed that are under long-term leases, we record a discounted
liability using a risk free rate for the future minimum lease payments and
related costs, such as utilities and taxes, from the date of closure to the end
of the remaining lease term, net of estimated probable recoveries from projected
sublease rentals. If estimated cost recoveries exceed our liability for future
minimum lease payments, the excess is recognized as income over the term of the
sublease. We estimate future net cash flows based on our experience in and our
knowledge of the market in which the closed store is located. However, these
estimates project net cash flow several years into the future and are affected
by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates. As of February
28, 2004, we had liabilities for future minimum lease payments of $131 million,
which related to 77 vacant stores and 36 subleased or assigned stores. Of this
amount, $21 million relates to stores closed in the normal course of business,
$91 million relates to stores closed as part of the asset disposition initiative
(see Note 4 of our Consolidated Financial Statements) and $19 million relates to
stores closed as part of our exit of the northern New England and Kohl's
businesses (see Note 2 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 are disclosed in Note 12 of our consolidated financial statements
and 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.
An example of how changes in these assumptions can affect our financial
statements occurred in fiscal 2003. Based on our review of market interest
rates, actual return on plan assets and other factors, we lowered our discount
rate for U.S. plans to 6.00% at year-end 2003 from 6.50% at year-end 2002. We
also lowered our expected return on plan assets for U.S. plans to 7.00% at
year-end 2003 from 7.50% at year-end 2002. These rates are applied to the
calculated value of plan assets and liabilities, which results in an amount that
is included in pension expense or income in the following years. When not
considering other changes in assumptions or actual return on plan assets, a 1%
change in the discount rate alone would either increase the benefit obligation
by $12.2 million or decrease the benefit obligation by $10.0 million, and a 1%
change in expected return on plan assets alone would either increase or decrease
2003 U.S. pension expense by $1.2 million.
When not considering other changes in assumptions for our post-retirement
benefits, a 1% change in the discount rate alone would either increase or
decrease 2003 service and interest cost by $0.05 million, while the accumulated
post-retirement benefit obligation would either increase by $2.1 million or
decrease by $1.9 million. The effect of a 1% change in the assumed health care
cost trend rate for each future year on the sum of 2003 service and interest
cost would either be an increase or decrease of $0.1 million, while accumulated
post-retirement benefit obligation would either increase by $1.6 million or
decrease by $1.4 million.
Refer to Note 12 - Employee Benefit Plans in the Notes to Consolidated
Financial Statements for a full discussion of our Company's employee benefit
plans.
Inventories
Store inventories are valued principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
Warehouse and other inventories are valued primarily at the lower of cost or
market with cost determined on a first-in, first-out basis. Inventories of
certain acquired companies are valued using the last-in, first-out method, which
was their practice prior to acquisition. We evaluate inventory shrinkage
throughout the year based on actual physical counts in our stores and
distribution centers and record reserves based on the results of these counts to
provide for estimated shrinkage between the store's last inventory and the
balance sheet date.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB
Statement 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds the
provisions of SFAS 4 that requires companies to classify certain gains and
losses from debt extinguishments as extraordinary items, eliminates the
provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980 and
amends the provisions of SFAS 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS 145 related to
classification of debt extinguishment are effective for fiscal years beginning
after May 15, 2002. Beginning in fiscal 2003, any gain or loss on extinguishment
of debt, previously classified as an extraordinary item in prior periods
presented, that does not meet the criteria of APB No. 30 for such
classification, will be reclassified to conform to the provisions of SFAS 145.
In accordance with SFAS 145, we have reclassified both the fiscal 2002 $12.2
million pretax extraordinary gain and the fiscal 2001 $12.4 million pretax
extraordinary loss to (loss) income from operations. In addition, we decreased
income tax expense by $0.3 million and $5.3 million, respectively, to reclassify
the tax benefits of these transactions in accordance with the new accounting
standard.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 will supersede Emerging
Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS 146 requires that costs
associated with an exit or disposal plan be recognized when incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. This Statement impacted the timing of recognition of costs associated
with our store closures subsequent to December 31, 2002.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"), which amends SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). In response to a growing
number of companies announcing plans to record expenses for the fair value of
stock options, SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The amendments to SFAS
123 in paragraphs 2(a)-2(e) of this Statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The disclosure
requirements set forth in this statement have been adopted in fiscal 2002 and
did not have a significant impact on the financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The provisions of SFAS 149 did not have a material impact on our
financial position or results of operations.
In January 2003 and December 2003, the FASB issued FIN 46 and FIN 46-R,
respectively. FIN 46 and FIN 46-R address the consolidation of entities whose
equity holders have either (a) not provided sufficient equity at risk to allow
the entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46 and FIN 46-R require
the consolidation of these entities, known as variable interest entities
("VIE's"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that is subject to a majority of the risk of loss from the
VIE's activities, entitled to receive a majority of the VIE's residual returns,
or both. FIN 46 and FIN 46-R apply immediately to variable interests in VIE's
created or obtained after January 31, 2003. For variable interests in a VIE
created before February 1, 2003, FIN 46 and FIN 46-R apply to VIE's no later
than the end of the first reporting period ending after March 15, 2004 (the
quarter ending June 19, 2004 for our Company). The Interpretations require
certain disclosures in financial statements issued after January 31, 2003, if it
is reasonably possible that our Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
As discussed further in Note 7, our Company served 63 franchised stores
as of February 28, 2004. These franchisees are required to purchase inventory
exclusively from our Company, which acts as a wholesaler to the franchisees. Our
exposure to loss as a result of our involvement with these franchisees includes
our operating income generated from our wholesale segment as detailed in Note 15
"Operating Segments" and our equipment leases and inventory notes, which totaled
$38.6 million at February 28, 2004. We are currently in the process of analyzing
the franchisee relationships in accordance with FIN 46 and FIN 46-R to determine
if any or all are VIE's. We believe it is likely that these franchisees are
VIE's, and that we are the primary beneficiary. Therefore, we would be required
to consolidate these entities upon FIN 46 and FIN 46-R becoming effective for
our Company.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for classification and measurement in the balance
sheets for certain financial instruments which possess characteristics of both a
liability and equity. Generally, it requires classification of such financial
instruments as a liability. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003. For financial instruments in
existence prior to May 31, 2003, SFAS 150 is effective for fiscal periods
beginning after June 15, 2003 (i.e., our third quarter of fiscal 2003). The
adoption of SFAS 150 did not have a material impact on our financial statements.
In November 2003, the Emerging Issues Task Force confirmed as a consensus
EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers"
("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and
reporting policies for manufacturers' coupons that can be presented at any
retailer that accepts coupons. For arrangements with vendors that are entered
into or modified after February 28, 2004, our Company is required to record the
vendor reimbursement as a reduction of cost of sales (instead of sales) if the
coupon can only be redeemed at a Company retail store. This modification to our
Company's accounting and reporting policies will only impact sales and cost of
sales beginning in our Company's first quarter of fiscal 2004 (the quarter
ending June 19, 2004) and is not expected to have a material impact on sales or
cost of sales.
In December 2003, the FASB issued SFAS 132 R, "Employer's Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS 132 R"). SFAS 132 R
requires new annual disclosures about the type of plan assets, investments
strategy, measurement date, plan obligations, and cash flows as well as the
components of the net periodic benefit cost recognized in interim periods. The
new annual disclosure requirements apply to fiscal years ending after December
15, 2003, except for the disclosure of expected future benefit payments, which
must be disclosed for fiscal years ending after June 15, 2004. Interim period
disclosures are generally effective for interim periods beginning after December
15, 2003. We have included the disclosures required by SFAS 132 R, including
expected future benefit payments, in our consolidated financial statements for
the year ended February 28, 2004.
During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act. The guidance in FSP 106-1 is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. The election to defer
accounting for the Act is a one-time election that must be made before net
periodic postretirement benefit costs for the period that includes the Act's
enactment date are first included in reported financial information pursuant to
the requirements of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related
to the appropriate accounting methodology for this event and in accordance with
FSP 106-1, we elected to defer accounting for the effects of the Act and
accordingly, the measures of the accumulated postretirement benefit obligations
and the net postretirement benefit cost disclosed do not reflect the effects of
the Act on the postretirement benefits. We have not determined the impact of the
Act on these benefits.
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.
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------------- --------------------- ----------------------
Sales $ 10,812,462 $ 10,096,781 $ 10,206,246
Cost of merchandise sold (7,882,646) (7,251,322) (7,288,619)
--------------- -------------- ----------------
Gross margin 2,929,816 2,845,459 2,917,627
Store operating, general
and administrative expense (3,098,305) (2,839,201) (3,034,014)
Gain on proceeds from the
demutualization of a mutual
insurance company - - 60,606
-------------- -------------- ---------------
(Loss) income from operations (168,489) 6,258 (55,781)
Interest expense (81,814) (84,679) (91,722)
Interest income 7,285 7,897 6,972
-------------- -------------- ---------------
Loss from continuing operations
before income taxes (243,018) (70,524) (140,531)
Benefit from (provision for) income
taxes 31,671 (130,630) 57,138
-------------- --------------- ---------------
Loss from continuing operations (211,347) (201,154) (83,393)
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of
tax benefit of $21.9 for the year
ended February 28, 2004, and
tax provision of $5.5 and $8.3
for the years ended February 22,
2003 and February 23, 2002,
respectively (30,183) 7,645 11,487
Gain on disposal of discontinued
operations, net of tax provision
of $68.4 as of February 28, 2004 94,506 - -
-------------- -------------- ---------------
Income from discontinued
operations 64,323 7,645 11,487
-------------- -------------- ---------------
Net loss $ (147,024) $ (193,509) $ (71,906)
============== ============== ===============
Net loss per share - basic and diluted:
Continuing operations $ (5.49) $ (5.23) $ (2.17)
Discontinued operations 1.67 0.20 0.29
-------------- -------------- --------------
Net loss per share - basic and
diluted $ (3.82) $ (5.03) $ (1.88)
============== ============= ==============
Weighted average common shares outstanding:
Basic 38,516,750 38,494,812 38,350,616
============== ============== ===============
Diluted 38,516,750 38,494,812 38,350,616
============== ============== ===============
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share amounts)
Accumulated
Common stock Additional other Retained Total
----------------------------- paid-in comprehensive earnings Stockholders'
Shares Amount capital loss (deficit) equity
------------- -------------- ---------- ------------------ ----------- ---------------
Balance at 2/24/01 38,347,216 $ 38,347 $456,470 $ (72,808) $ 326,802 $ 748,811
Net loss (71,906) (71,906)
Stock options exercised 20,412 21 283 304
Other comprehensive
loss (4,221) (4,221)
-------------- ----------- ----------- ---------------- ---------- ------------
Balance at 2/23/02 38,367,628 38,368 456,753 (77,029) 254,896 672,988
Net loss (193,509) (193,509)
Stock options exercised 148,178 148 2,658 2,806
Other comprehensive
income 15,906 15,906
------------- ----------- ----------- ---------------- ----------- ------------
Balance at 2/22/03 38,515,806 38,516 459,411 (61,123) 61,387 498,191
Net loss (147,024) (147,024)
Stock options exercised 3,099 3 168 171
Other comprehensive
income 34,486 34,486
------------- ----------- ----------- -------------- ------------- -----------
Balance at 2/28/04 38,518,905 $ 38,519 $459,579 $ (26,637) $ (85,637) $ 385,824
============= =========== =========== ============== ============= ===========
Fiscal 2003 Fiscal 2002 Fiscal 2001
-------------------- -------------------- --------------------
Comprehensive (loss) income
Net loss $ (147,024) $ (193,509) $ (71,906)
----------- ----------- -------------
Foreign currency translation adjustment 39,206 15,363 (5,089)
Net unrealized gain on available for sale securities,
net of tax - - 933
Reclassification adjustment for gains included in
net loss, net of tax - (933) -
Minimum pension liability adjustment, net of tax (1,547) (1,539) (65)
Net unrealized (loss) gain on derivatives, net of tax (3,173) 3,015 -
------------ ----------- ------------
Other comprehensive income (loss) 34,486 15,906 (4,221)
----------- ----------- -------------
Total comprehensive loss $ (112,538) $ (177,603) $ (76,127)
=========== =========== =============
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
February 28, 2004 February 22, 2003
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 276,151 $ 199,014
Accounts receivable, net of allowance for doubtful
accounts of $13,620 and $9,799 at February 28, 2004
and February 22, 2003, respectively 190,737 185,411
Inventories 654,344 682,734
Prepaid expenses and other current assets 25,080 32,429
------------ ------------
Total current assets 1,146,312 1,099,588
------------ ------------
Property:
Land 77,915 74,643
Buildings 317,596 297,217
Equipment and leasehold improvements 1,975,218 2,324,021
------------ ------------
Total - at cost 2,370,729 2,695,881
Less accumulated depreciation and amortization (987,027) (1,157,764)
------------ ------------
Property owned 1,383,702 1,538,117
Property under capital leases, net 65,632 71,806
------------ ------------
Property - net 1,449,334 1,609,923
Other assets 154,904 175,726
------------ ------------
Total assets $ 2,750,550 $ 2,885,237
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,271 $ 25,820
Current portion of obligations under capital leases 15,901 13,787
Accounts payable 477,536 511,634
Book overdrafts 96,273 101,817
Accrued salaries, wages and benefits 176,812 180,812
Accrued taxes 69,217 53,774
Other accruals 235,910 202,968
------------ ------------
Total current liabilities 1,073,920 1,090,612
------------ ------------
Long-term debt 823,738 803,277
Long-term obligations under capital leases 73,980 83,485
Other non-current liabilities 393,088 409,672
------------ ------------
Total liabilities 2,364,726 2,387,046
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - no par value; authorized - 3,000,000
shares; issued - none - -
Common stock - $1 par value; authorized - 80,000,000
shares; issued and outstanding - 38,518,905 and
38,515,806 shares at February 28, 2004 and
February 22, 2003, respectively 38,519 38,516
Additional paid-in capital 459,579 459,411
Accumulated other comprehensive loss (26,637) (61,123)
(Accumulated deficit) retained earnings (85,637) 61,387
------------- ------------
Total stockholders' equity 385,824 498,191
------------ ------------
Total liabilities and stockholders' equity $ 2,750,550 $ 2,885,237
============ ============
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Fiscal 2003 Fiscal 2002 Fiscal 2001
--------------- --------------- ----------------
Cash Flows From Operating Activities:
Net loss $ (147,024) $ (193,509) $ (71,906)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Farmer Jack long lived asset / goodwill impairment charge 60,082 - -
Asset disposition initiative 33,546 (6,394) 201,067
Depreciation and amortization 268,765 263,585 262,552
Realized gain on sale of securities - (1,717) -
Environmental charge - - 1,964
Deferred income tax provision (benefit) 8,670 157,566 (47,298)
Loss (gain) on disposal of owned property and
write-down of property, net 348 (1,140) 348
Gain on sale of discontinued operations (162,942) - -
Decrease (increase) in receivables 400 47,583 (22,151)
Decrease in inventories 44,025 46,705 58,288
(Increase) decrease in prepaid expenses and other
current assets (40,331) 44,631 (39,511)
(Increase) decrease in other assets (2,604) 19,274 988
Decrease in accounts payable (58,099) (54,575) (12,446)
Increase (decrease) in accrued salaries, wages and
benefits, and taxes 5,307 (28,511) 18,027
Increase (decrease) in other accruals 16,605 (63,051) (17,051)
Decrease in other non-current liabilities (35,371) (52,650) (7,684)
Other, net (6,355) 13,249 711
------------- ------------- ------------
Net cash (used in) provided by operating activities (14,978) 191,046 325,898
------------- ------------- ------------
Cash Flows From Investing Activities:
Expenditures for property (134,677) (219,530) (246,182)
Proceeds from disposal of property 264,600 56,731 105,808
------------ ------------ ------------
Net cash provided by (used in) investing activities 129,923 (162,799) (140,374)
------------ ------------ ------------
Cash Flows From Financing Activities:
Changes in short-term debt - - (5,000)
Proceeds under revolving lines of credit - 313,253 1,098,675
Payments on revolving lines of credit (135,000) (178,253) (1,288,282)
Proceeds from long-term borrowings 166,548 153 276,964
Payments on long-term borrowings (47,137) (95,039) (223,907)
Principal payments on capital leases (13,563) (12,167) (11,710)
(Decrease) increase in book overdrafts (6,562) (25,617) 18,824
Deferred financing fees (10,319) (5,744) (13,485)
Proceeds from stock options exercised 21 2,806 304
------------ ------------ ------------
Net cash used in financing activities (46,012) (608) (147,617)
------------- ------------- -------------
Effect of exchange rate changes on cash and
cash equivalents 8,204 2,755 (837)
------------ ------------ -------------
Net increase in cash and cash equivalents 77,137 30,394 37,070
Cash and cash equivalents at beginning of year 199,014 168,620 131,550
------------ ------------ ------------
Cash and cash equivalents at end of year $ 276,151 $ 199,014 $ 168,620
============ ============ ============
See Notes to Consolidated Financial Statements.
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, and where noted)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
- ---------------------------------------
The consolidated financial statements include the accounts of our Company
and all majority-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
We operate retail supermarkets in the United States and Canada. The U.S.
operations are mainly in the Eastern part of the U.S. and certain parts of the
Midwest. See the following footnotes for additional information on our Canadian
Operations: Note 7 - Wholesale Franchise Business, Note 8 - Indebtedness, Note
11 - Income Taxes, Note 12 - Retirement Plans and Benefits, Note 14 -
Commitments and Contingencies, and Note 15 - Operating Segments. Our principal
stockholder, Tengelmann Warenhandelsgesellschaft KG ("Tengelmann"), owned 57.0%
of our common stock as of February 28, 2004.
Fiscal Year
- -----------
Our fiscal year ends on the last Saturday in February. Fiscal 2003 ended
February 28, 2004, fiscal 2002 ended February 22, 2003, and fiscal 2001 ended
February 23, 2002. Fiscal 2003 had 53 weeks and both fiscal 2002 and fiscal 2001
were each comprised of 52 weeks.
Revenue Recognition
- -------------------
Retail revenue is recognized at point-of-sale. Wholesale revenue is
recognized, in accordance with its terms, when goods are shipped and title to
products and risk of loss are transferred to customers. Discounts that we
provide to customers are accounted for as a reduction to sales upon sale.
Vendor Allowances
- -----------------
Vendor allowances that relate to our Company's buying and merchandising
activities consist primarily of advertising and promotional allowances. With the
exception of allowances described below, allowances are recognized as a
reduction of cost of goods sold when the related performance is completed and
the inventory is sold. Lump-sum payments received for multi-year contracts are
generally amortized on a straight line basis over the life of the contracts.
Vendor rebates or refunds that are contingent upon our Company completing a
specified level of purchases or remaining a reseller for a specified time period
are recognized as a reduction of cost of goods sold based on a systematic and
rational allocation of the rebate or refund to each of the underlying
transactions that results in progress toward earning that rebate or refund,
assuming that we can reasonably estimate the rebate or refund and it is probable
that the specified target will be obtained. If we believe attaining the
milestone is not probable, the rebate or refund is recognized as the milestone
is achieved.
In November 2003, the Emerging Issues Task Force confirmed as a consensus
EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers"
("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and
reporting policies for manufacturers' coupons that can be presented at any
retailer that accepts coupons. For arrangements with vendors that are entered
into or modified after February 28, 2004, our Company is required to record the
vendor reimbursement as a reduction of cost of sales (instead of sales) if the
coupon can only be redeemed at a Company retail store. This modification to our
Company's accounting and reporting policies will only impact sales and cost of
sales beginning in our Company's first quarter of fiscal 2004 (the quarter
ending June 19, 2004) and is not expected to have a material impact on sales or
cost of sales.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Cash and Cash Equivalents
- -------------------------
Short-term investments that are highly liquid with an original maturity
of three months or less are deemed to be cash equivalents and are included in
"Cash and cash equivalents" on our Consolidated Balance Sheets.
Inventories
- -----------
Store inventories are stated principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
Warehouse and other inventories are stated primarily at the lower of cost or
market with cost determined on a first-in, first-out basis. Inventories of
certain acquired companies are stated using the last-in, first-out method, which
was their practice prior to acquisition. See Note 6 - Inventory for additional
information regarding our use of the last-in, first-out method.
We evaluate inventory shrinkage throughout the year based on the results
of our periodic physical counts in our stores and distribution centers and
record reserves based on the results of these counts to provide for estimated
shrinkage as of the balance sheet date.
Properties Held for Sale
- ------------------------
Properties held for sale include those properties, which have been
identified for sale by our Company and are recorded at the lower of their
carrying value or fair value less cost to sell. Once properties are identified
as held for sale, they are no longer depreciated and are reclassified to
"Prepaid expenses and other current assets" on our Consolidated Balance Sheets.
Advertising Costs
- -----------------
Advertising costs incurred to produce media advertising are expensed in
the period the advertisement is first shown. Other advertising costs, primarily
costs to produce circulars, place advertisements and pay advertising agency
fees, are expensed when incurred. We recorded advertising expense of $136.5
million for both fiscal 2003 and 2002, and $136.0 million for fiscal 2001.
Pre-opening Costs
- -----------------
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred.
Software Costs
- --------------
We capitalize externally purchased software and amortize it over three to
five years. Amortization expense related to software costs for fiscal 2003, 2002
and 2001 was $6.4 million, $7.5 million and $3.3 million, respectively.
We apply the provisions of the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
the capitalization of certain internally generated software costs. In fiscal
2003, 2002 and 2001, we capitalized $4.0 million, $26.7 million and $24.1
million, respectively, of such software costs. For fiscal 2003, 2002 and 2001,
we recorded related amortization expense of $13.4 million, $7.6 million and $2.7
million, respectively.
Earnings Per Share
- ------------------
We calculate earnings per share in accordance with Statement of Financial
Accounting Standards ("SFAS") 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the Consolidated Statements of Operations and requires a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations. Basic EPS is computed by dividing net income (loss) by the
weighted average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
The weighted average shares outstanding utilized in the basic EPS
calculation were 38,516,750 for fiscal 2003, 38,494,812 for fiscal 2002 and
38,350,616 for fiscal 2001. The additional common stock equivalents for fiscal
2003, 2002 and 2001 would have been 391,915, 387,040 and 588,603, respectively;
however, such shares were antidilutive and thus excluded from the diluted EPS
calculation.
Excess of Cost over Net Assets Acquired
- ---------------------------------------
In accordance with SFAS 142 "Goodwill and Other Intangible Assets," the
excess of cost over fair value of net assets acquired is no longer required to
be amortized, but tested for impairment at least annually by reassessing the
appropriateness of the goodwill balance based on forecasts of cash flows from
operating results on a discounted basis in comparison to the carrying value of
such operations. If the results of such comparison indicate that an impairment
may exist, we determine the implied fair market value of the goodwill using a
purchase price allocation approach and compare this value to the balance sheet
amount. If such comparison indicates that an impairment exists, we will
recognize a charge to operations at that time based upon the difference between
the implied fair market value of the goodwill and the balance sheet amount.
During fiscal 2003, we determined that goodwill relating to the Farmer Jack
reporting unit was entirely impaired; thus, we recorded an impairment charge of
$27.0 million as a component of operating income in "Store operating, general
and administrative expense" in our Consolidated Statements of Operations. Refer
to Note 3 - Valuation of Long Lived Assets and Goodwill in the Notes to
Consolidated Financial Statements for further discussion relating to the
impairment charges recorded.
The book value of excess of cost over net assets acquired at February 28,
2004 and February 22, 2003 was $5.9 million and $32.0 million, respectively, net
of accumulated amortization of $14.0 million for both fiscal years. We recorded
amortization expense of nil for fiscal 2003 and fiscal 2002, and $1.4 million
for fiscal 2001.
Our adoption of SFAS 142 eliminated the amortization of goodwill
beginning in the first quarter of fiscal 2002. The following table shows net
loss and net loss per share for the adoption of SFAS 142:
Fiscal 2003 Fiscal 2002 Fiscal 2001
------------ ----------- ------------
Reported net loss $ (147,024) $(193,509) $ (71,906)
Add back:
Goodwill amortization, net of tax - - 833
----------- ---------- ----------
Adjusted net loss $ (147,024) $(193,509) $ (71,073)
=========== ========== ==========
Net loss per share - basic and diluted:
Reported net loss per share $ (3.82) $ (5.03) $ (1.88)
Add back:
Goodwill amortization - - 0.02
---------- ---------- ----------
Adjusted net loss per share $ (3.82) $ (5.03) $ (1.86)
========== ========== ==========
Self Insurance Reserves
- -----------------------
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The current
portion of these liabilities is included in "Other accruals" and the non-current
portion is included in "Other non-current liabilities" on our Consolidated
Balance Sheets. 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). During
fiscal 2003, we recorded a $17.5 million increase in our workers' compensation
and general liability reserves in response to both adverse development of prior
years' costs and other developments including a continuing trend of rising
costs.
Closed Store Reserves
- ---------------------
For stores closed that are under long-term leases, we record a discounted
liability using a risk free rate for 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 net future cash flows based on our experience in and
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.
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.
During fiscal 2003, we recorded total impairment losses on U.S. Retail
segment property, plant and equipment of $37.2 million relating to our Farmer
Jack stores. Refer to Note 3 - Valuation of Long Lived Assets and Goodwill and
Note 4 - Asset Disposition Initiative in the Notes to Consolidated Financial
Statements for further discussion relating to impairment charges recorded during
the current fiscal year.
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 fiscal 2003, we recorded impairment losses on
property, plant and equipment of $25.0 million ($23.3 million in our U.S. Retail
segment and $1.7 million in our Canada Retail segment). Of this amount, $4.4
million related to U.S. Retail stores and $1.7 million related to Canada Retail
stores that were or will be closed in the normal course of business and are
included in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations. The remaining impairment losses we
recorded of $18.9 million during fiscal 2003 related to stores closed as a
result of our exit of the Kohl's business and are included in our Consolidated
Statements of Operations under the caption "(Loss) income from operations of
discontinued businesses, net of tax" (see Note 2 of our Consolidated Financial
Statements).
Property
- --------
Depreciation and amortization are calculated on the straight-line basis
over the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to fifty years and equipment is depreciated based
on lives varying from three to ten years. Leasehold improvements are amortized
over the lesser of their estimated useful lives and the remaining available
lease terms. Property leased under capital leases is amortized over the lives of
the respective leases or over their economic useful lives, whichever is less.
During fiscal 2003, 2002 and 2001, in addition to the impairment losses
discussed above, we disposed of and/or wrote down certain assets, which resulted
in a pretax net loss of $0.3 million, a pretax net gain of $1.1 million, and a
pretax net loss of $0.3 million, respectively.
Income Taxes
- ------------
We provide deferred income taxes on temporary differences between amounts
of assets and liabilities for financial reporting purposes and such amounts as
measured by tax regulations. A valuation allowance is recorded to reduce a
deferred tax asset to the amount expected to be realized.
Current Liabilities
- -------------------
Certain accounts payable checks issued but not presented to banks
frequently result in negative book balances for accounting purposes. Such
amounts are classified as "Book overdrafts" on our Consolidated Balance Sheets.
We accrue for vested vacation pay earned by our employees. Liabilities
for compensated absences of $77.3 million and $84.5 million at February 28, 2004
and February 22, 2003, respectively, are included in "Accrued salaries, wages
and benefits" on our Consolidated Balance Sheets.
Stock-Based Compensation
- ------------------------
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") with pro forma disclosure of compensation expense, net
income or loss and earnings per share as if the fair value based method
prescribed by SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
and SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148") had been applied.
Had compensation cost for our stock options been determined based on the
fair value at the grant dates for awards under those plans consistent with the
fair value methods prescribed by SFAS 123 and SFAS 148, our net loss and net
loss per share would have been reduced to the pro forma amounts indicated below:
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------- ------------------ ----------------
Net loss, as reported: $ (147,024) $ (193,509) $ (71,906)
Deduct/(Add): Stock-based employee
compensation income (expense)
included in reported net loss, net of
related tax effects (151) 449 (449)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (6,509) (8,016) (5,408)
-------------- --------------- -------------
Pro forma net loss $ (153,382) $ (201,974) $ (76,865)
============== =============== =============
Net loss per share - basic and diluted:
As reported $ (3.82) $ (5.03) $ (1.88)
Pro forma $ (3.98) $ (5.25) $ (2.00)
The pro forma effect on net loss and net loss per share may not be
representative of the pro forma effect in future years because it includes
compensation cost on a straight-line basis over the vesting periods of the
grants.
The fair value of the fiscal 2003, 2002 and 2001 option grants was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
Fiscal 2003 Fiscal 2002 Fiscal 2001
------------------ ------------------ ------------------
Expected life 7 years 7 years 7 years
Volatility 51% 47% 55%
Dividend yield range 0% 0% 0%
Risk-free interest rate range 2.71%-4.01% 3.33%-5.18% 4.07%-5.40%
Comprehensive Loss
- ------------------
Our Company's other comprehensive loss relates to changes in foreign
currency translation, minimum pension liability and unrealized gains or losses
on derivatives and securities held for sale.
Other comprehensive loss as of February 28, 2004, February 22, 2003 and
February 23, 2002 included:
Deferred Tax
Gross (Provision)/Benefit Net
------------------- ------------------ ----------------
Foreign currency translation adjustment $ 39,206 $ - $ 39,206
Minimum pension liability adjustment (1,547) - (1,547)
Unrealized loss on derivatives (4,972) 1,799 (3,173)
------------------ -------------------- ----------------
Balance at 2/28/04 $ 32,687 $ 1,799 $ 34,486
================== ==================== ================
Foreign currency translation adjustment $ 15,363 $ - $ 15,363
Reclassification adjustment for gains
included in net loss (1,609) 676 (933)
Minimum pension liability adjustment (1,613) 74 (1,539)
Unrealized gain on derivatives 4,917 (1,902) 3,015
------------------ -------------------- ----------------
Balance at 2/22/03 $ 17,058 $ (1,152) $ 15,906
================== ==================== ================
Foreign currency translation adjustment $ (5,089) $ - $ (5,089)
Minimum pension liability adjustment (112) 47 (65)
Unrealized gain on securities held for sale 1,609 (676) 933
------------------ -------------------- ----------------
Balance at 2/23/02 $ (3,592) $ (629) $ (4,221)
================== ==================== ================
Translation of Canadian Currency
- --------------------------------
Assets and liabilities denominated in Canadian currency are translated at
year-end rates of exchange, and revenues and expenses are translated at average
rates of exchange during the year. Gains and losses resulting from translation
adjustments are accumulated as a separate component of accumulated other
comprehensive loss within Stockholders' Equity.
New Accounting Pronouncements
- -----------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS 145, "Rescission of FASB Statements 4, 44 and 64, Amendment of FASB
Statement 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds the
provisions of SFAS 4 that requires companies to classify certain gains and
losses from debt extinguishments as extraordinary items, eliminates the
provisions of SFAS 44 regarding transition to the Motor Carrier Act of 1980 and
amends the provisions of SFAS 13 to require that certain lease modifications be
treated as sale leaseback transactions. The provisions of SFAS 145 related to
classification of debt extinguishment are effective for fiscal years beginning
after May 15, 2002. Beginning in fiscal 2003, any gain or loss on extinguishment
of debt, previously classified as an extraordinary item in prior periods
presented, that does not meet the criteria of APB No. 30 for such
classification, will be reclassified to conform to the provisions of SFAS 145.
In accordance with SFAS 145, we have reclassified the fiscal 2002 $12.2 million
pretax extraordinary gain and the fiscal 2001 $12.4 million pretax extraordinary
loss to (loss) income from operations. In addition, we decreased income tax
expense by $0.3 million and $5.3 million, respectively, to reclassify the tax
benefits of these transactions in accordance with the new accounting standard.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure" ("SFAS 148"), which amends SFAS 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). In response to a growing
number of companies announcing plans to record expenses for the fair value of
stock options, SFAS 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The amendments to SFAS
123 in paragraphs 2(a)-2(e) of this Statement shall be effective for financial
statements for fiscal years ending after December 15, 2002. The disclosure
requirements set forth in this statement have been adopted in fiscal 2002 and
did not have a significant impact on the financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. The new guidance amends SFAS 133 for decisions made: (a) as part of the
Derivatives Implementation Group process that effectively required amendments to
SFAS 133, (b) in connection with other Board projects dealing with financial
instruments, and (c) regarding implementation issues raised in relation to the
application of the definition of a derivative, particularly regarding the
meaning of an "underlying" and the characteristics of a derivative that contains
financing components. The amendments set forth in SFAS 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003 (with a few exceptions) and for hedging
relationships designated after June 30, 2003. The guidance is to be applied
prospectively. The provisions of SFAS 149 did not have a material impact on our
financial position or results of operations.
In January 2003 and December 2003, the FASB issued FIN 46 and FIN 46-R,
respectively. FIN 46 and FIN 46-R address the consolidation of entities whose
equity holders have either (a) not provided sufficient equity at risk to allow
the entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46 and FIN 46-R require
the consolidation of these entities, known as variable interest entities
("VIE's"), by the primary beneficiary of the entity. The primary beneficiary is
the entity, if any, that is subject to a majority of the risk of loss from the
VIE's activities, entitled to receive a majority of the VIE's residual returns,
or both. FIN 46 and FIN 46-R apply immediately to variable interests in VIE's
created or obtained after January 31, 2003. For variable interests in a VIE
created before February 1, 2003, FIN 46 and FIN 46-R apply to VIE's no later
than the end of the first reporting period ending after March 15, 2004 (the
quarter ending June 19, 2004 for our Company). The Interpretations require
certain disclosures in financial statements issued after January 31, 2003, if it
is reasonably possible that our Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
As discussed further in Note 7, our Company served 63 franchised stores
as of February 28, 2004. These franchisees are required to purchase inventory
exclusively from our Company, which acts as a wholesaler to the franchisees. Our
exposure to loss as a result of our involvement with these franchisees includes
our operating income generated from our wholesale segment as detailed in Note 15
"Operating Segments" and our equipment leases and inventory notes, which totaled
$38.6 million at February 28, 2004. We are currently in the process of analyzing
the franchisee relationships in accordance with FIN 46 and FIN 46-R to determine
if any or all are VIE's. We believe it is likely that these franchisees are
VIE's, and that we are the primary beneficiary. Therefore, we would be required
to consolidate these entities upon FIN 46 and FIN 46-R becoming effective for
our Company.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for classification and measurement in the balance
sheets for certain financial instruments which possess characteristics of both a
liability and equity. Generally, it requires classification of such financial
instruments as a liability. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003. For financial instruments in
existence prior to May 31, 2003, SFAS 150 is effective for fiscal periods
beginning after June 15, 2003 (i.e., our third quarter of fiscal 2003). The
adoption of SFAS 150 did not have a material impact on our financial statements.
In November 2003, the Emerging Issues Task Force confirmed as a consensus
EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers"
("EITF 03-10"). EITF 03-10 will not impact our Company's existing accounting and
reporting policies for manufacturers' coupons that can be presented at any
retailer that accepts coupons. For arrangements with vendors that are entered
into or modified after February 28, 2004, our Company is required to record the
vendor reimbursement as a reduction of cost of sales (instead of sales) if the
coupon can only be redeemed at a Company retail store. This modification to our
Company's accounting and reporting policies will only impact sales and cost of
sales beginning in our Company's first quarter of fiscal 2004 (the quarter
ending June 19, 2004) and is not expected to have a material impact on sales or
cost of sales.
In December 2003, the FASB issued SFAS 132 R, "Employer's Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS 132 R"). SFAS 132 R
requires new annual disclosures about the type of plan assets, investments
strategy, measurement date, plan obligations, and cash flows as well as the
components of the net periodic benefit cost recognized in interim periods. The
new annual disclosure requirements apply to fiscal years ending after December
15, 2003, except for the disclosure of expected future benefit payments, which
must be disclosed for fiscal years ending after June 15, 2004. Interim period
disclosures are generally effective for interim periods beginning after December
15, 2003. We have included the disclosures required by SFAS 132 R, including
expected future benefit payments, in our consolidated financial statements for
the year ended February 28, 2004.
During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act. The guidance in FSP 106-1 is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. The election to defer
accounting for the Act is a one-time election that must be made before net
periodic postretirement benefit costs for the period that includes the Act's
enactment date are first included in reported financial information pursuant to
the requirements of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related
to the appropriate accounting methodology for this event and in accordance with
FSP 106-1, we elected to defer accounting for the effects of the Act and
accordingly, the measures of the accumulated postretirement benefit obligations
and the net postretirement benefit cost disclosed do not reflect the effects of
the Act on the postretirement benefits. We have not determined the impact of the
Act on these benefits.
Reclassifications
- -----------------
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
Note 2 -- 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.
Upon the decision to sell these stores, we applied the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered the binding sale agreements related to these properties as an
estimate of the assets' fair value. As a result of the adoption of SFAS 144,
$22.1 million in net property, plant and equipment was reclassified as held for
sale as of February 22, 2003, and included in "Prepaid expenses and other
current assets" on our Consolidated Balance Sheets. These assets were no longer
depreciated after this date.
As of April 2003, all of the asset sales described above were completed,
generating proceeds of $137.6 million and resulting in a gain of $81.4 million
($47.2 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 year 2003. Included in these amounts were occupancy
related costs for locations not sold of $4.4 million, severance and related
costs of $3.5 million, non-accruable closing costs of $5.4 million and a net
gain of $0.2 million from inventory disposals.
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. As a result of this plan, we were able to sell a group of these stores
generating proceeds of $10.4 million and a gain of $6.4 million ($3.7 million
after tax). This gain is included in "Gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations for fiscal
year 2003.
Upon the decision to exit the remaining Kohl's stores located in
Milwaukee, Wisconsin, and the coffee business, we estimated the assets' fair
market value using a probability weighted average approach based upon expected
proceeds and recorded impairment losses on the property, plant and equipment at
the remaining Kohl's locations of $18.9 million, which is included in "Income
(loss) from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for fiscal year 2003. During fiscal year
2003, we closed the remaining stores in the Milwaukee market that had not been
sold and recorded exit costs of $28.1 million relating to future rent vacancy
(which consisted of the original vacancy charge of $25.1 million and additional
vacancy charges of $3.0 million), $5.7 million in severance charges, $2.0
million in non-accruable closing costs and $1.2 million in inventory markdowns.
Such amounts are included in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations for fiscal
year 2003.
We participate in various multi-employer union pension plans, which are
administered jointly by management and union representatives and which sponsor
most full-time and certain part-time union employees who are not covered by our
other pension plans. The decision to close our Kohl's stores and terminate our
participation in these plans triggered our Company's liability for our unfunded
vested benefits or other expenses under these jointly administered
union/management plans. As a result, we recorded expense for these plans of
approximately $5.5 million for fiscal year 2003. In addition, we recorded $1.0
million in expense relating to withdrawal from Kohl's health and welfare plan
during fiscal year 2003. Such amounts are included in "Income (loss) from
operations of discontinued businesses, net of tax" in our Consolidated
Statements of Operations for fiscal year 2003.
Further, during fiscal year 2003, we experienced favorable results in
marketing the closed stores which resulted in additional store sales, sublets,
and lease terminations and recorded reversals to our previously recorded
reserves of $4.5 million.
Recorded on our Consolidated Balance Sheet are the resulting reserves
related to the exit of the northern New England and Kohl's markets. The
following table summarizes the reserve activity during fiscal 2003:
Severance
and
Occupancy Benefits Fixed Assets Total
------------ ------------- -------------- ------------
Current year charge (1) $ 29,838 $ 15,732 $ 18,968 $ 64,538
Utilization (2) (8,890) (10,839) (18,968) (38,697)
Adjustments (3) (1,458) - - (1,458)
------------ ------------- -------------- ------------
Balance at
February 28, 2004 $ 19,490 $ 4,893 $ - $ 24,383
============ ============= ============== ============
(1) The current year charge to occupancy consists of $29.5 million related
to future occupancy costs and $0.3 million of present value of accrued
interest related to lease obligations. The current year charge to
severance and benefits of $15.7 million related to severance costs of
$9.2 million and costs for future obligations for early withdrawal
from multi-employer union pension plans and a health and welfare plan
as described above of $6.5 million. The current year charge to fixed
assets of $18.9 million represents the impairment losses on property,
plant and equipment at certain Kohl's locations.
(2) Occupancy utilization represents vacancy related payments for closed
locations. Severance and benefits utilization represents payments made
to terminated employees during the period and payments for pension
withdrawal.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million.
As of February 28, 2004, we had paid approximately $10.8 million of the
total original severance and benefits charge recorded, which resulted from the
termination of approximately 2,150 employees. The remaining severance liability
primarily relates to future obligations for early withdrawal from multi-employer
union pension plans, and individual severance payments, which will be paid by
the end of fiscal 2004.
At February 28, 2004, $5.5 million of the northern New England and Kohl's
exit reserves were included in "Other accruals" and $18.9 million were included
in "Other non-current liabilities" on our Consolidated Balance Sheets. We have
evaluated the liability balance of $24.4 million as of February 28, 2004 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.
During fiscal year 2003, we completed the sale of our Eight O'Clock Coffee
business, generating gross proceeds of $107.5 million and a gain of $75.1
million ($43.6 million after tax). This gain is included in "Gain on disposal of
discontinued operations, net of tax" on our Consolidated Statements of
Operations for fiscal year 2003. 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.
We have accounted for all of these separate business components as
discontinued operations in accordance with SFAS 144. 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 the discontinued New England and Kohl's supermarkets and Eight O'Clock
Coffee business, which are included in our Consolidated Statements of
Operations, under the caption "Income (loss) from operations of discontinued
businesses, net of tax".
Fiscal Year Ended
---------------------------------------------------------------------------
Feb. 28, 2004 Feb. 22, 2003 Feb. 23, 2002
---------------------- --------------------- ----------------------
Sales $ 221,220 $ 697,589 $ 767,070
Operating expenses (273,260) (684,408) (747,265)
----------------- -------------- --------------
(Loss) income from operations (52,040) 13,181 19,805
Benefit from (provision for) income taxes 21,857 (5,536) (8,318)
---------------- -------------- --------------
(Loss) income from operations of
discontinued businesses $ (30,183) $ 7,645 $ 11,487
================= ============= =============
Depreciation and amortization $ 1,610 $ 13,515 $ 15,171
================ ============= =============
Note 3 -- Valuation of Long Lived Assets and Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). As disclosed
previously, goodwill will no longer be amortized but will be subject to
impairment tests on an annual basis and whenever events or circumstances occur
indicating that the goodwill may be impaired. SFAS 142 was effective for our
Company on February 24, 2002. We completed our initial impairment review during
the second quarter of fiscal 2002 and concluded a transitional impairment charge
from the adoption of the standard was not required.
In accordance with the standard, we selected our fiscal fourth quarter
to conduct our annual impairment test for goodwill. However, through the third
quarter of fiscal 2003, we experienced operating losses for the past two years
for one of our Farmer Jack asset groups, which we believe is a triggering event
under SFAS 144 for potential impairment of the asset group's long lived assets.
In addition, the triggering event under SFAS 144 also triggered testing Farmer
Jack's goodwill for potential impairment under SFAS 142.
To assess Farmer Jack's goodwill for impairment under SFAS 142, we
performed an assessment of the carrying value of the reporting unit to determine
if the fair value of the reporting unit was below its carrying value. The fair
value of the Farmer Jack reporting unit was determined through internal analysis
and a valuation performed by an independent third party appraiser, primarily
using the discounted cash flow approach based on forward looking information
regarding revenues and costs of Farmer Jack. This valuation was based on a
number of estimates and assumptions, including the projected future operating
results of Farmer Jack, discount rate, and long term growth rate. As a result of
this review, we determined that the fair value of Farmer Jack was below its
carrying value and that the carrying value of the reporting unit goodwill
exceeded its implied fair value (defined as the fair value of the reporting unit
less the fair value of all assets and liabilities other than goodwill). Further,
based upon the analysis, we concluded that Farmer Jack's goodwill was entirely
impaired and we recorded an impairment charge of $27.0 million as a component of
operating income in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations for fiscal year 2003. Farmer Jack's
goodwill of $27.0 million was classified in "Other assets" in our Consolidated
Balance Sheet at February 22, 2003.
In accordance with SFAS 144, we review the carrying value 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 these assets is recoverable from their respective cash flows. If such review
indicates an impairment exists, we measure such impairment on a discounted
basis.
In connection with the goodwill impairment test, we reviewed the
carrying value of all of Farmer Jack's long-lived assets for potential
impairment under SFAS 144. We estimated Farmer Jack's future cash flows from its
long-lived assets based on internal analysis and valuations performed by an
independent third party appraiser. For those asset groups for which the carrying
value was not recoverable from their future cash flows, we determined the fair
value of the related assets based on the same analysis, primarily using the
discounted cash flow approach. As a result of this review, we recorded an
impairment charge for Farmer Jack's long-lived assets of $33.1 million, which is
recorded as a component of operating income in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for fiscal
year 2003.
In addition, during the fourth quarter of fiscal 2003, the Board of
Directors approved a plan to close, sell or convert several of our Farmer Jack
stores located in the Detroit, Michigan and Toledo, Ohio markets. As a result,
additional impairments totaling $4.1 million were recorded for the stores
currently held for closure, sale or conversion during the fourth quarter of
fiscal 2003.
We also review assets in stores planned for closure or conversion for
impairment upon determination that such assets will not be used for their
intended useful life. During fiscal 2003, we recorded additional impairment
losses on property, plant and equipment of $25.0 million ($23.3 million in our
U.S. Retail segment and $1.7 million in our Canada Retail segment) compared to
$18.9 million recorded during fiscal year 2002 ($15.7 million in our U.S. Retail
segment and $3.2 million in our Canada Retail segment). Of these amounts
recorded in fiscal 2003 and fiscal 2002, $4.4 million and $15.7 million,
respectively, related to U.S. Retail stores and $1.7 million and $3.2 million,
respectively, related to Canada Retail stores that were or will be closed in the
normal course of business. These amounts are included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations. The remaining impairment losses we recorded of $18.9 million during
fiscal 2003 related to stores closed as a result of our exit of the Kohl's
business and are included in our Consolidated Statements of Operations under the
caption "(Loss) income from operations of discontinued businesses, net of tax"
(see Note 2 of our Consolidated Financial Statements).
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.
Note 4 -- Asset Disposition Initiative
In fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores including the exit of the Richmond, Virginia and Atlanta, Georgia
markets. 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 would be closed and/or sold, and certain
administrative streamlining would take place. During the fourth quarter of
fiscal 2003, we announced an initiative to close 5 stores and convert 13 stores
to our Food Basics format in the Detroit, Michigan and Toledo, Ohio markets. As
a result, we recorded a charge of $37.7 million ($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) as follows:
Fiscal 2003
--------------------
Occupancy related $ 20,999
Severance and benefits 8,930
Fixed asset writeoffs 4,129
Nonaccruable closing costs 1,449
Inventory markdowns 2,244
--------------------
Total charges $ 37,751
====================
As of February 28, 2004, we had closed all of the above stores and
facilities. The following table summarizes the activity related to the charges
recorded for the aforementioned initiatives since the beginning of fiscal 2002:
Severance
and
Occupancy Benefits Fixed Assets Total
------------- ------------- -------------- --------------
Balance at
February 23, 2002 $ 143,700 $ 22,137 $ - $ 165,837
Addition (1) 7,249 3,544 - 10,793
Utilization (2) (34,003) (19,830) 776 (53,057)
Adjustments (3) (13,825) 889 (776) (13,712)
------------- ------------- --------------- ------------
Balance at
February 22, 2003 $ 103,121 $ 6,740 $ - $ 109,861
Addition (1) 26,553 8,930 4,129 39,612
Utilization (2) (32,053) (7,883) (4,129) (44,065)
Adjustments (3) (5,776) 1,558 - (4,218)
------------ ------------- -------------- ------------
Balance at
February 28, 2004 $ 91,845 $ 9,345 $ - $ 101,190
============ ============= ============== ============
(1) The additions to occupancy during fiscal 2003 represent charges related
to closures and conversions in the Detroit, Michigan market of $21.0
million and the present value of accrued interest related to lease
obligations of $5.6 million. The addition to severance during fiscal
2002 related to retention and productivity incentives that were accrued
as earned, and the addition in fiscal 2003 related to a voluntary
termination plan initiated in the Detroit, Michigan market.
(2) Occupancy utilization represents vacancy related payments for closed
locations. Severance utilization represents payments made to terminated
employees during the period.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $4.2 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations. During fiscal 2002, we
recorded net adjustments of $13.7 million primarily related to
reversals of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of $7.2
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 $3.2
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.
As described above, during fiscal 2003, we recorded a net charge of $33.5
million to our Consolidated Statements of Operations reflecting a $37.7 million
charge relating to our Farmer Jack restructuring program offset by a $4.2
million net gain relating to reversals of previously accrued vacancy related
costs. During fiscal 2002, we recorded a net gain of $6.4 million to our
Consolidated Statement of Operations reflecting a $13.7 million gain primarily
relating to reversals of previously accrued vacancy related costs offset by a
$7.3 million charge for non-accruable store inventory markdowns and closing
costs.
As of February 28, 2004, we had paid approximately $59.3 million of the
total original severance and benefits charge recorded, which resulted from the
termination of approximately 4,800 employees. The remaining severance liability
primarily relates to future obligations for early withdrawal from multi-employer
union pension plans, and individual severance payments which will be paid by the
end of fiscal 2005.
At February 28, 2004, approximately $26.8 million of the liability was
included in "Other accruals" and the remaining amount was included in "Other
non-current liabilities" on our Consolidated Balance Sheets.
Included in our Consolidated Statements of Operations for fiscal 2003,
2002 and 2001 are the sales and operating results of the aforementioned
permanently closed stores while they were open during the periods presented. The
results of these operations are as follows:
Fiscal 2003 Fiscal 2002 Fiscal 2001
----------- ------------ -----------
Sales $41,810 $ 68,776 $306,220
======= =========== ========
Operating loss $(8,034) $ (5,371) $(25,556)
======= =========== ========
We have evaluated the liability balance of $101 million as of February
28, 2004 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.
Note 5 - Properties Held for Sale
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. Upon the announcement of the sale of these stores, we
applied the provisions of SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144") to these properties held for sale. SFAS 144
requires properties held for sale to be classified as a current asset and valued
on an asset-by-asset basis at the lower of carrying amount or fair value less
costs to sell. In applying those provisions, we considered the binding sale
agreements related to these properties as an estimate of the assets' fair value.
As a result, $22.1 million in net property, plant and equipment were
reclassified as of February 22, 2003, and included in "Prepaid expenses and
other current assets" on our Consolidated Balance Sheets. As of April 2003,
these stores were sold. Refer to Note 2 of our Consolidated Financial
Statements.
In accordance with the provisions of SFAS 144, the properties held for
sale included in "Prepaid expenses and other current assets" in our Consolidated
Balance Sheets as of February 28, 2004 and February 22, 2003 are no longer being
depreciated.
Note 6 - Inventory
Approximately 6% and 13% of our inventories are valued using the last-in,
first-out ("LIFO") method at February 28, 2004 and February 22, 2003. Such
inventories would have been $17.3 million and $17.5 million higher at February
28, 2004 and February 22, 2003, respectively, if the retail and first-in,
first-out methods were used. We recorded LIFO credits of $0.2 million in fiscal
2003 and $1.1 million in fiscal 2002 as compared to a LIFO charge of $0.5
million in fiscal 2001. Liquidation of LIFO layers in the periods reported did
not have a significant effect on the results of operations.
Note 7 - Wholesale Franchise Business
We serviced 63 franchised stores as of February 28, 2004 and 65
franchised stores as of February 22, 2003 in Canada. These franchisees are
required to purchase inventory exclusively from the Company, which acts as a
wholesaler to the franchisees. During fiscal 2003, 2002 and 2001, we had
wholesale sales to these franchised stores of $814 million, $713 million and
$677 million, respectively. A majority of the franchised stores were converted
from our operated supermarkets. In addition, we sublease the stores and lease
the equipment in the stores to the franchisees. We also provide merchandising,
advertising, accounting and other consultative services to the franchisees for
which we receive a fee, which mainly represents the reimbursement of costs
incurred to provide such services.
Our Company holds as assets inventory notes collateralized by the
inventory in the stores and equipment lease receivables collateralized by the
equipment in the stores. The current portion of the inventory notes and
equipment leases amounting to approximately $6.4 million and $3.6 million were
included in "Accounts receivable" on our Consolidated Balance Sheets at February
28, 2004 and February 22, 2003, respectively. The long-term portion of the
inventory notes and equipment leases, net of the allowance for doubtful
accounts, totaling approximately $32.2 million and $41.1 million, were included
in "Other assets" on our Consolidated Balance Sheets at February 28, 2004 and
February 22, 2003, respectively.
The repayment of the inventory notes and equipment leases are dependent
upon positive operating results of the stores. To the extent that the
franchisees incur operating losses, we establish an allowance for doubtful
accounts. We continually assess the sufficiency of the allowance on a store by
store basis based upon the operating results and the related collateral
underlying the amounts due from the franchisees. In the event of default by a
franchisee, we reserve the option to reacquire the inventory and equipment at
the store and operate the franchise as a corporate owned store.
Included below are the amounts due to our Company for the next five years
and thereafter from the franchised stores for equipment leases and inventory
notes. The current portion of such amounts is included in "Accounts receivable"
and the non-current portion is included in "Other assets" in our Consolidated
Balance Sheets.
Allowance
For
Equipment Inventory Doubtful
Fiscal Leases Notes Accounts Total
------ ------------- ------------- ------------- -------------
2004 $ 9,101 $ 960 $ - $ 10,061
2005 8,416 1,497 (993) 8,920
2006 8,413 1,734 (1,150) 8,997
2007 5,897 2,057 (1,365) 6,589
2008 7,249 2,530 (1,678) 8,101
2009 and thereafter 5,865 3,190 (2,117) 6,938
------------- ------------- --------------- -------------
44,941 11,968 (7,303) 49,606
Less interest portion (11,011) - - (11,011)
------------- ------------- ------------- -------------
Due from franchise business $ 33,930 $ 11,968 $ (7,303) $ 38,595
============= ============= ============= =============
For fiscal 2003, 2002 and 2001, approximately $3 million, $2 million and
$1 million, respectively, of the amounts due from franchisees relate to
equipment leases which were non-cash transactions and, accordingly, have been
excluded from our Consolidated Statements of Cash Flows.
Refer to Note 1 - New Accounting Pronouncements regarding our Company's
analysis of our franchisees to determine if they are variable interest entities
in accordance with FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51 ("FIN 46") and the revised
version of FIN 46 ("FIN 46-R").
Refer to Note 14 - Commitments and Contingencies regarding a pending class
action lawsuit relating to our Canadian franchise business.
Note 8 - Indebtedness
Debt consists of the following:
February 28, February 22,
2004 2003
--------------- ----------------
9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000
9.125% Senior Notes, due December 15, 2011 216,500 230,500
7.75% Notes, due April 15, 2007 219,515 229,265
7.70% Senior Notes, due January 15, 2004 - 22,100
On balance sheet financing, due February 2021 through February 2026 181,442 -
Deferred gain from termination of interest rate swaps 7,600 10,008
Mortgages and Other Notes, due 2003 through 2018
(average interest rates at year end of 8.00% and
7.58%, respectively) 1,676 3,204
U.S. bank borrowings at 4.125% - 135,000
Less unamortized discount on 7.75% Notes (724) (980)
----------- -----------
826,009 829,097
Less current portion of long-term debt (2,271) (25,820)
----------- -----------
Long-term debt $ 823,738 $ 803,277
=========== ===========
During fiscal 2003, we amended and restated our Secured Credit Agreement
(the "Amended and Restated Credit Agreement") and decreased our borrowing base
to $400 million. Thus, at February 28, 2004, we had a $400 million secured
revolving credit agreement with a syndicate of lenders enabling us to borrow
funds on a revolving basis sufficient to refinance short-term borrowings and
provide working capital as needed. This amended facility provides us with
greater operating flexibility and provides for increased capital spending. Under
the Amended and Restated Credit Agreement, there are no financial covenants as
long as availability under the agreement exceeds $50 million.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$93.5 million at February 28, 2004) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of February 28, 2004, there were no borrowings under these credit
agreements. As of February 28, 2004, after reducing availability for outstanding
letters of credit and borrowing base requirements, we had $213.0 million
available under the Amended and Restated Credit Agreement.
During fiscal 2003, we repurchased in the open market $9.8 million of our
7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within income from operations in accordance with SFAS 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB 13, and Technical Corrections".
During fiscal 2002, we repurchased in the open market $50.7 million of
our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $12.2 million. In accordance with SFAS 145,
this gain has been reclassified within income from operations for fiscal 2002.
Under the Amended and Restated Credit Agreement, we are permitted to make bond
repurchases and may do so from time to time in the future.
During fiscal 2003, we sold 13 properties and simultaneously leased them
back from the purchaser resulting in an on balance sheet financing. Refer to
Note 16 - Sale-Leaseback Transactions for further discussion of this
transaction.
As of February 28, 2004 and February 22, 2003, we had no borrowings under
uncommitted lines of credit.
The net book value of real estate pledged as collateral for all mortgage
loans amounted to nil at February 28, 2004 and $3.2 million at February 22,
2003. The net book value of real estate pledged as collateral for our $400
million Secured Credit Agreement amounted to $22.8 million at February 28, 2004
and $82.9 million at February 22, 2003 under the prior year agreement. This
decrease in properties pledged as collateral is mainly due to the sale of
properties in fiscal 2003 as part of our sale leaseback transaction.
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 28, 2004 at terms contingent upon market conditions at
the time of sale.
Maturities for the next five fiscal years and thereafter are: 2004 - $2.3
million; 2005 - $2.3 million; 2006 - $2.2 million; 2007 - $219.9 million; 2008 -
$0.1 million; 2009 and thereafter - $599.2 million. Interest payments on
indebtedness were approximately $63 million for fiscal 2003, $68 million for
fiscal 2002 and $60 million for fiscal 2001.
Note 9 - Fair Value of Financial Instruments
The estimated fair values of our financial instruments are as follows:
February 28, 2004 February 22, 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
9.375% Notes, due August 1, 2039 $ 200,000 $ 180,080 $ 200,000 $ 135,600
9.125% Senior Notes, due December 15, 2011 216,500 186,731 230,500 186,705
7.75% Notes, due April 15, 2007 218,791 197,743 228,285 182,628
7.70% Senior Notes, due January 15, 2004 - - 22,100 21,216
On balance sheet financing, due February 2021
through February 2026 181,442 181,442 - -
Mortgages and Other Notes, due 2003
through 2018 1,676 1,676 3,204 3,204
U.S. Bank borrowings at 4.125% - - 135,000 135,000
Fair value for the public debt securities is based on quoted market
prices. As of February 28, 2004 and February 22, 2003, the carrying values of
cash and cash equivalents, accounts receivable and accounts payable approximated
fair values due to the short-term maturities of these instruments.
Note 10 - Lease Obligations
We operate primarily in leased facilities. Lease terms generally range up
to twenty-five years for store leases and thirty years for other leased
facilities, with options to renew for additional periods. In addition, we also
lease some store equipment and trucks. The majority of the leases contain
escalation clauses relating to real estate tax increases and certain store
leases provide for increases in rentals when sales exceed specified levels.
The Consolidated Balance Sheets include the following:
February 28, February 22,
2004 2003
------------- ------------
Property under capital leases $ 179,667 $ 178,491
Accumulated amortization (114,035) (106,685)
----------- -----------
Net property under capital leases $ 65,632 $ 71,806
=========== ===========
During fiscal 2003 and fiscal 2001, we did not enter into any new capital
leases. During fiscal 2002, we entered into new capital leases totaling $9
million. These capital lease amounts are non-cash transactions and, accordingly,
have been excluded from the Consolidated Statements of Cash Flows. Interest paid
as part of capital lease obligations was approximately $10 million in fiscal
2003, $11 million in fiscal 2002 and $13 million in fiscal 2001.
Rent expense for operating leases during the last three fiscal years
consisted of the following:
Fiscal 2003 Fiscal 2002 Fiscal 2001
----------- ------------ -----------
Minimum rentals $ 274,684 $ 273,396 $ 249,509
Contingent rentals 4,500 4,551 4,126
----------- ----------- -----------
Total rent expense $ 279,184 $ 277,947 $ 253,635
=========== =========== ===========
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 28, 2004 are shown in the table below.
All amounts are exclusive of lease obligations and sublease rentals applicable
to facilities for which reserves have previously been established. In addition,
we sublease 63 stores to the franchise business. Included in the operating lease
column in the table below are the rental payments to be made by our Company
partially offset by the rental income to be received from the franchised stores.
Capital Operating
Fiscal Leases Leases
------ ------------- -------------
2004 $ 24,414 $ 246,063
2005 14,901 242,292
2006 13,443 236,770
2007 11,732 228,292
2008 10,336 215,962
2009 and thereafter 101,673 2,112,548
------------ -------------
176,499 $ 3,281,927
=============
Less executory costs (201)
------------
Net minimum rentals 176,298
Less interest portion (86,417)
------------
Present value of net minimum rentals $ 89,881
============
Note 11 - Income Taxes
The components of loss from continuing operations before income taxes are
as follows:
Fiscal 2003 Fiscal 2002 Fiscal 2001
------------- --------------- ---------------
United States $ (270,717) $ (136,737) $(183,813)
Canada 27,699 66,213 43,282
----------- ------------ ----------
Total $ (243,018) $ (70,524) $(140,531)
============ ============= ==========
The benefit from (provision for) income taxes from continuing operations
consists of the following:
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------- --------------- ------------
Current:
Federal $ - $ 24,166 $ -
Canadian (1,998) (1,162) (708)
State and local (4,239) (3,104) (3,000)
-------------- ------------ --------
(6,237) 19,900 (3,708)
-------------- ------------ --------
Deferred:
Federal 34,636 (94,157) 56,448
Canadian (8,670) (24,849) (19,336)
State and local 11,942 (31,524) 23,734
-------------- ------------ ---------
37,908 (150,530) 60,846
-------------- ------------ ---------
Benefit from
(provision for)
income taxes $ 31,671 $ (130,630) $ 57,138
============== ============ =========
Our U.S. tax benefit from continuing operations was offset by a tax
provision provided on discontinued operations in accordance with Statement of
Financial Accounting Standards 109, "Accounting for Income Taxes."
The deferred income tax (provision) benefit resulted primarily from the
annual change in temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax
regulations, net operating loss ("NOL") carryforwards and, in fiscal 2003 and
fiscal 2002, the U.S. valuation allowance.
The deferred tax provision recorded in fiscal 2003 for our Canadian
operations of approximately $8.7 million reflects the utilization of $7.1
million of NOL carryforwards and other temporary differences.
The deferred tax provision recorded in fiscal 2002 for our U.S.
operations of approximately $125.7 million mainly relates to NOL
carryforwards and the U.S. related valuation allowance. In accordance with SFAS
109 "Accounting for Income Taxes", a valuation allowance is created and offset
against the net deferred tax asset 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 historic cumulative
losses, and in particular, the significant increase in U.S. operating losses
during the second quarter of fiscal 2002, we concluded that it was appropriate
to establish a full valuation allowance for our U.S. net deferred tax asset in
the amount of $133.7 million during the second quarter of fiscal 2002. During
the remainder of fiscal 2002, the valuation allowance was increased by $27.8
million, totaling $161.5 million for the fiscal year. In future periods, U.S.
losses will not be tax effected until such time as the certainty of future tax
benefits can be reasonably assured. The valuation allowance will be adjusted
when and if, in our opinion, significant positive evidence exists which
indicates that it is more likely than not that we will be able to realize the
U.S. deferred tax asset.
As of February 28, 2004, we had NOL carryforwards of approximately $622
million from our U.S. operations, which will expire between February 2019 and
February 2024.
We have not recorded deferred income taxes on the undistributed earnings
of our foreign subsidiaries because of our intent to indefinitely reinvest such
earnings. At February 28, 2004, the undistributed earnings of the foreign
subsidiaries amounted to approximately $191.9 million. Upon distribution of
these earnings in the form of dividends or otherwise, we may be subject to U.S.
income taxes and foreign withholding taxes. It is not practical, however, to
estimate the amount of taxes that might be payable on the eventual remittance of
these earnings.
A reconciliation of income taxes from continuing operations at the 35%
federal statutory income tax rate for fiscal 2003, 2002 and 2001 to income taxes
as reported is as follows:
Fiscal 2003 Fiscal 2002 Fiscal 2001
---------------- --------------- ---------------
Income tax benefit from continuing
operations computed at federal
statutory income tax rate $ 85,056 $ 24,684 $ 49,187
State and local income taxes, net of
federal tax benefit 5,007 (22,508) 13,477
Tax rate differential relating
to Canadian operations (973) (2,836) (4,896)
Goodwill and other permanent differences (378) (285) (630)
U.S. valuation allowance (57,041) (129,685) -
----------- ------------ ----------
Income tax benefit (provision), as reported $ 31,671 $ (130,630) $ 57,138
=========== ============ ==========
Income tax payments, net of income tax refunds, for fiscal 2003 and 2001
were approximately $4.2 million and $0.2 million, respectively. Income tax
refunds, net of income tax payments for fiscal 2002, were approximately $10.0
million.
The components of net deferred tax assets (liabilities) are as follows:
February 28, February 22,
2004 2003
------------- -------------
Current assets:
Insurance reserves $ 27,220 $ 25,533
Other reserves and accrued benefits 17,205 43,813
Accrued postretirement and postemployment benefits 756 756
Lease obligations 769 775
Pension obligations 997 3,188
Miscellaneous 2,910 5,181
------------- -------------
49,857 79,246
------------- -------------
Current liabilities:
Inventories (6,205) (8,736)
Health and welfare (9,490) (8,267)
Miscellaneous (2,316) (2,304)
-------------- -------------
(18,011) (19,307)
-------------- -------------
Valuation allowance (31,488) (58,312)
-------------- --------------
Deferred income taxes included in prepaid expenses and
other current assets $ 358 $ 1,627
============= =============
Non-current assets:
Alternative minimum tax credits $ 31,984 $ 31,984
Other reserves including asset disposition charges 76,532 75,828
Lease obligations 9,258 8,387
NOL carryforwards 257,049 181,938
Insurance reserves 16,800 16,800
Accrued postretirement and postemployment benefits 26,600 23,535
Pension obligations 10,970 11,293
Step rents 24,409 24,066
State tax 5,000 -
Miscellaneous 8,248 2,736
------------- -------------
466,850 376,567
------------- -------------
Non-current liabilities:
Depreciation (254,276) (255,683)
Pension obligations (27,882) (19,927)
Unrealized gain on derivatives (103) (1,902)
Miscellaneous (804) (2,375)
-------------- --------------
(283,065) (279,887)
-------------- --------------
Valuation allowance (197,688) (103,182)
-------------- --------------
Net non-current deferred income tax liability
included in Other non-current liabilities $ (13,903) $ (6,502)
============== ==============
Note 12 - Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees
under various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements.
The components of net pension cost (income) were as follows:
2003 2002 2001
------------------------ --------------------- ---------------------
U.S. Canada U.S. Canada U.S. Canada
--------- ---------- -------- -------- --------- ------
Service cost $ 3,276 $ 6,954 $ 3,344 $ 5,416 $ 4,023 $ 4,656
Interest cost 9,138 11,783 9,372 9,753 9,659 9,386
Expected return on plan assets (10,337) (15,138) (12,057) (14,827) (12,627) (14,489)
Amortization of unrecognized
net asset (13) (442) (13) (665) (13) (749)
Amortization of unrecognized
net prior service cost 147 335 292 294 291 293
Amortization of unrecognized net
actuarial gain (74) 584 (1,473) (47) (1,865) (135)
Curtailments and settlements (1,696) - - - - -
Administrative expenses and other - 253 - 215 - 569
--------- ---------- -------- -------- --------- ---------
Net pension cost (income) $ 441 $ 4,329 $ (535) $ 139 $ (532) $ (469)
========= ========== ========= ======== ========== ==========
Our U.S. and Canadian defined benefit pension plans use December 31 as
their measurement date. The following tables set forth the change in benefit
obligations, the change in plan assets, and the accumulated benefit obligation
for fiscal 2003 and 2002 for our defined benefit plans:
2003 2002
--------------------------- ---------------------------
Change in Benefit Obligation U.S. Canada U.S. Canada
---------------------------- ----------- ---------- ----------- -----------
Benefit obligation - beginning of year $ 145,916 $ 169,084 $ 139,985 $ 150,895
Service cost 3,276 6,954 3,344 5,416
Interest cost 9,138 11,783 9,372 9,753
Actuarial loss 8,971 14,293 6,409 2,737
Benefits paid (6,704) (10,121) (13,194) (9,214)
Amendments (5) - - -
Settlements (12,975) - - -
Effect of exchange rate - 21,938 - 9,497
---------- --------- ----------- -----------
Benefit obligation - end of year $ 147,617 $ 213,931 $ 145,916 $ 169,084
========== ========= =========== ===========
Change in Plan Assets
Plan assets at fair value - beginning of year $ 144,557 $ 176,751 $ 157,974 $ 176,396
Actual return on plan assets 21,571 29,602 (2,230) (6,852)
Company contributions 2,118 9,520 2,007 6,059
Benefits paid (6,704) (10,121) (13,194) (9,214)
Settlements (12,975) - - -
Effect of exchange rate - 23,045 - 10,362
---------- --------- ----------- -----------
Plan assets at fair value - end of year $ 148,567 $ 228,797 $ 144,557 $ 176,751
========== ========= =========== ===========
Accumulated Benefit Obligation $ 145,275 $ 205,687 $ 143,680 $ 161,137
------------------------------ ========== ========= =========== ===========
Plans with accumulated benefit obligation in excess of plan assets
consisted of the following and only relate to U.S. plans:
2003 2002
------------- -------------
Accumulated benefit obligation $ 27,637 $ 26,237
Projected benefit obligation $ 27,857 $ 26,289
Plan assets at fair value $ 407 $ 335
Amounts recognized on our Consolidated Balance Sheets consisted of the
following:
2003 2002
--------------------------- ---------------------------
U.S. Canada U.S. Canada
----------- ---------- ----------- -----------
Plan assets in excess of projected benefit
obligation $ 950 $ 14,867 $ (1,359) $ 7,667
Unrecognized net transition asset (12) - (26) (401)
Unrecognized prior service cost 401 1,366 554 1,518
Unrecognized net actuarial (gain) loss (13,774) 38,640 (13,296) 35,207
---------- --------- ----------- -----------
Total recognized on the Consolidated
Balance Sheets $ (12,435) $ 54,873 $ (14,127) $ 43,991
========== ========= =========== ===========
2003 2002
--------------------------- ---------------------------
U.S. Canada U.S. Canada
----------- ---------- ----------- -----------
Prepaid benefit cost $ 19,408 $ 54,873 $ 16,028 $ 43,991
Accrued benefit liability (35,384) - (32,548) -
Intangible asset 353 - 752 -
Accumulated other comprehensive income 3,188 - 1,641 -
---------- -------- ----------- -----------
Total recognized on the Consolidated
Balance Sheets $ (12,435) $ 54,873 $ (14,127) $ 43,991
========== ========= ============ ===========
The prepaid pension asset is included in "Other assets" on the
Consolidated Balance Sheets while the pension liability is included in "Accrued
salaries, wages and benefits" and "Other non-current liabilities".
At February 28, 2004 and February 22, 2003, our additional minimum
pension liability for our defined benefit plans exceeded the aggregate of the
unrecognized prior service costs and the net transition obligation. Accordingly,
stockholders' equity was reduced by $1.5 million and $1.5 million, respectively.
The weighted average assumptions in the following table represent the
rates used to develop the actuarial present value of projected benefit
obligation for the year listed and also the net periodic benefit cost for the
following year:
2003 2002 2001
----------------------- ----------------------- -----------------------
U.S. Canada U.S. Canada U.S. Canada
--------- ----------- -------- ----------- --------- -----------
Weighted average discount
rate 6.00% 6.00% 6.50% 6.50% 7.00% 6.50%
Weighted average rate of
compensation increase 3.00% 3.50% 3.50% 4.00% 4.00% 4.00%
Expected long-term rate of
return on plan assets 7.00% 7.50% 7.50% 8.50% 8.00% 8.50%
The expected long-term rate of return on plan assets for fiscal 2004 is 7.00%
and represents the weighted average of expected returns for each asset category.
We determine our expected long-term rate of return based on historical
performance, adjusted for current trends.
Our defined benefit pension plan weighted average asset allocations by
asset category were as follows:
Actual Allocation at December 31,
---------------------------------------------------
2003 2002
Target ----------------------- -----------------------
Allocation U.S. Canada U.S. Canada
----------------------- -------- ----------- --------- -----------
Equities 55 - 75% 59% 60% 57% 61%
Bonds 25 - 40% 30% 34% 36% 38%
Cash 0 - 10% 11% 6% 7% 1%
-------- ----------- --------- -----------
Total 100% 100% 100% 100%
======== =========== ========= ===========
Our defined benefit pension plan has target asset allocation ranges of
25% - 75% for equity and fixed income securities. The Plan's assets are held in
trust funds and are actively managed by external fund managers. Equity security
investments consist of a broad range of publicly traded securities, ranging from
small to large capitalization stocks and are diversified in both growth and
value orientated strategies as well as diverse industry sectors. Fixed income
securities consist of a broad range of investments including U.S. government
securities, corporate debt securities, mortgages and other asset backed
obligations. The Plan does not allow for direct investments in the publicly
traded securities of our Company and investments in derivatives for speculative
purposes.
Estimated future defined benefit payments expected to be paid are as
follows:
U.S. Canada
------ --------
2004 $ 9,080 $ 10,482
2005 9,219 10,632
2006 9,281 11,006
2007 10,358 11,455
2008 10,587 11,680
Years 2009 - 2013 86,867 66,634
We also expect to contribute $2 million in cash to our defined benefit
pension plan in fiscal 2004.
Defined Contribution Plans
We maintain a defined contribution retirement plan to which we contribute
an amount equal to 4% of eligible participants' salaries and a savings plan to
which eligible participants may contribute a percentage of eligible salary. We
contribute to the savings plan based on specified percentages of the
participants' eligible contributions. Participants become fully vested in our
contributions after 5 years of service. Our contributions charged to operations
for both plans were approximately $13.9 million, $12.6 million and $12.3 million
in fiscal years 2003, 2002 and 2001, respectively.
Multi-employer Union Pension Plans
We participate in various multi-employer union pension plans which are
administered jointly by management and union representatives and which sponsor
most full-time and certain part-time union employees who are not covered by our
other pension plans. The pension expense for these plans approximated $43.2
million, $40.3 million and $37.5 million in fiscal 2003, 2002 and 2001,
respectively. We could, under certain circumstances, be liable for unfunded
vested benefits or other expenses of jointly administered union/management
plans, which benefits could be significant and material for our Company. At this
time, we have not established any liabilities for future withdrawals because
such withdrawals from these plans are not probable and the amount cannot be
estimated.
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 period. We use a December 31
measurement date for both our U.S. and Canadian postretirement benefits.
The components of net postretirement benefits (income) cost are as
follows:
52 Weeks Ended
----------------------------------------------------
December 31, December 31, December 31,
U.S. Plans 2003 2002 2001
---------- ----------------- ---------------- -----------------
Service cost $ 240 $ 351 $ 284
Interest cost 1,316 1,419 1,481
Prior service cost (1,347) (1,347) (1,347)
Amortization of gain (367) (322) (445)
----------- ----------- -----------
Net postretirement benefits (income) cost $ (158) $ 101 $ (27)
=========== =========== ===========
52 Weeks Ended
----------------------------------------------------
December 31, December 31, December 31,
Canadian Plans 2003 2002 2001
-------------- ----------------- ---------------- -----------------
Service cost $ 330 $ 302 $ 281
Interest cost 935 885 884
Prior service cost (387) (33) (33)
Amortization of loss 327 292 322
---------- ----------- -----------
Net postretirement benefits cost $ 1,205 $ 1,446 $ 1,454
========== =========== ===========
The unfunded status of the plans is as follows:
December 31, 2003 December 31, 2002
--------------------------- ----------------------------
U.S. Canada U.S. Canada
----------- ------------- ------------- -------------
Unfunded accumulated benefit
obligation at beginning of year $ 20,992 $ 14,753 $ 21,975 $ 13,164
Service cost 240 330 351 302
Interest cost 1,316 935 1,419 885
Plan amendment - (5,954) - -
Benefits paid (1,486) (385) (1,912) (737)
Actuarial loss (gain) 959 (438) (841) 310
Foreign exchange - 1,745 - 829
----------- ------------- ------------- -------------
Accumulated benefit obligation
at end of year 22,021 10,986 20,992 14,753
Unrecognized net loss (gain) from
experience differences 6,420 (5,631) 7,746 (5,693)
Unrecognized prior service cost 9,164 6,201 10,511 453
----------- ------------- ------------- -------------
Accrued postretirement benefit
costs at end of year $ 37,605 $ 11,556 $ 39,249 $ 9,513
=========== ============= ============= =============
Assumed discount rate 6.0% 6.0% 6.5% 6.5%
=========== ============= ============= =============
The assumed rate of future increase in health care benefit cost for
fiscal 2004 was 11.25% - 13.25% and is expected to decline to 5.5% by the year
2020 and remain at that level thereafter. The effect of a 1% change in the
assumed health care cost trend rate for each future year on the sum of service
and interest cost would either be an increase or decrease of $0.1 million,
while the accumulated postretirement benefit obligation would either increase
by $1.6 million or decrease by $1.4 million.
During January 2004, the FASB issued FASB Staff Position ("FSP") 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the "Act")", which permits a
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Act. The guidance in FSP 106-1 is effective for interim or annual financial
statements of fiscal years ending after December 7, 2003. The election to defer
accounting for the Act is a one-time election that must be made before net
periodic postretirement benefit costs for the period that includes the Act's
enactment date are first included in reported financial information pursuant to
the requirements of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions" ("SFAS 106"). Based upon the uncertainties related
to the appropriate accounting methodology for this event and in accordance with
FSP 106-1, we elected to defer accounting for the effects of the Act and
accordingly, the measures of the accumulated postretirement benefit obligations
and the net postretirement benefit cost shown above do not reflect the effects
of the Act on the postretirement benefits. We have not determined the impact of
the Act on these benefits.
Our election to defer accounting for the effects of the Act may not be
changed and the deferral will continue to apply until authoritative guidance on
the accounting for the federal subsidy is issued, or the election to defer
expires if, subsequent to January 31, 2004, but prior to the issuance of
additional authoritative guidance, a significant event occurs that ordinarily
would call for remeasurement of a plan's assets and obligations - for example, a
plan amendment, settlement, or curtailment. Upon the occurrence of such an
event, we would be required to account for that event pursuant to the guidance
in SFAS 106 and also reflect in our accounting for postretirement benefits other
than pensions our best estimate of the effects of the Act, including the federal
subsidy (if applicable based on the terms of the plan and the sponsor's analysis
of generally accepted accounting principles) and any effects on participation
rates and health care cost estimates. Once final guidance is issued, previously
reported information is subject to change.
Estimated future postretirement benefit payments expected to be paid are
as follows:
U.S. Canada
-------- ----------
2004 $ 1,635 $ 443
2005 1,677 461
2006 1,679 482
2007 1,673 496
2008 1,713 508
Years 2009 - 2013 9,215 2,989
Postemployment Benefits
We accrue costs for pre-retirement, postemployment benefits provided to
former or inactive employees and recognize an obligation for these benefits. The
costs of these benefits have been included in operations for each of the three
fiscal years in the period ended February 28, 2004. As of February 28, 2004 and
February 22, 2003, we had a liability reflected on the Consolidated Balance
Sheets of $25.3 million and $22.8 million, respectively, related to such
benefits.
Note 13 - Stock Options
At February 28, 2004, we had four stock-based compensation plans. We
apply the principles of APB 25 for stock options and FASB Interpretation No. 28
for Stock Appreciation Rights ("SAR's"). SAR's allow the holder, in lieu of
purchasing stock, to receive cash in an amount equal to the excess of the fair
market value of common stock on the date of exercise over the option price.
Our 1984 Stock Option Plan for officers and key employees, which expired
on February 1, 1994, provided for the granting of 1,500,000 shares and was
amended as of July 10, 1990 to increase to 1,500,000 the number of options
available for grant as either options or SAR's. Such awards were granted at the
fair market value of the Company's common stock at the date of grant.
Our 1994 Stock Option Plan (the "1994 Plan") for officers and key
employees, which expired on March 17, 2004, provided for the granting of
1,500,000 shares as either options or SAR's. In fiscal 2003, the Company granted
46,750 options under this plan. Options and SAR's issued under this plan vest
25% on each issuance anniversary date over a four-year period. Under this plan,
options and SAR's were granted at the fair market value of the Company's common
stock at the date of grant.
Effective July 13, 1999, the Board of Directors and stockholders approved
the 1998 Long Term Incentive and Share Award Plan (the "1998 Plan") for our
Company's officers and key employees. The 1998 Plan provides for the granting of
5,000,000 shares in the form of options, SAR's or stock awards. During fiscal
2003, the Company granted 1,061,225 options under this plan. As of February 28,
2004, 700,073 options were available for granting. Options and SAR's issued
under this plan also vest 25% on each anniversary date of issuance over a
four-year period. Such awards are also granted at the fair market value of the
Company's common stock at the date of grant.
The 1994 Stock Option Plan for Board of Directors (the "1994 Board of
Directors' Plan") provides for the granting of 100,000 stock options at the fair
market value of our common stock at the date of grant. Options granted under
this plan totaled 4,000 in fiscal 2003, 4,000 in fiscal 2002, and 8,000 in
fiscal 2001. At February 28, 2004, there were 62,767 options available for grant
under this plan. One-third of the options granted on a given date vest on each
anniversary date of issuance over a three year period.
A summary of option transactions is as follows:
Officers, Key Employees and Directors
-------------------------------------
Weighted
Average
Shares Price
------------- ---------
Outstanding February 24, 2001 3,244,664 $ 24.04
Granted 1,506,513 9.48
Canceled or expired (419,780) 25.61
Exercised (20,412) 14.85
------------- ---------
Outstanding February 23, 2002 4,310,985 $ 18.84
Granted 2,078,465 13.17
Canceled or expired (1,240,769) 17.75
Exercised (148,178) 18.94
------------- ---------
Outstanding February 22, 2003 5,000,503 $ 16.75
Granted 1,111,975 4.99
Canceled or expired (750,555) 17.08
Exercised (3,099) 6.71
-------------- ---------
Outstanding February 28, 2004 5,358,824 $ 14.24
============= =========
Exercisable at:
February 22, 2003 1,665,327 $ 23.99
February 28, 2004 2,248,825 $ 20.92
The weighted average fair values of options granted during the last three fiscal
years are as follows:
Fiscal 2001 $ 5.77
Fiscal 2002 $ 7.18
Fiscal 2003 $ 2.75
A summary of stock options outstanding and exercisable at February 28,
2004 is as follows:
Weighted
Options Average Weighted Options Weighted
Average Range Outstanding Remaining Average Exercisable Average
of Grant at Contractual Grant at Grant
Prices 2/28/04 Life Price 2/28/04 Price
------------------------ ------------- ------------- -------------- ------------- -------------
$ 4.31 - $ 8.94 1,929,574 9.5 years $ 5.14 255,065 $ 5.55
$ 9.06 - $10.66 978,633 7.1 years $ 9.10 303,253 $ 9.13
$ 11.63 - $16.31 38,000 7.6 years $ 14.03 22,500 $14.49
$ 17.38 - $19.80 1,265,307 7.2 years $ 17.72 651,447 $17.84
$ 21.50 - $30.00 503,350 4.7 years $ 27.74 372,600 $27.81
$ 30.25 - $31.75 345,400 4.7 years $ 31.37 345,400 $31.37
$ 32.31 - $37.00 298,560 5.3 years $ 32.51 298,560 $32.51
------------- ------- ------------- ------------
5,358,824 $ 14.24 2,248,825 $20.92
========= ======= ============= ============
A summary of SAR transactions is as follows:
Officers and Key Employees
- --------------------------
Price Range
Shares Per Share
------------ -------------------
Outstanding February 24, 2001 507,762 $ 21.88 - $45.38
Canceled or expired (265,625) 23.38 - 24.75
Exercised (9,375) 23.38 - 45.38
------------ -------------------
Outstanding February 23, 2002 232,762 $ 21.88 - $31.63
Canceled or expired (84,000) 23.38 - 27.25
Exercised (16,887) 21.88 - 24.75
------------ -------------------
Outstanding February 22, 2003 131,875 $ 23.38 - $31.63
Canceled or expired (119,375) 23.38 - 31.63
Exercised -
------------ --------------------
Outstanding February 28, 2004 12,500 $ 31.63
============ ====================
Exercisable at:
February 22, 2003 131,875 $ 23.38 - $31.63
February 28, 2004 12,500 $ 31.63
Note 14 - Commitments and Contingencies
In May 1999, four present and former employees of The Food Emporium
filed suit against our Company in federal court in New York for unpaid wages and
overtime. In April 2000, the judge certified the case as a class action status
for this case covering approximately 82 stores in 9 counties in the New York
metropolitan area. Approximately 840 current and former full and part-time
employees of The Food Emporium and A&P opted into the class. The parties agreed
to settle the case for $3.1 million dollars, and on May 7, 2004, the court
accepted the settlement.
In April 2002, three Canadian Food Basics franchisees commenced a
breach of contract action in a Canadian court against The Great Atlantic &
Pacific Company of Canada, Limited ("A&P Canada") as representative plaintiffs
for a purported class of approximately 70 current and former Canadian Food
Basics franchisees. The lawsuit seeks unspecified damages in connection with A&P
Canada's alleged failure to distribute to the franchisees the full amount of
vendor allowances and/or rebates to which the franchisees claim they are
entitled under the operative franchise agreements. A&P Canada disputes the
plaintiff-franchisees' claim and has filed a counterclaim seeking to recover
subsidies made by it to the plaintiffs. The lawsuit was certified as a class
action in December 2002. A majority of the class members have opted out of the
proceeding. A&P Canada's appeal of the class certification order was dismissed
and the Company is seeking leave to file a further appeal. This suit is
scheduled for trial in October 2004.
On June 5, 2002, a purported securities class action Complaint was
filed in the United States District Court for the District of New Jersey against
our Company and certain of our officers and directors in an action captioned
Brody v. The Great Atlantic & Pacific Tea Co., Inc., No. 02 CV 2674 (FSH). The
Brody lawsuit and four subsequently-filed related lawsuits were consolidated
into a single lawsuit captioned In re The Great Atlantic & Pacific Tea Company,
Inc. Securities Litigation, No. 02 CV 2674 (FSH) (the "Class Action Lawsuit").
On December 2, 2002, plaintiffs filed their Consolidated Amended Class Action
Complaint (the "Complaint"), which alleged claims under Sections 10(b) (and Rule
10b-5 promulgated thereunder) and 20(a) of the Securities Exchange Act of 1934
arising out of our Company's July 5, 2002 filing of restated financial
statements for fiscal 1999, fiscal 2000 and the first three quarters of fiscal
2001. The Complaint in the Class Action Lawsuit sought unspecified money
damages, costs and expenses. On January 17, 2003, defendants filed a motion
seeking to dismiss the Complaint. By Opinion & Order entered on September 18,
2003, the District Court dismissed plaintiffs' Complaint without prejudice. On
October 13, 2003, after having declined to file a Second Amended Complaint,
plaintiffs filed a Notice of Appeal to the United States Court of Appeals for
the Third Circuit. The appeal has been fully briefed, and the parties are
awaiting further action by the Third Circuit.
We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. We are
also subject to certain environmental claims. While the outcome of these claims
cannot be predicted with certainty, Management does not believe that the outcome
of any of these legal matters will have a material adverse effect on our
consolidated results of operations, financial position or cash flows.
We adopted the accounting and disclosure requirements of FASB
Interpretation 45 ("FIN 45" or the "Interpretation"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34" during fiscal 2002. As required to
be disclosed by this interpretation, we are the guarantor of a loan of $2.2
million related to a shopping center, which will expire in 2011.
Note 15 - Operating Segments
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance. Our chief operating decision maker is our Chairman of the
Board, President and Chief Executive Officer.
We currently operate in three reportable segments: United States Retail,
Canada Retail and Canada Wholesale. The retail segments are comprised of retail
supermarkets in the United States and Canada, while the wholesale segment is
comprised of our Canadian operation that serves as exclusive wholesaler to our
franchised stores.
The accounting policies for the segments are the same as those described
in the summary of significant accounting policies. We measure segment
performance based upon (loss) income from operations.
Information on segments is as follows:
OPERATING DATA Fiscal 2003 Fiscal 2002 Fiscal 2001
- -------------- ----------------- ------------------ ------------------
Sales
U.S. Retail $ 7,562,947 $ 7,427,038 $ 7,723,035
Canada Retail 2,435,703 1,957,257 1,806,705
Canada Wholesale 813,812 712,486 676,506
--------------- --------------- ----------------
Total Company $ 10,812,462 $ 10,096,781 $ 10,206,246
=============== =============== ================
Depreciation and amortization
U.S. Retail $ 215,639 $ 210,097 $ 212,086
Canada Retail 51,516 39,973 35,295
Canada Wholesale - - -
--------------- --------------- ----------------
Total Company $ 267,155 $ 250,070 $ 247,381
=============== =============== ================
(Loss) income from operations *
U.S. Retail $ (221,796) $ (63,187) $ (103,616)
Canada Retail 28,774 39,056 21,301
Canada Wholesale 24,533 30,389 26,534
--------------- --------------- ----------------
Total Company $ (168,489) $ 6,258 $ (55,781)
================ =============== =================
Interest expense
U.S. Retail $ (73,343) $ (75,919) $ (81,574)
Canada Retail (5,412) (6,013) (7,557)
Canada Wholesale (3,059) (2,747) (2,591)
---------------- --------------- ----------------
Total Company $ (81,814) $ (84,679) $ (91,722)
================ =============== ================
Interest income
U.S. Retail $ 316 $ 2,369 $ 1,377
Canada Retail 3,447 2,083 1,970
Canada Wholesale 3,522 3,445 3,625
--------------- --------------- ----------------
Total Company $ 7,285 $ 7,897 $ 6,972
=============== =============== ================
(Loss) income from continuing operations before income taxes *
U.S. Retail $ (294,823) $ (136,737) $ (183,813)
Canada Retail 26,809 35,126 15,714
Canada Wholesale 24,996 31,087 27,568
--------------- --------------- ----------------
Total Company $ (243,018) $ (70,524) $ (140,531)
================ =============== =================
* (Loss) income from operations and (loss) income from continuing operations
before income taxes for fiscal 2003 exclude U.S. charges to Canada of $24.1
million, which are not considered for management reporting.
February 28, February 22, February 23,
FINANCIAL POSITION DATA 2004 2003 2002
- ----------------------- ----------------- ------------------ ------------------
Capital expenditures
U.S. Retail $ 73,726 $ 164,586 $ 192,705
Canada Retail 60,951 54,944 53,477
Canada Wholesale - - -
--------------- --------------- ----------------
Total Company $ 134,677 $ 219,530 $ 246,182
=============== =============== ================
Total assets
U.S. Retail $ 1,985,309 $ 2,216,455 $ 2,599,628
Canada Retail 681,592 597,634 521,278
Canada Wholesale 83,649 71,148 73,358
--------------- --------------- ----------------
Total Company $ 2,750,550 $ 2,885,237 $ 3,194,264
=============== =============== ================
Long-lived assets
United States $ 1,081,274 $ 1,318,238 $ 1,451,235
Canada 374,002 323,973 289,088
--------------- --------------- ----------------
Total Company $ 1,455,276 $ 1,642,211 $ 1,740,323
=============== =============== ================
Note 16 - Sale-Leaseback Transactions
During fiscal 2001, we sold 7 properties and simultaneously leased them
back from the purchaser. The properties subject to this sale had a carrying
value of approximately $42.7 million. Net proceeds received related to these
transactions amounted to approximately $50.8 million. Of the 7 properties sold,
4 were sold for a profit resulting in a gain after deducting expenses of $11.0
million. Three properties in the aforementioned transaction were sold at a loss
of $4.5 million after expenses. The majority of this loss was related to one of
these properties, which was anticipated at the end of fiscal 2000, and,
accordingly, was recognized in full at that time since the carrying value of
such property exceeded its fair value less the cost of disposal. In addition,
during fiscal 2001, we sold 2 properties and simultaneously leased them back
from the purchaser which were originally recorded as off balance sheet operating
leases. However, due to our Company's continuing involvement with these 2
properties, in the fourth quarter of fiscal 2003, an adjustment was made to
record these two transactions as financings under the provisions of SFAS 66
"Accounting for Sales of Real Estate" ("SFAS 66"). The impact of these
adjustments was immaterial to the fourth quarter and fiscal 2003 as well as to
the prior periods to which they relate. The carrying value of these 2 properties
of approximately $8.3 million has been recorded on our Consolidated Balance
Sheet and the sale has been reversed. In addition, the sales prices of these
properties of $14.9 million have been recorded as financing obligations with
maturities of 17 and 22 years, respectively, within "Long term debt" on our
Consolidated Balance Sheet at February 28, 2004.
The aforementioned sales plus other sales that have been completed in
prior years resulted in a combined gain of $55.1 million, which has been
deferred in our Consolidated Balances Sheets and is being amortized over the
lives of the respective leases as a reduction of rental expense. Approximately
$2.8 million of this gain is included in "Other accruals" and the remainder is
included "Other non-current liabilities" in our Consolidated Balance Sheets.
During fiscal 2003, we recognized a gain of $4.7 million, of which $2.3
million related to the deferred gain that was recognized as a result of the sale
of the Landover coffee plant, compared to a gain of $3.0 million during fiscal
2002. The remaining deferred gain at February 28, 2004 amounted to $48.3
million.
On February 27, 2004, we sold 13 properties and simultaneously leased
them back from the purchaser. However, due to our Company's continuing
involvement with these properties, the sale did not qualify for sale-leaseback
accounting in accordance with SFAS 98, "Accounting for Leases" but rather as a
financing under the provisions of SFAS 66. In accordance with SFAS 66, the
carrying value of these properties of approximately $73.6 million remained on
our Consolidated Balance Sheet and no sale was recognized. Instead, the sales
price of these properties of $166.5 million was recorded as a financing
obligation with a maturity of 20 years, with the exception of one property that
has a maturity of 22 years, within "Long term debt" on our Consolidated Balance
Sheet at February 28, 2004. In addition, all lease payments are being expensed
to "Interest expense" in our Consolidated Statements of Operations. Of the 13
properties sold, all were sold for a profit resulting in a gain, after deducting
expenses, which has been deferred and will not be recognized until the end of
the respective leases when our continuing involvement ceases.
We expect to enter into similar transactions for other owned properties
from time to time in the future.
Note 17 - Gain On Proceeds From The Demutualization Of A Mutual
Insurance Company
During fiscal 2001, we received $60.6 million from the demutualization of
The Prudential Insurance Company. This consisted of cash of $35.2 million, and
common stock of $25.4 million, which is included in "Prepaid expenses and other
current assets," in our Consolidated Balance Sheets at February 23, 2002. This
amount was recorded as a nonrecurring gain and included in the determination of
income (loss) from operations and net cash provided by operating activities in
fiscal 2001. At February 23, 2002, we had an unrealized gain of $0.9 million,
net of tax, related to the common stock held as available for sale securities
that was recorded as a separate component of Stockholders' Equity.
During fiscal 2002, we sold our remaining holdings in this common stock
and recognized a gain of $1.7 million. This gain was included in "Store
operating, general and administrative expense" on our Consolidated Statements of
Operations for fiscal 2002.
Note 18 - Related Party Transactions
A&P Properties Limited, a subsidiary of our Company, leases a store in
Windsor, Ontario, Canada from Tenga Capital Corporation, which is owned by
Erivan and Helga Haub. Erivan Haub is the father of Christian W. E. Haub, our
Chairman of the Board, President and Chief Executive Officer, and is a general
partner, together with Tengelmann Verwaltungs- und Beteiligungs GmbH, Karl
Erivan Warder Haub and Christian W. E. Haub of Tengelmann, which owns a
controlling interest of our common stock. Helga Haub is the mother of Christian
W. E. Haub and is a member of our Board of Directors. The lease, which commenced
in 1983 and expires on October 31, 2013, includes four 5-year renewal options.
The base annual rental was C$0.5 million (U.S. $0.4 million) until October 31,
2003, when it decreased to C$0.4 million (U.S. $0.3 million).
Prior to fiscal 2003, we were a party to agreements granting Tengelmann
and its affiliates the exclusive right to use the "A&P(R)" and "Master
Choice(R)" trademarks in certain European countries pursuant to which we
received $0.1 million during each of fiscal 2002 and 2001, which is the maximum
annual royalty fee under such agreements. Beginning in fiscal 2003, all such
material agreements were canceled. Royalties for use of our trademarks in
Germany were paid at the commencement of that license in 1979. We are also a
party to agreements under which we purchased from Wissoll, which was formally an
affiliate of Tengelmann, approximately $0.3 million, $0.7 million and $0.6
million worth of the Black Forest line and Master Choice(R) candy during fiscal
2003, 2002 and 2001, respectively.
During fiscal 2003, we entered into a three year agreement with OBI
International Development and Service GMBH ("OBI International"), a subsidiary
of Tengelmann, to purchase seasonal merchandise to be sold in our stores. Our
purchases from OBI International totaled $0.8 million in fiscal 2003.
We own a jet aircraft, which Tengelmann leases under a full cost
reimbursement lease. During fiscal 2003, 2002 and 2001, Tengelmann was obligated
to and has reimbursed us $2.8 million, $2.8 million and $2.5 million,
respectively, for their use of the aircraft.
Note 19 - Environmental Liability
We own a non-retail real estate location that was subjected to
environmental contamination. We obtained an environmental remediation report to
enable us to assess the potential environmental liability related to this
property. Factors considered in determining the liability included, among
others, whether we had been designated as a potentially responsible party, the
number of potentially responsible parties designated at the site, the stage of
the proceedings and the available environmental technology.
During fiscal 2000, we assessed the likelihood that a loss had been
incurred at this site as probable and based on findings included in remediation
reports and discussion with legal counsel, estimated the potential loss to be
$3.0 million on an undiscounted basis. Accordingly, such amount was accrued at
that time. At each balance sheet date, we assess our exposure with respect to
this environmental remediation based on current available information.
Subsequently, during fiscal 2000, with respect to such review, we determined
that additional costs amounting to $1.3 million would be incurred to remedy
these environmental issues and, accordingly, this additional amount was accrued.
During fiscal 2001, due to an unfavorable ruling by the local
municipality, which was subsequently upheld by the New Jersey Superior Court,
denying our proposed development plan, we determined that a decrease in the
value of the property had occurred and recorded an additional charge of $2.0
million.
The total liability, net of costs incurred to date, of $3.0 million was
included in "Other non-current liabilities" in our Consolidated Balance Sheets
at February 28, 2004.
Note 20 - North American Power Outage
In August 2003, a major power outage affected our Northeast, Michigan
and Canadian operations. We maintain insurance coverage which provides for
reimbursement for product loss as well as incremental costs incurred as a result
of this blackout. Therefore, our fiscal 2003 results were not materially
affected by the power outage.
Note 21 - Summary of Quarterly Results (Unaudited)
The following table summarizes our results of operations by quarter for
fiscal 2003 and fiscal 2002. The first quarter of each fiscal year contains
sixteen weeks, while the second and third quarters each contain twelve weeks.
The fourth quarter of 2002 contains twelve weeks and the fourth quarter of 2003
contains thirteen weeks.
-------------------------------------------------------------------------------------
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
--------------- ---------------- --------------- ---------------- ---------------
2003 (unaudited) (Dollars in thousands, except per share amounts)
- ----------------
Sales $3,203,830 $2,443,700 $2,465,295 $2,699,637 $10,812,462
Gross margin 879,169 658,926 656,061 735,660 2,929,816
Depreciation and amortization 84,096 61,596 63,383 58,080 267,155
Loss from operations (a) (d) (12,459) (20,913) (84,432) (50,685) (168,489)
Interest expense (24,884) (17,945) (18,383) (20,602) (81,814)
Loss from continuing operations (20,342) (57,095) (72,658) (61,252) (211,347)
Income (loss) from discontinued
operations 40,622 (26,595) 47,556 2,740 64,323
Net income (loss) (b) 20,280 (83,690) (25,102) (58,512) (147,024)
Per share data:
Loss from continuing operations
- basic (c) (0.53) (1.48) (1.89) (1.59) (5.49)
Income (loss) from discontinued
operations - basic (c) 1.06 (0.69) 1.23 0.07 1.67
Net income (loss) - basic (c) 0.53 (2.17) (0.65) (1.52) (3.82)
Loss from continuing operations
- diluted (0.53) (1.48) (1.89) (1.59) (5.49)
Income (loss) from discontinued
operations - diluted 1.05 (0.69) 1.23 0.07 1.67
Net income (loss) - diluted 0.52 (2.17) (0.65) (1.52) (3.82)
Market price:
High 9.54 11.05 9.96 9.33
Low 4.08 7.92 5.02 7.15
Number of stores at end of period 667 643 645 633
Number of franchised stores served
at end of period 64 64 63 63
- ---------------------------------------------------------------------------------------------------------------------------
Such amounts are comprised of the following; item (b) is net of applicable income taxes:
(a) Asset disposition initiative $ - $ 5,230 $ 124 $ (38,900) $ (33,546)
Goodwill/long-lived asset impairment
charge - - (60,082) - (60,082)
All other losses from operations (12,459) (26,143) (24,474) (11,785) (74,861)
--------- ---------- ---------- ---------- ----------
Loss from operations $(12,459) $ (20,913) $ (84,432) $ (50,685) $(168,489)
========= ========== ========= ========== ==========
(b) Asset disposition initiative $ - $ 5,230 $ (224) $(38,542) $ (33,536)
Goodwill/long-lived asset impairment
charge - - (60,082) - (60,082)
All other earnings (losses) 20,280 (88,920) 35,204 (19,970) (53,406)
-------- ---------- --------- ---------- ----------
Net income (loss) $ 20,280 $ (83,690) $ (25,102) $ (58,512) $(147,024)
======== ========== ========= ========== =========
(c) The sum of quarterly basic income (loss) per share differs from full year
amounts because the number of weighted average common shares outstanding
has increased each quarter.
(d) Loss from operations for the fourth quarter of fiscal 2003 includes a $17.5
million charge to increase our workers' compensation and general liability
reserves in response to both adverse development of prior years' costs and
other developments including a continuing trend of rising costs.
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
------------- -------------- ------------- -------------- ---------------
2002 (unaudited) (Dollars in thousands, except per share amounts)
- ----------------
Sales $3,093,776 $2,327,182 $2,310,775 $2,365,048 $10,096,781
Gross margin 881,815 659,332 643,952 660,360 2,845,459
Depreciation and amortization 72,551 58,740 58,016 60,763 250,070
Income (loss) from operations (a) (d) 25,214 (7,607) (11,280) (69) 6,258
Interest expense (26,752) (19,640) (19,816) (18,471) (84,679)
Income (loss) from continuing
operations 789 (147,261) (31,864) (22,818) (201,154)
Income from discontinued
operations 1,086 2,577 2,132 1,850 7,645
Net income (loss) (b) 1,875 (144,684) (29,732) (20,968) (193,509)
Per share data:
Income (loss) from
continuing operations - basic
and diluted (c) 0.02 (3.82) (0.83) (0.59) (5.23)
Income (loss) from
discontinued operations - basic
and diluted (c) 0.03 0.06 0.06 0.05 0.20
Net income (loss) - basic and
diluted (c) 0.05 (3.76) (0.77) (0.54) (5.03)
Market price:
High 28.44 20.00 10.85 8.25
Low 18.55 9.75 5.34 4.70
Number of stores at end of period 692 692 692 695
Number of franchised stores served
at end of period 68 66 65 65
- --------------------------------------------------------------------------------------------------------------------------
Such amounts are comprised of the following; item (b) is net of applicable
income taxes:
(a) Asset disposition initiative $ (6,963) $ (1,303) $ 11,128 $ 3,532 $ 6,394
Gain on proceeds from insurance
company demutualization 1,717 - - - 1,717
All other earnings (losses) from
operations 30,460 (6,304) (22,408) (3,601) (1,853)
-------- ------------ ---------- ----------- -----------
Income (loss) from operations $ 25,214 $ (7,607) $ (11,280) $ (69) $ 6,258
======== ============ ========= ========== ===========
(b) Asset disposition initiative $ (4,094) $ (776) $ 11,132 $ 3,331 $ 9,593
Gain on proceeds from insurance
company demutualization 996 - - - 996
Deferred tax asset valuation allowance - (133,675) - - (133,675)
All other earnings (losses) 4,973 (10,233) (40,864) (24,299) (70,423)
-------- ------------ ---------- ---------- -----------
Net (loss) income $ 1,875 $ (144,684) $ (29,732) $ (20,968) $(193,509)
======== =========== ========= ========= ==========
(c) The sum of quarterly basic income per share differs from full year amounts
because the number of weighted average common shares outstanding has
increased each quarter.
(d) Income (loss) from operations for the fourth quarter of fiscal 2002
includes severance of approximately $10 million and a charge relating to
the adoption of EITF 02-16 "Accounting By a Customer (including a Reseller)
for Certain Consideration Received From a Vendor" of approximately $2
million. These charges are offset by a $7 million reduction of accruals for
occupancy costs primarily related to a change in estimate.
Management's Report on Consolidated Financial Statements
- --------------------------------------------------------
The Management of The Great Atlantic & Pacific Tea Company, Inc. has
prepared the consolidated financial statements and related financial data
contained in this Annual Report. The financial statements were prepared in
accordance with accounting principles generally accepted in the United States of
America appropriate to the business and, by necessity and circumstance, include
some amounts, which were determined using Management's best judgments and
estimates with appropriate consideration to materiality.
Management is responsible for the objectivity of the consolidated
financial statements and other financial data included in this report. To meet
this responsibility, Management maintains a system of internal accounting
controls to provide reasonable assurance that assets are safeguarded and that
accounting records are reliable. Management supports a program of internal
audits and internal accounting control reviews to provide reasonable assurance
that the system is operating effectively.
Within the 90-day period prior to the date of this report, we evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act
of 1934. Based upon that evaluation, we concluded that our Company's disclosure
controls and procedures are effective to ensure that our Company is able to
collect, process and disclose the information we are required to disclose in the
report we file with the Securities and Exchange Commission within the required
time periods.
Since the date of the most recent evaluation of our Company's internal
controls over financial reporting, there have been no significant changes in
such controls or in other factors that could have significantly affected those
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
The Board of Directors pursues its responsibility for reported financial
information through its Audit Committee. The Audit Committee meets periodically
and, when appropriate, separately with Management, internal auditors and the
independent accountants, PricewaterhouseCoopers LLP, to review each of their
respective activities.
Christian W. E. Haub Mitchell P. Goldstein
Chairman of the Board, President Senior Vice President,
and Chief Executive Officer Chief Financial Officer
Report of Independent Auditors
To the Stockholders and Board of Directors of
The Great Atlantic & Pacific Tea Company, Inc:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and comprehensive
(loss) income and cash flows present fairly, in all material respects, the
financial position of The Great Atlantic & Pacific Tea Company, Inc. and its
subsidiaries at February 28, 2004 and February 22, 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2004 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 21, 2004
Five Year Summary of Selected Financial Data
- --------------------------------------------
Fiscal 2003 Fiscal 2002 Fiscal 2001 Fiscal 2000 Fiscal 1999
(53 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c)
-------------- --------------- -------------- ---------------- -------------
(unaudited)
(Dollars in thousands, except per share amounts)
Operating Results
Sales $10,812,462 $10,096,781 $10,206,246 $9,835,856 $9,367,964
(Loss) income from
operations (a) (168,489) 6,258 (55,781) 47,925 141,601
Depreciation and
amortization (267,155) (250,070) (247,381) (238,767) (215,768)
Interest expense (81,814) (84,679) (91,722) (102,488) (90,445)
(Loss) income from continuing
operations (211,347) (201,154) (83,393) (30,001) 32,134
Income from discontinued
operations 64,323 7,645 11,487 10,501 3,179
Net (loss) income (b) (147,024) (193,509) (71,906) (19,500) 35,313
Per Share Data
(Loss) income from continuing
operations - basic and diluted (5.49) (5.23) (2.17) (0.78) 0.84
Income from discontinued
operations - basic and diluted 1.67 0.20 0.29 0.27 0.08
Net (loss) income - basic and diluted (3.82) (5.03) (1.88) (0.51) 0.92
Cash dividends - - - 0.30 0.40
Book value per share 10.02 12.93 17.54 19.53 20.65
Financial Position
Current assets $1,146,312 $1,099,588 $1,212,074 $1,197,873 $1,218,717
Current liabilities 1,073,920 1,090,612 1,184,463 1,130,062 1,153,173
Working capital 72,392 8,976 27,611 67,811 65,544
Current ratio 1.07 1.01 1.02 1.06 1.06
Expenditures for property 134,677 219,530 246,182 415,842 479,572
Total assets 2,750,550 2,885,237 3,194,264 3,319,157 3,331,359
Current portion of
long-term debt 2,271 25,820 526 6,195 2,382
Current portion of
capital lease obligations 15,901 13,787 10,691 11,634 11,327
Long-term debt 823,738 803,277 779,440 915,321 865,675
Long-term portion of
capital lease obligations 73,980 83,485 93,587 106,797 117,870
Total debt 915,890 926,369 884,244 1,039,947 997,254
Debt to total capitalization 70% 65% 57% 58% 56%
Five Year Summary of Selected Financial Data - Continued
Fiscal 2003 Fiscal 2002 Fiscal 2001 Fiscal 2000 Fiscal 1999
(53 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c) (52 Weeks)(c)
-------------- --------------- -------------- ---------------- -------------
(unaudited)
(Dollars in thousands, except per share amounts)
Equity
Stockholders' equity 385,824 498,191 672,988 748,811 792,138
Weighted average shares
outstanding 38,516,750 38,494,812 38,350,616 38,347,216 38,330,379
Number of registered
stockholders 5,469 5,751 6,087 6,281 6,890
Other
Number of employees 74,185 78,710 78,995 83,000 80,900
New store openings 19 31 21 47 54
Number of stores at
year end 633 695 702 752 750
Total store area
(square feet) 24,724,168 26,817,650 26,664,312 27,931,729 26,904,331
Number of franchised
stores served at year end 63 65 67 68 65
Total franchised store
area (square feet) 2,048,016 2,066,401 2,108,969 2,021,206 1,908,271
Such amounts are comprised of the following; item (b) is net of applicable
income taxes:
(a) Asset disposition initiative $ (33,546) $ 6,394 $(193,468) $ - $ (59,886)
Goodwill/long-lived asset impairment
charge (60,082) - - - -
Gain on proceeds from insurance
company demutualization - 1,717 60,606 - -
All other (losses) earnings from
operations (74,861) (1,853) 77,081 47,925 201,487
---------- ---------- --------- --------- ---------
(Loss) income from operations $(168,489) $ 6,258 $ (55,781) $ 47,925 $ 141,601
========== ========= ========== ========= =========
(b) Asset disposition initiative $ (33,536) $ 9,593 $(112,268) $ - $ (34,836)
Goodwill/long-lived asset impairment
charge (60,082) - - - -
Gain on proceeds from insurance
company demutualization - 996 35,151 - -
Deferred tax asset valuation allowance - (133,675) - - -
All other (losses) earnings (53,406) (70,423) 5,211 (19,500) 70,149
--------- ---------- --------- ---------- ---------
Net (loss) income $(147,024) $(193,509) $ (71,906) $ (19,500) $ 35,313
========= ========== ========== ========== =========
(c) Not derived from audited financial information.
Executive Officers
- ------------------
Christian W. E. Haub
Chairman of the Board,
President and Chief Executive Officer
Eric Claus
President and
Chief Executive Officer, A&P Canada
Brian C. Piwek
President and
Chief Executive Officer, A&P U.S.
William P. Costantini
Senior Vice President,
General Counsel and Secretary
Mitchell P. Goldstein
Senior Vice President,
Chief Financial Officer
John E. Metzger
Senior Vice President,
Chief Information Officer
Board Of Directors
- ------------------
Christian W. E. Haub (c)(d)
Chairman of the Board,
President and Chief Executive Officer
John D. Barline, Esq. (b)(c)(f)
Williams, Kastner & Gibbs LLP,
Tacoma, Washington
Jens-Jurgen Bockel (d)
Chief Financial Officer and
Member of the Managing Board
Tengelmann Warenhandelsgesellschaft KG
Muelheim, Germany
Bobbie A. Gaunt (a)(b)(c)(e)
Former President and CEO,
Ford Motor Company of Canada
Helga Haub (c)(d)
Dan P. Kourkoumelis (a)(e)(f)
Former President and CEO,
Quality Food Centers, Inc.
Edward Lewis (b)(d)(e)
Chairman and Chief Executive Officer,
Essence Communications Partners
Richard L. Nolan (a)(c)(e)(f)
Philip M. Condit Professor of Business Administration
University of Washington Business School
and
William Barclay Harding Professor of Business Administration (Emeritus)
Harvard University
Maureen B. Tart-Bezer (a)(d)(e)
Chief Financial Officer
Virgin Mobile USA, LLC
(a) Member of Audit Committee (Maureen B. Tart-Bezer, Chair)
(b) Member of Compensation Committee (Bobbie A. Gaunt, Chair)
(c) Member of Executive Committee (Christian W. E. Haub, Chair)
(d) Member of Finance Committee (Edward Lewis, Chair)
(e) Member of Governance Committee (Richard L. Nolan, Chair)
(f) Member of IT Oversight Committee (Dan P. Kourkoumelis, Chair)
Stockholder Information
- -----------------------
Executive Offices
Box 418
2 Paragon Drive
Montvale, NJ 07645
Telephone 201-573-9700
Independent Accountants
PricewaterhouseCoopers LLP
400 Campus Drive
PO Box 988
Florham Park, NJ 07932
Stockholder Inquiries and Publications
Stockholders, security analysts, members of the media and others interested in
further information about our Company are invited to contact the Investor
Relations Help Line at 201-571-4537.
Internet users can access information on A&P at: www.aptea.com
Correspondence concerning stockholder address changes
or other stock account matters should be directed to our Company's
Transfer Agent & Registrar
American Stock Transfer and Trust Company
59 Maiden Lane
New York, NY 10038
Telephone 800-937-5449
www.amstock.com
Communications with the Board of Directors
Stockholders who would like to contact the Company's Board of Directors,
including a committee thereof or a specific Director, can send an e-mail to
bdofdirectors@aptea.com or write to the following address: c/o The Great
Atlantic & Pacific Tea Company, Inc., Office of the General Counsel, 2 Paragon
Drive, Montvale, NJ 07645.
Form 10-K
Copies of Form 10-K filed with the Securities and Exchange Commission will be
provided to stockholders upon written request to the Secretary at the Executive
Offices in Montvale, New Jersey.
Annual Meeting
The Annual Meeting of Stockholders will
be held at 9:00 a.m. (EDT) on
Tuesday, July 13, 2004 at
The Westin Southfield Detroit Hotel
1500 Town Center
Southfield, Michigan, USA
Common Stock
Common stock of our Company is listed and traded on the New York Stock Exchange
under the ticker symbol "GAP" and has unlisted trading privileges on the Boston,
Midwest, Philadelphia, Cincinnati, and Pacific Stock Exchanges. The stock is
generally reported in newspapers and periodical tables as "GtAtPc".
(C) 2004 The Great Atlantic & Pacific Tea Co., Inc. All rights reserved.