Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in charter)
Maryland 13-1890974
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of December 2, 2002 the Registrant had a total of 38,515,806 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
Dec. 1, 2001 Dec. 1, 2001
(As Restated (As Restated
Nov. 30, 2002 See Note 2) Nov. 30, 2002 See Note 2)
------------------ ------------------ ------------------ -----------------
Sales $ 2,466,475 $ 2,525,388 $ 8,274,191 $ 8,461,272
Cost of merchandise sold (1,774,345) (1,798,476) (5,924,935) (6,026,550)
------------ -------------- -------------- -------------
Gross margin 692,130 726,912 2,349,256 2,434,722
Store operating, general and
administrative expense (699,733) (862,196) (2,332,253) (2,524,105)
------------ -------------- --------------- -------------
(Loss) income from operations (7,603) (135,284) 17,003 (89,383)
Interest expense (19,816) (20,495) (66,208) (71,969)
Interest income 1,231 1,450 6,295 5,184
------------ -------------- -------------- -------------
Loss before income taxes and
extraordinary item (26,188) (154,329) (42,910) (156,168)
(Provision for) benefit from income taxes (3,544) 64,693 (128,947) 63,820
------------ -------------- -------------- -------------
Loss before extraordinary item (29,732) (89,636) (171,857) (92,348)
Extraordinary loss on early
extinguishment of debt - - (684) -
------------ -------------- -------------- -------------
Net loss $ (29,732) $ (89,636) $ (172,541) $ (92,348)
============ ============== ============== =============
Net loss per share - basic and diluted:
Loss before extraordinary item $ (0.77) $ (2.34) $ (4.46) $ (2.41)
Extraordinary loss on early extinguishment
of debt - - (0.02) -
------------ --------------- ------------- -------------
Net loss per share - basic and diluted $ (0.77) $ (2.34) $ (4.48) $ (2.41)
============ ============== ============== =============
Weighted average number of
common shares outstanding 38,515,806 38,347,225 38,488,514 38,347,219
Common stock equivalents 6,337 678,214 529,313 473,250
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 38,522,143 39,025,439 39,017,827 38,820,469
============= ============== ============== =============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
40 Week Period Ended
November 30, 2002
- -----------------
Balance at beginning of period 38,367,628 $ 38,368 $ 456,753 $ 254,896 $ (77,029) $ 672,988
Net loss (172,541) (172,541)
Other comprehensive income 4,445 4,445
Stock options exercised 148,178 148 2,658 2,806
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,515,806 $ 38,516 $ 459,411 $ 82,355 $ (72,584) $ 507,698
============ =========== =========== =========== =========== ===========
40 Week Period Ended
December 1, 2001
As Restated - See Note 2
- ------------------------
Balance at beginning of period 38,347,216 $ 38,347 $ 456,470 $ 326,802 $ (72,808) $ 748,811
Net loss (92,348) (92,348)
Other comprehensive loss (1,214) (1,214)
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,347,216 $ 38,347 $ 456,470 $ 234,454 $ (74,022) $ 655,249
============ =========== =========== =========== =========== ===========
Comprehensive Income
12 Weeks Ended 40 Weeks Ended
-------------------------------------- -------------------------------------
(As Restated (As Restated
See Note 2) See Note 2)
Nov. 30, 2002 Dec. 1, 2001 Nov. 30, 2002 Dec. 1, 2001
------------------ ------------------ ------------------ -----------------
Net loss $ (29,732) $ (89,636) $ (172,541) $ (92,348)
------------ ----------- ----------- ----------
Reclassification adjustment for gains
included in net loss - - (933) -
Unrealized gain on derivatives 2,408 - 2,256 -
Foreign currency translation adjustment (2,101) (940) 3,122 (1,214)
------------ ----------- ----------- ----------
Other comprehensive income (loss) 307 (940) 4,445 (1,214)
------------ ----------- ----------- ----------
Total comprehensive loss $ (29,425) $ (90,576) $ (168,096) $ (93,562)
============ =========== =========== ==========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
November 30, February 23,
2002 2002
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 171,210 $ 168,620
Accounts receivable, net of allowance for doubtful accounts
of $9,512 and $9,198 at November 30, 2002 and
February 23, 2002, respectively 192,526 206,188
Inventories 745,430 716,083
Prepaid expenses and other current assets 36,674 121,183
------------- --------------
Total current assets 1,145,840 1,212,074
------------- --------------
Non-current assets:
Property:
Property owned 1,590,808 1,627,722
Property leased under capital leases 74,004 76,800
------------- --------------
Property - net 1,664,812 1,704,522
Other assets 174,637 273,850
------------- --------------
Total assets $ 2,985,289 $ 3,190,446
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,504 $ 526
Current portion of obligations under capital leases 12,601 10,691
Accounts payable 515,370 547,113
Book overdrafts 174,239 127,079
Accrued salaries, wages and benefits 166,071 167,724
Accrued taxes 66,361 69,559
Other accruals 233,051 261,771
------------- --------------
Total current liabilities 1,169,197 1,184,463
------------- --------------
Non-current liabilities:
Long-term debt 826,638 779,440
Long-term obligations under capital leases 87,081 93,587
Other non-current liabilities 394,675 459,968
------------- --------------
Total liabilities 2,477,591 2,517,458
------------- --------------
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 - 38,515,806 and 38,367,628
shares at November 30, 2002 and February 23, 2002, respectively 38,516 38,368
Additional paid-in capital 459,411 456,753
Accumulated other comprehensive loss (72,584) (77,029)
Retained earnings 82,355 254,896
------------- --------------
Total stockholders' equity 507,698 672,988
------------- --------------
Total liabilities and stockholders' equity $ 2,985,289 $ 3,190,446
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
40 Weeks Ended
-------------------------------------------------
Dec. 1, 2001
(As Restated
Nov. 30, 2002 See Note 2)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (172,541) $ (92,348)
Adjustments to reconcile net loss to cash provided
by operating activities:
Asset disposition initiative (2,862) 172,474
Depreciation and amortization 199,881 204,953
Deferred income tax provision (benefit) 147,624 (66,107)
(Gain) loss on disposal of owned property (4,806) 22
Other changes in assets and liabilities:
Decrease (increase) in receivables 38,776 (21,890)
Increase in inventories (28,076) (22,038)
Decrease (increase) in prepaid expenses and other current assets 25,178 (18,108)
Decrease in other assets 18,552 10,287
(Decrease) increase in accounts payable (43,466) 15,811
(Decrease) increase in accrued salaries, wages and benefits (2,318) 4,635
(Decrease) increase in accrued taxes (26,654) 4,566
(Decrease) increase in other accruals (28,833) 2,897
Decrease in other non-current liabilities (69,088) (24,101)
Other operating activities, net 5,462 (6,945)
----------- -----------
Net cash provided by operating activities 56,829 164,108
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (182,278) (176,209)
Gain on sale of securities (1,717) -
Proceeds from disposal of property 51,982 97,843
----------- -----------
Net cash used in investing activities (132,013) (78,366)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt 28,000 10,000
Proceeds under revolving lines of credit 98,253 1,092,412
Payments on revolving lines of credit (48,253) (1,192,018)
Proceeds from long-term borrowings 87 915
Payments on long-term borrowings (37,578) (22,404)
Principal payments on capital leases (9,530) (9,030)
Increase in book overdrafts 47,068 20,419
Deferred financing fees (3,470) (5,678)
Proceeds from exercises of stock options 2,806 2
----------- -----------
Net cash used in financing activities 77,383 (105,382)
Effect of exchange rate changes on cash and cash equivalents 391 (705)
----------- -----------
Net increase in cash and cash equivalents 2,590 (20,345)
Cash and cash equivalents at beginning of period 168,620 131,550
----------- -----------
Cash and cash equivalents at end of period $ 171,210 $ 111,205
=========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying consolidated financial statements of The Great Atlantic &
Pacific Tea Company, Inc. (the "Company") for the 12 and 40 weeks ended November
30, 2002 and December 1, 2001, respectively, are unaudited and, in the opinion
of management, contain all adjustments that are of a normal and recurring nature
necessary to present fairly the financial position and results of operations for
such periods. The consolidated financial statements should be read in
conjunction with the consolidated financial statements and related notes
contained in the Company's 2001 Annual Report on Form 10-K. Interim results are
not necessarily indicative of results for a full year. Certain reclassifications
have been made to prior year amounts to conform to current year presentation.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries.
2. Restatement of Previously Issued Financial Statements
Prior to filing its 2001 Annual Report on Form 10-K, the Company discovered
certain irregularities relating to the timing for the recognition of vendor
allowances and the accounting for certain inventory. As the Company announced on
May 24, 2002, it promptly commenced a review of these issues. This review caused
the Company to delay filing its Annual Report on Form 10-K. As a result of the
accounting errors discovered during this review, the Company restated its
financial statements for fiscal 1999 and fiscal 2000, and supplementary
unaudited financial information for the first, second and third quarters of
fiscal 2001. In addition, the Company restated its financial statements to
correct other accounting errors for 1) the timing of the recognition of certain
other vendor allowances which were not accounted for in accordance with
generally accepted accounting principles ("GAAP"), 2) the use of a method of
estimating self-insurance reserves which did not comply with GAAP, and 3) the
recognition of sublet income associated with certain closed stores, which did
not comply with GAAP. The summary of the effects of the restatement are
presented in the tables below entitled "Overall Impact of the Restatement".
Overall Impact of the Restatement
- ---------------------------------
The following schedules show the effects of the restatement on previously
reported earnings for the 12 and 40 weeks ended December 1, 2001. The
restatement had the aggregate effect of decreasing retained earnings by $75
million as of February 27, 1999. This amount had previously been reported as net
income in years prior to fiscal 1999 using accounting methods that did not
conform with GAAP. In general, the Company's prior methodologies understated its
reported earnings for the 12 and 40 weeks ended December 1, 2001. This resulted
from errors in accounting from reduced recognition of vendor allowance credits
and increased recognition of self-insurance claims expense in order to reduce
the balance sheet underaccruals for these matters. The Company restated its
financial statements to properly present its results of operations and financial
condition in accordance with GAAP.
Before Tax (a) Earnings Increase (Decrease)
- -------------- ------------------------------------------------
12 Weeks Ended 40 Weeks Ended
December 1, 2001 December 1, 2001
--------------------- ----------------------
(Dollars in millions)
Vendor allowances:
Irregularities $ (2,559) $ (6,871)
Non-GAAP policy 4,109 17,245
Perishable inventory irregularity (75) (608)
Self-insurance reserves 3,523 9,278
Closed store subleases (83) (925)
----------- -----------
Pre-tax impact of restatement 4,915 18,119
Provision for income taxes (2,064) (7,610)
----------- -----------
Total impact of restatement $ 2,851 $ 10,509
=========== ===========
(a) Changes to vendor allowances and perishable inventory irregularities impact
the cost of merchandise sold line on the Statements of Consolidated
Operations. Changes to closed store subleases impact the selling, general
and administrative expense line on the Statements of Consolidated
Operations. Changes to self-insurance reserves impact both the selling,
general and administrative expense and interest expense lines on the
Statements of Consolidated Operations as follows:
Earnings Increase (Decrease)
------------------------------------------------
12 Weeks Ended 40 Weeks Ended
December 1, 2001 December 1, 2001
--------------------- ----------------------
Selling, general and administrative expense $ 4,608 $ 12,893
Interest expense (1,085) (3,615)
----------- -----------
$ 3,523 $ 9,278
=========== ===========
Effect on Net Income Earnings Increase (Decrease)
- -------------------- ------------------------------------------------
12 Weeks Ended 40 Weeks Ended
December 1, 2001 December 1, 2001
--------------------- ----------------------
(Dollars in millions)
Vendor allowances:
Irregularities $ (1,484) $ (3,985)
Non-GAAP policy 2,383 10,002
Perishable inventory irregularity (44) (353)
Self-insurance reserves 2,043 5,381
Closed store subleases (47) (536)
----------- -----------
Total impact of the restatement $ 2,851 $ 10,509
=========== ===========
Irregularities
- --------------
As referred to above, the Company discovered certain irregularities with respect
to accounting for vendor allowances and perishable inventory. The resultant
review identified that certain employees circumvented the Company's system of
internal controls resulting in accounting errors. With respect to vendor
allowances, those errors caused valid allowances generally to be recognized
before they were earned. With respect to perishable inventories, the
irregularities related to overstatement of inventory due to inappropriate
adjustments made to physical counts, causing errors in the periods presented in
the tables above. The Company modified certain procedures and is in the process
of implementing additional procedural changes designed to prevent such
irregularities in the future.
Vendor Allowances
- -----------------
Prior to fiscal 1997, the Company recognized vendor allowances for certain
one-year and multi-year allowance contracts as cash was received since the
Company believed that such amounts received were non-refundable and that no
future performance was required. In fiscal 1997, the Company implemented a new
accounting policy whereby the amount of allowances recognized was limited to the
amount of such allowances recognized in the prior year. Allowances in excess of
such limit were deferred and were not amortized. Neither policy was in
conformity with GAAP. The Company's methods resulted in the overstatement of its
reported earnings in the aggregate prior to fiscal 1997. Furthermore, the policy
implemented in fiscal 1997 had the effect of reducing its reported earnings in
subsequent periods as the Company limited its recognition of these allowances in
order to increase its accrual for unearned allowances. Also, the volume of these
transactions has been decreasing in recent years, further causing the allowances
recognized in recent years to be less than they would have been if these
contracts had previously been deferred and recognized over their term in
accordance with GAAP. See "Overall Impact of the Restatement" above for the
amount of such restatement.
Self-Insurance Reserves
- -----------------------
The Company's business results in significant risks that the Company
self-insures. These risks relate primarily to customer and employee accidents.
The Company estimates and records the present value of the expected self-insured
portion of the cost of such accidents and related liability matters as
self-insurance reserves. The Company's previous method of establishing its
self-insurance reserves was not appropriate because it did not adequately
consider its historical loss experience resulting from the frequency (number of
incidents) and severity (ultimate cost) of claims. It also improperly included
adjustments to reduce the reserve in anticipation of future improvement in
expected loss experience resulting from planned risk management changes intended
to reduce the frequency and severity of future claims. This method was not in
conformity with GAAP. Accordingly, the Company restated its financial statements
to correct this accounting error by reflecting its self-insurance reserves on
the basis of actuarially determined estimates. The Company's prior method
resulted in overstatement of its reported earnings in the aggregate prior to
fiscal 1997. In recent years, the Company had generally reduced its reported
earnings as it accrued these costs at rates in excess of its actual development
of the underlying claims. The reserve is impacted by and was determined as of
each report date based upon the Company's information regarding frequency and
severity, among other factors, which was available at each report date. The
Company's frequency decreased approximately 10% from fiscal 1999 through fiscal
2001; severity was relatively unchanged during this period. These reserves
represent the present value of the estimated self-insured portion of claims,
including claims incurred but not reported. Such claims generally are expected
to be paid within five years, although payments on some employee accident claims
extend beyond this period. See "Overall Impact of the Restatement" above for the
amount of such restatement.
Closed Store Subleases
- ----------------------
In the normal course of business, the Company closes stores periodically. For
stores closed that are under long-term leases, the Company records a liability
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 cost recoveries from sublease rentals. In some cases, the
Company subleases the stores for amounts in excess of its own related costs
under its lease. Under the Company's prior accounting method, such excess of
sublease amounts was recorded as an offset to the cost of closure of other
locations. Such a methodology was not in conformity with GAAP. Accordingly, the
Company restated its financial statements to correct this accounting error by
recognizing those sublease excesses ratably as income over the term of the
sublease. The Company's prior accounting method had the effect of overstating
reported earnings in the period in which a sublease was entered into by the
amount that total sublease rental exceeded the lease obligations, and decreasing
reported earnings in the subsequent periods in which the excess should have been
recognized. See "Overall Impact of the Restatement" above for the amount of such
restatements. The Company's prior methodology had no effect on stores closed as
part of the Asset Disposition Initiative discussed in Note 6 of the Company's
Consolidated Financial Statements.
The following is a summary of the significant effects of the restatement on the
Company's Statements of Consolidated Operations for the 12 and 40 weeks ended
December 1, 2001:
12 Weeks Ended December 1, 2001
-----------------------------------------------------------
(Dollars in thousands) As Previously
Reported Adjustments As Restated
------------------ ------------------ -----------------
Statement of Consolidated Operations
- ------------------------------------
Cost of merchandise sold $ (1,799,951) $ 1,475 $ (1,798,476)
Gross margin 725,437 1,475 726,912
Store operating, general and administrative expense (866,721) 4,525 (862,196)
(Loss) income from operations (141,284) 6,000 (135,284)
Interest expense (19,410) (1,085) (20,495)
(Loss) income before income taxes (159,244) 4,915 (154,329)
Benefit from (provision for) income taxes 66,757 (2,064) 64,693
Net (loss) income (92,487) 2,851 (89,636)
Net (loss) income - basic and diluted $ (2.41) $ 0.07 $ (2.34)
40 Weeks Ended December 1, 2001
-----------------------------------------------------------
As Previously
Reported Adjustments As Restated
------------------ ------------------ -----------------
Statement of Consolidated Operations
- ------------------------------------
Cost of merchandise sold $ (6,036,316) $ 9,766 $ (6,026,550)
Gross margin 2,424,956 9,766 2,434,722
Store operating, general and administrative expense (2,536,073) 11,968 (2,524,105)
(Loss) income from operations (111,117) 21,734 (89,383)
Interest expense (68,354) (3,615) (71,969)
(Loss) income before income taxes (174,287) 18,119 (156,168)
Benefit from (provision for) income taxes 71,430 (7,610) 63,820
Net (loss) income (102,857) 10,509 (92,348)
Net (loss) income - basic and diluted $ (2.68) $ 0.27 $ (2.41)
3. Income Taxes
The income tax provision recorded for the 40 weeks ended November 30, 2002 and
December 1, 2001 reflects the Company's estimated expected annual tax rates
applied to its respective domestic and foreign financial results.
Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for
Income Taxes" ("SFAS 109") 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
deferred tax asset will not be realized. Based upon the Company's continued
assessment of the realization of its U.S. net deferred tax asset and its
historic cumulative losses, and in particular, the significant increase in U.S.
operating losses during the second quarter of fiscal 2002, the Company concluded
that it was appropriate to establish a full valuation allowance for its
U.S. net deferred tax asset in the amount of approximately $134 million during
the 28 weeks ended September 7, 2002. During the 12 weeks ended November 30,
2002, the valuation allowance was increased by an additional $15 million. In
future periods, U.S. earnings or losses will not be tax effected until such time
as the certainty of future tax benefits can be reasonably assured.
The Company had a net current deferred tax asset related to its Canadian
operations which was included in prepaid expenses and other current assets on
its Consolidated Balance Sheet totaling $1.9 million and a net non-current
deferred tax asset related to its Canadian operations which was included in
other assets on its Consolidated Balance Sheet totaling $3.5 million at
November 30, 2002.
The income tax benefit recorded for the 40 weeks ended December 1, 2001 reflects
a one-time adjustment relating to an enacted federal tax rate reduction from the
Canadian government. This new legislation which became effective during the
first quarter of fiscal 2001 will reduce the Canadian federal corporate income
tax rate by a total of 7% from 28% to 21% by January 1, 2004. However, the
income tax benefit for the 40 weeks ended December 1, 2001 was decreased by $1.2
million to reflect the reduction in value of the deferred Canadian tax asset
(primarily relating to net operating loss carryforwards) resulting from the
lower rates. Excluding this adjustment of the deferred tax asset, the Company
would have had an income tax benefit of $65.0 million or 41.6% of the loss
before income taxes.
During the 40 weeks ended December 1, 2001, the Ontario government enacted
corporate income tax rate changes, gradually reducing the rate from 14% to 8% by
January 1, 2006. This additional Canadian tax rate reduction did not have a
significant impact on the financial statements for the 12 and 40 weeks ended
November 30, 2002 or December 1, 2001.
4. Wholesale Franchise Business
As of November 30, 2002, the Company served 65 franchised stores. These
franchisees are required to purchase inventory exclusively from the Company,
which acts as a wholesaler to the franchisees. The Company had sales to these
franchised stores of $165 million and $157 million for the third quarters of
fiscal 2002 and 2001, respectively, and $547 million and $518 million for the
first 40 weeks of fiscal 2002 and 2001, respectively. In addition, the Company
subleases the stores and leases the equipment in the stores to the franchisees.
The Company also provides merchandising, advertising, accounting and other
consultative services to the franchisees for which it receives a fee, which
primarily represents the reimbursement of costs incurred to provide such
services.
The 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, net
of an allowance for doubtful accounts, totaling approximately $4.7 million and
$2.8 million, are included in accounts receivable at November 30, 2002 and
February 23, 2002, respectively. The long-term portion of the inventory notes
and equipment leases totaling approximately $39.1 and $44.8 million are included
in other assets at November 30, 2002 and February 23, 2002, 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, the Company establishes an allowance for doubtful
accounts. The Company continually assesses 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, the Company reserves the option to reacquire the inventory and
equipment at the store and operate the franchise as a corporate owned store.
Refer to Note 9 - Commitments and Contingencies regarding the Company's pending
class action lawsuit relating to its Canadian franchisee business.
5. Impact of New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 142,
"Goodwill and Other Intangible Assets". The provisions of this statement were
required to be applied by the Company starting in 2002. This statement applied
to all goodwill and other intangible assets recognized in the Company's
financial statements at the date of adoption. At that time, goodwill was no
longer required to be amortized, but will be tested for impairment annually. Had
goodwill continued to be amortized, the Company would have recorded $0.3 million
and $1.1 million, respectively, in amortization expense during the 12 and 40
weeks ended November 30, 2002. Amortization expense for the 12 and 40 weeks
ended December 1, 2001 was $0.3 million and $1.1 million, respectively.
Additionally, impairment losses for goodwill and indefinite-lived intangible
assets that arise due to the initial application of this statement would be
reported as resulting from a change in accounting principle. The Company has
completed its initial testing for impairment of goodwill and indefinite-lived
intangible assets and has determined that no impairment existed at the end of
the second quarter of fiscal 2002.
In June 2001, the FASB issued SFAS 143, "Accounting For Asset Retirement
Obligations". This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to adopt the
provisions of SFAS No. 143 at the beginning of fiscal 2003. The Company has
determined that the adoption of this statement will not have a material impact
on its financial position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement requires that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. This statement also broadens the
presentation of discontinued operations to include more disposal transactions.
The provisions of this statement were required to be adopted by the Company at
the beginning of fiscal 2002. The Company has determined that no impairment
occurred during the 12 and 40 weeks ended November 30, 2002.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB Statement 13, and Technical Corrections". 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. In future periods, the Company will classify debt
extinguishment costs within income from operations and will reclassify
previously reported debt extinguishments as such. The provisions of SFAS 145
related to lease modification are effective for transactions occurring after May
15, 2002. The Company does not expect the provisions of SFAS 145 related to
lease modification to have a material impact on its financial position or
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 will supersede Emerging Issues
Task Force 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 No. 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 No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
This statement will impact the timing of recognition of costs associated with
the Company's store closures after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation No. 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." FIN 45 clarifies the requirements of FASB Statement No.
5, "Accounting for Contingencies," relating to the guarantor's accounting for,
and disclosure of, the issuance of certain types of guarantees and requires that
upon issuance of a guarantee, the entity (i.e. the guarantor) must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
The provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantor's year end. The disclosure provisions of the
Interpretation are effective for financial statements of interim and annual
periods that end after December 15, 2002. This Interpretation will impact the
accounting for, and disclosure of, the Company's guarantees beginning in the
fourth quarter of 2002.
In November 2002, the EITF reached consensus on several issues related to EITF
02-16, "Accounting by a Customer (including a Reseller) for Certain
Consideration Received from a Vendor". The Task Force reached a consensus that
in most cases, cash consideration received by a customer from a vendor is
presumed to be a reduction of the prices of the vendor's products or services
and should, therefore, be characterized as a reduction of cost of sales when
recognized in the customer's income statement. The Task Force also reached a
consensus that a rebate or refund of a specified amount of cash consideration
that is payable pursuant to a binding arrangement only if the customer completes
a specified cumulative level of purchases or remains a customer for a specified
time period should be recognized as a reduction of the cost of sales based on a
systematic and rational allocation of the cash consideration offered to each of
the underlying transactions that results in progress by the customer toward
earning the rebate or refund provided the amounts are probable and reasonably
estimable. If the rebate or refund is not probable and reasonably estimable, it
should be recognized as the milestones are achieved. The Company does not expect
these consensuses to have a significant impact on the financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards
(FAS) No. 148, Accounting for Stock-Based Compensation -- Transition and
Disclosure, which amends FAS 123, Accounting for Stock-Based Compensation. In
response to a growing number of companies announcing plans to record expenses
for the fair value of stock options, FAS 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, FAS 148 amends the
disclosure requirements of FAS 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. The amendments to Statement 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 Company does not expect this statement to have a
significant impact on the financial statements.
6. Asset Disposition Initiative
In May 1998, the Company initiated an assessment of its business operations in
order to identify the factors that were impacting the performance of the
Company. As a result of this assessment, in fiscal 1998 and 1999, the Company
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.
As of February 23, 2002, the Company had closed all stores and facilities
related to this phase of the initiative. The Company paid $29 million of the
total net severance charges from the time of the original charges through
November 30, 2002, which resulted from the termination of approximately 3,400
employees. The remaining severance liability primarily relates to future
obligations for early withdrawals from multi-employer union pension plans.
The following table summarizes the activity related to the aforementioned
charges since the beginning of fiscal 2001:
Severance
Store and
Occupancy Benefits Total
---------------- --------------- ---------------
Reserve Balance at Feb. 24, 2001 $ 82,861 $ 2,721 $ 85,582
Addition 3,818 (1) - 3,818
Utilization (23,302)(2) (544) (23,846)
---------- ---------- ----------
Reserve Balance at Feb. 23, 2002 63,377 2,177 65,554
Addition 2,399 (1) - 2,399
Utilization (10,664) (2) (308) (10,972)
---------- ---------- ----------
Reserve Balance at November 30, 2002 $ 55,112 $ 1,869 $ 56,981
========== ========== ==========
(1) The additions to store occupancy of $3.8 million and $2.4 million during
fiscal 2001 and the 40 weeks ended November 30, 2002 represent the present
value of accrued interest related to lease obligations.
(2) Store occupancy utilization of $23.3 million and $10.7 million for fiscal
2001 and the 40 weeks ended November 30, 2002 represent lease and other
occupancy payments made during those periods.
At November 30, 2002, approximately $8.7 million of the reserve was included in
"Other accruals" and the remaining amount was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheet.
Included in the Statements of Consolidated Operations are the operating results
of the aforementioned stores while they were open during the periods presented.
The operating results of these stores were as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Nov. 30, Dec. 1, Nov. 30, Dec. 1,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales $ - $ - $ - $ 197
============= ============ ============= =============
Operating loss $ - $ - $ - $ (108)
============= ============ ============= ==============
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from Management's review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, the Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses should be closed and/or sold, and certain administrative streamlining
should take place. As a result of these decisions, the Company announced on
November 14, 2001 that it would incur costs of approximately $200 - $215 million
pretax through the third quarter of fiscal 2002. The following table details the
amounts charged to the Statements of Consolidated Operations since the
announcement of the initiative.
12 Weeks 40 Weeks
Ended Ended
(In millions) Nov. 30, 2002 Nov. 30, 2002 Fiscal 2001
------------------ ------------------ ------------------
Cost of merchandise sold $ (243) (a) $ (1,263) (a) $ (3,888) (a)
Store operating, general and
administrative expense 11,371 (b) 4,125 (c) (189,580) (d)
---------- ---------- ------------
Pretax credit/(charge) $ 11,128 $ 2,862 $ (193,468)
========== ========== ===========
(a) The amounts included in "Cost of merchandise sold" in the Statements of
Consolidated Operations were comprised solely of inventory markdowns that
were expensed as incurred.
(b) The pretax credit of $11.4 million included in "Store operating, general
and administrative expense" in the Statement of Consolidated Operations
for the 12 weeks ended November 30, 2002 consisted of $10.2 million of
reversals of previously accrued amounts for vacancy related costs and the
recognition of a gain on the disposal of fixed assets in the amount of
$1.6 million partially offset by $0.5 million related to closing costs
that were expensed as incurred.
(c) The pretax credit of $4.1 million included in "Store operating, general
and administrative expense" in the Statement of Consolidated Operations
for the 40 weeks ended November 30, 2002 consisted of $10.2 million of
reversals of previously accrued amounts for vacancy related costs and the
recognition of a gain on the disposal of fixed assets in the amount of
$1.6 million partially offset by $4.1 million related to closing costs
that were expensed as incurred and $3.6 million related to severance.
(d) Of the net pretax charges of $189.6 million included in "Store operating,
general and administrative expense" in the Statement of Consolidated
Operations for fiscal 2001, $80.8 million related to future vacancy costs,
$24.3 million related to net severance charges, $81.5 million related to
fixed asset and goodwill write-downs, and $3.0 million related to closing
costs that were expensed as incurred.
To the extent fixed assets included in the items noted above could be used in
other continuing operations, the Company has or will transfer those assets as
needed. Fixed assets that the Company cannot transfer to other operations will
be scrapped. Accordingly, the write-down recorded during fiscal 2001 was based
on expected transfers.
Included in the $193.5 million net charges recorded during fiscal 2001 were
other charges related to the plan that were not accounted for in the reserve
recorded on the Consolidated Balance Sheets because they were expensed as
incurred. Such costs have been, and will continue to be, expensed as incurred
while the asset disposition is being executed. During fiscal 2001, these costs
amounted to $8.7 million, which were primarily related to non-accruable closing
costs and inventory markdowns. Also included in the $193.5 million net charges
was a reversal of previously accrued severance and benefits of $0.6 million
related to a reduction in the severance payments required to be made to certain
store employees in Canada in accordance with Ontario provincial law. Included in
the $11.1 million and $2.9 million pretax credits recorded during the 12 and 40
weeks ended November 30, 2002, were similar items that were not accounted for in
the reserve recorded on the Consolidated Balance Sheets because they were
expensed as incurred. These costs amounted to $0.7 million and $5.3 million,
which were primarily related to non-accruable closing costs and inventory
markdowns for the 12 and 40 weeks ended November 30, 2002.
These costs for all periods discussed are excluded from the table below which
represents only the reserve recorded on the balance sheet as well as the
goodwill/fixed asset writedowns.
The following table summarizes the activity related to the aforementioned
reserve recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Severance
and Goodwill/
Occupancy Benefits Fixed Assets Total
--------------- ---------------- -------------- ----------------
Original Charge $ 80,456 $ 23,435 $ 81,519 $ 185,410
Addition (1) 1,673 - - 1,673
Utilization (2) (1,806) (2,891) (81,519) (86,216)
Adjustment (3) - (584) - (584)
----------- ------------- ----------- ------------
Reserve Balance at
February 23, 2002 80,323 19,960 - 100,283
Addition (1) 3,323 3,544 - 6,867
Utilization (2) (17,553) (17,842) - (35,395)
Adjustment (3) (10,180) - - (10,180)
----------- ------------- ----------- ------------
Reserve Balance at
November 30, 2002 $ 55,913 $ 5,662 $ - $ 61,575
=========== ============= =========== ============
(1) The additions to occupancy of $1.7 million and $3.3 million during
fiscal 2001 and the 40 weeks ended November 30, 2002 represent the
present value of accrued interest related to lease obligations. The
addition to severance of $3.5 million during the 40 weeks ended
November 30, 2002 related to retention and productivity incentives that
were accrued as earned.
(2) Occupancy utilization of $1.8 million and $17.6 million during fiscal
2001 and the 40 weeks ended November 30, 2002 represents vacancy
related payments for closed locations. Severance utilization of $2.9
million and $17.8 million during fiscal 2001 and the 40 weeks ended
November 30, 2002 represents payments made to terminated employees
during the period. Goodwill/fixed asset utilization of $81.5 million
during fiscal 2001 represents the write-off of fixed assets of the
operations to be discontinued and the write-off of goodwill related to
the Barn warehouse in Canada that was deemed to be impaired.
(3) At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a
result of changes in circumstances and/or estimates. As a result,
during fiscal 2001, the Company recorded an adjustment to severance and
benefits of $0.6 million related to a reduction in the severance
payments required to be made to certain store employees in Canada.
Under Ontario provincial law, employees to be terminated as part of a
mass termination are entitled to receive compensation, either worked or
paid as severance, for a set period of time after the official notice
date. Since such closures took place later than originally expected,
less time remained in the aforementioned guarantee period. Further,
during the third quarter of fiscal 2002, the Company reversed $10.2
million of previously accrued vacancy related costs due to the
following:
o Favorable results of assigning leases at certain locations of $3.6
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that the
Company had chosen to abandon at the time of the original charge
due to changes in the competitive environment in the market in
which that store is located of $3.3 million.
As of November 30, 2002, the Company paid approximately $21 million of the total
severance charge recorded which resulted from the termination of approximately
970 employees. The remaining individual severance payments will be paid by the
end of fiscal 2003.
At November 30, 2002, approximately $12.1 million of the reserve was included in
"Other accruals" and the remaining amount was included in "Other non-current
liabilities" on the Company's Consolidated Balance Sheet.
Included in the Statements of Consolidated Operations are the operating results
of the aforementioned stores while they were open during the periods presented.
The operating results of these stores were as follows:
12 Weeks Ended 40 Weeks Ended
------------------------------- -------------------------------
Nov. 30, Dec. 1, Nov. 30, Dec. 1,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Sales $ 2,491 $ 65,392 $ 20,794 $ 224,784
============= ============ ============= =============
Operating income (loss) $ 70 $ (5,874) $ (957) $ (19,841)
============= ============ ============= =============
As of November 30, 2002, the Company closed all of the aforementioned stores
except one location in the United States that the Company has decided to
continue operations at due to changes in the competitive environment in the
market in which that store is located and one location in Canada where the
closing is dependent upon the opening of another store in close proximity.
Based upon current available information, Management evaluated the reserve
balances as of November 30, 2002 of $57.0 million for the 1998 phase of the
asset disposition initiative and $61.6 million for the 2001 phase of the asset
disposition initiative and has concluded that they are adequate. The Company
will continue to monitor the status of the vacant properties and adjustments to
the reserve balances will be recorded in the future, if necessary.
7. 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. The Company's chief operating decision maker is the Chief
Executive Officer.
The Company currently operates 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 the Company's Canadian operation that serves as the exclusive
wholesaler to the Company's franchised stores and serves as wholesaler to
certain third party retailers.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies included in the Company's Fiscal 2001
Annual Report. The Company measures segment performance based upon income (loss)
from operations.
Interim information on segments is as follows:
12 Weeks Ended 40 Weeks Ended
---------------------------------------- ---------------------------------------
(Dollars in thousands) December 1, December 1,
November 30, 2001 November 30, 2001
2002 As Restated 2002 As Restated
------------------ ------------------ ----------------- -----------------
Sales
U.S. Retail $ 1,845,234 $ 1,952,948 $ 6,246,881 $ 6,560,141
Canada Retail 455,971 415,671 1,480,789 1,382,679
Canada Wholesale 165,270 156,769 546,521 518,452
------------------ ------------------ ----------------- -----------------
Total Company $ 2,466,475 $ 2,525,388 $ 8,274,191 $ 8,461,272
================== ================== ================= =================
Depreciation and amortization
U.S. Retail $ 52,412 $ 53,527 $ 169,827 $ 177,915
Canada Retail 8,719 8,170 30,054 27,038
Canada Wholesale - - - -
------------------ ------------------ ----------------- -----------------
Total Company $ 61,131 $ 61,697 $ 199,881 $ 204,953
================== ================== ================= =================
(Loss) income from operations
U.S. Retail $ (16,991) $ (145,325) $ (37,257) $ (129,493)
Canada Retail 3,049 3,879 31,310 20,168
Canada Wholesale 6,339 6,162 22,950 19,942
------------------ ------------------ ----------------- -----------------
Total Company $ (7,603) $ (135,284) $ 17,003 $ (89,383)
================== =================== ================= ==================
(Loss) income before income taxes
and extraordinary item
U.S. Retail $ (35,015) $ (163,556) $ (94,586) $ (192,530)
Canada Retail 2,320 2,801 28,131 15,623
Canada Wholesale 6,507 6,426 23,545 20,739
------------------ ------------------ ----------------- -----------------
Total Company $ (26,188) $ (154,329) $ (42,910) $ (156,168)
================== ================== ================= =================
Capital expenditures
U.S. Retail $ 33,802 $ 38,320 $ 142,051 $ 140,375
Canada Retail 14,457 14,408 40,227 35,834
Canada Wholesale - - - -
------------------ ------------------ ----------------- -----------------
Total Company $ 48,259 $ 52,728 $ 182,278 $ 176,209
================== ================== ================= =================
November 30, February 23,
2002 2002
----------------- -----------------
Total assets
U.S. Retail $ 2,339,436 $ 2,595,810
Canada Retail 575,575 521,278
Canada Wholesale 70,278 73,358
----------------- -----------------
Total Company $ 2,985,289 $ 3,190,446
================= =================
8. Gain On Proceeds From The Demutualization Of A Mutual Insurance Company
-
During the fourth quarter of fiscal 2001, the Company 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. During the 40 weeks ended
November 30, 2002, the Company sold its 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 the Company's Statement of
Consolidated Operations for the 40 weeks ended November 30, 2002.
9. Commitments and Contingencies
On January 13, 2000, the Attorney General of the State of New York filed an
action in New York Supreme Court, County of New York, alleging that the Company
and its subsidiary Shopwell, Inc., together with the Company's outside delivery
service Chelsea Trucking, Inc., violated New York law by failing to pay minimum
and overtime wages to individuals who delivered groceries at one of the Food
Emporium's stores in New York City. The complaint seeks a determination of
violation of law, an unspecified amount of restitution, an injunction and costs.
A purported class action lawsuit was filed on January 13, 2000 in the federal
district court for the Southern District of New York against the Company,
Shopwell, Inc. and others by Faty Ansoumana and others. The federal court action
makes similar minimum wage and overtime pay allegations under both federal and
state law and extends the allegations to various stores operated by the Company.
In May 2001, the federal court granted plaintiffs' motion for certification of a
class action. On September 18, 2002, the plaintiffs, the Attorney General and
the Company entered into a Stipulation and Agreement of Settlement pursuant to
which the Company would pay approximately $3 million in full settlement of the
actions and would receive releases from the class and the Attorney General,
and the actions would be dismissed with prejudice. The proposed settlement has
been preliminarily approved by the federal court, but remains subject to entry
of an order of final approval by such court. The settlement amount has been
accrued for and is included in "Other accruals" on the Company's Consolidated
Balance Sheets.
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.
On May 31, 2002, a stockholders' derivative Complaint was filed in the Superior
Court of New Jersey in Bergen County against the Company's directors (some of
whom are also executive officers) in an action captioned Osher v. Barline, Civ.
Action No. BER L-4673-02 (N.J. Super. Ct.) (the "Derivative Lawsuit"). The
Complaint alleges that the defendants violated their fiduciary obligations to
the Company and its stockholders by failing to establish and maintain adequate
accounting controls and mismanaging the assets and business of the Company, and
seeks unspecified money damages, costs and expenses. On September 13, 2002, the
parties submitted for the Court's consideration a stipulation and proposed Order
staying the Derivative Lawsuit.
In June and July 2002, several purported securities class action Complaints were
filed in the United States District Court for the District of New Jersey against
the Company and certain of its officers and directors, purporting to assert
claims under Sections 10(b) (and Rule 10b-5 promulgated thereunder) and 20(a) of
the Securities Exchange Act of 1934 arising out of the Company's accounting
practices and certain alleged material misrepresentations and omissions made by
the Company concerning its financial results. On September 9, 2002, the Court
entered an Order consolidating the class action lawsuits under the caption In re
The Great Atlantic & Pacific Tea Company, Inc. Securities Litigation (the "Class
Action") and appointing Lead Plaintiffs and Lead and Liaison Plaintiffs'
Counsel. A single Consolidated Amended Complaint was filed by plaintiffs in the
Class Action on December 2, 2002. Defendants' motion seeking an Order dismissing
the Amended Complaint is to be filed by January 17, 2003.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. The
Company is 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 the Company's consolidated results of operations, financial position
or cash flows.
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
- ------------
This Management's Discussion and Analysis describes matters considered by
Management to be significant to understanding the financial position, results of
operations and liquidity of the Company, including a discussion of the results
of operations as well as liquidity and capital resources. These items are
presented as follows:
o Basis of Presentation -- a discussion of the Company's fiscal year end and
interim reporting periods.
o Operating Results and Liquidity and Capital Resources -- a discussion of the
following:
- Results for the 12 weeks ended November 30, 2002 compared to the 12 weeks
ended December 1, 2001;
- Results for the 40 weeks ended November 30, 2002 compared to the 40 weeks
ended December 1, 2001;
- The Company's Asset Disposition Initiative; and
- Current and expected future liquidity.
o Critical Accounting Policies -- a discussion of significant estimates made by
Management.
BASIS OF PRESENTATION
- ---------------------
The Company's fiscal year ends on the last Saturday in February. Fiscal 2001
ended February 23, 2002 and fiscal 2000 ended February 24, 2001. Fiscal 2001
and fiscal 2000 were each comprised of 52 weeks. The first quarter
of each fiscal year contains 16 weeks, while the other quarters each contain 12
weeks. As such, the third quarter and year-to-date periods consist of 12 and 40
weeks, respectively. Except where noted, all per share data presented is both
basic and diluted.
OPERATING RESULTS AND LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------
12 WEEKS ENDED NOVEMBER 30, 2002 COMPARED TO THE 12 WEEKS ENDED DECEMBER 1, 2001
- --------------------------------------------------------------------------------
OVERALL
- -------
Sales for the third quarter of fiscal 2002 were $2.47 billion, compared with
$2.53 billion in the third quarter of fiscal 2001; comparable store sales
increased 0.1%. Net loss per share for the third quarter of fiscal 2002 was
$0.77 compared to a net loss per share of $2.34 for the third quarter of fiscal
2001. Included in the Company's results for the third quarter of fiscal 2002 was
a benefit of $11.1 million ($0.29 per share) relating to its asset disposition
initiative (see Note 6 of the Company's Consolidated Financial Statements).
The following schedule details the adjustments from "as reported" to "as
adjusted" results for the third quarter of fiscal 2002:
Third Third Third
Quarter Adjustments to be Quarter Quarter
2002 (added) subtracted 2002 2001
results as ---------------------------- results results
(In Millions) reported Asset disposition initiative as adjusted As Restated*
--------------- ----------------------------- --------------- ------------
Sales $ 2,466.5 $ - $ 2,466.5 $ 2,525.4
Cost of merchandise sold (1,774.4) (0.3) (1,774.1) (1,798.5)
------------ ---------- ---------- --------------
Gross margin 692.1 (0.3) 692.4 726.9
Rate to sales 28.06% 28.07% 28.78%
Store operating, general and
administrative expense (699.7) 11.4 (711.1) (862.2)
Rate to sales 28.37% 28.83% 34.14%
-
------------ ----------- ---------- -------------
(Loss) income from operations (7.6) 11.1 (18.7) (135.3)
Interest expense (19.8) - (19.8) (20.5)
Interest income 1.2 - 1.2 1.5
------------ ----------- ---------- -------------
(Loss) income before income taxes and
extraordinary item (26.2) 11.1 (37.3) (154.3)
(Provision for) benefit
from income taxes (3.5) - (3.5) 64.7
------------ ----------- ---------- -------------
Net loss (income) $ (29.7) $ 11.1 $ (40.8) $ (89.6)
============ =========== ========== =============
* See Note 2 - Restatement of Previously Issued Financial Statements in the Company's Consolidated Financial Statements.
SALES
- -----
Sales for the third quarter of fiscal 2002 of $2.47 billion decreased $59
million or 2.3% from sales of $2.53 billion for the third quarter of fiscal
2001. The lower sales were due to a decrease in retail sales of $67 million
offset by an increase in wholesale sales of $8 million. The decrease in retail
sales was attributable to the closure of 94 stores since the beginning of the
third quarter of fiscal 2001, of which 40 were closed in fiscal 2002, which
decreased sales by $124 million. Included in the 94 stores closed since the
beginning of third quarter of fiscal 2001 were 37 stores closed as part of the
asset disposition initiative. This decrease was partially offset by the opening
of 40 new stores since the beginning of the third quarter of fiscal 2001, of
which 27 were opened in fiscal 2002, increasing sales by $57 million, and a
favorable effect of the Canadian exchange rate, which increased sales by $0.8
million. This was additionally offset by increased comparable store sales, which
include replacement stores, for the third quarter of fiscal 2002 of 0.1% (down
1.5% in the U.S. and up 7.1% in Canada) when compared to the third quarter of
fiscal 2001. The increase in wholesale sales was attributable to higher sales
volume of $8 million and a favorable effect of the Canadian exchange rate, which
increased sales by $0.3 million.
Sales in the U.S. for the third quarter of fiscal 2002 decreased $108 million or
5.5% compared to the third quarter of fiscal 2001. Sales in Canada for the third
quarter of fiscal 2002 increased $49 million or 8.5% from the third quarter of
fiscal 2001.
Average weekly sales per supermarket were approximately $284,000 for the third
quarter of fiscal 2002 versus $273,800 for the corresponding period of the prior
year, an increase of 3.7%. This increase was primarily due to the following:
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
- ------------
Gross margin as a percentage of sales decreased 72 basis points to 28.06% for
the third quarter of fiscal 2002 from 28.78% for the third quarter of fiscal
2001. This decrease was caused primarily by more aggressive promotional activity
during the current period in order to drive sales volume.
The gross margin dollar decrease of $35 million resulted from decreases in sales
volume and the gross margin rate, offset slightly by a favorable effect of the
Canadian exchange rate. The U.S. operations gross margin decrease of $37 million
resulted from decreases of $33 million due to lower sales volume and $4 million
due to a lower gross margin rate. The Canadian operations gross margin increase
of $2 million resulted from increases of $11 million due to higher sales volume
and $0.2 million from fluctuations in the Canadian exchange rate partially
offset by a decrease of $9 million due to a lower gross margin rate.
Also included in gross margin for the third quarters of fiscal 2002 and 2001
were costs related to the Company's asset disposition initiative of $0.3 million
and $0.2 million, respectively, which were incurred to mark down inventory in
stores announced for closure. Excluding the charges described above, as a
percentage of sales, gross margin would have been 28.07% and 28.79% for the 12
week period ended November 30, 2002 and December 1, 2001, respectively.
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $700 million
for the third quarter of fiscal 2002 compared to $862 million for the third
quarter of fiscal 2001. As a percentage of sales, SG&A was 28.37% for the third
quarter of fiscal 2002 compared to 34.14% for the third quarter of fiscal 2001.
Included in SG&A for the third quarters of fiscal 2002 and 2001 were gains of
$11.4 million and net costs of $164.5 million, respectively, relating to the
Company's asset disposition initiative as described in Note 6 of the
Consolidated Financial Statements. Excluding these items, SG&A was $711 million
or 28.83% as a percentage of sales for the third quarter of fiscal 2002 compared
to $698 million or 27.63% for the third quarter of fiscal 2001. This increase of
120 basis points was primarily due to the following:
o Increased labor costs as a percentage of sales in the U.S.;
o Increased advertising activity in the U.S. and Canada during the current
period in order to drive sales volume;
o Higher occupancy costs as a percentage of sales in the U.S. due to the fixed
nature of such costs;
o Higher consulting costs due to a non-merchandise product and service sourcing
initiative;
o Higher closed store expenses for stores closed during the normal course of
business.
Partially offset by the following:
o Lower expenditures related to the Company's business process initiative,
which was announced in fiscal 2000 (the "business process initiative").
Included in SG&A for the third quarters of fiscal 2002 and fiscal 2001 were
$13.9 million and $22.6 million, respectively, relating to the Company's
business process initiative. Such costs primarily included professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative.
INTEREST EXPENSE
- ----------------
Interest expense of $20 million for the third quarter of fiscal 2002 decreased
from the prior year amount of $21 million due primarily to the following:
o Lower interest expense on the Company's Secured Credit Agreement during the
third quarter of fiscal 2002 compared to the third quarter of fiscal 2001; and
o The Company's effective utilization of interest rate swaps which commenced in
the fourth quarter of fiscal 2001.
Partially offset by the following:
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 the Company's Secured Credit Agreement
was primarily caused by the following:
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;
o Proceeds received on the sale leaseback transactions described in Note 14
of the Consolidated Financial Statements in the Company's Fiscal 2001
Annual Report on Form 10-K; and
o Proceeds received as a result of the demutualization of the Prudential
Insurance Company as described in Note 8 of the Company's Consolidated
Financial Statements filed herein.
INCOME TAXES
- ------------
The provision for income taxes for the 12 week period ended November 30,
2002 was $3.5 million compared to a benefit from income taxes of $64.7 million
in the comparable period of fiscal 2001. The increase in the provision for
income taxes relates to the absence of the tax effect on U.S. losses that would
have been recorded if a valuation allowance was not created and offset against
the Company's net deferred tax asset during the second quarter of fiscal 2002.
During the 12 weeks ended November 30, 2002, the valuation allowance was
increased by an additional $15 million. Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes" ("SFAS 109") requires
such 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.
40 WEEKS ENDED NOVEMBER 30, 2002 COMPARED TO THE 40 WEEKS ENDED DECEMBER 1, 2001
- --------------------------------------------------------------------------------
OVERALL
- -------
Sales for the 40 weeks ended November 30, 2002 were $8.27 billion, compared with
$8.46 billion for the 40 weeks ended December 1, 2001; comparable store sales
increased 0.3%. Net loss per share for the 40 weeks ended November 30, 2002 was
$4.48 compared to a net loss per share of $2.41 for the 40 weeks ended December
1, 2001. Included in the Company's results for the 40 weeks ended November 30,
2002 was a $134 million U.S. net deferred tax asset valuation allowance ($3.48
per share; see Note 3 of the Company's Consolidated Financial Statements), an
extraordinary after tax charge of $0.4 million or $0.01 per share for the cost
of repurchasing $37.7 million of its 7.75% Notes due April 15, 2007, a $2.9
million gain ($6.3 million after tax or $0.16 per share) relating to its asset
disposition initiative (see Note 6 of the Company's Consolidated Financial
Statements), 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 8 of the Company's Consolidated Financial Statements).
The following schedule details the adjustments from "as reported" to "as
adjusted" results for the 40 weeks ended November 30, 2002:
Adjustments to be (added) subtracted
40 Weeks --------------------------------------------- 40 Weeks 40 Weeks
Ended Deferred Gain on Ended Ended
Nov. 30, 2002 Asset Extra- tax asset sale of Nov. 30, 2002 Dec. 1, 2001
results as disposition ordinary valuation common results results
(In Millions) reported initiative loss allowance stock as adjusted As Restated*
------------- ------------- --------- --------- --------- -------------- -------------
Sales $ 8,274.2 $ - $ - $ - $ - $ 8,274.2 $ 8,461.3
Cost of merchandise sold (5,924.9) (1.2) - - - (5,923.7) (6,026.6)
------------ ----------- -------- -------- -------- ------------ -------------
Gross margin 2,349.3 (1.2) - - - 2,350.5 2,434.7
Rate to sales 28.39% 28.41% 28.77%
Store operating, general and
administrative expense (2,332.3) 4.1 - - 1.7 (2,338.1) (2,524.1)
Rate to sales 28.19% 28.26% 29.83%
Income (loss) from operations 17.0 2.9 - - 1.7 12.4 (89.4)
Interest expense (66.2) - - - - (66.2) (72.0)
Interest income 6.3 - - - - 6.3 5.2
------------ ----------- -------- -------- -------- ------------ -------------
(Loss) income before
income taxes and
extraordinary item (42.9) 2.9 - - 1.7 (47.5) (156.2)
(Provision for) benefit
from income taxes (128.9) 3.4 - (133.7) (0.7) 2.1 63.8
------------ ------------ -------- -------- -------- ------------ -------------
Net (loss) income before
extraordinary item (171.8) 6.3 - (133.7) 1.0 (45.4) (92.4)
Extraordinary loss on
early extinguishment
of debt (0.7) - (0.4) (0.3) - - -
------------ ----------- ------- ------- -------- ------------ -------------
Net (loss) income $ (172.5) $ 6.3 $ (0.4) $(134.0) $ 1.0 $ (45.4) $ (92.4)
============ =========== ======= ======= ======== ============ =============
* See Note 2 - Restatement of Previously Issued Financial Statements in the Company's Consolidated Financial Statements.
SALES
- -----
Sales for the 40 weeks ended November 30, 2002 of $8.27 billion decreased $187
million or 2.2% from sales of $8.46 billion for the 40 weeks ended December 1,
2001. The lower sales were due to a decrease in retail sales of $215 million
partially offset by an increase in wholesale sales of $28 million. The decrease
in retail sales was attributable to the closure of 112 stores since the
beginning of fiscal 2001, of which 40 were closed in fiscal 2002, which
decreased sales by $384 million. Included in the 112 stores closed since the
beginning of fiscal 2001 were 37 stores closed as part of the asset disposition
initiative. Additionally, the unfavorable effect of the Canadian exchange rate
decreased sales by $12 million. This decrease was partially offset by the
opening of 48 new stores since the beginning of fiscal 2001, of which 27 were
opened in fiscal 2002, increasing sales by $157 million. This was additionally
offset by increased comparable store sales, which include replacement stores,
for the 40 weeks ended November 30, 2002 of 0.3% (down 1.1% in the U.S. and up
6.9% in Canada) when compared to the 40 weeks ended December 1, 2001. The
increase in wholesale sales was attributable to higher sales volume of $32
million partially offset by the unfavorable effect of the Canadian exchange rate
which decreased sales by $4 million.
Sales in the U.S. for the 40 weeks ended November 30, 2002 decreased by $313
million or 4.8% compared to the 40 weeks ended December 1, 2001. Sales in Canada
for the 40 weeks ended November 30, 2002 increased by $126 million or 6.6% from
the 40 weeks ended December 1, 2001.
Average weekly sales per supermarket were approximately $286,200 for the 40
weeks ended November 30, 2002 versus $273,800 for the corresponding period of
the prior year, an increase of 4.5%. This increase was 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
- ------------
Gross margin as a percentage of sales decreased 38 basis points to 28.39% for
the 40 weeks ended November 30, 2002 from 28.77% for the 40 weeks ended December
1, 2001. The gross margin dollar decrease of $86 million resulted from decreases
in sales volume, the gross margin rate and the Canadian exchange rate. The U.S.
operations gross margin decrease of $102 million resulted from decreases of $96
million due to lower sales volume and $6 million due to a lower gross margin
rate. The Canadian operations gross margin increase of $16 million resulted from
an increase of $32 million due to higher sales volume partially offset by
decreases of $12 million due to a lower gross margin rate and $4 million from
fluctuations in the Canadian exchange rate.
Included in gross margin for the 40 weeks ended November 30, 2002 and December
1, 2001 were costs related to the Company's asset disposition initiative of $1.2
million and $0.2 million, respectively, which were incurred to mark down
inventory in stores announced for closure. Excluding this charge, as a
percentage of sales, the gross margin rate would have been 28.41% for the 40
weeks ended November 30, 2002 compared to 28.78% for the 40 weeks ended December
1, 2001. This decrease was caused primarily by the following:
o More aggressive promotional activity during the current period in order to
drive sales volume; and
o Increased inventory shrink losses during the current year period compared to
the prior year period.
Gross margin for the 40 weeks ended December 1, 2001 included costs of $6.3
million incurred as part of the Company's 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
- ---------------------------------------------------
Store operating, general and administrative expense ("SG&A") was $2.33 billion
for the 40 weeks ended November 30, 2002 compared to $2.52 million for the 40
weeks ended December 1, 2001. As a percentage of sales, SG&A was 28.19% for the
40 weeks ended November 30, 2002 compared to 29.83% for the 40 weeks ended
December 1, 2001. Included in SG&A for the 40 weeks ended November 30, 2002 and
December 1, 2001 were gains of $4.1 million and net costs of $164.7 million,
respectively, relating to the Company's asset disposition initiative as
described in Note 6 of the Consolidated Financial Statements. Also included in
SG&A for the 40 weeks ended November 30, 2002 was 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 8 of the Consolidated
Financial Statements. Excluding these items, SG&A was $2.34 billion or 28.26% as
a percentage of sales for the 40 weeks ended November 30, 2002 compared to $2.36
billion or 27.88% for the 40 weeks ended December 1, 2001. The major items
impacting SG&A as a percentage of sales for the 40 weeks ended November 30, 2002
compared to the 40 weeks ended December 1, 2001 were as follows:
o Lower costs related to the Company's business process initiative;
o Gains on the sale of property and equipment;
o Lower depreciation expense as a result of the aforementioned sale of
property and equipment and the asset impairment recognized as a result of
the asset disposition initiative;
o Lower management bonus expenses; and
o Lower costs related to utilities.
Partially offset by the following:
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;
o Higher closed store expenses for stores closed during the normal
course of business; and
o Costs associated with the restatement of previously issued financial
statements as discussed further in Note 2 of the Company's Consolidated
Financial Statements.
Included in SG&A for the 40 weeks ended November 30, 2002 and December 1, 2001
were $49.0 million and $71.2 million, respectively, relating to the Company's
business process initiative. Such costs primarily included professional
consulting fees and salaries, including related benefits, of employees working
full-time on the initiative.
INTEREST EXPENSE
- ----------------
Interest expense of $66 million for the 40 weeks ended November 30, 2002
decreased from the prior year amount of $72 million due primarily to the
following:
o Lower interest expense on the Company's Secured Credit Agreement during the
40 weeks ended November 30, 2002 compared to the 40 weeks ended December 1,
2001;
o Lower interest expense on the Company's bank borrowings during the 40 weeks
ended November 30, 2002 compared to the 40 weeks ended December 1, 2001; and
o The Company's effective utilization of interest rate swaps which commenced in
the fourth quarter of fiscal 2001.
Partially offset by the following:
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 the Company's Secured Credit Agreement
was primarily caused by the following:
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;
o Proceeds received on the sale leaseback transactions described in Note 14
of the Consolidated Financial Statements in the Company's Fiscal 2001
Annual Report on Form 10-K; and
o Proceeds received as a result of the demutualization of the Prudential
Insurance Company as described in Note 8 of the Company's Consolidated
Financial Statements filed herein.
INCOME TAXES
- ------------
The provision for income taxes for the 40 week period ended November 30, 2002
was $128.9 million compared to a benefit from income taxes of $63.8 million in
the comparable period of fiscal 2001. The increase in the provision for income
taxes relates to the absence of the tax effect on U.S. losses that would have
been recorded if a valuation allowance was not created and offset against the
Company's net deferred tax asset during the second quarter of fiscal 2002.
During the 12 weeks ended November 30, 2002, the valuation allowance was
increased by an additional $15 million. Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes" ("SFAS 109") requires
such 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.
ASSET DISPOSITION INITIATIVE
- ----------------------------
In May 1998, the Company initiated an assessment of its business operations in
order to identify the factors that were impacting the performance of the
Company. As a result of this assessment, in fiscal 1998 and 1999, the Company
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.
As of February 23, 2002, the Company had closed all stores and facilities
related to this phase of the initiative. The Company paid $29 million of the
total net severance charges from the time of the original charges through
November 30, 2002, which resulted from the termination of approximately 3,400
employees. The remaining severance liability primarily relates to future
obligations for early withdrawals from multi-employer union pension plans.
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from Management's review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, the Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses should be closed and/or sold, and certain administrative streamlining
should take place. As a result of these decisions, the Company announced on
November 14, 2001 that it would incur costs of approximately $200 - $215 million
pretax through the third quarter of fiscal 2002. The following table details the
amounts charged to the Statements of Consolidated Operations since the
announcement of the initiative.
12 Weeks 40 Weeks
Ended Ended
(In millions) Nov. 30, 2002 Nov. 30, 2002 Fiscal 2001
------------------ ------------------ ------------------
Cost of merchandise sold $ (243) (a) $ (1,263) (a) $ (3,888) (a)
Store operating, general and
administrative expense 11,371 (b) 4,125 (c) (189,580) (d)
---------- ---------- ------------
Pretax credit/(charge) 11,128 $ 2,862 $ (193,468)
========== ========== ===========
(a) The amounts included in "Cost of merchandise sold" in the Statements of
Consolidated Operations were comprised solely of inventory markdowns that
were expensed as incurred.
(b) The pretax credit of $11.4 million included in "Store operating, general
and administrative expense" in the Statement of Consolidated Operations
for the 12 weeks ended November 30, 2002 consisted of $10.2 million of
reversals of previously accrued amounts for vacancy related costs and the
recognition of a gain on the disposal of fixed assets in the amount of
$1.6 million partially offset by $0.5 million related to closing costs
that were expensed as incurred.
(c) The pretax credit of $4.1 million included in "Store operating, general
and administrative expense" in the Statement of Consolidated Operations
for the 40 weeks ended November 30, 2002 consisted of $10.2 million of
reversals of previously accrued amounts for vacancy related costs and the
recognition of a gain on the disposal of fixed assets in the amount of
$1.6 million partially offset by $4.1 million related to closing costs
that were expensed as incurred and $3.6 million related to severance.
(d) Of the net pretax charges of $189.6 million included in "Store operating,
general and administrative expense" in the Statement of Consolidated
Operations for fiscal 2001, $80.8 million related to future vacancy costs,
$24.3 million related to net severance charges, $81.5 million related to
fixed asset and goodwill write-downs, and $3.0 million related to closing
costs that were expensed as incurred.
To the extent fixed assets included in the items noted above could be used in
other continuing operations, the Company has or will transfer those assets as
needed. Fixed assets that the Company cannot transfer to other operations will
be scrapped. Accordingly, the write-down recorded during fiscal 2001 was based
on expected transfers.
At each balance sheet date, Management assesses the adequacy of the reserve
balance to determine if any adjustments are required as a result of changes in
circumstances and/or estimates. As a result, during fiscal 2001, the Company
recorded an adjustment to severance and benefits of $0.6 million related to a
reduction in the severance payments required to be made to certain store
employees in Canada. Under Ontario provincial law, employees to be terminated as
part of a mass termination are entitled to receive compensation, either worked
or paid as severance, for a set period of time after the official notice date.
Since such closures took place later than originally expected, less time
remained in the aforementioned guarantee period. Further, during the third
quarter of fiscal 2002, the Company reversed $10.2 million of previously accrued
vacancy related costs due to the following:
o Favorable results of assigning leases at certain locations of $3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive environment in
the market in which that store is located of $3.3 million; and
o The decision to proceed with development at a site that the Company had
chosen to abandon at the time of the original charge due to changes in
the competitive environment in the market in which that store is
located of $3.3 million.
As of November 30, 2002, the Company paid approximately $21 million of the total
severance charge recorded which resulted from the termination of approximately
970 employees. The remaining individual severance payments will be paid by the
end of fiscal 2003.
As of November 30, 2002, the Company had closed all of the aforementioned stores
except the one location that the Company has decided to continue operations at
due to changes in the competitive environment in the market in which that store
is located.
Based upon current available information, Management evaluated the reserve
balances as of November 30, 2002 of $57.0 million for the 1998 phase of the
asset disposition initiative and $61.6 million for the 2001 phase of the asset
disposition initiative and has concluded that they are adequate. The Company
will continue to monitor the status of the vacant properties and adjustments to
the reserve balances will be recorded in the future, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company had negative working capital of $23 million at November 30, 2002
compared to positive working capital of $28 million at February 23, 2002. The
Company had cash and cash equivalents aggregating $171 million at November 30,
2002 compared to $169 million at the end of fiscal 2001. The decrease in working
capital was attributable primarily to the following:
o A decrease in accounts receivable due to timing of receipts;
o A decrease in the net deferred tax asset due to the recording of a
valuation allowance for the entire U.S. net