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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 19, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-4141
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
(Exact name of registrant as specified in charter)
Maryland 13-1890974
- --------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 Paragon Drive
Montvale, New Jersey 07645
----------------------------------------
(Address of principal executive offices)
(201) 573-9700
Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act. YES [X] NO [ ]
As of July 27, 2004 the Registrant had a total of 38,562,151 shares of common
stock - $1 par value outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except share and per share amounts)
(Unaudited)
16 Weeks Ended
----------------------------------
June 14, 2003
(As Restated
June 19, 2004 See Note 3)
----------------- -----------------
Sales $ 3,286,223 $ 3,228,523
Cost of merchandise sold (2,356,569) (2,305,349)
--------------- ----------------
Gross margin 929,654 923,174
Store operating, general and administrative expense (938,274) (933,784)
--------------- ----------------
Loss from operations (8,620) (10,610)
Interest expense (26,850) (24,884)
Interest income 841 780
Minority interest in earnings of consolidated franchisees (1,376) (274)
---------------- ----------------
Loss from continuing operations before income taxes (36,005) (34,988)
(Provision for) benefit from income taxes (5,458) 14,358
---------------- ----------------
Loss from continuing operations (41,463) (20,630)
Discontinued operations (Note 5):
Loss from operations of discontinued businesses, net of tax benefit of
$0 and $6,460 for the 16 weeks ended June 19, 2004 and June 14, 2003,
respectively (1,383) (11,459)
Gain on disposal of discontinued operations, net of tax provision of $29,359
for the 16 weeks ended June 14, 2003 - 52,081
--------------- ----------------
(Loss) income from discontinued operations (1,383) 40,622
--------------- ----------------
Cumulative effect of change in accounting principle - FIN 46-R, net
of tax - (8,047)
--------------- ----------------
Net (loss) income $ (42,846) $ 11,945
=============== ================
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.08) $ (0.53)
Discontinued operations (0.03) 1.05
Cumulative effect of change in accounting principle - FIN 46-R - (0.21)
--------------- ----------------
Net (loss) income per share - basic and diluted $ (1.11) $ 0.31
=============== ================
Weighted average number of common shares outstanding 38,520,018 38,515,806
Common stock equivalents 370,914 185,411
--------------- ----------------
Weighted average number of common and common equivalent
shares outstanding 38,890,932 38,701,217
=============== ================
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
(Accumulated Accumulated
Common Stock Additional Deficit) Other Total
----------------------------- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
16 Week Period Ended
June 19, 2004
- -------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (42,846) (42,846)
Other comprehensive loss (5,938) (5,938)
Stock options exercised 1,625 1 6 7
------------ ----------- ----------- ---------- ------------ ------------
Balance at end of period 38,520,530 $ 38,520 $ 459,585 $ (120,946) $ (33,177) $ 343,982
============ =========== =========== ============ ============ ===========
16 Week Period Ended
June 14, 2003
As Restated - See Note 3
- ------------------------
Balance at beginning of period,
as previously stated 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191
Add adjustment for the cumulative
effect on prior years of
applying retroactively the
new method of accounting
for inventory (LIFO to FIFO) 17,462 17,462
------------ ----------- ----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted 38,515,806 38,516 459,411 78,849 (61,123) 515,653
Net income 11,945 11,945
Other comprehensive income 38,785 38,785
------------ ----------- ----------- ----------- ------------ -----------
Balance at end of period 38,515,806 $ 38,516 $ 459,411 $ 90,794 $ (22,338) $ 566,383
============ =========== =========== =========== ============ ===========
Comprehensive (Loss) Income
- ---------------------------
16 Weeks Ended
----------------------------------
(As Restated
See Note 3)
June 19, 2004 June 14, 2003
------------- -------------
Net (loss) income $ (42,846) $ 11,945
---------- ----------
Foreign currency translation adjustment (6,773) 39,492
Net unrealized gain (loss) on derivatives, net of tax 835 (707)
--------- -----------
Other comprehensive (loss) income, net of tax (5,938) 38,785
--------- ----------
Total comprehensive (loss) income $ (48,784) $ 50,730
========= ==========
Accumulated Other Comprehensive Loss Balances
- ---------------------------------------------
Accumulated
Foreign Net Unrealized Minimum Other
Currency (Loss) Gain Pension Comprehensive
Translation on Derivatives Liability (Loss) Income
------------- -------------- ------------ -------------
Balance at February 28, 2004, As Restated - See Note 3 $ (23,892) $ (158) $ (3,189) $ (27,239)
Current period change (6,773) 835 - (5,938)
------------ ----------- ------------ ------------
Balance at June 19, 2004 $ (30,665) $ 677 $ (3,189) $ (33,177)
============ =========== ============ ============
Balance at February 22, 2003 $ (62,496) $ 3,015 $ (1,642) $ (61,123)
Current period change, As Restated 39,492 (707) - 38,785
------------ ----------- ------------ ------------
Balance at June 14, 2003, As Restated $ (23,004) $ 2,308 $ (1,642) $ (22,338)
============ =========== ============ ============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands except share amounts)
(Unaudited)
February 28, 2004
June 19, (As Restated
2004 See Note 3)
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 278,934 $ 297,008
Accounts receivable, net of allowance for doubtful accounts of
$13,002 and $13,620 at June 19, 2004 and February 28, 2004,
respectively 146,177 171,835
Inventories 712,989 694,120
Prepaid expenses and other current assets 36,467 25,225
------------- --------------
Total current assets 1,174,567 1,188,188
------------- --------------
Non-current assets:
Property:
Property owned 1,381,984 1,405,925
Property leased under capital leases, net 61,842 65,632
------------- --------------
Property - net 1,443,826 1,471,557
Other assets 110,274 115,500
------------- --------------
Total assets $ 2,728,667 $ 2,775,245
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,272 $ 2,271
Current portion of obligations under capital leases 13,165 15,901
Accounts payable 532,169 480,712
Book overdrafts 90,329 96,273
Accrued salaries, wages and benefits 167,182 177,142
Accrued taxes 76,317 74,698
Other accruals 208,133 236,238
------------- --------------
Total current liabilities 1,089,567 1,083,235
------------- --------------
Non-current liabilities:
Long-term debt 830,297 823,738
Long-term obligations under capital leases 71,030 73,980
Other non-current liabilities 386,045 394,361
Minority interests in consolidated franchisees 7,746 7,172
------------- --------------
Total liabilities 2,384,685 2,382,486
------------- --------------
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 - 38,520,530 and
38,518,905 shares at June 19, 2004 and February 28, 2004,
respectively 38,520 38,519
Additional paid-in capital 459,585 459,579
Accumulated other comprehensive loss (33,177) (27,239)
Accumulated deficit (120,946) (78,100)
------------- --------------
Total stockholders' equity 343,982 392,759
------------- --------------
Total liabilities and stockholders' equity $ 2,728,667 $ 2,775,245
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
16 Weeks Ended
-------------------------------------------------
June 14, 2003
(As Restated
June 19, 2004 See Note 3)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (42,846) $ 11,945
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
Asset disposition initiative 1,061 -
Depreciation and amortization 81,122 87,328
Deferred income tax provision (benefit) 1,012 (6,314)
Loss on disposal of owned property 397 13
Gain on sale of discontinued operations - (81,440)
Cumulative effect of change in accounting principle - FIN 46-R - 8,047
Other changes in assets and liabilities:
Decrease in receivables 24,840 9,585
Increase in inventories (22,822) (17,200)
Increase in prepaid expenses and other current assets (14,933) (21,964)
(Increase) decrease in other assets (433) 1,659
Increase in accounts payable 55,635 5,949
(Decrease) increase in accrued salaries, wages and benefits, and taxes (6,813) 22,806
Decrease in other accruals (27,899) (3,207)
Increase (decrease) in minority interest 727 (46)
Decrease in other non-current liabilities (13,020) (15,829)
Other operating activities, net 1,060 838
----------- -----------
Net cash provided by operating activities 37,088 2,170
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (55,491) (56,949)
Proceeds from disposal of property 6,140 137,614
----------- -----------
Net cash (used in) provided by investing activities (49,351) 80,665
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on revolving lines of credit - (135,000)
Proceeds from long-term borrowings 7,301 16
Payments on long-term borrowings - (1,159)
Principal payments on capital leases (4,616) (4,088)
(Decrease) increase in book overdrafts (5,717) 9,543
Deferred financing fees (813) (62)
Proceeds from stock option exercise 7 -
----------- -----------
Net cash used in financing activities (3,838) (130,750)
Initial impact of adoption of FIN 46-R - 22,030
Effect of exchange rate changes on cash and cash equivalents (1,973) 9,748
----------- -----------
Net decrease in cash and cash equivalents (18,074) (16,137)
Cash and cash equivalents at beginning of period 297,008 199,014
----------- -----------
Cash and cash equivalents at end of period $ 278,934 $ 182,877
=========== ===========
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)
1. Basis of Presentation
The accompanying Consolidated Statements of Operations and Consolidated
Statements of Cash Flows of The Great Atlantic & Pacific Tea Company, Inc.
("We," "Our," "Us" or "Our Company") for the 16 weeks ended June 19, 2004 and
June 14, 2003, and the Consolidated Balance Sheets at June 19, 2004 and February
28, 2004, are unaudited and, in the opinion of management, contain all
adjustments that are of a normal and recurring nature necessary to present
fairly the financial position and results of operations for such periods. The
accompanying consolidated financial statements also include the impact of
adopting Interpretation No. 46 ("FIN 46-R"), "Consolidation of Variable Interest
Entities - an interpretation of 'Accounting Research Bulletin No. 51'", EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers" ("EITF
03-10") and the change in our method of valuing certain of our inventories from
the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO")
method during the first quarter of fiscal 2004. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in our Fiscal 2003 Annual Report on Form
10-K. Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements include the accounts of our Company, all
majority-owned subsidiaries, and franchise operations. Significant intercompany
accounts and transactions have been eliminated. Certain reclassifications have
been made to prior year amounts to conform to current year presentation.
2. Impact of New Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
132 R, "Employer's Disclosure about Pensions and Other Postretirement Benefits"
("SFAS 132 R"). SFAS 132 R requires new annual disclosures about the type of
plan assets, investments strategy, measurement date, plan obligations, and cash
flows as well as the components of the net periodic benefit cost recognized in
interim periods. The new annual disclosure requirements apply to fiscal years
ending after December 15, 2003, except for the disclosure of expected future
benefit payments, which must be disclosed for fiscal years ending after June 15,
2004. Interim period disclosures are generally effective for interim periods
beginning after December 15, 2003. We have included the disclosures required by
SFAS 132 R, including expected future benefit payments, in our consolidated
financial statements for the year ended February 28, 2004. We have also included
all newly required interim period disclosures for the quarter ending June 19,
2004 in Note 7 - Retirement Plans and Benefits.
In December 2003, the United States enacted into law the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act"). The Act establishes
a prescription drug benefit under Medicare, known as "Medicare Part D," and a
Federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB issued FASB Staff Position No. 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"). We have elected to defer the
accounting for the effects of the Act, as permitted by FAS 106-2. Therefore, in
accordance with FAS 106-2, our consolidated financial statements and
accompanying notes do not reflect the favorable effects of the Act on the plans,
the magnitude of which has not yet been determined. Specific authoritative
guidance on the accounting for the federal subsidy is pending, and that
guidance, when issued, could require our Company to change previously reported
information.
Refer to Note 3 - Restatement and Changes in Accounting regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our consolidated financial statements.
3. Restatement and Changes in Accounting
FIN 46-R
- --------
In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of `Accounting Research
Bulletin No. 51'". FIN 46-R addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at risk to allow the
entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46-R requires the
consolidation of these entities, known as variable interest entities ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns, or
both. FIN 46-R applies immediately to variable interests in VIE's created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46-R applies to VIE's no later than the end of the first
reporting period ending after March 15, 2004 (the quarter ending June 19, 2004
for our Company).
As of June 19, 2004, we served 66 franchised stores. These franchisees are
required to purchase inventory from our Company, which acts as a wholesaler to
the franchisees. We had sales to these franchised stores of $254 million and
$251 million for the first quarter of fiscal years 2004 and 2003, respectively.
In addition, we sublease the stores and lease the equipment in the stores to the
franchisees. We also provide merchandising, advertising, bookkeeping and other
consultative services to the franchisees for which we receive a fee, which
primarily represents the reimbursement of costs incurred to provide such
services. Based upon the new criteria for consolidation of VIE's, we have
determined that all of our franchised stores do not have sufficient equity at
risk to allow them to finance their own activities. Thus, these franchisees are
VIE's of which, under FIN 46-R, we are deemed the primary beneficiary and
accordingly have included them in our consolidated financial statements as of
February 23, 2003. As permitted by FIN 46-R, our Company elected to restate
prior year's consolidated financial statements for the impact of adopting this
interpretation for comparability purposes.
Prior to February 23, 2003, we held as assets inventory notes collateralized by
the inventory in the stores and equipment lease receivables collateralized by
the equipment in the stores. The current portion of the inventory notes and
equipment leases, net of allowance for doubtful accounts, had been included in
"Accounts receivable" on our Consolidated Balance Sheets, while the long-term
portion of the inventory notes and equipment leases had been included in "Other
assets" on our Consolidated Balance Sheets. The repayment of these inventory
notes and equipment leases had been dependent upon positive operating results of
the stores. To the extent that the franchisees incurred operating losses, we had
established an allowance for doubtful accounts. We assessed the sufficiency of
the allowance on a store by store basis based upon the operating results and the
related collateral underlying the amounts due from the franchisees. In the event
of default by a franchisee, we reserved the option to reacquire the inventory
and equipment at the store and operate the franchise as a corporate owned store.
The cumulative effect adjustment of $8.0 million primarily represents the
difference between consolidating these entities as of February 23, 2003 and the
allowance for doubtful accounts that was provided for these franchises at that
date.
Also refer to Note 10 - Commitments and Contingencies regarding our pending
class action lawsuit relating to our Canadian franchise business.
EITF 03-10
- ----------
In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers". The
provisions of EITF 03-10 became effective for our Company in the first quarter
of fiscal 2004. EITF 03-10 provides guidance for the reporting of vendor
consideration received by a reseller as it relates to manufacturers' incentives,
such as rebates or coupons, tendered by consumers. Vendor incentives should be
included in revenues only if defined criteria are met. As such, our Company will
continue to record as part of revenues manufacturers' coupons that can be
presented at any retailer that accepts coupons. However, in the case of vendor
incentives that can only be redeemed at a Company retail store, such
consideration would be recorded as a decrease in cost of sales. As permitted by
the transition provisions of EITF 03-10, we have reclassified prior year's sales
and cost of sales for comparative purposes in this report. Implementation of
EITF 03-10 has no effect on gross margin dollars, net income or cash flows, but
certain vendor coupons or rebates that had been recorded in sales in the past
are currently being recognized as a reduction of cost of sales. The
implementation of EITF 03-10 has resulted in decreases in both sales and cost of
sales of $15.3 million in the first quarter of fiscal 2004 and $14.7 million in
the first quarter of fiscal 2003.
Inventory
- ---------
At February 28, 2004, approximately 6% of our inventories, relating to all
merchandise sold in our Waldbaums and Farmer Jack banners, that were acquired
during the past two decades, were valued at the lower of cost or market using
the LIFO method. During the first quarter of fiscal 2004, we changed our method
of valuing these inventories from the LIFO method to the FIFO method. We believe
that the new method is preferable because the FIFO method produces an inventory
value on our Consolidated Balance Sheets that better approximates current costs.
In addition, under FIFO, the flow of costs is generally more consistent with our
physical flow of goods. The adoption of the FIFO method will enhance
comparability of our financial statements by conforming all of our inventories
to the same accounting method. Our Company applied this change by retroactively
restating our consolidated financial statements as required by Accounting
Principles Board Opinion No. 20, "Accounting Changes," which resulted in an
increase to retained earnings as of February 23, 2003 of approximately $17.5
million.
Overall Impact
- --------------
The following tables reflect the impact of the adoption of FIN 46-R, including
the impact of all elimination entries relating to the consolidation of the
franchisees, EITF 03-10, and the change in our method of valuing certain of our
inventories from the LIFO method to the FIFO method on our Consolidated
Statements of Operations and Consolidated Balance Sheets for the periods
presented. Note that the adoption of EITF 03-10 only impacts our Consolidated
Statements of Operations. Furthermore, the change in our method of valuing
certain of our inventories impacts our Consolidated Balance Sheets and had a $0
impact on our Consolidated Statement of Operations for the 16 weeks ended June
14, 2003.
Consolidated
A&P for the Consolidated
16 weeks ended Impact of Impact of A&P for the
June 19, 2004 adoption of adoption of 16 weeks ended
prior to changes FIN 46-R EITF 03-10 June 19, 2004
---------------- --------------- ---------------- -----------------
Sales $ 3,258,579 $ 42,976 $ (15,332) $ 3,286,223
Cost of merchandise sold (2,376,163) 4,262 15,332 (2,356,569)
------------- ------------- ------------- -------------
Gross margin 882,416 47,238 - 929,654
Store operating, general and administrative
expense (897,517) (40,757) - (938,274)
------------- ------------- ------------- -------------
(Loss) income from operations (15,101) 6,481 - (8,620)
Interest expense (26,850) - - (26,850)
Interest income 2,294 (1,453) - 841
Minority interest in earnings of consolidated
franchisees - (1,376) - (1,376)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (39,657) 3,652 - (36,005)
Provision for income taxes (4,414) (1,044) - (5,458)
------------- ------------- ------------- -------------
(Loss) income from continuing operations (44,071) 2,608 - (41,463)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,383) - - (1,383)
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Loss from discontinued operations (1,383) - - (1,383)
-------------- ------------- ------------- -------------
Net (loss) income $ (45,454) $ 2,608 $ - $ (42,846)
============= ============= ============= =============
Depreciation $ (79,674) $ (1,448) $ - $ (81,122)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Restated for the
16 weeks ended adoption of adoption of 16 weeks ended
June 14, 2003 FIN 46-R EITF 03-10 June 14, 2003
---------------- --------------- ---------------- -----------------
Sales $ 3,203,830 $ 39,409 $ (14,716) $ 3,228,523
Cost of merchandise sold (2,324,661) 4,596 14,716 (2,305,349)
-------------- ------------- ------------- -------------
Gross margin 879,169 44,005 - 923,174
Store operating, general and administrative
expense (891,628) (42,156) - (933,784)
------------- ------------- ------------- -------------
(Loss) income from operations (12,459) 1,849 - (10,610)
Interest expense (24,884) - - (24,884)
Interest income 2,139 (1,359) - 780
Minority interest in earnings of consolidated
franchisees - (274) - (274)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (35,204) 216 - (34,988)
Benefit from (provision for) income taxes 14,862 (504) - 14,358
------------- ------------- ------------- -------------
Loss from continuing operations (20,342) (288) - (20,630)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (11,459) - - (11,459)
Gain on disposal of discontinued operations,
net of tax 52,081 - - 52,081
------------- ------------- ------------- -------------
Income from discontinued operations 40,622 - - 40,622
------------- ------------- ------------- -------------
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - (8,047) - (8,047)
------------- ------------- ------------- -------------
Net income (loss) $ 20,280 $ (8,335) $ - $ 11,945
============= ============= ============= =============
Depreciation $ (84,096) $ (1,681) $ - $ (85,777)
-------------- ------------- ------------- -------------
Consolidated
A&P at Impact of Consolidated
June 19, 2004 adoption of A&P at
prior to adoption FIN 46-R June 19, 2004
-------------------- -------------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 254,505 $ 24,429 $ 278,934
Accounts receivable 167,365 (21,188) 146,177
Inventories 690,020 22,969 712,989
Prepaid expenses and other current assets 36,444 23 36,467
------------------ ------------------ ------------------
Total current assets 1,148,334 26,233 1,174,567
------------------ ------------------ ------------------
Non-current assets:
Property:
Property owned 1,362,633 19,351 1,381,984
Property leased under capital leases, net 61,842 - 61,842
------------------ ------------------ ------------------
Property, net 1,424,475 19,351 1,443,826
Other assets 146,637 (36,363) 110,274
------------------ ------------------ ------------------
Total assets $ 2,719,446 $ 9,221 $ 2,728,667
================== ================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,272 $ - $ 2,272
Current portion of obligations under capital
leases 13,165 - 13,165
Accounts payable 532,506 (337) 532,169
Book overdrafts 90,329 - 90,329
Accrued salaries, wages and benefits 164,716 2,466 167,182
Accrued taxes 71,554 4,763 76,317
Other accruals 207,166 967 208,133
------------------ ------------------ ------------------
Total current liabilities 1,081,708 7,859 1,089,567
------------------ ------------------ ------------------
Non-current liabilities:
Long-term debt 830,297 - 830,297
Long-term obligations under capital leases 71,030 - 71,030
Other non-current liabilities 384,956 1,089 386,045
Minority interests - 7,746 7,746
------------------ ------------------ ------------------
Total liabilities 2,367,991 16,694 2,384,685
------------------ ------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,520 - 38,520
Additional paid-in capital 459,585 - 459,585
Accumulated other comprehensive income (32,844) (333) (33,177)
Accumulated deficit (113,806) (7,140) (120,946)
------------------ ------------------ ------------------
Total stockholders' equity 351,455 (7,473) 343,982
------------------ ------------------ ------------------
Total liabilities and stockholders'equity $ 2,719,446 $ 9,221 $ 2,728,667
================== ================== ==================
Consolidated
A&P as Consolidated
previously Impact of Impact of A&P as
reported at adoption of change from Restated at
February 28, 2004 FIN 46-R LIFO to FIFO February 28, 2004
----------------- ------------------ ------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,151 $ 20,857 $ - $ 297,008
Accounts receivable 190,737 (18,902) - 171,835
Inventories 654,344 22,491 17,285 694,120
Prepaid expenses and other current assets 25,080 145 - 25,225
----------- ----------- ----------- -----------
Total current assets 1,146,312 24,591 17,285 1,188,188
----------- ----------- ----------- -----------
Non-current assets:
Property:
Property owned 1,383,702 22,223 - 1,405,925
Property leased under capital leases, net 65,632 - - 65,632
----------- ----------- ----------- -----------
Property, net 1,449,334 22,223 - 1,471,557
Other assets 154,904 (39,404) - 115,500
----------- ----------- ----------- -----------
Total assets $ 2,750,550 $ 7,410 $ 17,285 $ 2,775,245
=========== =========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,271 $ - $ - $ 2,271
Current portion of obligations under capital
leases 15,901 - - 15,901
Accounts payable 477,536 3,176 - 480,712
Book overdrafts 96,273 - - 96,273
Accrued salaries, wages and benefits 176,812 330 - 177,142
Accrued taxes 69,217 5,481 - 74,698
Other accruals 235,910 328 - 236,238
----------- ----------- ----------- -----------
Total current liabilities 1,073,920 9,315 - 1,083,235
----------- ----------- ----------- -----------
Non-current liabilities:
Long-term debt 823,738 - - 823,738
Long-term obligations under capital leases 73,980 - - 73,980
Other non-current liabilities 393,088 1,273 - 394,361
Minority interests - 7,172 - 7,172
----------- ----------- ----------- -----------
Total liabilities 2,364,726 17,760 - 2,382,486
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - - -
Common stock 38,519 - - 38,519
Additional paid-in capital 459,579 - - 459,579
Accumulated other comprehensive income (26,637) (602) - (27,239)
Accumulated deficit (85,637) (9,748) 17,285 (78,100)
----------- ----------- ----------- -----------
Total stockholders' equity 385,824 (10,350) 17,285 392,759
----------- ------------ ----------- -----------
Total liabilities and stockholders'equity $ 2,750,550 $ 7,410 $ 17,285 $ 2,775,245
=========== =========== =========== ===========
4. Income Taxes
The income tax provision recorded for the 16 weeks ended June 19, 2004 and June
14, 2003 reflects our estimated expected annual tax rates applied to our
respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") requires that a
valuation allowance be created and offset against a 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
our 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. For the 16 weeks ended June 19, 2004, the valuation
allowance was increased by $20.5 million. To the extent that our U.S. operations
generate taxable income in future periods, we will reverse the income tax
valuation allowance. In future periods, U.S. earnings or losses will not be tax
effected until such time as the certainty of future tax benefits can be
reasonably assured.
Further, in accordance with SFAS 109, income from discontinued operations can be
tax effected under certain circumstances. As a result, we taxed the income from
discontinued operations for the first quarter ended June 14, 2003 at our
effective tax rate. The tax provision for discontinued operations of $22.9
million for the first quarter ended June 14, 2003 was completely offset by a tax
benefit from continuing operations.
For the first quarter of fiscal 2004, our effective income tax rate provision
of 15.1% increased from the effective income tax rate benefit of (41.0%) in the
first quarter of fiscal 2003 as follows:
16 weeks ended
--------------------------------------------------------
June 19,2004 June 14, 2003
--------------------------- ---------------------------
Tax Effective Tax Rate Tax Effective Tax Rate
----- ------------------ ------- ------------------
United States $(1,380) 3.8% $22,024 (62.9%)
Canada (4,078) 11.3% (7,666) 21.9%
-------- ------- -------- -------
$(5,458) 15.1% $14,358 (41.0%)
======== ======= ======== =======
The increase in our effective tax rate was primarily due to the absence of a tax
benefit recognized from the loss on continuing operations. As discussed above,
$22.9 million of benefit was recognized in the first quarter of fiscal 2003 as
compared to the first quarter of fiscal 2004, where no benefit was recognized.
The remaining provisions included in the U.S. of $1.4 million and $0.9 million
for the first quarters of fiscal 2004 and 2003, respectively, represent state
and local taxes. Partially offsetting the increase was the impact of the lower
mix of Canadian income from continuing operations as a percentage of our
Company's loss from continuing operations in the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003.
We had a net current deferred tax asset which is included in "Prepaid expenses
and other current assets" on our Consolidated Balance Sheet totaling $0.3
million and a net non-current deferred tax liability which is included in "Other
non-current liabilities" on our Consolidated Balance Sheet totaling $14.9
million at June 19, 2004, relating to our Canadian operations.
5. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee,
Wisconsin market, where 23 of our remaining 24 Kohl's stores were located, as
well as our Eight O'Clock Coffee business, through the sale and/or disposal of
these assets.
Upon the decision to sell these businesses, we applied the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered, where available, the binding sale agreements related to these
properties as an estimate of the assets' fair value. As a result of the adoption
of SFAS 144, $22.1 million in net property 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. Of this amount, $12.4 million
related to northern New England locations and $9.7 million related to Kohl's
locations. These assets were no longer depreciated after this date.
We have accounted for all of these separate business components as discontinued
operations in accordance with SFAS 144. In determining whether a store or group
of stores qualifies as discontinued operations treatment, we include only those
stores for which (i.) the operations and cash flows will be eliminated from our
ongoing operations as a result of the disposal and (ii.) we will not have any
significant continuing involvement in the operations of the stores after the
disposal. In making this determination, we consider the geographic location of
the stores. If the operations and cash flows of stores to be disposed of are
replaced by other operations and cash flows of stores in the same geographic
district, we would not include the stores as discontinued operations.
Amounts in the financial statements and related notes for all periods shown have
been reclassified to reflect the discontinued operations. Summarized below are
the operating results for these discontinued businesses, which are included in
our Consolidated Statements of Operations, under the caption "Loss from
operations of discontinued businesses, net of tax" for the 16 weeks ended June
19, 2004 and June 14, 2003 and the results of disposing these businesses which
were included in "Gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for the 16 weeks ended June 14, 2003.
16 Weeks Ended June 19, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses - 24 - 24
--------------- ---------------- --------------- ----------------
Income from operations - 24 - 24
Disposal costs:
Severance and benefits (326) - - (326)
Non-accruable closing costs (42) (222) (590) (854)
Interest accretion on present value
of future occupancy costs (3) (224) - (227)
--------------- ---------------- --------------- ----------------
Total disposal costs (371) (446) (590) (1,407)
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, before
tax (371) (422) (590) (1,383)
Tax provision - - - -
--------------- ---------------- --------------- ----------------
Loss from operations of
discontinued businesses, net
of tax $ (371) $ (422) $ (590) $ (1,383)
=============== ================ =============== ================
16 Weeks Ended June 14, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ 32,726 $ 84,735 $ 25,172 $ 142,633
Operating expenses (35,367) (87,193) (18,227) (140,787)
--------------- ---------------- --------------- ----------------
(Loss) gain from operations (2,641) (2,458) 6,945 1,846
Disposal costs:
- ---------------
Property impairments - (15,217) - (15,217)
Pension withdrawal liability - (4,000) - (4,000)
Non-accruable closing costs 565 10 (1,123) (548)
--------------- ---------------- --------------- ----------------
Total disposal costs 565 (19,207) (1,123) (19,765)
--------------- ------------- --------------- ----------------
(Loss) gain from operations of
discontinued businesses, before
tax (2,076) (21,665) 5,822 (17,919)
Income tax benefit (provision) 748 7,810 (2,098) 6,460
--------------- ------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses, net
of tax $ (1,328) $ (13,855) $ 3,724 $ (11,459)
=============== ================ =============== ================
Gain (loss) from disposal of
discontinued businesses
Gain on sale of property $ 85,983 $ 8,827 $ - $ 94,810
Gain on sale of inventory 1,645 - - 1,645
Occupancy related costs (3,993) (310) - (4,303)
Severance and benefits (2,670) (812) - (3,482)
Non-accruable inventory costs - (1,297) - (1,297)
Non-accruable closing costs (3,170) (2,763) - (5,933)
--------------- ---------------- --------------- ----------------
Gain on disposal of
discontinued businesses, before
tax 77,795 3,645 - 81,440
Tax provision (28,045) (1,314) - (29,359)
--------------- ---------------- --------------- ----------------
Gain on disposal of discontinued
businesses, net of tax $ 49,750 $ 2,331 $ - $ 52,081
=============== ================ =============== ================
Northern New England
As previously stated, as part of our strategic plan we decided to exit the
northern New England market by closing and/or selling 21 stores in that region
in order to focus on our core geographic markets. As a result of these sales, we
generated proceeds of $117.5 million, resulting in a gain of $77.8 million
($49.8 million after tax). This gain was included in "Gain on disposal of
discontinued operations, net of tax" on our Consolidated Statements of
Operations for the 16 weeks ended June 14, 2003. Included in these amounts were
occupancy related costs for locations not sold of $4.0 million, severance and
related costs of $2.7 million, non-accruable closing costs of $3.2 million and a
gain of $1.6 million from inventory disposals. During the first quarter of
fiscal 2004, we incurred additional costs to wind down our operations in this
region subsequent to the sale of these stores of $0.4 million primarily related
to additional severance costs which were included in "Loss from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations.
The following table summarizes the reserve activity during fiscal 2003 and the
first quarter of 2004 related to the exit of the northern New England market:
Severance
and
Occupancy Benefits Total
------------ ------------- --------------
Fiscal 2003 charge (1) $ 3,993 $ 2,670 $ 6,663
Additions (1) 6 - 6
Utilization (2) (3,547) (2,612) (6,159)
------------ ------------- ---------------
Balance at
February 28, 2004 $ 452 $ 58 $ 510
Additions (1) 3 326 329
Utilization (2) (22) (383) (405)
------------ ------------- ---------------
Balance at
June 19, 2004 $ 433 $ 1 $ 434
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
expected future occupancy costs such as rent, common area maintenance
and real estate taxes. The additions to occupancy for both periods
presented represent the interest accretion on future occupancy costs
which were recorded at present value at the time of the original
charge. The fiscal 2003 charge to severance and benefits of $2.7
million related to severance to be paid to employees terminated as a
result of our exit from the northern New England market. The first
quarter of fiscal 2004 charge to severance and benefits of $0.3 million
related to additional severance required to be paid to employees
terminated in accordance with a union contract as a result of our exit
from the northern New England market.
(2) Occupancy utilization represents payments made during those periods for
costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance and benefits utilization represents
payments made to terminated employees during the period.
We paid $3.6 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $3.0 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$0.4 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2007. The remaining severance liability
relates to expected future payments for severance and benefits to individual
employees and will be fully paid out by mid-2004.
At June 19, 2004 and February 28, 2004, $0.2 million and $0.3 million,
respectively, of the northern New England exit reserves was included in "Other
accruals" and $0.2 million and $0.2 million, respectively, was included in
"Other non-current liabilities" on our Consolidated Balance Sheets. We have
evaluated the liability balance of $0.4 million as of June 19, 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.
Kohl's Market
Madison
- -------
As previously stated, as part of our strategic plan we decided to exit the
Kohl's-Madison market by selling 7 stores and closing 1 store in that region in
order to focus on our core geographic markets. As a result of this sale, we
generated proceeds of $20.1 million, resulting in a gain of $3.6 million ($2.3
million after tax). This gain was included in "Gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations for the 16
weeks ended June 14, 2003. Included in these amounts were occupancy related
costs for locations not sold of $0.3 million, severance and related costs of
$0.8 million, non-accruable closing costs of $2.8 million and a loss of $1.3
million from inventory disposals.
Milwaukee
- ---------
As previously stated, we adopted a formal plan to exit the Kohl's-Milwaukee
market, where 23 of our remaining 24 Kohl's stores were located, by closing
and/or selling these locations. Upon our initial decision to exit the Kohl's
stores located in Milwaukee, Wisconsin, we estimated the assets' fair market
value using a probability weighted average approach based upon expected proceeds
and recorded impairment losses on the property at the remaining Kohl's locations
of $15.2 million. Further, we participate in various multi-employer union
pension plans, which are administered jointly by management and union
representatives and in which most full-time and certain part-time union
employees who are not covered by our other pension plans participate. 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 $4.0 million for
the 16 weeks ended June 14, 2003. These amounts, as well as the tax benefit of
$7.8 million are included in "Loss from operations of discontinued businesses,
net of tax" in our Consolidated Statements of Operations for the 16 weeks ended
June 14, 2003.
The following table summarizes the reserve activity during fiscal 2003 and the
16 weeks ended June 19, 2004 related to the exit of the Kohl's market:
Severance
and
Occupancy Benefits Total
------------ ------------- --------------
Fiscal 2003 charge (1) $ 25,487 $ 13,062 $ 38,549
Additions (2) 352 - 352
Utilization (3) (5,342) (8,228) (13,570)
Adjustments (4) (1,458) - (1,458)
------------ ------------- --------------
Balance at
February 28, 2004 $ 19,039 $ 4,834 $ 23,873
Additions (2) 224 - 224
Utilization (3) (1,396) (969) (2,365)
------------ ------------- --------------
Balance at
June 19, 2004 $ 17,867 $ 3,865 $ 21,732
============ ============= ==============
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related
to future occupancy costs such as rent, common area maintenance and
real estate taxes, which was recorded subsequent to the first quarter
of fiscal 2003. The fiscal 2003 charge to severance and benefits of
$13.1 million related to severance costs of $6.6 million and costs for
future obligations for early withdrawal from multi-employer union
pension plans and a health and welfare plan of $6.5 million, of which
$4.0 million was recorded in the first quarter of fiscal 2003.
(2) The fiscal 2003 and the first quarter of fiscal 2004 additions to
occupancy of $0.3 million and $0.2 million, respectively, relate to
interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge.
(3) Occupancy utilization represents vacancy related payments for closed
locations such as rent, common area maintenance, real estate taxes and
lease termination payments. Severance and benefits utilization
represents payments made to terminated employees during the period and
payments for pension withdrawal.
(4) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. During fiscal 2003, we recorded net
adjustments of $1.5 million primarily related to reversals of
previously accrued vacancy related costs due to favorable results of
terminating and subleasing certain locations of $4.5 million offset by
additional vacancy accruals of $3.0 million.
We paid $6.7 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $9.2 million of the total severance charges from the
time of the original charges through June 19, 2004, which resulted from the
termination of approximately 2000 employees. The remaining occupancy liability
of $17.9 million relates to expected future payments under long term leases and
is expected to be paid out in full by 2020. The remaining severance liability of
$3.9 million relates to future obligations for early withdrawal from
multi-employer union pension plans, and individual severance payments, which
will be paid by mid-2006.
At June 19, 2004 and February 28, 2004, $8.1 million and $4.8 million,
respectively, of the Kohl's exit reserves was included in "Other accruals" and
$13.6 million and $19.1 million, respectively, was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $21.7 million as of June 19, 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.
Eight O'Clock Coffee
During the 16 weeks ended June 14, 2003, we were in the process of selling our
Eight O'Clock Coffee business. As a result of this decision, we included certain
professional services costs amounting to $1.1 million, the operating profits of
this business of $6.9 million and the tax provision of $2.1 million in "Loss
from operations of discontinued businesses, net of tax" on our Consolidated
Statements of Operations for the 16 weeks ended June 14, 2003.
Additional costs incurred to wind down our operations in this business
subsequent to the sale of $0.6 million were included in "Loss from operations of
discontinued businesses, net of tax" on our Consolidated Statements of
Operations for 16 weeks ended June 19, 2004.
6. Asset Disposition Initiative
Overview
- --------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 16 weeks ended June 19, 2004 and June 14, 2003.
Present value ("PV") interest represents interest accretion on future occupancy
costs which were recorded at present value at the time of the original charge.
Non-accruable items represent charges related to the restructuring that are
required to be expensed as incurred in accordance with SFAS 146 "Accounting for
Costs Associated with Exit or Disposal Activities".
16 Weeks Ended June 19, 2004 16 Weeks Ended June 14, 2003
---------------------------------------------- ----------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
--------- ----------- ------------- --------- ----------- ------------- ------------- -------
Balance Sheet accruals
PV interest $ 630 $ 781 $ 222 $ 1,633 $ 828 $ 986 $ - $ 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Total accrued to
balance sheets 630 781 222 1,633 828 986 - 1,814
-------- ----------- ----------- --------- ----------- ------------- ------------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writeoffs - - 90 90 - - - -
Inventory markdowns - - 291 291 - - - -
Closing costs - - 680 680 - - - -
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Total non-accruable items - - 1,061 1,061 - - - -
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Less PV interest (630) (781) (222) (1,633) (828) (986) - (1,814)
-------- ----------- ----------- --------- ----------- ------------ ------------ ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest - - 1,061 1,061 - - - -
========= =========== =========== ========= =========== =========== =========== ==========
Project Great Renewal
- ---------------------
In May 1998, we initiated an assessment of our business operations in order to
identify the factors that were impacting our performance. As a result of this
assessment, in fiscal 1998 and 1999, we announced a plan to close two warehouse
facilities and a coffee plant in the U.S., a bakery plant in Canada and 166
stores (156 in the United States and 10 in Canada) including the exit of the
Richmond, Virginia and Atlanta, Georgia markets. As of June 19, 2004, we had
closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 622 8 630 - - - 622 8 630
Utilization (2) (1,777) (40) (1,817) (62) - (62) (1,839) (40) (1,879)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 30,317 $ 420 $ 30,737 $ 2,095 $ - $ 2,095 $ 32,412 $ 420 $ 32,832
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $0.6 million
during the 16 weeks ended June 19, 2004 represent the interest accretion
on future occupancy costs which were recorded at present value at the time
of the original charge.
(2) Occupancy utilization of $23.3 million, $13.6 million and $20.0 million for
fiscal 2001, 2002 and 2003, respectively, and $1.8 million during the 16
weeks ended June 19, 2004 represents payments made during those periods
for costs such as rent, common area maintenance, real estate taxes and
lease termination costs. Severance utilization of $0.5 million, $0.4
million and $0.3 million for fiscal 2001, 2002 and 2003, respectively, and
$0.1 million during the 16 weeks ended June 19, 2004 represents payments
to individuals for severance and benefits, as well as payments to pension
funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $94.5 million of the total occupancy charges from the time of the
original charges through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.5 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 3,400 employees. The remaining occupancy liability
of $30.7 million relates to expected future payments under long term leases and
is expected to be paid in full by 2020. The remaining severance liability of
$2.1 million primarily relates to expected future payments for early withdrawals
from multi-employer union pension plans and will be fully paid out in 2020.
None of these stores were open during either of the first quarters of fiscal
2003 or 2004. As such, there was no impact on the Statements of Consolidated
Operations from the 166 stores included in this phase of the initiative.
At both June 19, 2004 and February 28, 2004, approximately $6.2 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 Sheets.
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $32.8 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of Directors
approved a plan resulting from our review of the performance and potential of
each of the Company's businesses and individual stores. At the conclusion of
this review, our Company determined that certain underperforming operations,
including 39 stores (30 in the United States and 9 in Canada) and 3 warehouses
(2 in the United States and 1 in Canada) should be closed and/or sold, and
certain administrative streamlining should take place. As of June 19, 2004, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative recorded on the Consolidated Balance Sheets since the announcement of
the charge in November 2001:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Original charge $ 78,488 $ 1,968 $ 80,456 $ 15,688 $ 7,747 $ 23,435 $ 94,176 $ 9,715 $ 103,891
Addition (1) 1,653 20 1,673 - - - 1,653 20 1,673
Utilization (2) (1,755) (51) (1,806) (1,945) (946) (2,891) (3,700) (997) (4,697)
Adjustments (3) - - - - (584) (584) - (584) (584)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 781 - 781 - - - 781 - 781
Utilization (2) (1,680) (7) (1,687) (36) (57) (93) (1,716) (64) (1,780)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
June 19, 2004 $ 38,685 $ 368 $ 39,053 $ 2,275 $ 1 $ 2,276 $ 40,960 $ 369 $ 41,329
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $1.7 million, $4.1 million and $2.9
million during fiscal 2001, 2002 and 2003, respectively, and $0.8
million during the 16 weeks ended June 19, 2004 represent the interest
accretion on future occupancy costs which were recorded at present
value at the time of the original charge. The addition to severance of
$3.5 million during fiscal 2002 related to retention and productivity
incentives that were accrued as earned.
(2) Occupancy utilization of $1.8 million, $20.4 million and $11.0 million
during fiscal 2001, 2002 and 2003, respectively, and $1.7 million
during the 16 weeks ended June 19, 2004 represent payments made during
those periods for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of
$2.9 million, $19.5 million and $3.5 million during fiscal 2001, 2002
and 2003, respectively, and $0.1 million during the 16 weeks ended
June 19, 2004 represent payments made to terminated employees during
the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. Under Ontario provincial
law, employees to be terminated as part of a mass termination are
entitled to receive compensation, either worked or paid as severance,
for a set period of time after the official notice date. Since such
closures took place later than originally expected, less time remained
in the aforementioned guarantee period. As a result, during fiscal
2001, we recorded an adjustment to severance and benefits of $0.6
million related to a reduction in the severance payments required to be
made to certain store employees in Canada. Further, during fiscal 2002,
we recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge.
We paid $34.8 million ($32.1 million in the U.S. and $2.7 million in Canada) of
the total occupancy charges from the time of the original charges through June
19, 2004 which was primarily for occupancy related costs such as rent, common
area maintenance, real estate taxes and lease termination costs. We paid $25.9
million ($16.9 million in the U.S. and $9.0 million in Canada) of the total net
severance charges from the time of the original charges through June 19, 2004,
which resulted from the termination of approximately 1,100 employees. The
remaining occupancy liability of $39.1 million primarily relates to expected
future payments under long term leases through 2017. The remaining severance
liability of $2.3 million relates to expected future payments for severance and
benefits payments to individual employees and will be fully paid out by 2006.
At June 19, 2004 and February 28, 2004 approximately $11.8 million and $11.6
million of the reserve, respectively, was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 39 stores that
were identified for closure as part of this asset disposition. The results of
these operations are as follows:
June 19, 2004 June 14, 2003
------------- -------------
Sales $ - $ 316
============= =============
Operating loss $ - $ (72)
============= =============
Based upon current available information, we evaluated the reserve balances as
of June 19, 2004 of $41.3 million for this phase of the asset disposition
initiative and have concluded that they are adequate to cover expected future
costs. The Company will continue to monitor the status of the vacant properties
and adjustments to the reserve balances may be recorded in the future, if
necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we announced an
initiative to close 6 stores and convert 13 stores to our Food Basics banner in
the Detroit, Michigan and Toledo, Ohio markets. In addition to the charge of
$37.7 million related to the last phase of this initiative ($2.2 million in
"Cost of merchandise sold" and $35.5 million in "Store operating, general and
administrative expense" in our Consolidated Statement of Operations for fiscal
2003), we recorded costs in the first quarter of fiscal 2004 of $1.1 million
($0.3 million in "Cost of merchandise sold" and $0.8 million in "Store
operating, general and administrative expense") as follows:
16 Weeks Ended 53 Weeks Ended
June 19, 2004 February 28, 2004
---------------- ------------------
Occupancy related $ - $ 20,999
Severance and benefits - 8,930
Property writeoffs 90 4,129
Nonaccruable closing costs 680 1,449
Inventory markdowns 291 2,244
--------------- ---------------
Total charges $ 1,061 $ 37,751
=============== ===============
As of June 19, 2004, we had closed all 6 stores and successfully completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writeoffs as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
Severance
and
Occupancy Benefits Total
------------ ------------- ----------
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 222 - 222
Utilization (2) (2,356) (4,157) (6,513)
------------ ------------- ----------
Balance at
June 19, 2004 $ 17,828 $ 662 $ 18,490
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and the 16
weeks ended June 19, 2004 represent interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge. The original charge to severance during fiscal 2003 of
$8.9 million related to individual severings as a result of the store
closures, as well as a voluntary termination plan initiated in the
Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $2.4 million during fiscal
2003 and the 16 weeks ended June 19, 2004, respectively, represents
payments made for costs such as rent, common area maintenance, real
estate taxes and lease termination costs. Severance utilization of $4.1
million and $4.2 million during fiscal 2003 and the 16 weeks ended June
19, 2004, respectively, represent payments made to terminated employees
during the period.
We paid $3.4 million of the total occupancy charges from the time of the
original charge through June 19, 2004 which was primarily for occupancy related
costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.3 million of the total net severance charges from
the time of the original charges through June 19, 2004, which resulted from the
termination of approximately 300 employees. The remaining occupancy liability of
$17.8 million relates to expected future payments under long term leases and is
expected to be paid out in full by 2014. The remaining severance liability of
$0.7 million relates to expected future payments for severance and benefits to
individual employees and will be fully paid out by mid-2005.
Included in the Statements of Consolidated Operations for the first quarters of
fiscal 2004 and 2003 are the sales and operating results of the 6 stores that
were identified for closure as part of this phase of the initiative. The results
of these operations are as follows:
16 Weeks Ended
-----------------------------------
June 19, June 14,
2004 2003
---------------- ---------------
Sales $ 2,433 $ 16,966
================ ==============
Operating loss $ (43) $ (2,479)
================ ==============
At June 19, 2004 and February 28, 2004, approximately $2.9 million and $9.0
million, respectively, of the liability was included in "Other accruals" and the
remaining amount was included in "Other non-current liabilities" on our
Consolidated Balance Sheets.
We have evaluated the liability balance of $18.5 million as of June 19, 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.
7. Retirement Plans and Benefits
Defined Benefit Plans
We provide retirement benefits to certain non-union and union employees under
various defined benefit plans. Our defined benefit pension plans are
non-contributory and benefits under these plans are generally determined based
upon years of service and, for salaried employees, compensation. We fund these
plans in amounts consistent with the statutory funding requirements. The
components of net pension cost were as follows:
For the 16 Weeks Ended
-----------------------------------------------------
June 19, 2004 June 14, 2003
--------------------- ---------------------
U.S. Canada U.S. Canada
--------- --------- ------- ----------
Service cost $ 1,115 $ 2,573 $ 989 $ 2,099
Interest cost 2,617 3,848 2,759 3,557
Expected return on plan assets (3,043) (4,979) (6,490) (4,569)
Amortization of unrecognized net transition asset (4) - (4) (133)
Amortization of unrecognized net prior service cost 29 143 44 101
Amortization of unrecognized net (gain) loss (40) 565 3,347 176
Administrative expenses and other - 81 - 76
--------- --------- -------- ---------
Net pension cost $ 674 $ 2,231 $ 645 $ 1,307
========= ========= ======== =========
Contributions
We previously disclosed in our consolidated financial statements for the year
ended February 28, 2004, that we expected to contribute $2.0 million in cash to
our defined benefit plans in fiscal 2004. As of June 19, 2004, these
contributions have not been made; however, we continue to expect to contribute
this amount during fiscal 2004.
Postretirement Benefits
We provide postretirement health care and life benefits to certain union and
non-union employees. We recognize the cost of providing postretirement benefits
during employees' active service periods. The components of net postretirement
benefits (income) cost are as follows:
For the 16 Weeks Ended
-----------------------------------------------------
June 19, 2004 June 14, 2003
---------------------- ----------------------
U.S. Canada U.S. Canada
--------- --------- --------- ---------
Service cost $ 88 $ 72 $ 72 $ 114
Interest cost 391 197 397 311
Prior service cost (414) (156) (111) (11)
Amortization of gain (84) 105 (406) 91
--------- --------- --------- ---------
Net postretirement benefits (income) cost $ (19) $ 218 $ (48) $ 505
========== ========= ========= =========
8. 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) income and net
(loss) income per share would have been reduced to the pro forma amounts
indicated below:
16 Weeks Ended
----------------------------------
June 14, 2003
June 19, 2004 As Restated
--------------- ----------------
Net (loss) income, as reported: $ (42,846) $ 11,945
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (1,287) (2,121)
-------------- -------------
Pro forma net (loss) income $ (44,133) $ 9,824
============== =============
Net (loss) income per share - basic:
As reported $ (1.11) $ 0.31
Pro forma $ (1.15) $ 0.26
Net income (loss) per share - diluted:
As reported