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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 September 11, 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 October 15, 2004 the Registrant had a total of 38,555,180 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 28 Weeks Ended
-------------------------------------- -------------------------------------
Sept. 6, 2003 Sept. 6, 2003
(As Restated (As Restated
Sept. 11, 2004 See Note 3) Sept. 11, 2004 See Note 3)
------------------ ------------------ ------------------ -----------------
Sales $ 2,490,559 $ 2,464,758 $ 5,770,858 $ 5,693,281
Cost of merchandise sold (1,795,046) (1,773,689) (4,155,349) (4,079,038)
------------ -------------- -------------- -------------
Gross margin 695,513 691,069 1,615,509 1,614,243
Store operating, general and administrative
expense (740,021) (711,111) (1,668,637) (1,644,895)
------------ -------------- --------------- -------------
Loss from operations (44,508) (20,042) (53,128) (30,652)
Interest expense (22,078) (17,945) (48,928) (42,829)
Interest income 768 574 1,609 1,354
Minority interest in earnings of consolidated
franchisees (342) 446 (1,718) 172
------------- -------------- --------------- -------------
Loss from continuing operations before
income taxes (66,160) (36,967) (102,165) (71,955)
Benefit from (provision for) income taxes 1,614 (20,125) (3,844) (5,767)
------------ --------------- --------------- -------------
Loss from continuing operations (64,546) (57,092) (106,009) (77,722)
Discontinued operations (Note 5):
Income (loss) from operations of discontinued
businesses, net of tax provision of $0 and
tax benefit of $15,902 for the
12 weeks ended 9/11/04 and 9/06/03,
respectively, and tax benefit of $0
and $21,696 for the 28 weeks
ended 9/11/04 and 9/06/03, respectively 344 (19,684) (1,039) (29,962)
(Loss) gain on disposal of discontinued
operations, net of tax provision of $0 and
$3,160 for the 12 weeks ended 9/11/04, and
9/06/03, respectively, and $0 and $31,853
for the 28 weeks ended
9/11/04 and 9/06/03, respectively - (6,911) - 43,989
------------ -------------- -------------- -------------
Income (loss) from discontinued operations 344 (26,595) (1,039) 14,027
------------ -------------- -------------- -------------
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - - - (8,047)
------------ -------------- -------------- -------------
Net loss $ (64,202) $ (83,687) $ (107,048) $ (71,742)
============ ============== ============== =============
Net (loss) income per share - basic and diluted:
Continuing operations $ (1.68) $ (1.48) $ (2.75) $ (2.01)
Discontinued operations 0.01 (0.69) (0.03) 0.36
Cumulative effect of a change in accounting
principle - FIN 46-R - - - (0.21)
------------- --------------- -------------- --------------
Net loss per share - basic and diluted $ (1.67) $ (2.17) $ (2.78) $ (1.86)
============= ============== ============== =============
Weighted average number of common shares
outstanding 38,521,685 38,516,670 38,520,732 38,516,176
Common stock equivalents 281,061 635,554 325,304 392,570
------------- -------------- -------------- -------------
Weighted average number of common and
common equivalent shares outstanding 38,802,746 39,152,224 38,846,036 38,908,746
============= ============== ============== =============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Accumulated
Common Stock Additional Other Total
----------------------------- Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit (Loss)/Income Equity
-------------- ------------- ------------- ------------- ----------------- ---------------
28 Week Period Ended
September 11, 2004
- ------------------------
Balance at beginning of period 38,518,905 $ 38,519 $ 459,579 $ (78,100) $ (27,239) $ 392,759
Net loss (107,048) (107,048)
Other comprehensive income 12,651 12,651
Stock options exercised 3,375 3 13 16
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,522,280 $ 38,522 $ 459,592 $ (185,148) $ (14,588) $ 298,378
============ =========== =========== ============ =========== ===========
28 Week Period Ended
September 6, 2003
As Restated - See Note 3
- ------------------------
Balance at beginning of period,
as previously stated 38,515,806 $ 38,516 $ 459,411 $ 61,387 $ (61,123) $ 498,191
Add adjustment for the cumulative
effect on prior years of
applying retroactively the
new method of accounting
for inventory (LIFO to FIFO) 17,462 17,462
------------ ----------- ----------- ----------- ----------- -----------
Balance at beginning of period,
as adjusted 38,515,806 38,516 459,411 78,849 (61,123) 515,653
Net loss (71,742) (71,742)
Other comprehensive income 27,305 27,305
Stock options exercised 1,412 1 11 12
------------ ----------- ----------- ----------- ----------- -----------
Balance at end of period 38,517,218 $ 38,517 $ 459,422 $ 7,107 $ (33,818) $ 471,228
============ =========== =========== ============ =========== ===========
Comprehensive loss
- ------------------
12 Weeks Ended 28 Weeks Ended
-------------------------------------- -------------------------------------
(As Restated (As Restated
See Note 3) See Note 3)
Sept. 11, 2004 Sept. 6, 2003 Sept. 11, 2004 Sept. 6, 2003
------------------ ------------------ ------------------ -----------------
Net loss $ (64,202) $ (83,687) $ (107,048) $ (71,742)
----------- ----------- ----------- -----------
Foreign currency translation adjustment 18,970 (9,520) 12,197 29,972
Net unrealized (loss) gain on derivatives,
net of tax (381) (1,960) 454 (2,667)
------------ ------------ ----------- -----------
Other comprehensive income (loss) 18,589 (11,480) 12,651 27,305
------------ ----------- ----------- -----------
Total comprehensive loss $ (45,613) $ (95,167) $ (94,397) $ (44,437)
=========== =========== =========== ===========
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 12,197 454 - 12,651
----------- ---------- ----------- -----------
Balance at September 11, 2004 $ (11,695) $ 296 $ (3,189) $ (14,588)
============ ========== ============ ============
Balance at February 22, 2003 $ (62,496) $ 3,015 $ (1,642) $ (61,123)
Current period change, As Restated 29,972 (2,667) - 27,305
----------- ----------- ----------- -----------
Balance at September 6, 2003, As Restated $ (32,524) $ 348 $ (1,642) $ (33,818)
============ ========== ============ ============
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
September 11, (As Restated
2004 See Note 3)
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,834 $ 297,008
Accounts receivable, net of allowance for doubtful accounts
of $13,166 and $13,620 at September 11, 2004 and
February 28, 2004, respectively 141,713 171,835
Inventories 728,925 694,120
Prepaid expenses and other current assets 61,812 33,796
------------- --------------
Total current assets 1,209,284 1,196,759
------------- --------------
Non-current assets:
Property:
Property owned 1,380,244 1,405,925
Property leased under capital leases 60,628 65,632
------------- --------------
Property - net 1,440,872 1,471,557
Other assets 120,751 115,500
------------- --------------
Total assets $ 2,770,907 $ 2,783,816
============= ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,274 $ 2,271
Current portion of obligations under capital leases 11,878 15,901
Accounts payable 536,092 480,712
Book overdrafts 107,827 96,273
Accrued salaries, wages and benefits 180,973 177,142
Accrued taxes 71,320 74,698
Other accruals 246,672 236,238
------------- --------------
Total current liabilities 1,157,036 1,083,235
------------- --------------
Non-current liabilities:
Long-term debt 829,770 823,738
Long-term obligations under capital leases 73,167 73,980
Other non-current liabilities 405,964 402,932
Minority interest in consolidated franchisees 6,592 7,172
------------- --------------
Total liabilities 2,472,529 2,391,057
------------- --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock--no par value; authorized - 3,000,000
shares; issued - none - -
Common stock--$1 par value; authorized - 80,000,000
shares; issued and outstanding - 38,522,280 and 38,518,905
shares at September 11, 2004 and February 28, 2004, respectively 38,522 38,519
Additional paid-in capital 459,592 459,579
Accumulated other comprehensive loss (14,588) (27,239)
Accumulated deficit (185,148) (78,100)
-------------- --------------
Total stockholders' equity 298,378 392,759
------------- --------------
Total liabilities and stockholders' equity $ 2,770,907 $ 2,783,816
============= ==============
See Notes to Quarterly Report
The Great Atlantic & Pacific Tea Company, Inc.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
28 Weeks Ended
-------------------------------------------------
Sept. 6, 2003
(As Restated
Sept. 11, 2004 See Note 3)
---------------------- ----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (107,048) $ (71,742)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Asset disposition initiative 1,070 (5,230)
Property impairments 1,679 466
Depreciation and amortization 143,519 150,331
Deferred income taxes (2,236) 4,661
Loss on disposal of owned property 849 100
Gain on sale of discontinued operations - (75,842)
Cumulative effect of change in accounting principle - FIN 46-R - 8,047
Other changes in assets and liabilities:
Decrease (increase) in receivables 31,370 (8,103)
(Increase) decrease in inventories (28,818) 15,323
Increase in prepaid expenses and other current assets (23,647) (31,778)
(Increase) decrease in other assets (11,857) 7,170
Increase in accounts payable 47,917 17,968
(Decrease) increase in accrued salaries, wages, benefits and taxes (1,975) 24,994
Increase in other accruals 7,169 8,769
Decrease in minority interest (798) (1,074)
Decrease in other non-current liabilities (6,514) (21,720)
Other operating activities, net 1,259 (2,028)
----------- ------------
Net cash provided by operating activities 51,939 20,312
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (97,442) (75,864)
Proceeds from disposal of property 10,127 142,064
----------- -----------
Net cash (used in) provided by investing activities (87,315) 66,200
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on revolving lines of credit - (135,000)
Proceeds from long-term borrowings 7,365 16,016
Principal payments on long-term borrowings (33) (1,127)
Principal payments on capital leases (6,458) (7,203)
Increase in book overdrafts 10,983 15,413
Deferred financing fees (955) (414)
Proceeds from exercises of stock options 16 12
----------- -----------
Net cash provided by (used in) financing activities 10,918 (112,303)
Initial impact of FIN 46-R - 20,921
Effect of exchange rate changes on cash and cash equivalents 4,284 8,914
----------- -----------
Net (decrease) increase in cash and cash equivalents (20,174) 4,044
Cash and cash equivalents at beginning of period 297,008 199,014
----------- -----------
Cash and cash equivalents at end of period $ 276,834 $ 203,058
=========== ===========
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 12 and 28 weeks ended September 11,
2004 and September 6, 2003, and the Consolidated Balance Sheets at September 11,
2004 and February 28, 2004, are unaudited and, in the opinion of Management,
contain all adjustments that are of a normal and recurring nature necessary to
present fairly the financial position and results of operations for such
periods. The accompanying consolidated financial statements also include the
impact of adopting Financial Accounting Standards Board ("FASB") Interpretation
No. 46 ("FIN 46-R"), "Consolidation of Variable Interest Entities - an
interpretation of `Accounting Research Bulletin No. 51'," EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor, by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"), and the
change in our method of valuing certain of our inventories from the last-in,
first-out ("LIFO") method to the first-in, first-out ("FIFO") method 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 FASB issued SFAS 132-R, "Employer's Disclosure about
Pensions and Other Postretirement Benefits" ("SFAS 132-R"). SFAS 132-R requires
new annual disclosures about the type of plan assets, investments strategy,
measurement date, plan obligations, and cash flows as well as the components of
the net periodic benefit cost recognized in interim periods. The new annual
disclosure requirements apply to fiscal years ending after December 15, 2003,
except for the disclosure of expected future benefit payments, which must be
disclosed for fiscal years ending after June 15, 2004. Interim period
disclosures are generally effective for interim periods beginning after December
15, 2003. We have included the disclosures required by SFAS 132-R, including
expected future benefit payments, in our consolidated financial statements for
the year ended February 28, 2004. We have also included all newly required
interim period disclosures for the 12 and 28 weeks ended September 11, 2004 and
September 6, 2003 in Note 8 - Retirement Plans and Benefits.
In December 2003, the United States enacted into law the Medicare Prescription
Drug Improvement and Modernization Act of 2003 (the "Act"). The Act establishes
a prescription drug benefit under Medicare, known as "Medicare Part D," and a
Federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB issued FASB Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003" ("FAS 106-2"). Refer to Note 8 - Retirement Plans and
Benefits regarding the impact of adoption of FAS 106-2 in our consolidated
financial statements.
Refer to Note 3 - Restatement and Changes in Accounting regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our consolidated financial statements.
3. Restatement and Changes in Accounting
FIN 46-R
- --------
In December 2003, the FASB issued revised Interpretation No. 46, "Consolidation
of Variable Interest Entities - an interpretation of `Accounting Research
Bulletin No. 51'". FIN 46-R addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity at risk to allow the
entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest. FIN 46-R requires the
consolidation of these entities, known as variable interest entities ("VIE's"),
by the primary beneficiary of the entity. The primary beneficiary is the entity,
if any, that is subject to a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns, or
both. FIN 46-R applies immediately to variable interests in VIE's created or
obtained after January 31, 2003. For variable interests in a VIE created before
February 1, 2003, FIN 46-R applies to VIE's no later than the end of the first
reporting period ending after March 15, 2004 (the quarter ended June 19, 2004
for our Company).
Based upon the new criteria for consolidation of VIE's, we have determined that
(i.) all of our franchised stores do not have sufficient equity at risk to allow
them to finance their own activities, (ii.) we absorb the expected losses of all
of our franchised stores, and (iii.) we have a de facto agency relationship with
the franchisees in which the franchisees cannot sell, transfer, or encumber its
interests in the franchise without our prior approval. Therefore, we are deemed
the primary beneficiary and accordingly have included the franchisee operations
in our consolidated financial statements as of February 23, 2003. As permitted
by FIN 46-R, our Company elected to restate fiscal 2003's consolidated financial
statements for the impact of adopting this interpretation for comparability
purposes.
As of September 11, 2004, we served 65 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 $185 million and
$177 million for the 12 weeks ended September 11, 2004 and September 6, 2003,
respectively, and $439 million and $428 million for the 28 weeks ended September
11, 2004 and September 6, 2003, respectively. In addition, we sublease the
stores and lease the equipment in the stores to the franchisees. We also provide
merchandising, advertising, bookkeeping and other consultative services to the
franchisees for which we receive a fee, which primarily represents the
reimbursement of costs incurred to provide such services.
Prior to February 23, 2003, we held, as assets, inventory notes collateralized
by the inventory in the stores and equipment lease receivables collateralized by
the equipment in the stores. The current portion of the inventory notes and
equipment leases, net of allowance for doubtful accounts, had been included in
"Accounts receivable" on our Consolidated Balance Sheets, while the long-term
portion of the inventory notes and equipment leases had been included in "Other
assets" on our Consolidated Balance Sheets. The repayment of these inventory
notes and equipment leases had been dependent upon positive operating results of
the stores. To the extent that the franchisees incurred operating losses, we had
established an allowance for doubtful accounts. We assessed the sufficiency of
the allowance on a store by store basis based upon the operating results and the
related collateral underlying the amounts due from the franchisees. In the event
of default by a franchisee, we reserved the option to reacquire the inventory
and equipment at the store and operate the franchise as a corporate owned store.
The cumulative effect adjustment of $8.0 million primarily represents the
difference between consolidating these entities as of February 23, 2003 and the
allowance for doubtful accounts that was provided for these franchises at that
date.
Also refer to Note 11 - Commitments and Contingencies regarding our settlement
of a class action lawsuit relating to our Canadian franchise business.
EITF 03-10
- ----------
In November 2003, the Emerging Issues Task Force confirmed as a consensus EITF
Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor, by
Resellers to Sales Incentives Offered to Consumers by Manufacturers". The
provisions of EITF 03-10 became effective for our Company in the first quarter
of fiscal 2004. EITF 03-10 provides guidance for the reporting of vendor
consideration received by a reseller as it relates to manufacturers' incentives,
such as rebates or coupons, tendered by consumers. Vendor incentives should be
included in revenues only if defined criteria are met. As such, our Company will
continue to record as part of revenues manufacturers' coupons that can be
presented at any retailer that accepts coupons. However, in the case of vendor
incentives that can only be redeemed at a Company retail store, such
consideration would be recorded as a decrease in cost of sales. As permitted by
the transition provisions of EITF 03-10, we have reclassified prior year's sales
and cost of sales for comparative purposes in this report. Implementation of
EITF 03-10 has no effect on gross margin dollars, net income or cash flows, but
certain vendor coupons or rebates that had been recorded in sales in the past
are currently being recognized as a reduction of cost of sales. The
implementation of EITF 03-10 has resulted in decreases in both sales and cost of
sales of $12.3 million and $10.1 million for the 12 weeks ended September 11,
2004 and September 6, 2003, respectively, and $27.6 million and $24.8 million
for the 28 weeks ended September 11, 2004 and September 6, 2003, respectively.
Inventory
- ---------
At February 28, 2004, approximately 6% of our inventories, relating to all
merchandise sold in our Waldbaums and Farmer Jack banners, that were acquired
during the past two decades, were valued at the lower of cost or market using
the LIFO method. During the first quarter of fiscal 2004, we changed our method
of valuing these inventories from the LIFO method to the FIFO method. We believe
that the new method is preferable because the FIFO method produces an inventory
value on our Consolidated Balance Sheets that better approximates current costs.
In addition, under FIFO, the flow of costs is generally more consistent with our
physical flow of goods. The adoption of the FIFO method will enhance
comparability of our financial statements by conforming all of our inventories
to the same accounting method. Our Company applied this change by retroactively
restating our consolidated financial statements as required by Accounting
Principles Board Opinion No. 20, "Accounting Changes," which resulted in an
increase to retained earnings as of February 23, 2003 of approximately $17.5
million.
Overall Impact
- --------------
The following tables reflect the impact of the adoption of (i.) FIN 46-R on our
Canadian operations, including the impact of all elimination entries relating to
the consolidation of the franchisees, (ii.) EITF 03-10 on our U.S. ($6.4 million
and $14.8 million for the 12 and 28 weeks ended September 11, 2004,
respectively, as compared to $7.5 million and $18.2 million for the 12 and 28
weeks ended September 6, 2003, respectively) and Canadian ($5.9 million and
$12.9 million for the 12 and 28 weeks ended September 11, 2004, respectively, as
compared to $2.6 million and $6.6 million for the 12 and 28 weeks ended
September 6, 2003, respectively) operations, and (iii.) the change in our method
of valuing certain of our inventories from the LIFO method to the FIFO method on
our U.S. operations in our 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 $1.1 million impact on our Consolidated
Statement of Operations for both the 12 and 28 weeks ended September 6, 2003.
Consolidated
A&P for the Consolidated
12 weeks ended Impact of Impact of A&P for the
Sept. 11, 2004 adoption of adoption of 12 weeks ended
prior to changes FIN 46-R EITF 03-10 Sept. 11, 2004
---------------- ------------- ------------- --------------
Sales $ 2,467,688 $ 35,196 $ (12,325) $ 2,490,559
Cost of merchandise sold (1,806,601) (770) 12,325 (1,795,046)
------------- -------------- ------------- -------------
Gross margin 661,087 34,426 - 695,513
Store operating, general and administrative
expense (707,541) (32,480) - (740,021)
------------- ------------- ------------- -------------
(Loss) income from operations (46,454) 1,946 - (44,508)
Interest expense (22,078) - - (22,078)
Interest income 1,809 (1,041) - 768
Minority interest in earnings of consolidated
franchisees - (342) - (342)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (66,723) 563 - (66,160)
Benefit from (provision for) income taxes 1,944 (330) - 1,614
------------- ------------- ------------- -------------
(Loss) income from continuing operations (64,779) 233 - (64,546)
Discontinued operations:
Income from operations of discontinued
businesses, net of tax 344 - - 344
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Income from discontinued operations 344 - - 344
------------- ------------- ------------- -------------
Net (loss) income $ (64,435) $ 233 $ - $ (64,202)
============= ============= ============= =============
Depreciation $ (61,249) $ (1,148) $ - $ (62,397)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Change from Restated for the
12 weeks ended adoption of adoption of LIFO to 12 weeks ended
Sept. 6, 2003 FIN 46-R EITF 03-10 FIFO Sept. 6, 2003
--------------- ---------------- --------------- ---------------- -----------------
Sales $ 2,443,700 $ 31,176 $ (10,118) $ - $ 2,464,758
Cost of merchandise sold (1,784,774) (92) 10,118 1,059 (1,773,689)
-------------- -------------- ------------- ------------- -------------
Gross margin 658,926 31,084 - 1,059 691,069
Store operating, general
and administrative expense (679,839) (31,272) - - (711,111)
-------------- ------------- ------------- ------------- -------------
(Loss) income from operations (20,913) (188) - 1,059 (20,042)
Interest expense (17,945) - - - (17,945)
Interest income 1,773 (1,199) - - 574
Minority interest in earnings
of consolidated franchisees - 446 - - 446
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (37,085) (941) - 1,059 (36,967)
Provision for income taxes (20,010) (115) - - (20,125)
-------------- -------------- ------------- ------------- --------------
(Loss) income from continuing
operations (57,095) (1,056) - 1,059 (57,092)
Discontinued operations:
Loss from operations of
discontinued businesses,
net of tax (19,684) - - - (19,684)
Loss on disposal of
discontinued operations,
net of tax (6,911) - - - (6,911)
-------------- ------------- ------------- ------------- --------------
Loss from discontinued
operations (26,595) - - - (26,595)
-------------- ------------- ------------- ------------- --------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - - - - -
------------- ------------- ------------- ------------- -------------
Net (loss) income $ (83,690) $ (1,056) $ - $ 1,059 $ (83,687)
============== ============== ============= ============= ==============
Depreciation $ (61,596) $ (1,407) $ - $ - $ (63,003)
-------------- ------------- ------------- ------------- -------------
Consolidated
A&P for the Consolidated
28 weeks ended Impact of Impact of A&P for the
Sept. 11, 2004 adoption of adoption of 28 weeks ended
prior to changes FIN 46-R EITF 03-10 Sept. 11, 2004
---------------- ------------- ------------- --------------
Sales $ 5,720,343 $ 78,172 $ (27,657) $ 5,770,858
Cost of merchandise sold (4,186,498) 3,492 27,657 (4,155,349)
------------- ------------- ------------- -------------
Gross margin 1,533,845 81,664 - 1,615,509
Store operating, general and administrative
expense (1,595,400) (73,237) - (1,668,637)
------------- ------------- ------------- -------------
(Loss) income from operations (61,555) 8,427 - (53,128)
Interest expense (48,928) - - (48,928)
Interest income 4,103 (2,494) - 1,609
Minority interest in earnings of consolidated
franchisees - (1,718) - (1,718)
------------- ------------- ------------- -------------
(Loss) income from continuing operations
before income taxes (106,380) 4,215 - (102,165)
Provision for income taxes (2,470) (1,374) - (3,844)
------------- ------------- ------------- -------------
(Loss) income from continuing operations (108,850) 2,841 - (106,009)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,039) - - (1,039)
Gain on disposal of discontinued operations,
net of tax - - - -
------------- ------------- ------------- -------------
Loss from discontinued operations (1,039) - - (1,039)
-------------- ------------- ------------- -------------
Net (loss) income $ (109,889) $ 2,841 $ - $ (107,048)
============= ============= ============= =============
Depreciation $ (140,923) $ (2,596) $ - $ (143,519)
------------- ------------- ------------- -------------
Consolidated
A&P as Consolidated
previously A&P as
reported for the Impact of Impact of Change from Restated for the
28 weeks ended adoption of adoption of LIFO to 28 weeks ended
Sept. 6, 2003 FIN 46-R EITF 03-10 FIFO Sept. 6, 2003
--------------- ---------------- --------------- ---------------- -----------------
Sales $ 5,647,530 $ 70,585 $ (24,834) $ - $ 5,693,281
Cost of merchandise sold (4,109,435) 4,504 24,834 1,059 (4,079,038)
-------------- ------------- ------------- ------------- -------------
Gross margin 1,538,095 75,089 - 1,059 1,614,243
Store operating, general
and administrative expense (1,571,467) (73,428) - - (1,644,895)
-------------- ------------- ------------- ------------- -------------
(Loss) income from operations (33,372) 1,661 - 1,059 (30,652)
Interest expense (42,829) - - - (42,829)
Interest income 3,912 (2,558) - - 1,354
Minority interest in earnings
of consolidated franchisees - 172 - - 172
------------- ------------- ------------- ------------- -------------
(Loss) income from continuing
operations before income taxes (72,289) (725) - 1,059 (71,955)
Provision for income taxes (5,148) (619) - - (5,767)
-------------- -------------- ------------- ------------- --------------
(Loss) income from continuing
operations (77,437) (1,344) - 1,059 (77,722)
Discontinued operations:
Loss from operations of
discontinued businesses,
net of tax (29,962) - - - (29,962)
Gain on disposal of
discontinued operations,
net of tax 43,989 - - - 43,989
------------- ------------- ------------- ------------- -------------
Income from discontinued
operations 14,027 - - - 14,027
------------- ------------- ------------- ------------- -------------
Cumulative effect of change in
accounting principle -
FIN 46-R, net of tax - (8,047) - - (8,047)
------------- -------------- ------------- ------------- --------------
Net (loss) income $ (63,410) $ (9,391) $ - $ 1,059 $ (71,742)
============== ============== ============= ============= ==============
Depreciation $ (145,692) $ (3,088) $ - $ - $ (148,780)
-------------- ------------- ------------- ------------- -------------
Consolidated
A&P at Impact of Consolidated
September 11, 2004 adoption of A&P at
prior to adoption FIN 46-R September 11, 2004
-------------------- -------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 251,422 $ 25,412 $ 276,834
Accounts receivable 169,166 (27,453) 141,713
Inventories 702,887 26,038 728,925
Prepaid expenses and other current assets 60,827 985 61,812
------------------ ------------------ ------------------
Total current assets 1,184,302 24,982 1,209,284
------------------ ------------------ ------------------
Non-current assets:
Property:
Property owned 1,361,466 18,778 1,380,244
Property leased under capital leases, net 60,628 - 60,628
------------------ ------------------ ------------------
Property, net 1,422,094 18,778 1,440,872
Other assets 155,898 (35,147) 120,751
------------------ ------------------ ------------------
Total assets $ 2,762,294 $ 8,613 $ 2,770,907
================== ================== ==================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,274 $ - $ 2,274
Current portion of obligations under capital
leases 11,878 - 11,878
Accounts payable 535,515 577 536,092
Book overdrafts 107,827 - 107,827
Accrued salaries, wages and benefits 178,396 2,577 180,973
Accrued taxes 66,035 5,285 71,320
Other accruals 245,731 941 246,672
------------------ ------------------ ------------------
Total current liabilities 1,147,656 9,380 1,157,036
------------------ ------------------ ------------------
Non-current liabilities:
Long-term debt 829,770 - 829,770
Long-term obligations under capital leases 73,167 - 73,167
Other non-current liabilities 406,085 (121) 405,964
Minority interest in consolidated franchisees - 6,592 6,592
------------------ ------------------ ------------------
Total liabilities 2,456,678 15,851 2,472,529
------------------ ------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,522 - 38,522
Additional paid-in capital 459,592 - 459,592
Accumulated other comprehensive loss (14,258) (330) (14,588)
Accumulated deficit (178,240) (6,908) (185,148)
------------------ ------------------ ------------------
Total stockholders' equity 305,616 (7,238) 298,378
------------------ ------------------ ------------------
Total liabilities and stockholders'equity $ 2,762,294 $ 8,613 $ 2,770,907
================== ================== ==================
Consolidated
Consolidated Impact of Impact of A&P as
A&P at adoption of change from Restated at
February 28, 2004 FIN 46-R LIFO to FIFO February 28, 2004
----------------- ------------------ ------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 276,151 $ 20,857 $ - $ 297,008
Accounts receivable 190,737 (18,902) - 171,835
Inventories 654,344 22,491 17,285 694,120
Prepaid expenses and other current assets 33,651 145 - 33,796
----------- ----------- ----------- -----------
Total current assets 1,154,883 24,591 17,285 1,196,759
----------- ----------- ----------- -----------
Non-current assets:
Property:
Property owned 1,383,702 22,223 - 1,405,925
Property leased under capital leases, net 65,632 - - 65,632
----------- ----------- ----------- -----------
Property, net 1,449,334 22,223 - 1,471,557
Other assets 154,904 (39,404) - 115,500
----------- ----------- ----------- -----------
Total assets $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,271 $ - $ - $ 2,271
Current portion of obligations under capital
leases 15,901 - - 15,901
Accounts payable 477,536 3,176 - 480,712
Book overdrafts 96,273 - - 96,273
Accrued salaries, wages and benefits 176,812 330 - 177,142
Accrued taxes 69,217 5,481 - 74,698
Other accruals 235,910 328 - 236,238
----------- ----------- ----------- -----------
Total current liabilities 1,073,920 9,315 - 1,083,235
----------- ----------- ----------- -----------
Non-current liabilities:
Long-term debt 823,738 - - 823,738
Long-term obligations under capital leases 73,980 - - 73,980
Other non-current liabilities 401,659 1,273 - 402,932
Minority interest in consolidated franchisees - 7,172 - 7,172
----------- ----------- ----------- -----------
Total liabilities 2,373,297 17,760 - 2,391,057
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - - -
Common stock 38,519 - - 38,519
Additional paid-in capital 459,579 - - 459,579
Accumulated other comprehensive loss (26,637) (602) - (27,239)
Accumulated deficit (85,637) (9,748) 17,285 (78,100)
----------- ----------- ----------- -----------
Total stockholders' equity 385,824 (10,350) 17,285 392,759
----------- ------------ ----------- -----------
Total liabilities and stockholders'equity $ 2,759,121 $ 7,410 $ 17,285 $ 2,783,816
=========== =========== =========== ===========
4. Income Taxes
The income tax provision recorded for the 28 weeks ended September 11, 2004 and
September 6, 2003 reflects our estimated expected annual tax rates applied to
our respective domestic and foreign financial results.
SFAS No. 109 "Accounting for Income Taxes" ("SFAS 109") provides that a deferred
tax asset is recognized for temporary differences that will result in deductible
amounts in future years and for carryforwards. In addition, SFAS 109 requires
that a valuation allowance be recognized if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax asset will not be realized. Based upon our continued assessment of the
realization of our U.S. deferred tax asset and our historic cumulative losses,
we concluded that it was appropriate to record a valuation allowance in an
amount that would reduce our U.S. deferred tax asset to the amount that is more
likely than not to be realized. For the 12 and 28 weeks ended September 11,
2004, the valuation allowance was increased by $27.0 million and $40.3 million,
respectively. To the extent that our U.S. operations generate sufficient taxable
income in future periods, we will reverse the income tax valuation allowance. In
future periods, U.S. earnings or losses will not be tax effected until such time
as the certainty of future tax benefits can be reasonably assured.
Further, in accordance with SFAS 109, income from discontinued operations can be
tax effected under certain circumstances. As a result, we taxed the income from
discontinued operations for the 28 weeks ended September 6, 2003 at our
effective tax rate. The tax provision for discontinued operations of $10.2
million for the 28 weeks ended September 6, 2003 was completely offset by a tax
benefit from continuing operations. Similarly, the tax benefit for discontinued
operations of $12.7 million for the 12 weeks ended September 6, 2003 was
completely offset by a tax provision for continuing operations.
For the second quarter of fiscal 2004, our effective income tax rate of 2.4%
changed from the effective income tax rate of 54.5% in the second quarter of
fiscal 2003 as follows:
12 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax (Benefit) Effective
Benefit Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (1,035) 1.6% $ (14,117) 38.2%
Canada 2,649 (4.0%) (6,008) 16.3%
--------------- ---------------- -------------- ----------------
$ 1,614 (2.4%) $ (20,125) 54.5%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
provision recognized from continuing operations. As discussed above, $12.7
million of provision was recognized in the second quarter of fiscal 2003 as
compared to the second quarter of fiscal 2004, where no provision was
recognized. The remaining provisions recorded in the U.S. of $1.0 million and
$1.4 million for the second quarters of fiscal 2004 and 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations in
the second quarter of fiscal 2004 as compared to the second quarter of fiscal
2003.
For the 28 weeks ended September 11, 2004, our effective income tax rate of 3.8%
changed from the effective income tax rate of 8.0% for the 28 weeks ended
September 6, 2003 as follows:
28 Weeks Ended
--------------------------------------------------------------------
September 11, 2004 September 6, 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax Benefit Effective
Benefit Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
United States $ (2,415) 2.4% $ 7,907 (11.0%)
Canada (1,429) 1.4% (13,674) 19.0%
--------------- ---------------- --------------- ----------------
$ (3,844) 3.8% $ (5,767) 8.0%
=============== ================ =============== ================
The decrease in our effective tax rate was primarily due to the absence of a tax
benefit recognized from continuing operations. As discussed above, $10.2 million
of benefit was recognized for the 28 weeks ended September 6, 2003 as compared
to the 28 weeks ended September 11, 2004, where no benefit was recognized. The
remaining provisions recorded in the U.S. of $2.4 million and $2.3 million for
the 28 weeks ended September 11, 2004 and September 6, 2003, respectively,
represent state and local taxes. In addition, the decrease in our effective tax
rate resulted from the impact of the higher mix of Canadian loss from continuing
operations as a percentage of our Company's loss from continuing operations for
the 28 weeks ended September 11, 2004 as compared to the 28 weeks ended
September 6, 2003.
At September 11, 2004 and February 28, 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 $16.6 million and $8.9 million,
respectively, and a net non-current deferred tax liability which is included in
"Other non-current liabilities" on our Consolidated Balance Sheet totaling $27.9
million and $22.5 million, respectively.
5. Long Lived Assets
We review the carrying values of our long-lived assets for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. Such review is primarily based upon groups of
assets and the undiscounted estimated future cash flows from such assets to
determine if the carrying value of such assets is recoverable from their
respective cash flows. If such review indicates an impairment exists, we measure
such impairment on a discounted basis using a probability weighted approach and
a risk free rate.
Such review may also be based upon appraisals of or offers for our long-lived
assets we receive in the normal course of business. During both the 12 and 28
weeks ended September 11, 2004, we recorded an impairment loss of $0.9 million
related to certain idle property that, based upon new information received about
such assets, including an appraisal and an offer, was impaired and written down
to its net realizable value. This amount was included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations. There were no such amounts recorded during the 12 and 28 weeks ended
September 6, 2003.
We also review assets in stores planned for closure or conversion for impairment
upon determination that such assets will not be used for their intended useful
life. During both the 12 and 28 weeks ended September 11, 2004, we recorded
impairment losses on property, plant and equipment of $0.8 million compared to
$4.2 million and $19.4 million during the 12 and 28 weeks ended September 6,
2003, respectively. Of these amounts, $0.8 million in both fiscal 2004 periods
presented and $0.5 million in both fiscal 2003 periods presented related to
United States stores that were or will be closed in the normal course of
business and are included in "Store operating, general and administrative
expense" in our Consolidated Statements of Operations. The remaining impairment
losses we recorded of $3.7 million and $18.9 million during the 12 and 28 weeks
ended September 6, 2003, respectively, related to stores closed as a result of
our exit of the Kohl's business and are included in our Consolidated Statements
of Operations under the caption "(Loss) gain on disposal of discontinued
operations, net of tax" (see Note 6 of our Consolidated Financial Statements).
The effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
If current operating levels and trends continue, there may be additional future
impairments on long-lived assets, including the potential for impairment of
assets that are held and used.
6. Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core assets,
including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the Milwaukee,
Wisconsin market, where our remaining 23 Kohl's stores were located, as well as
our Eight O'Clock Coffee business, through the sale and/or disposal of these
assets.
Upon the decision to sell these stores, we applied the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") to these properties
held for sale. SFAS 144 requires properties held for sale to be classified as a
current asset and valued on an asset-by-asset basis at the lower of carrying
amount or fair value less costs to sell. In applying those provisions, we
considered, where available, the binding sale agreements related to these
properties as an estimate of the assets' fair value. As a result of the adoption
of SFAS 144, $22.1 million in net property, plant and equipment was reclassified
as held for sale as of February 22, 2003, and included in "Prepaid expenses and
other current assets" on our Consolidated Balance Sheets. 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 stores to be disposed of are replaced by other stores in the same
geographic district, we would not include the stores as discontinued operations.
Amounts in the financial statements and related notes for all periods shown have
been reclassified to reflect the discontinued operations. Summarized below are
the operating results for these discontinued businesses, which are included in
our Consolidated Statements of Operations, under the caption "Income (loss) from
operations of discontinued businesses, net of tax" for the 12 and 28 weeks
ending September 11, 2004 and September 6, 2003, and the results of disposing
these businesses which are included in "(Loss) gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations for 12 and
28 weeks ending September 11, 2004 and September 6, 2003.
12 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 699 (352) (3) 344
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 699 (352) (3) 344
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 699 $ (352) $ (3) $ 344
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Non-accruable closing costs $ 702 $ (192) $ (3) $ 507
Interest accretion on present value of
future occupancy costs (3) (160) - (163)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 699 $ (352) $ (3) $ 344
--------------- ---------------- --------------- -------------
12 Weeks ended September 6, 2003
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ - $ 38,494 $ 18,901 $ 57,395
Operating expenses (474) (79,500) (13,007) (92,981)
------------- ---------------- --------------- --------------
(Loss) income from operations of
discontinued businesses, before
tax (474) (41,006) 5,894 (35,586)
Tax benefit (provision) 212 18,324 (2,634) 15,902
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (262) $ (22,682) $ 3,260 $ (19,684)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (2,500) $ - $ (2,500)
Occupancy related costs - (25,077) - (25,077)
Severance and benefits - (7,138) - (7,138)
Non-accruable inventory costs - (692) - (692)
Non-accruable closing costs (474) 451 (320) (343)
--------------- ---------------- --------------- ----------------
Total disposal related costs $ (474) $ (34,956) $ (320) $ (35,750)
--------------- ---------------- --------------- ----------------
Loss on disposal of
discontinued businesses
Gain on sale of fixed assets $ - $ - $ - $ -
Fixed asset impairments - (3,751) - (3,751)
Loss on disposal of
--------------- ---------------- --------------- ----------------
discontinued businesses, before
tax - (3,751) - (3,751)
Tax provision - (3,160) - (3,160)
--------------- ---------------- --------------- ----------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (6,911) $ - $ (6,911)
=============== ================ =============== ================
28 Weeks ended September 11, 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 328 (774) (593) (1,039)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 328 (774) (593) (1,039)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 328 $ (774) $ (593) $ (1,039)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
Severance and benefits $ (326) $ - $ - $ (326)
Non-accruable closing costs 660 (390) (593) (323)
Interest accretion on present value
of future occupancy costs (6) (384) - (390)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 328 $ (774) $ (593) $ (1,039)
--------------- ---------------- --------------- -------------
28 Weeks ended September 6, 2003
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 44,073 $ 200,028
Operating expenses (43,464) (175,865) (32,357) (251,686)
------------- --------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (10,738) (52,636) 11,716 (51,658)
Tax benefit (provision) 3,912 22,517 (4,733) 21,696
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (6,826) $ (30,119) $ 6,983 $ (29,962)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (25,387) - (29,380)
Non-accruable inventory costs - (1,989) - (1,989)
Non-accruable closing costs (3,114) (1,837) (1,443) (6,394)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,635) (8,415) - (11,050)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (8,097) $ (44,128) $ (1,443) $ (53,668)
--------------- ---------------- --------------- --------------
28 Weeks ended September 6, 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Gain (loss) from disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 8,827 $ - $ 94,810
Fixed asset impairments - (18,968) - (18,968)
Gain (loss) on disposal of
------------- ------------- ------------- ----------------
discontinued businesses, before
tax 85,983 (10,141) - 75,842
Tax provision (30,997) (856) - (31,853)
------------- ---------------- ------------- ----------------
Gain (loss) disposal of discontinued
businesses, net of tax $ 54,986 $ (10,997) $ - $ 43,989
============= ================ ============= ================
Northern New England
- --------------------
As previously stated, as part of our strategic plan we decided, in February
2003, to exit the northern New England market by closing and/or selling 21
stores in that region in order to focus on our core geographic markets. As a
result of these sales, we generated proceeds of $117.5 million, resulting in a
gain of $86.0 million ($55.0 million after tax). This gain was included in
"(Loss) gain on disposal of discontinued operations, net of tax" on our
Consolidated Statements of Operations for the 28 weeks ended September 6, 2003.
In addition, as part of the exit of this business, we reported a loss of $0.5
million ($0.3 million after tax) and $10.7 million ($6.8 million after tax) for
the 12 and 28 weeks ended September 6, 2003, respectively, which were included
in "Income (loss) from operations of discontinued businesses, net of tax" on our
Consolidated Statements of Operations for those periods. During the 12 and 28
weeks ended September 11, 2004, we recorded gains of $0.7 million and $0.3
million, respectively, primarily due to favorable results of winding down this
business.
The following table summarizes the reserve activity related to the exit of the
northern New England market since the charge was recorded:
Severance
and
Occupancy Benefits Total
--------- ---------- -------
Fiscal 2003 charge (1) $3,993 $2,670 $6,663
Additions (2) 6 - 6
Utilization (3) (3,547) (2,612) (6,159)
-------- ------- --------
Balance at
February 28, 2004 452 58 510
Additions (2) 6 326 332
Utilization (3) (25) (384) (409)
-------- ------- --------
Balance at
September 11, 2004 $ 433 $ - $ 433
======= ====== ========
(1) The fiscal 2003 charge to occupancy consists of $4.0 million related to
future expected occupancy costs such as rent, common area maintenance and
real estate taxes. The addition to occupancy represents 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.
(2) The additions to occupancy represents the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(3) Occupancy utilization represents vacancy related payments for closed
locations. Severance and benefits utilization represents payments made to
terminated employees during the period.
As of September 11, 2004, we had paid approximately $3.0 million in severance
and benefits costs, which resulted from the termination of approximately 300
employees.
At September 11, 2004, $0.1 million of the northern New England exit reserves
was included in "Other accruals" and $0.3 million was included in "Other
non-current liabilities" on our Consolidated Balance Sheets. We have evaluated
the liability balance of $0.4 million as of September 11, 2004 based upon
current available information and have concluded that it is appropriate. We will
continue to monitor the status of the vacant properties and adjustments to the
reserve balance may be recorded in the future, if necessary.
Kohl's Market
- -------------
As previously stated, as part of our strategic plan we decided to exit the
Madison and Milwaukee, Wisconsin markets, which comprised our Kohl's banner.
As a result of the Madison sales, we generated proceeds of $20.1 million,
resulting in a gain of $8.8 million ($5.6 million after tax). This gain was
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for the 28 weeks ended September 6,
2003.
As a result of the decision to exit Milwaukee, we estimated the assets' fair
market value using a probability weighted average approach based upon expected
proceeds and recorded impairment losses on the property, plant and equipment at
the remaining Kohl's locations of $3.8 million and $18.9 million during the 12
and 28 weeks ended September 6, 2003, respectively. This net loss is also
included in "(Loss) gain on disposal of discontinued operations, net of tax" on
our Consolidated Statements of Operations for those periods.
As a result of the closure and impending sale of certain Milwaukee locations, we
recorded exit costs net of the results of these businesses while they were open
of $41.0 million and $52.6 million for the 12 and 28 weeks ended September 6,
2003. These charges are detailed in the tables above and are included in "Income
(loss) from operations of discontinued businesses, net of tax" in our
Consolidated Statements of Operations for those periods. During the 12 and 28
weeks ended September 11, 2004, we recorded charges of $0.4 million and $0.8
million, respectively, primarily due to residual costs of winding down this
business.
The following table summarizes the reserve activity since the charge was
recorded:
Severance
and Fixed
Occupancy Benefits Assets Total
--------- ----------- ----------- -----------
Fiscal 2003 charge (1) $25,487 $13,062 $18,968 $57,517
Additions (2) 352 - - 352
Utilization (3) (5,342) (8,228) (18,968) (32,538)
Adjustments (4) (1,458) - - (1,458)
-------- ---------------- -------- ---------
Balance at
February 28, 2004 19,039 4,834 - 23,873
Additions (2) 384 - - 384
Utilization (3) (2,309) (1,614) - (3,923)
-------- -------- -------- --------
Balance at
September 11, 2004 $17,114 $ 3,220 $ - $20,334
======== ======== ======== ========
(1) The fiscal 2003 charge to occupancy consists of $25.5 million related to
future occupancy costs such as rent, common area maintenance and real
estate taxes. The fiscal 2003 charge to severance and benefits of $13.1
million related to severance costs of $6.6 million and costs for future
obligations for early withdrawal from multi-employer union pension plans
and a health and welfare plan of $6.5 million. The fiscal 2003 charge to
property of $18.9 million represents the impairment losses at certain
Kohl's locations.
(2) The additions to occupancy represents the interest accretion on future
occupancy costs which were recorded at present value at the time of the
original charge.
(3) Occupancy utilization represents vacancy related payments for closed
locations 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.
As of September 11, 2004, we had paid approximately $9.8 million of the total
original severance and benefits charge recorded, which resulted from the
termination of approximately 2,000 employees. The remaining severance liability
relates to future obligations for early withdrawal from multi-employer union
pension plans which will be paid by mid-2006, and individual severance payments
which will be paid by the end of fiscal 2004.
At September 11, 2004, $6.7 million of the Kohl's exit reserves was included in
"Other accruals" and $13.6 million was included in "Other non-current
liabilities" on our Consolidated Balance Sheets. We have evaluated the liability
balance of $20.3 million as of September 11, 2004 based upon current available
information and have concluded that it is appropriate. We will continue to
monitor the status of the vacant properties and adjustments to the reserve
balance may be recorded in the future, if necessary.
Eight O'Clock Coffee
- --------------------
During the second half of fiscal 2003, we completed the sale of our Eight
O'Clock Coffee business, generating gross proceeds of $107.5 million and a gain
of $85.0 million ($49.3 million after tax). The sale of the coffee business also
included a contingent note for up to $20.0 million, the value and payment of
which is based upon certain elements of the future performance of the Eight
O'Clock Coffee business and therefore is not included in the gain. During the 12
and 28 weeks ended September 6, 2003, we incurred costs of $0.3 million and $1.4
million related to the pending sale. During the 12 and 28 weeks ended September
11, 2004, we incurred costs of nil and $0.6 million related to winding down this
business subsequent to the sale during the latter half of fiscal 2003.
7. Asset Disposition Initiative
Overview
- --------
In fiscal 1998 and 1999, we announced a plan to close two warehouse facilities
and a coffee plant in the U.S., a bakery plant in Canada and 166 stores
including the exit of the Richmond, Virginia and Atlanta, Georgia markets
(Project Great Renewal). In addition, during the third quarter of fiscal 2001,
we announced that certain underperforming operations, including 39 stores (30 in
the United States and 9 in Canada) and 3 warehouses (2 in the United States and
1 in Canada) would be closed and/or sold, and certain administrative
streamlining would take place (2001 Asset Disposition). During the fourth
quarter of fiscal 2003, we announced an initiative to close 6 stores and convert
13 stores to our Food Basics banner in the Detroit, Michigan and Toledo, Ohio
markets (Farmer Jack Restructuring).
Presented below is a reconciliation of the charges recorded on our Consolidated
Balance Sheets, Consolidated Statements of Operations and Consolidated
Statements of Cash Flows for the 12 and 28 weeks ended September 11, 2004 and
September 6, 2003. Present value ("PV") interest represents interest accretion
on future occupancy costs which were recorded at present value at the time of
the original charge. Non-accruable items represent charges related to the
restructuring that are required to be expensed as incurred in accordance with
SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities".
12 Weeks Ended September 11, 2004 12 Weeks Ended September 6, 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 $ 446 $ 568 $ 158 $ 1,172 $ 592 $ 714 $ - $ 1,306
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 446 568 158 1,172 592 714 - 1,306
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - - - - 422 - 422
Inventory markdowns - - - - - - - -
Closing costs - - 9 9 - - - -
-------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Total non-accruable
items - - 9 9 - 422 - 422
-------- ----------- ----------- --------- ----------- ----------- ----------- -----------
Less PV interest (446) (568) (158) (1,172) (592) (714) - (1,306)
--------- ----------- ------------ ---------- ------------ ----------- ----------- -----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 9 $ 9 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= =========== =========== =========== ===========
28 Weeks Ended September 11, 2004 28 Weeks Ended September 6, 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ------------ ------------- --------- ----------- ----------- ------------- ---------
Balance Sheet accruals
PV interest $ 1,076 $ 1,349 $ 380 $ 2,805 $ 1,420 $ 1,700 $ - $ 3,120
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 1,076 1,349 380 2,805 1,420 1,700 - 3,120
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - - - - - (6,778) - (6,778)
Additional severance - - - - - 955 - 955
Adjustments to
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
balance sheets - - - - - (5,823) - (5,823)
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - - 90 90 - 422 - 422
Inventory markdowns - 291 291 - - - -
Closing costs - - 689 689 - - - -
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Total non-accruable
items - - 1,070 1,070 - 422 - 422
-------- ----------- ----------- --------- ------------- ----------- ----------- ---------
Less PV interest (1,076) (1,349) (380) (2,805) (1,420) (1,700) - (3,120)
--------- ----------- ------------ ---------- ------------- ------------ ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ - $ 1,070 $ 1,070 $ - $ (5,401) $ - $ (5,401)
======== =========== =========== ========= ============ =========== =========== ========
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 September 11, 2004, we
had closed all stores and facilities related to this phase of the initiative.
The following table summarizes the activity related to this phase of the
initiative over the last three fiscal years:
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 24, 2001 $ 82,189 $ 672 $ 82,861 $ 2,721 $ - $ 2,721 $ 84,910 $ 672 $ 85,582
Addition (1) 3,500 318 3,818 - - - 3,500 318 3,818
Utilization (2) (22,887) (415) (23,302) (544) - (544) (23,431) (415) (23,846)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 23, 2002 $ 62,802 $ 575 $ 63,377 2,177 $ - $ 2,177 64,979 575 65,554
Addition (1) 2,861 298 3,159 - - - 2,861 298 3,159
Utilization (2) (13,230) (386) (13,616) (370) - (370) (13,600) (386) (13,986)
Adjustments (3) (3,645) - (3,645) 639 - 639 (3,006) - (3,006)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 48,788 $ 487 $ 49,275 $ 2,446 $ - $ 2,446 $ 51,234 $ 487 $ 51,721
Addition (1) 2,276 372 2,648 - - - 2,276 372 2,648
Utilization (2) (19,592) (407) (19,999) (289) - (289) (19,881) (407) (20,288)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 31,472 $ 452 $ 31,924 $ 2,157 $ - $ 2,157 $ 33,629 $ 452 $ 34,081
Addition (1) 1,063 13 1,076 - - - 1,063 13 1,076
Utilization (2) (3,285) (85) (3,370) (433) - (433) (3,718) (85) (3,803)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
Sept. 11, 2004 $ 29,250 $ 380 $ 29,630 $ 1,724 $ - $ 1,724 $ 30,974 $ 380 $ 31,354
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.8 million, $3.2 million and $2.6
million during fiscal 2001, 2002 and 2003, respectively, and $1.1 million
during the 28 weeks ended September 11, 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 $3.4 million during the 28
weeks ended September 11, 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
$0.4 million during the 28 weeks ended September 11, 2004 represents
payments to individuals for severance and benefits, as well as payments to
pension funds for early withdrawal from multi-employer union pension plans.
(3) At each balance sheet date, we assess the adequacy of the balance to
determine if any adjustments are required as a result of changes in
circumstances and/or estimates. We have continued to make favorable
progress in marketing and subleasing the closed stores. As a result, during
fiscal 2002, we recorded a reduction of $3.6 million in occupancy accruals
related to this phase of the initiative. Further, we increased our reserve
for future minimum pension liabilities by $0.6 million to better reflect
expected future payouts under certain collective bargaining agreements.
We paid $96.1 million of the total occupancy charges from the time of the
original charges through September 11, 2004 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.8 million of the total net severance charges from
the time of the original charges through September 11, 2004, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $29.6 million relates to expected future payments under long term
leases and is expected to be paid in full by 2020. The remaining severance
liability of $1.7 million primarily relates to expected future payments for
early withdrawals from multi-employer union pension plans and will be fully paid
out by 2020.
None of these stores were open during either of the first or second 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 September 11, 2004 and February 28, 2004, approximately $5.6 million and $6.5
millio