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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 18, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission File Number 1-3657
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WINN-DIXIE STORES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0514290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5050 Edgewood Court, Jacksonville, Florida 32254-3699
(Address of principal executive offices) (Zip Code)
(904) 783-5000
(Registrant's telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year,
if changed since last report)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No __
As of September 18, 2002, there were 140,764,410 shares outstanding of the
registrant's common stock, $1 par value.
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WINN-DIXIE STORES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Statements of Operations 1
(Unaudited), For the 12 Weeks Ended
September 18, 2002 and September 19, 2001
Condensed Consolidated Balance Sheets 2
September 18, 2002 (Unaudited) and June 26, 2002 (Note A)
Condensed Consolidated Statements of Cash Flows 3
(Unaudited), For the 12 Weeks Ended
September 18, 2002 and September 19, 2001
Notes to Condensed Consolidated Financial Statements 4 - 14
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 15 - 21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 - 24
Item 4. Controls and Procedures 25
Part II: Other Information
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29 - 30
Part I - Financial Information
Item 1. Financial Statements
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Dollar amounts in thousands except per share data
For the 12 Weeks Ended
September 18, 2002 September 19, 2001
------------------ ------------------
Net sales $2,832,765 2,807,756
Cost of sales, including warehouse and delivery expenses 2,033,204 2,056,396
---------- ----------
Gross profit on sales 799,561 751,360
Other operating and administrative expenses 729,833 685,972
---------- ----------
Operating income 69,728 65,388
Interest expense, net 14,921 14,878
---------- ----------
Earnings from continuing operations before income taxes 54,807 50,510
Income taxes 20,005 19,445
---------- ----------
Net earnings from continuing operations 34,802 31,065
---------- ----------
Discontinued operations (Note O)
Loss from discontinued operations - (14,070)
Income tax benefit - (5,416)
---------- ----------
Net loss from discontinued operations - (8,654)
---------- ----------
Net earnings $ 34,802 22,411
========== ==========
Basic earnings per share:
Earnings from continuing operations $ 0.25 0.22
Loss from discontinued operations - (0.06)
---------- ----------
Basic earnings per share $ 0.25 0.16
========== ==========
Diluted earnings per share:
Earnings from continuing operations $ 0.25 0.22
Loss from discontinued operations - (0.06)
---------- ----------
Diluted earnings per share $ 0.25 0.16
========== ==========
Dividends per share $ 0.05 0.17
========== ==========
Weighted average common shares outstanding - basic 140,357 140,281
========== ==========
Weighted average common shares outstanding - diluted 140,807 140,971
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands except par value
September 18, 2002 June 26, 2002
------------------ -------------
ASSETS (Unaudited) (Note A)
- ------
Current Assets:
Cash and cash equivalents $ 77,432 227,846
Marketable securities 18,842 18,606
Trade and other receivables 115,258 116,154
Merchandise inventories less LIFO reserve of
$218,873 ($215,873 as of June 26, 2002) 1,054,311 1,063,288
Prepaid expenses and other assets 44,541 53,934
Deferred income taxes 156,593 158,478
----------- -----------
Total current assets 1,466,977 1,638,306
----------- -----------
Cash surrender value of life insurance, net 11,559 16,197
Property, plant and equipment, net 953,473 966,752
Goodwill 87,808 87,808
Non-current deferred income taxes 109,196 113,291
Other assets, net 116,303 115,224
----------- -----------
Total assets $ 2,745,316 2,937,578
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,736 2,739
Current obligations under capital leases 3,464 3,471
Accounts payable 451,824 509,704
Reserve for insurance claims and self-insurance 94,535 98,450
Accrued wages and salaries 97,357 111,556
Accrued rent 143,961 144,597
Accrued expenses 154,975 174,805
Income taxes payable 46,858 64,582
----------- -----------
Total current liabilities 994,710 1,109,904
----------- -----------
Reserve for insurance claims and self-insurance 159,230 160,226
Long-term debt 440,584 540,612
Obligations under capital leases 23,992 24,787
Defined benefit plan 53,391 52,887
Lease liability on closed stores, net of current portion 171,457 180,785
Other liabilities 59,180 55,993
----------- -----------
Total liabilities 1,902,544 2,125,194
----------- -----------
Commitments and contingent liabilities (Notes I, J, L & P)
Shareholders' Equity:
Common stock $1 par value. Authorized 400,000,000 shares
issued and outstanding 140,764,410 at September 18, 2002
and 140,592,009 at June 26, 2002 140,764 140,592
Retained earnings 705,598 676,322
Accumulated other comprehensive loss (3,590) (4,530)
----------- -----------
Total shareholders' equity 842,772 812,384
----------- -----------
Total liabilities and shareholders' equity $ 2,745,316 2,937,578
=========== =========
See accompanying notes to condensed consolidated financial statements.
2
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollar amounts in thousands
September 18, 2002 September 19, 2001
------------------ ------------------
Cash flows from operating activities:
Net earnings $ 34,802 22,411
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 37,979 39,877
Deferred income taxes 5,207 4,027
Defined benefit plan 504 1,235
Reserve for insurance claims and self-insurance (5,780) (1,623)
Stock compensation plans 1,327 975
Change in operating assets and liabilities, net of effects
from acquisitions:
Trade and other receivables 896 (19,763)
Merchandise inventories 8,977 30,028
Prepaid expenses and other assets 12,444 10,618
Accounts payable (52,751) (72,555)
Income taxes payable 12,436 9,875
Other current accrued expenses (19,146) (23,228)
--------- ---------
Subtotal 36,895 1,877
Income taxes paid on company owned life insurance (52,002) -
--------- ---------
Net cash (used in) provided by operating activities (15,107) 1,877
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (22,270) (12,845)
(Increase) decrease in investments and other assets (4,228) 1,939
--------- ---------
Net cash used in investing activities (26,498) (10,906)
--------- ---------
Cash flows from financing activities:
Principal payments on long-term debt (101,031) (1,014)
Principal payments on capital lease obligations (802) (755)
Purchase of common stock (40) (30)
Proceeds of sales under associates' stock purchase plan - 719
Dividends paid (7,030) (23,894)
Other 94 (11,589)
--------- ---------
Net cash used in financing activities (108,809) (36,563)
--------- ---------
Decrease in cash and cash equivalents (150,414) (45,592)
Cash and cash equivalents at beginning of year 227,846 121,061
--------- ---------
Cash and cash equivalents at end of period $ 77,432 75,469
========= =========
Supplemental cash flow information:
Interest paid $ 7,896 9,972
Interest and dividends received $ 496 464
Income taxes paid $ 54,463 517
See accompanying notes to condensed consolidated financial statements.
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(A) Basis of Presentation: The accompanying unaudited Condensed
Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the 12 weeks ended September 18, 2002 are not necessarily
indicative of the results that may be expected for the year
ending June 25, 2003.
The balance sheet at June 26, 2002 has been derived from the
audited financial statements at that date, but does not include
all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Winn-Dixie
Stores, Inc. and subsidiaries annual report on Form 10-K for the
fiscal year ended June 26, 2002. The Condensed Consolidated
Financial Statements include the accounts of Winn-Dixie Stores,
Inc. and its subsidiaries, which operate as a major food retailer
in twelve states and the Bahama Islands. Reference to the
"Company" includes Winn-Dixie Stores, Inc. and all of its
subsidiaries, collectively.
(B) Cash and Cash Equivalents: Cash equivalents consist of highly
liquid investments with maturity of three months or less when
purchased. Cash and cash equivalents are stated at cost plus
accrued interest, which approximates market.
(C) Marketable Securities: Marketable securities consist principally
of fixed income securities categorized as available-for-sale.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, are excluded from earnings and reported as a separate
component of shareholders' equity until realized. A decline in
the fair value of available-for-sale securities below cost that
is deemed other than temporary is charged to earnings, resulting
in the establishment of a new cost basis for the security.
Realized gains and losses are included in earnings and are
derived using the specific identification method for determining
the cost of securities sold.
(D) Inventories: Inventories are stated at the lower of cost or
market. The "dollar value" last-in, first-out (LIFO) method is
used to determine the cost of approximately 84% of inventories
consisting primarily of merchandise in stores and distribution
warehouses. Manufacturing, pharmacy and produce inventories are
valued at the lower of first-in, first-out (FIFO), cost or
market. Elements of cost included in manufacturing inventories
consist of material, direct labor and plant overhead.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(E) Revenue Recognition: Revenue is recognized at the point of sale
for retail sales. Sales discounts are offered to customers at the
time of purchase as part of the Company's Customer Reward Card
program as well as other promotional events. All sales discounts
are recorded as a reduction of sales at the time of purchase.
Additionally, the Company offers awards to customers based on an
accumulation of points as part of its Customer Reward Card
program. The points accumulation and redemption occur within the
same reporting period with no free or discounted products or
services to be delivered in the future. Accordingly, the Company
had no liability established for points redemption as of
September 18, 2002.
(F) Merchandise Cost: Vendor allowances and credits that relate to
the Company's merchandising activities are recorded as a
reduction of cost of sales as they are earned according to the
underlying agreement with the vendor. Allowances consist
primarily of promotional allowances, quantity discounts and
payments under merchandising agreements. Amounts received under
promotional or other merchandising allowance agreements that
require specific performance are recognized when the performance
is satisfied, the amount is fixed and determinable and the
collection is reasonably assured. Lump sum payments received in
advance of performance are recorded as deferred income in other
liabilities, either current or non-current as appropriate, and
recognized over the life of the agreement.
(G) LIFO: Results for the quarter reflect a pre-tax LIFO inventory
charge of $3.0 million in fiscal 2003 and 2002. If the FIFO
method had been used for the current quarter, net earnings from
continuing operations would have been $36.7 million, or $0.26 per
diluted share, as compared with $32.9 million, or $0.23 per
diluted share in the previous year. An actual valuation of
inventory under the LIFO method can be made only at the end of
each fiscal year based on the inventory levels and costs at that
time. Accordingly, interim LIFO calculations must be based on
management's estimates of expected year-end inventory levels and
costs. Because these are subject to forces beyond management's
control, interim results are subject to the final year-end LIFO
inventory valuations.
(H) Comprehensive Income: Comprehensive income differs from net
income in the quarter due to changes in the fair value of the
Company's interest rate swaps related to the cash flow hedge and
marketable securities. Comprehensive income for the quarter ended
was $35.7 million, or $0.25 per diluted share compared to $18.4
million, or $0.13 per diluted share in the previous year.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(I) Debt:
September 18, 2002 June 26, 2002
------------------ -------------
364-day $175,000 revolving credit facility due 2003;
interest payable at LIBOR plus 2.50% $ - -
Five-year $200,000 revolving credit facility due 2006;
interest payable at LIBOR plus 2.50% - -
Mortgage note payable with interest at 9.40% and
monthly $22 principal and interest payments 1,403 1,434
and 10.0% of principal paid annually each October
Six-year term loan due 2007; interest payable
at LIBOR plus 2.75% and .25% of principal
paid quarterly 145,000 246,000
8.875% senior notes due 2008; interest payable
semiannually on April 1 and October 1 295,917 295,917
------------------ -------------
Total 442,320 543,351
Less current portion 1,736 2,739
------------------ -------------
Long-term portion $ 440,584 540,612
================== =============
The senior secured credit facilities and senior unsecured notes
contain certain covenants as defined in the credit agreement and
indenture, as amended. The Company was in compliance with these
covenants at September 18, 2002. During the quarter, the Company
prepaid $100.0 million on the six-year term loan. In accordance
with Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No.13, and Technical Corrections" ("SFAS 145"),
the unamortized debt issue cost of $2.6 million ($1.6 million net
of tax) associated with the early extinguishment of the debt is
recorded in continuing operations as interest expense. As of
September 18, 2002, the Company had $52.0 million in outstanding
letters of credit used to support inventory purchases and
insurance obligations.
The Company has a cash flow hedge on the six-year term loan due
2007. See Quantitative and Qualitative Disclosures About Market
Risk for additional information.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(I) Debt, continued: The Company entered into an interest rate swap
agreement, designated as a fair value hedge as defined under SFAS
133, "Accounting for Derivative Instruments and Hedge
Activities," with a notional amount totaling $300.0 million and a
variable interest rate, which is fixed semi-annually on the first
of April and October based on six-month LIBOR. This agreement was
entered to exchange the fixed interest rate on the Company's
8.875% senior notes for a variable interest rate. In accordance
with SFAS 133, changes in the fair value of the interest rate
swap agreements offset changes in the fair value of the fixed
rate debt due to changes in the market interest rate.
Accordingly, the long-term debt on the Condensed Consolidated
Balance Sheets as of September 18, 2002 decreased by $4.1
million, which reflected a decrease in the fair value of the
debt. The corresponding increase in the hedge liability was
recorded in other liabilities. The agreement is deemed to be a
perfectly effective fair value hedge and therefore qualifies for
the short-cut method of accounting under SFAS 133. As a result,
no ineffectiveness is expected to be recognized in the Company's
earnings associated with the interest rate swap agreement on the
8.875% senior notes.
(J) Income Taxes: The provision for income taxes reflects
management's best estimate of the effective tax rate expected for
the fiscal year. The effective tax rate for fiscal years 2003 and
2002 is 36.5% and 38.5%, respectively.
The Company has a reserve established for taxes and interest
related to the company-owned life insurance (COLI) tax liability.
In July 2002, the Company paid $52.0 million to the Internal
Revenue Service from the reserve. Additional amounts, if any,
will be paid after receiving a final assessment from the Internal
Revenue Service and, in the opinion of management, will not have
any additional material adverse impact on the Company's financial
condition or results of operations.
(K) Reclassification: Certain other prior year amounts may have been
reclassified to conform to the current year's presentation.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(L) Lease Liability on Closed Stores: The Company accrues for the
obligation related to closed store locations based on the present
value of expected future rental payments, net of sublease income.
The following amounts are included in accrued rent and lease
liability on closed stores, as of September 18, 2002:
Lease Liability on
Closed Stores
------------------
Balance at June 26, 2002 $ 264,386
Additions/adjustments 5,346
Utilization (24,171)
------------------
Balance at September 18, 2002 $ 245,561
==================
The additions/adjustments amount includes the effect on earnings
from the accretion of the present value of the expected future
rental payments, additional leases added to the accrual and
adjustments due to the settlement of certain existing leases. The
utilization amount includes payments made for rent and related
costs and the buyout of eight leases. The lease liability on
closed stores consist of $134.6 million related to restructure
and $62.8 million related to the discontinued operations. The
additions/adjustments and the utilization for restructure were
$2.0 million and $10.1 million, respectively for the quarter. The
current portion of the accrued balance at September 18, 2002
totals $74.1 million and is included in accrued rent.
(M) Goodwill and Other Intangible Assets: Goodwill is not amortized
but is tested for impairment, for each reporting unit, on an
annual basis and between annual tests in certain circumstances.
In accordance with the guidelines in Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), the Company determined it has one reporting
unit.
The Company performed an impairment review at September 18, 2002,
and concluded that there were no necessary adjustments.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(M) Goodwill and Intangible Assets, continued: Other intangible
assets consist of a non-compete fee and the cost of purchasing
pharmacy prescription files. The Company reassessed the useful
lives of other intangible assets and determined the useful lives
are appropriate in determining amortization expense. The balance,
which is a component of other assets on the Condensed
Consolidated Balance Sheets, as of September 18, 2002 is as
follows:
Other
Intangible
Assets
----------
Other intangible assets $ 7,461
Less: Accumulated amortization 2,831
-----------
Other intangible assets, net $ 4,630
===========
Amortization expense for other intangible assets for quarters
ended September 18, 2002 and September 19, 2001 was $284 and
$270, respectively. The estimated remaining amortization expense
for each of the fiscal years subsequent to June 26, 2002 is as
follows:
Amortization
Expense
------------
Remaining for year ended June 25, 2003 $ 922
For year ended June 30, 2004 1,153
For year ended June 29, 2005 1,099
For year ended June 28, 2006 410
For year ended June 27, 2007 103
Thereafter 943
------------
$ 4,630
============
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(N) Guarantor Subsidiaries: During the second quarter of fiscal 2001,
the Company filed a registration statement with the Securities
and Exchange Commission to authorize the issuance of up to $1
billion in debt securities. The debt securities may be jointly
and severally, fully and unconditionally guaranteed by
substantially all of the Company's operating subsidiaries. The
guarantor subsidiaries are 100% owned subsidiaries of the
Company. Condensed consolidated financial information for the
Company and its guarantor subsidiaries is as follows:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERAIONS
(Amounts in thousands)
12 Weeks ended September 18, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Net sales $ 1,276,536 1,556,229 - 2,832,765
Cost of sales 916,031 1,117,173 - 2,033,204
------------ ----------- ------------ ------------
Gross profit 360,505 439,056 - 799,561
Other operating and administrative expenses 309,845 419,988 - 729,833
------------ ----------- ------------ ------------
Operating income 50,660 19,068 - 69,728
Equity in earnings of consolidated subsidiaries 12,108 - (12,108) -
Interest expense, net 14,921 - - 14,921
------------ ----------- ------------ ------------
Earnings before income taxes 47,847 19,068 (12,108) 54,807
Income taxes 13,045 6,960 - 20,005
------------ ----------- ------------ ------------
Net earnings $ 34,802 12,108 (12,108) 34,802
============ =========== ============ ============
12 Weeks ended September 19, 2001
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Net sales $ 1,256,225 1,551,531 - 2,807,756
Cost of sales 924,202 1,132,194 - 2,056,396
------------ ------------ ------------ ------------
Gross profit 332,023 419,337 - 751,360
Other operating and administrative expenses 304,154 381,818 - 685,972
------------ ------------ ------------ ------------
Operating income 27,869 37,519 - 65,388
Equity in earnings of consolidated subsidiaries 14,421 - (14,421) -
Interest expense, net 14,878 - - 14,878
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes 27,412 37,519 (14,421) 50,510
Income taxes 5,001 14,444 - 19,445
------------ ------------ ------------ ------------
Net earnings from continuing operations 22,411 23,075 (14,421) 31,065
Net loss from discontinued operations - (8,654) - (8,654)
------------ ------------ ------------ ------------
Net earnings $ 22,411 14,421 (14,421) 22,411
============ ============ ============ ============
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(N) Guarantor Subsidiaries, continued:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
September 18, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Merchandise inventories $ 320,879 733,432 - 1,054,311
Other current assets 247,874 164,792 - 412,666
------------ ------------ ------------ ------------
Total current assets 568,753 898,224 - 1,466,977
Property, plant and equipment, net 372,043 581,430 - 953,473
Other non-current assets 206,490 118,376 - 324,866
Investments in and advances to/from subsidiaries 845,762 - (845,762) -
------------ ------------ ------------ ------------
Total assets $ 1,993,048 1,598,030 (845,762) 2,745,316
============ ============ ============ ============
Accounts payable $ 91,693 360,131 - 451,824
Other current liabilities 382,116 160,770 - 542,886
------------ ------------ ------------ ------------
Total current liabilities 473,809 520,901 - 994,710
Long-term debt 440,584 - - 440,584
Other non-current liabilities 235,883 231,367 - 467,250
Common stock of $1 par value 140,764 6,237 (6,237) 140,764
Retained earnings and other shareholders' equity 702,008 839,525 (839,525) 702,008
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 1,993,048 1,598,030 (845,762) 2,745,316
============ ============ ============ ============
June 26, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Merchandise inventories $ 320,515 742,773 - 1,063,288
Other current assets 387,696 187,322 - 575,018
------------ ------------ ------------ ------------
Total current assets 708,211 930,095 - 1,638,306
Property, plant and equipment, net 375,029 591,723 - 966,752
Other non-current assets 213,434 119,086 - 332,520
Investments in and advances to/from subsidiaries 900,911 - (900,911) -
------------ ------------ ------------ ------------
Total assets $ 2,197,585 1,640,904 (900,911) 2,937,578
============ ============ ============ ============
Accounts payable $ 146,128 363,576 - 509,704
Other current liabilities 461,251 138,949 - 600,200
------------ ------------ ------------ ------------
Total current liabilities 607,379 502,525 - 1,109,904
Long-term debt 540,612 - - 540,612
Other non-current liabilities 237,210 237,468 - 474,678
Common stock of $1 par value 140,592 6,238 (6,238) 140,592
Retained earnings and other shareholders' equity 671,792 894,673 (894,673) 671,792
------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 2,197,585 1,640,904 (900,911) 2,937,578
============ ============ ============ ============
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(N) Guarantor Subsidiaries, continued:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Amounts in thousands)
12 Weeks ended September 18, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities $ (104,717) 89,610 - (15,107)
------------ ------------- ------------ ------------
Purchases of property, plant and equipment, net (11,996) (10,274) - (22,270)
Decrease (increase) in other assets 52,919 (1,998) (55,149) (4,228)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 40,923 (12,272) (55,149) (26,498)
------------ ------------ ------------ ------------
Principal payments on long-term debt (101,031) - - (101,031)
Dividends paid (7,030) - - (7,030)
Other 12,836 (68,733) 55,149 (748)
------------ ------------ ------------ ------------
Net cash used in financing activities (95,225) (68,733) 55,149 (108,809)
------------ ------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (159,019) 8,605 - (150,414)
Cash and cash equivalents at the beginning of the year 228,981 (1,135) - 227,846
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the quarter $ 69,962 7,470 - 77,432
============ ============ ============ ============
12 Weeks ended September 19, 2001
Guarantor
Parent Subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities $ (133,882) 135,759 - 1,877
------------ ------------ ------------ ------------
Purchases of property, plant and equipment, net (5,448) (7,397) - (12,845)
Decrease (increase) in other assets 122,995 (356) (120,700) 1,939
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 117,547 (7,753) (120,700) (10,906)
------------ ------------ ------------ ------------
Dividends paid (23,894) - - (23,894)
Other (11,134) (122,235) 120,700 (12,669)
------------ ------------ ------------ ------------
Net cash used in financing activities (35,028) (122,235) 120,700 (36,563)
------------ ------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (51,363) 5,771 - (45,592)
Cash and cash equivalents at the beginning of the year 111,136 9,925 - 121,061
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the quarter $ 59,773 15,696 - 75,469
============ ============ ============ ============
The Company allocates all cost incurred by its headquarters,
which is not specifically identifiable to each subsidiary, based
on its relative size to the Company as a whole. Taxes payable and
deferred taxes are obligations of the Company. Expenses related
to both current and deferred income taxes are allocated to each
subsidiary based on the consolidated Company's effective tax
rates.
Expenses incurred by the guarantor subsidiaries, if they operated
on a stand-alone basis, may or may not have been higher were it
not for the benefit derived from related-party transactions and
the headquarters functions described above.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(O) Discontinued Operations: On May 6, 2002, the Company announced a
formal plan to exit the Texas and Oklahoma operations, which
consisted of 71 locations, a dairy plant and a distribution
center in Texas and 5 locations in Oklahoma. In addition, seven
leases were in effect on stores that were previously closed. The
Company decided to discontinue these operations as a result of
continued operational losses and reductions in market share. In
accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), the Texas and Oklahoma operations are
considered components of an entity, which requires the Company to
disclose the exit as a discontinued operation. At June 26, 2002,
the Company exited these operations, either by sale or
abandonment.
There was no revenue from discontinued operations for the quarter
ended September 18, 2002, compared to gross revenue of $146.3
million for the quarter ended September 19, 2001.
A summary of the accruals and loss on disposal of discontinued
operations follows:
Employee
Termination and Lease
Other Location Termination
Closing Costs Costs Total
---------------- --------------- ---------------
Balance at June 26, 2002 $ 9,034 72,401 81,435
Utilization (8,342) (9,570) (17,912)
---------------- --------------- ---------------
Balance at September 18, 2002 $ 692 62,831 63,523
================ =============== ===============
The Company has $14.3 million in held for sale assets relating to
the exiting of the Texas and Oklahoma operations. The held for
sale assets are reported in the prepaid expenses and other assets
section of the Condensed Consolidated Balance Sheet. The held for
sale assets consist mainly of land, land improvements, building,
leasehold improvements and store and office equipment.
(P) Litigation: There are pending against the Company various claims
and lawsuits arising in the normal course of business, including
suits charging violations of certain civil rights laws and
various proceedings arising under federal, state or local
regulations protecting the environment.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(P) Litigation, continued: Among the suits charging violations of
certain civil rights laws, there are actions that purport to be
class actions, and which allege sexual harassment, retaliation
and/or a pattern and practice of race-based and gender-based
discriminatory treatment of employees and applicants. The
plaintiffs seek, among other relief, certification of the suits
as proper class actions, declaratory judgment that the Company's
practices are unlawful, back pay, front pay, benefits and other
compensatory damages, punitive damages, injunctive relief and
reimbursement of attorneys' fees and costs.
The Company is committed to full compliance with all applicable
civil rights laws. Consistent with this commitment, the Company
has firm and long-standing policies in place prohibiting
discrimination and harassment. The Company denies the allegations
of the various complaints and is vigorously defending the
actions.
While the ultimate outcome of litigation cannot be predicted with
certainty, in the opinion of management, the ultimate resolution
of these actions will not have a material adverse effect on the
Company's financial condition or results of operations.
(Q) Accounting Pronouncements: Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13 and Technical Corrections"
("SFAS 145"), became effective for the Company July 2002. The
adoption of SFAS 145 will require that losses on early
extinguishment of debt be included in continuing operations
rather than as an extraordinary item. See Note I - Debt.
Statement of Financial Accounting Standards No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), provides guidance on the recognition and measurement of
liabilities for costs associated with exit or disposal
activities. The provisions of this Statement are effective for
exit or disposal activities that are initiated after December 31,
2002. The Company is currently reviewing SFAS 146 to determine
the impact upon adoption.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This analysis should be read in conjunction with the Condensed Consolidated
Financial Statements.
Results of Operations
Continuing Operations. Sales for the 12 weeks ended September 18, 2002, were
$2.8 billion, an increase of $25.0 million or 0.9% compared with the same
quarter last year. Identical store sales, which include enlargements and exclude
the sales from stores that opened or closed during the period, increased 2.0%
for the quarter. Comparable store sales, which include replacement stores,
increased 2.1% for the quarter. The increase in sales was primarily due to the
Company's marketing efforts during the last year, including the "real deal"
branding initiative and the Customer Reward Card program.
The Company's Customer Reward Card program allows the customer to receive
ongoing benefits that include merchandise discounts, automatic entry into
various sweepstakes, notification of special events, participation in specialty
merchandise clubs, discounts on services provided by select marketing partners
and other special incentives. The Customer Reward Card is part of a major
initiative to focus on superior customer relationship marketing that reinforces
the Company's "real deal" branding initiative. The Customer Reward Card is
currently in use in the Company's Alabama, Louisiana, Mississippi and Florida
area stores.
For the 12 weeks ended September 18, 2002, the Company opened two new stores and
closed two existing stores. A total of 1,073 locations were in operation on
September 18, 2002, compared to 1,153 on September 19, 2001. During the fourth
quarter of fiscal year 2002, the Company closed 76 stores related to
discontinued operations. As of September 18, 2002, retail space totaled 47.5
million square feet compared to 51.1 million square feet in the prior year. The
Company has three new stores under construction.
Gross profit increased $48.2 million for the quarter. As a percentage of sales,
gross profit for the current quarter and the corresponding quarter of fiscal
2002 was 28.2% and 26.8%, respectively. Increased gross profit margin is
primarily due to improved sales as a result of the Company's marketing
initiatives, improvement in procurement and shrink reduction initiatives.
15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations, continued:
Other operating and administrative expenses increased $43.9 million for the
current quarter as compared to the corresponding quarter in fiscal 2002. As a
percentage of sales, other operating and administrative expenses for the current
quarter and the corresponding quarter of the previous year was 25.8% and 24.5%,
respectively.
The increase in other operating and administrative expenses for the current
quarter was primarily due to an increase in the accrual for profit sharing
contributions and an increase in advertising and retail operating expenses in
connection with the startup of the Customer Reward Card in Alabama, Louisiana
and Mississippi.
Rent expense for the quarter on operating leases was $78.2 million, as compared
to $77.8 million in the previous year.
Interest expense totaled $14.9 million for the current quarter and corresponding
quarter in fiscal 2002. Interest expense is primarily interest on long-term and
short-term debt and the interest on capital leases. The current quarter interest
expense includes $2.6 million of unamortized debt issued costs and a $3.3
million payment to unwind the swap associated with the early extinguishment of
debt.
Earnings from continuing operations before income taxes were $54.8 million for
the current quarter compared to $50.5 million in the corresponding quarter of
fiscal 2002.
Income taxes have been accrued at an effective tax rate of 36.5% for fiscal 2003
and 38.5% for fiscal 2002. The decline in the effective tax rate is primarily
due to the expected utilization of previously unrecognized tax benefits arising
from state net operating loss carry forwards. This rate is expected to
approximate the effective rate for fiscal year 2003.
Net earnings from continuing operations for the current quarter amounted to
$34.8 million, or $0.25 per diluted share as compared to $31.1 million, or $0.22
per diluted share for the corresponding quarter of the previous year. The LIFO
charge reduced net earnings from continuing operations by $1.9 million, or $0.01
per diluted share in the current quarter compared to $1.8 million, or $0.01 per
diluted share in the corresponding quarter of the previous year.
During the fourth quarter of fiscal 2002, the Company exited its Texas and
Oklahoma operations, which consisted of 76 stores, a distribution center and a
dairy plant. Net loss from discontinued operations was $8.7 million, or $.06 per
diluted share for quarter ended September 19, 2001.
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
Cash and marketable securities amounted to $96.3 million at September 18, 2002
compared to $246.5 million at June 26, 2002. Working capital amounted to $472.3
million at September 18, 2002, compared to $528.4 million at June 26, 2002. Cash
decreased due to a $100.0 million prepayment on the six-year term loan and a
payment of $52.0 million to the Internal Revenue Service in the current quarter
(See Note I - Debt and Note J - Income Taxes). The prepayment of debt was funded
from cash from operating activities. During the current quarter, excess cash was
invested in highly liquid overnight investments with an average interest rate
received of approximately 2.0%.
Net cash (used in) provided by operating activities amounted to $(15.1) million
for the 12 weeks ended September 18, 2002, compared to $1.9 million in the
previous year. The increase in net cash used in operations is largely due to a
$52.0 million payment to the Internal Revenue Service and partially offset by an
increase in earnings and a smaller decrease in accounts payables. Excluding the
$52.0 million payment to the Internal Revenue Service, cash provided by
operating activities would have increased to $36.9 million in the current
quarter.
Net cash used in investing activities was $26.5 million for the 12 weeks ended
September 18, 2002, compared to $10.9 million in the previous year. The change
was primarily due to an increase in capital expenditures. Capital expenditures
for the current quarter totaled $22.3 million compared to $12.8 million for the
corresponding quarter of fiscal 2002.
The Company estimated that total capital investment in Company retail and
support facilities, including operating leases, will be $235.0 million in fiscal
2003. The Company has no material construction or purchase commitments
outstanding as of September 18, 2002.
Net cash used in financing activities was $108.8 million for the 12 weeks ended
September 18, 2002, compared to $36.6 million in the previous year. In the
current year, the Company prepaid $100.0 million on the six-year term loan and
reduced dividend payments.
The Company is a party to various proceedings arising under federal, state and
local regulations protecting the environment. Management is of the opinion that
any liability, which might result from any such proceedings, will not have a
material adverse effect on the Company's consolidated earnings or financial
position.
Impact of Inflation
The Company's primary costs, inventory and labor, increase with inflation.
Recovery of these costs must come from improved operating efficiencies, and to
the extent permitted by our competition, through improved gross profit margins.
17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies
The Condensed Consolidated Financial Statements and Notes to Condensed
Consolidated Financial Statements contain information that is pertinent to
Management's Discussion and Analysis. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities. Future events and their effects cannot be determined with absolute
certainty. Therefore, the determination of estimates requires the exercise of
judgment based on various assumptions and other factors such as historical
experience, current and expected economic conditions, and in some cases,
actuarial calculations. The Company constantly reviews these significant factors
and makes adjustments where facts and circumstances dictate. Historically,
actual results have not significantly deviated from estimated results determined
using the factors described above.
The following is a discussion of the accounting policies considered to be most
critical to the Company. These accounting policies are both most important to
the portrayal of the Company's financial condition and results, and require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Self-insurance reserves. It is the Company's policy to self-insure for certain
insurable risks consisting primarily of physical loss to property, business
interruptions, workers' compensation, comprehensive general and auto liability.
Insurance coverage is obtained for catastrophic property and casualty exposures
as well as those risks required to be insured by law or contract. Based on an
independent actuary's estimate of the aggregate liability for claims incurred, a
provision for claims under the self-insured program is recorded and revised
annually. The actuarial estimates are subject to uncertainty from various
sources, including changes in claim reporting patterns, claim settlement
patterns, judicial decisions, legislation, and economic conditions. Although the
Company believes that the actuarial estimates are reasonable, significant
differences related to the items noted above could materially affect the
Company's self-insurance obligations and future expense.
Long-lived assets. The Company periodically evaluates the period of depreciation
or amortization for long-lived assets to determine whether current circumstances
warrant revised estimates of useful lives. The Company reviews its property,
plant and equipment for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability
is measured by a comparison of the carrying amount to the net undiscounted cash
flows expected to be generated by the asset. An impairment loss would be
recorded for the excess of net book value over the fair value of the asset
impaired. The fair value is estimated based on expected discounted future cash
flows.
With respect to owned property and equipment associated with closed stores, the
value of the property and equipment is adjusted to reflect recoverable values
based on the Company's prior history of disposing of similar assets and current
economic conditions.
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies, continued:
Long-lived assets, continued. The results of impairment tests are subject to
management's estimates and assumptions of projected cash flows and operating
results. The Company believes that, based on current conditions, materially
different reported results are not likely to result from long-lived asset
impairments. However, a change in assumptions or market conditions could result
in a change in estimated future cash flows and the likelihood of materially
different reported results.
Intangible assets and goodwill. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 142 requires companies to cease
amortizing goodwill that existed at the time of adoption and establish a new
method for testing goodwill for impairment on an annual basis at the reporting
unit level (or an interim basis if an event occurs that might reduce the fair
value of a reporting unit below its carrying value). The Company has determined
that it is contained within one reporting unit and, as such, impairment is
tested at the company level. SFAS 142 also requires that an identifiable
intangible asset that is determined to have an indefinite useful economic life
not be amortized, but separately tested for impairment using a fair value based
approach.
The evaluation of goodwill and intangibles with indefinite useful lives for
impairment requires management to use significant judgments and estimates
including, but not limited to, projected future revenue and cash flows. The
Company believes that, based on current conditions, materially different
reported results are not likely to result from goodwill and intangible
impairments. However, a change in assumptions or market conditions could result
in a change in estimated future cash flows and the likelihood of materially
different reported results.
Store closing costs. The Company provides for closed store liabilities relating
to the estimated post-closing lease liabilities and other related exit costs
associated with the store closing commitments. The closed store liabilities are
usually paid over the lease terms associated with the closed stores having
remaining terms ranging from one to 20 years. The Company estimates the lease
liabilities, net of estimated sublease income only to the extent of the
liability, using a discount rate based on long-term rates with a remaining lease
term based on an estimated disposition date to calculate the present value of
the anticipated rent payments on closed stores. Other exit costs include
estimated real estate taxes, common area maintenance, insurance and utility
costs to be incurred after the store closes over the anticipated lease term.
Store closings are generally completed within one year after the decision to
close.
Adjustments to closed store liabilities and other exit costs primarily relate to
changes in subtenants and actual exit costs differing from original estimates.
Adjustments are made for changes in estimates in the period in which the change
becomes known. Any excess accrued store closing liability remaining upon
settlement of the obligation is reversed to income in the period that such
settlement is determined. Inventory write-downs, if any, in connection with
store closings, are classified in cost of sales. Costs to transfer inventory and
equipment from closed stores are expensed as incurred. Severance costs are
rarely incurred in connection with ordinary store closings.
19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Critical Accounting Policies, continued:
Store closing costs, continued. Store closing liabilities are reviewed quarterly
and adjusted to ensure that any accrued amount is properly stated. Although the
Company believes that the estimates used are reasonable, significant differences
related to the items noted above or a change in market conditions could
materially affect the Company's reserve for store closing obligations and future
expense.
COLI litigation. The Company was a party to litigation arising from its
interpretation of certain provisions of the U.S. tax code. The Company received
an unfavorable court decision related to the deduction of interest expense on
Company Owned Life Insurance (COLI). Appeals have been unsuccessful in reversing
the decision. The Company has recorded a reserve based on consultations with
outside legal counsel and historical negotiations of similar cases. See Note J -
Income Taxes for further discussion. The Company has and will continue to
negotiate the ultimate settlement of this matter. There are uncertainties in any
litigation of this nature and the ultimate settlement could vary from the
amounts recorded in the Consolidated Financial Statements. While the ultimate
outcome of this matter cannot be predicted with certainty, in the opinion of
management, the ultimate resolution of this matter will not have any additional
material adverse impact on the Company's financial condition or results of
operations.
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Cautionary Statement Regarding Forward-Looking Information and Statements
This Form 10-Q contains certain information that constitutes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve certain risks and
uncertainties. Actual results may differ materially from the results described
in the forward-looking statements.
Factors that may cause actual results to differ materially from those projected
include, but are not limited to:
o the Company's ability to achieve the benefits contemplated from the
various operational changes being implemented by management;
o heightened competition, including specifically the intensification of
price competition, the entry of new competitors, or the expansion of
existing competitors in one or more operating regions;
o changes in federal, state or local legislation or regulations affecting
food manufacturing, food distribution, or food retailing, including
environmental compliance;
o the possible impact of changes in the ratings assigned to the Company's
debt instruments by nationally recognized rating agencies; and
o general business and economic conditions in the Company's operating
regions, including conditions arising from the current state of the
economy generally, the recent stock market decline, the rate of
inflation/deflation, changes in population, consumer demands and
spending, and the availability of new employees.
Please refer to discussions of these and other factors in this Form 10-Q and
other Company filings with the Securities and Exchange Commission. The Company
disclaims any intent or obligation to revise or update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are cautioned not to place undue reliance on these
forward-looking statements.
21
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash Flow Hedge: The Company has outstanding a $145 million six-year term loan
with a variable interest rate based on the one-month LIBOR. The Company utilizes
derivative financial instruments to reduce its exposure to market risk from
changes in interest rates. The instruments primarily used to mitigate the risk
are interest rate swaps. The derivative instruments held on the $145 million
six-year term loan are designated as highly effective cash flow hedges of
interest rate risk on variable rate debt and, accordingly, the change in fair
value of these instruments is recorded as a component of other comprehensive
income.
On July 26, 2002, the Company unwound the swap with a notional amount of $150.0
million and a maturity of March 29, 2003. The swap was unwound in conjunction
with the $100.0 million pay down of the related debt on July 29, 2002.
The Company has remaining one interest rate swap agreement with a notional
amount of $100.0 million to hedge the interest rate risk associated with the
$145 million outstanding in variable rate debt. The notional amount does not
represent a measure of exposure to the Company. The interest rate swap agreement
matures on March 29, 2004. The Company will pay the counterparty interest at a
fixed rate of 5.03% and the counterparty will pay the Company interest at a
variable rate equal to the one-month LIBOR (1.82% as of September 18, 2002).
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to these financial instruments. However, counterparties to
these agreements are major financial institutions and the risk of loss due to
nonperformance is considered by management to be minimal. The Company does not
hold or issue interest rate swaps for trading purposes.
The fair value of the Company's interest rate swap is obtained from dealer
quotes. This value represents the estimated amount the Company would receive or
pay to terminate the agreement, taking into consideration the difference between
the contract rate of interest and rates currently quoted for agreements of
similar terms and maturities. At September 18, 2002, the fair value of the
Company's interest rate swap resulted in an unrealized loss of $4.5 million
($2.8 million after tax). The Company recorded the unrealized loss in
accumulated other comprehensive income in shareholders' equity. During the next
12 months, the Company will incur interest expense, including the effect of the
interest rate swap, at a weighted average rate of 6.79% on the $145 million
outstanding in variable rate debt.
The Company measures effectiveness by the ability of the interest rate swap to
offset cash flows associated with changes in the one-month LIBOR. To the extent
that this contract is not considered effective, any changes in fair value
relating to the ineffective portion will be immediately recognized in income.
However, the contract was effective during the period and no gain or loss was
reported in earnings.
22
Quantitative and Qualitative Disclosures About Market Risk
Fair Value Hedge: In addition to the interest rate swap for the six-year term
loan, on August 2, 2002, the Company reentered into interest rate swap
agreements in which the Company effectively exchanged the $300 million fixed
rate 8.875% interest on the senior notes for two variable rates in the notional
amount of $200 and $100 million at six-month LIBOR plus 428 and 424 basis
points, respectively. The Company received $7.4 million on the initial swaps, to
be amortized over the remaining life of the bond as an offset to interest
expense. The variable interest rates, which are based on six-month LIBOR, are
fixed semiannually on the first day of April and October. The six-month LIBOR
rate was 2.341% on April 1, 2002. The maturity dates of the interest rate swap
agreements match those of the underlying debt.
In accordance with SFAS 133, the Company designated the interest rate swap
agreements on the senior notes as perfectly effective fair value hedges and,
accordingly, uses the short-cut method of evaluating effectiveness. As permitted
by the short-cut method, the change in fair value of the interest rate swaps
will be reflected in earnings and an equivalent amount will be reflected as a
change in the carrying value of the swaps, with an offset to earnings. There is
no ineffectiveness to be recorded. On April 1, 2002, the Company decreased the
fair value of the 8.875% senior notes by $4.1 million and recorded the
corresponding interest rate swap liability of $4.1 million in the other
liabilities section of the Consolidated Balance Sheets.
The Company's objectives for entering into these swaps were to reduce the
Company's exposure to changes in the fair value of the debt and to obtain
variable rate financing at an attractive cost. The swaps effectively converted
the fixed-rate debt to a floating rate. The agreement involves receipt of fixed
rate amounts in exchange for floating rate interest payments over the life of
the agreement without an exchange of the underlying principal amount.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to these financial instruments. However, counterparties to
these agreements are major financial institutions and the risk of loss due to
nonperformance is considered by management to be minimal. The Company does not
hold or issue interest rate swaps for trading purposes.
23
Quantitative and Qualitative Disclosures About Market Risk
The following table presents the future principal cash flows and
weighted-average interest rates expected on the Company's existing long-term
debt instruments and interest rate swap agreements. Fair values have been
determined based on quoted market prices as of September 18, 2002.
Expected Maturity Date
----------------------
(Dollar amounts in thousands)
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
Liabilities:
Long-term debt
Fixed Rate $ 286 283 279 276 279 300,000 $301,403 $ 306,233
Average interest rate 9.40% 9.40% 9.40% 9.40% 9.40% 8.88% 8.88%
Variable Rate $1,450 1,450 1,450 1,450 139,200 - $145,000 $ 145,000
Average interest rate 4.63% 5.43% 6.32% 6.88% 7.33% - 7.27%
Interest rate derivatives
Interest rate swaps:
Variable to Fixed $ - 100,000 - - - - $100,000 $ (4,454)
Average pay rate - 5.03% - - - - 5.03%
Average receive rate - 2.68% - - - - 2.68%
Fixed to Variable $ - - - - - 300,000 $300,000 $ (4,083)
Average pay rate - - - - - 9.33% 9.33%
Average receive rate - - - - - 8.88% 8.88%
24
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
25
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
Part II - Other Information
Item 1. Legal Proceedings
See Note P - Litigation of the Notes to Condensed Consolidated
Financial Statements, included herein, regarding various claims
and lawsuits pending against the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 2002 Annual Meeting of Shareholders of the Company took place
on October 9, 2002.
(b) Three matters were submitted to a vote at the meeting:
1. The election of two Class III directors for terms expiring in
2005;
2. Ratification of the appointment by the board of directors of
the company of KPMG LLP as auditors of the company for the
fiscal year commencing June 27, 2002;
3. To consider and act upon a shareholder proposal, which
management opposes;
With respect to the election of Director, the votes were as
follows:
Class III, for terms Shares
expiring in 2005 Shares for Withheld
----------------------------------------------------
John H. Dasburg 119,332,281 2,762,809
Julia B. North 119,424,981 2,670,109
With respect to the appointment of KPMG LLP as auditors of the Company
for the fiscal year commencing June 27, 2002, the vote was: 119,089,802
shares for; 2,062,802 shares against; 942,486 shares abstained.
With respect to consider and act upon a shareholder proposal, the vote
was: 5,899,076 shares for; 99,176,607 shares against; 1,808,819 shares
abstained. There were 15,210,588 broker non-votes.
26
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
Item 5. Other Information
John H. Dasburg, Chairman, President and Chief Executive Officer of
Burger King Corporation, was elected to the Board of Directors on
August 7, 2002.
Dennis A. Hanley, formerly the Director of Retail Operations of
Woolworth's New Zealand Limited, was elected as Vice President of
Produce and Floral Merchandising effective July 29, 2002.
August B. Toscano, Senior Vice President, Human Resources resigned from
the Company effective September 17, 2002.
Karen E. Salem, formerly Senior Vice President and Chief Information
Officer of Corning Cable Systems, was elected as Senior Vice President
and Chief Information Officer effective September 18, 2002.
Laurence B. Appel, formerly Senior Vice President Legal, of The Home
Depot, was elected as Senior Vice President and General Counsel on
September 30, 2002.
Joel B. Barton, formerly Executive Vice President of Merchandising and
Marketing, and President of Retail Stores for Spartan Stores, Inc., was
elected Vice President and Division Manager of the Charlotte Division
effective September 27, 2002.
John E. Anderson, President and Chief Executive Officer of Patriot
Transportation Holdings, Inc., was elected to the Board of Directors on
October 9, 2002.
Stephen T. deRiesthal, formerly Regional Director of Real Estate, was
elected Vice President of Real Estate effective September 23, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350.
99.2 Written Statement of the Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K
Not applicable
27
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINN-DIXIE STORES, INC.
Date: October 9, 2002 /S/ RICHARD P. MC COOK
----------------------------------
Richard P. McCook
Senior Vice President and
Chief Financial Officer
Date: October 9, 2002 /S/ D. MICHAEL BYRUM
------------------------------------
D. Michael Byrum
Vice President, Corporate Controller
and Chief Accounting Officer
28
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Allen R. Rowland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Winn-Dixie
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 9, 2002
By: /S/ Allen R. Rowland
----------------
Allen R. Rowland
President and Chief Operating Officer
29
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Richard P. McCook, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Winn-Dixie
Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: October 9, 2002
By:/S/ Richard P. McCook
-----------------
Richard P. McCook
Senior Vice President and Chief Financial Officer
30