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<SEC-DOCUMENT>0000043300-05-000023.txt : 20050510
<SEC-HEADER>0000043300-05-000023.hdr.sgml : 20050510
<ACCEPTANCE-DATETIME>20050510061426
ACCESSION NUMBER: 0000043300-05-000023
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20050226
FILED AS OF DATE: 20050510
DATE AS OF CHANGE: 20050510
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: GREAT ATLANTIC & PACIFIC TEA CO INC
CENTRAL INDEX KEY: 0000043300
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411]
IRS NUMBER: 131890974
STATE OF INCORPORATION: MD
FISCAL YEAR END: 0226
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04141
FILM NUMBER: 05813840
BUSINESS ADDRESS:
STREET 1: 2 PARAGON DR
CITY: MONTVALE
STATE: NJ
ZIP: 07645
BUSINESS PHONE: 2015739700
MAIL ADDRESS:
STREET 1: 2 PARAGON DRIVE
CITY: MONTVALE
STATE: NJ
ZIP: 07645
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>f10kfy2004.txt
<DESCRIPTION>FY 2004 FORM 10K - YEAR ENDED FEBRUARY 26, 2005
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended February 26, 2005
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 its 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)
Registrant's telephone number, including area code: 201-573-9700
---------------------------------
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock - $1 par value New York Stock Exchange
7.75% Notes, due April 15, 2007 New York Stock Exchange
9.125% Senior Notes, due
December 15, 2011 New York Stock Exchange
9.375% Notes, due August 1, 2039 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
---------------------------------
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of the close of business on September 10, 2004, the
registrant's most recently completed second fiscal quarter, was $258,099,276.
The number of shares of common stock outstanding as of the close of
business on May 5, 2005 was 38,963,530.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part I, Items 1 and 3, and Part II, Items
5, 6, 7, 7A, 8, 9A and 15 are incorporated by reference from the Registrant's
Fiscal 2004 Annual Report to Stockholders. The information required by Part II,
Items 10, 11, 12, 13, and 14 are incorporated by reference from the
Registrant's Proxy Statement.
<PAGE>
PART I
ITEM 1 - Business
General
- -------
The Great Atlantic & Pacific Tea Company, Inc. ("A&P", "we", "our",
"us" or "our Company") is engaged in the retail food business. We operated 647
stores averaging approximately 39,500 square feet per store as of February 26,
2005. In addition, we served as wholesaler to 42 franchise stores in Canada
averaging approximately 32,750 square feet per store as of February 26, 2005. On
the basis of reported sales for fiscal 2004, we believe that we are among North
America's largest retail food chains.
Operating under the trade names A&P(R), Super Fresh(R),
Sav-A-Center(R), Farmer Jack(R), Waldbaum's(TM), Super Foodmart, Ultra Food &
Drug, Dominion(R), Food Basics(R), The Barn Markets(R) and The Food Emporium(R),
we sell groceries, meats, fresh produce and other items commonly offered in
supermarkets. In addition, many stores have bakery, delicatessen, pharmacy,
floral, fresh fish and cheese departments and on-site banking. National,
regional and local brands are sold as well as private label merchandise. In
support of our retail operations, we sell other private label products in our
stores under other brand names of our Company which include without limitation,
America's Choice(R), Master Choice(R), Health Pride(R), Savings Plus and The
Farm.
Building upon a broad base of A&P supermarkets, our Company has
historically expanded and diversified within the retail food business through
the acquisition of other supermarket chains and the development of several
alternative store types. We now operate our stores with merchandise, pricing and
identities tailored to appeal to different segments of the market, including
buyers seeking gourmet and ethnic foods, a wide variety of premium quality
private label goods and health and beauty aids along with the array of
traditional grocery products.
The Company's Securities and Exchange Commission ("SEC") filings are
promptly posted to its website at www.aptea.com after they are filed with the
SEC and can be accessed free of charge through a link on the "Investors" page.
Modernization of Facilities
- ---------------------------
During fiscal 2004, we expended approximately $216 million for capital
projects, which included 24 new supermarkets and 18 major remodels or
enlargements. Our Company has planned capital expenditures of approximately $225
to $250 million in fiscal 2005. These expenditures relate primarily to opening
10 to 15 new supermarkets, converting 1 to 3 stores to new formats, and
enlarging or remodeling 100 - 110 supermarkets. In addition, we plan to continue
with at least similar levels of capital expenditures in fiscal 2006 and several
years thereafter.
Sources of Supply
- -----------------
Our Company obtains the merchandise sold in our stores from a variety
of suppliers located primarily in the United States and Canada. Our Company has
long-standing and satisfactory relationships with our suppliers.
<PAGE>
Employees
- ---------
As of February 26, 2005, we had approximately 73,000 employees, of
which 69% were employed on a part-time basis. Approximately 89% of our employees
are covered by union contracts.
Competition
- -----------
The supermarket business is highly competitive throughout the marketing
areas served by our Company and is generally characterized by low profit margins
on sales with earnings primarily dependent upon rapid inventory turnover,
effective cost controls and the ability to achieve high sales volume. We compete
for sales and store locations with a number of national and regional chains, as
well as with many independent and cooperative stores and markets.
Segment Information
- -------------------
The segment information required is contained under the caption "Note
14 - Operating Segments" in the Fiscal 2004 Annual Report to Stockholders and is
herein incorporated by reference.
Foreign Operations
- ------------------
The information required is contained under the captions "Management's
Discussion and Analysis", "Note 2 - Restatement of Previously Issued Financial
Statements", "Note 3 - Changes in Accounting Methods," "Note 4 - Valuation of
Goodwill and Long-Lived Assets", "Note 10 - Income Taxes", "Note 11 - Retirement
Plans and Benefits", "Note 13 - Commitments and Contingencies" and "Note 14 -
Operating Segments" in the Fiscal 2004 Annual Report to Stockholders and is
herein incorporated by reference.
ITEM 2 - Properties
At February 26, 2005, we owned 65 properties consisting of the
following:
Stores, Not Including Stores in Owned Shopping Centers
------------------------------------------------------
Land and building owned 16
Building owned and land leased 17
----
Total stores 33
Shopping Centers
----------------
Land and building owned 5
Building owned and land leased 3
----
Total shopping centers 8
Warehouses
----------
Land and building owned 6
<PAGE>
Administrative and Other Properties
-----------------------------------
Land and building owned 5
Building owned and land leased 3
Property under development - building owned and land leased 1
Property under development - land and building owned 1
Property under development - land only 2
Undeveloped land 6
----
Total other properties 18
----
Total Properties 65
====
At February 26, 2005, we operated 647 retail stores and serviced 42
franchised stores. These stores are geographically located as follows:
Company Stores:
--------------
New England States:
------------------
Connecticut 28
----
Total 28
Middle Atlantic States:
----------------------
District of Columbia 1
Delaware 9
Maryland 30
New Jersey 94
New York 136
Pennsylvania 25
----
Total 295
Midwestern States:
-----------------
Michigan 95
Ohio 6
----
Total 101
Southern States:
---------------
Louisiana 24
Mississippi 4
----
Total 28
----
Total United States 452
Ontario, Canada 195
----
Total Stores 647
====
Franchised Stores:
Ontario, Canada 42
----
Total Franchised Stores 42
====
The total area of all of our operated retail stores is 25.6 million
square feet averaging approximately 39,500 square feet per store. Excluding
liquor and The Food Emporium(R) stores, which are generally smaller in size, the
average store size is approximately 41,700 square feet. The total area of all
franchised stores is 1.4 million square feet averaging approximately 32,750
square feet per store. The 24 new stores opened in fiscal 2004 consisted of 24
supermarkets and range in size from 7,500 to 60,000 square feet, with an average
size of approximately 41,750 square feet. The stores built over the past several
years and those planned for fiscal 2005 and thereafter, generally range in size
from 40,000 to 60,000 square feet. The selling area of new stores is
approximately 72% of the total square footage.
<PAGE>
As of the end of fiscal 2004, we operated 12 warehouses to service our
store network. These warehouses are geographically located as follows:
Louisiana 1
Maryland 1
Michigan 2
New Jersey 1
New York 2
Pennsylvania 1
----
Total United States 8
Ontario, Canada 4
----
Total Warehouses 12
====
The net book value of real estate pledged as collateral for the
Company's $400 million Secured Revolving Credit Agreement amounted to $16.1
million as of February 26, 2005.
ITEM 3 - Legal Proceedings
The information required is contained under the caption "Note 13 -
Commitments and Contingencies" in the Fiscal 2004 Annual Report to Stockholders
and is herein incorporated by reference.
ITEM 4 - Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2004.
PART II
ITEM 5 - Market for the Registrant's Common Stock and Related Security Holder
Matters
The information required is contained under the captions "Summary of
Quarterly Results", "Five Year Summary of Selected Financial Data", and
"Stockholder Information" in the Fiscal 2004 Annual Report to Stockholders and
is herein incorporated by reference.
Our Company is prohibited, under the terms of our Revolving Credit
Agreement, from paying cash dividends on common shares. As such, we have not
made dividend payments in the previous three years and do not intend to pay
dividends in the normal course of business in fiscal 2005.
<PAGE>
Securities authorized for issuance under equity compensation plans are
summarized below:
<TABLE>
<CAPTION>
As of February 26, 2005
Weighted Average
Number of Exercise Price Number of
Securities of Outstanding Securities
to be Issued Options and Available to
Upon Exercises Rights Grant
----------------- ------------------ ------------------
<S> <C> <C> <C>
Plan Category
- -------------
1994 Stock Option Plan for officers and key employees 1,016,025** $ 15.43** - *
1998 Long Term Incentive and Share Award Plan 3,425,909 14.30 1,268,622
1994 Stock Option Plan for Board of Directors 34,700 17.95 65,167
----------------- --------------- ------------------
Total Options Outstanding as of February 26, 2005 4,476,634 $ 14.58** 1,333,789
================= ============== ==================
* On March 17, 2004, the plan expired.
** Includes 12,500 SAR's with a weighted average exercise price of $31.625.
Since SAR's enable the holder, in lieu of purchasing stock, to receive cash
in an amount equal to the excess of the fair market value of common stock
on the date of exercise over the option price, such SAR's have not been
included in the "Number of Securities to be Issued Upon Exercises" column
above.
</TABLE>
ITEM 6 - Selected Financial Data
The information required is contained under the caption "Five Year
Summary of Selected Financial Data" in the Fiscal 2004 Annual Report to
Stockholders and is herein incorporated by reference.
ITEM 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required is contained under the caption "Management's
Discussion and Analysis" in the Fiscal 2004 Annual Report to Stockholders and is
herein incorporated by reference.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
The information required is contained in the section "Market Risk"
under the caption "Management's Discussion and Analysis" in the Fiscal 2004
Annual Report to Stockholders and is herein incorporated by reference.
ITEM 8 - Financial Statements and Supplementary Data
(a) Financial Statements: The financial statements required to be filed
herein are described in Part IV, Item 15 of this report. Except for
the sections included herein by reference, our Fiscal 2004 Annual
Report to Stockholders is not deemed to be filed as part of this
report.
(b) Supplementary Data: The information required is contained under the
caption "Summary of Quarterly Results" in the Fiscal 2004 Annual
Report to Stockholders and is herein incorporated by reference.
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the fiscal year ended February 26,
2005.
ITEM 9A - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
- ------------------------------------------------
We have established and maintain disclosure controls and procedures
that are designed to ensure that information required to be disclosed in our
Company's Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our Company's management,
including our Chairman of the Board and Chief Executive Officer and Executive
Vice President, Chief Financial Officer and Secretary, as appropriate, to allow
timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the
participation of our Company's management, including our Company's Chairman of
the Board and Chief Executive Officer along with our Company's Executive Vice
President, Chief Financial Officer and Secretary, of the effectiveness of the
design and operation of our Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of
February 26, 2005, our Company's Chairman of the Board and Chief Executive
Officer along with our Company's Executive Vice President, Chief Financial
Officer and Secretary, concluded that our Company's disclosure controls and
procedures were effective as of February 26, 2005.
The Company's management does not expect that its disclosure controls and
procedures or its internal control over financial reporting will prevent all
errors and all fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and breakdowns
can occur because of simple errors or mistakes. Additionally, controls can be
circumvented by the individual acts of some person or by collusion of two or
more people. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Accordingly, the Company's disclosure controls and procedures
are designed to provide reasonable, not absolute, assurance that the objectives
of our disclosure control system are met and, as set forth above, the Company's
management has concluded, based on their evaluation as of the end of the period,
that our disclosure controls and procedures were sufficiently effective to
provide reasonable assurance that the objectives of our disclosure control
system were met.
Incorporation by reference of Management's Annual Report on Internal Control
over Financial Reporting
- ------------------------------------------------------------------------------
Management of The Great Atlantic and Pacific Tea Company, Inc. has prepared
an annual report on internal control over financial reporting. Management's
report, together with the attestation report of the independent registered
public accounting firm, is included in our Company's Fiscal 2004 Annual Report
to Stockholders and is herein incorporated by reference in this Annual Report on
Form 10-K.
Changes in Internal Control over Financial Reporting
- ----------------------------------------------------
Other than discussed below, there has been no change during our Company's
fiscal quarter ended February 26, 2005 in our Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, our Company's internal control over financial reporting.
In coming to the conclusion that our internal control over financial
reporting was effective as of February 26, 2005, our management considered,
among other things, the restatement related to the accounting for leases, as
disclosed in Note 2 of Notes to the Consolidated Financial Statements included
in our Fiscal 2004 Annual Report to Stockholders which is herein incorporated by
reference, which management concluded resulted from a deficiency in our controls
over the accounting for leases, which represented a material weakness.
Management notified the Audit Committee of the Board of Directors and our
Company's independent registered public accounting firm of this matter. During
the fourth quarter of fiscal 2004 and prior to February 26, 2005, the Company
implemented controls to ensure that all leases are reviewed and accounted for in
accordance with generally accepted accounting principles. Accordingly, the
Company evaluated its internal controls over the selection and application of
lease accounting policies as of February 26, 2005 and has concluded that the
material weakness had been remediated as of year-end.
ITEM 9B - Other Information
On May 5, 2005, our Company approved the payout to executive officers of
$2,960,553 in cash bonuses, pursuant to the Management Incentive Plan for Fiscal
Year 2004, which includes the payout of the following amounts to the Company's
Named Executive Officers, as defined by Item 402(a)(3) of Regulation S-K:
<PAGE>
<TABLE>
<CAPTION>
Cash Bonus Award for
Officer Title Fiscal Year 2004
- --------------------- ------------------------------------------------------------- --------------------
<S> <C> <C>
Christian W.E. Haub Chairman of the Board and Chief Executive Officer $ 766,438
Eric Claus President and Chief Executive Officer, Canadian Company 455,875
Mitchell P. Goldstein Executive Vice President, Chief Financial Officer & Secretary 401,000
John E. Metzger Senior Vice President, Chief Information Officer 251,625
Brian Piwek President and Chief Operating Officer 455,875
</TABLE>
PART III
ITEMS 10 and 11 - Directors and Executive Officers of the Registrant and
Executive Compensation
The executive officers of our Company are as follows:
<TABLE>
<CAPTION>
Name Age Current Position
- --------------------------- ------ ------------------------------------------------------------
<S> <C> <C>
Christian W.E. Haub 40 Chairman of the Board and Chief Executive Officer
Eric Claus 48 President and Chief Executive Officer, Canadian Company
Brenda M. Galgano 36 Senior Vice President and Corporate Controller
Mitchell P. Goldstein 44 Executive Vice President, Chief Financial Officer & Secretary
Peter Johannes Jueptner 42 Executive Vice President, Retail Development
John E. Metzger 50 Senior Vice President, Chief Information Officer
William Moss 57 Vice President and Treasurer
Brian Piwek 58 President and Chief Operating Officer
</TABLE>
The executive officers of our Company are chosen annually and serve
under the direction of the Chief Executive Officer ("CEO") with the consent of
the Board of Directors.
Mr. Haub currently serves as Chairman of the Board and Chief Executive
Officer of our Company. He was elected a director on December 3, 1991, and is
Chair of the Executive Committee and a member of the Finance Committee. Mr. Haub
served as Chief Operating Officer of our Company from December 7, 1993, becoming
Co-Chief Executive Officer on April 2, 1997, sole CEO on May 1, 1998 and
Chairman of the Board on May 1, 2001. Mr. Haub also served as President of the
Company from December 7, 1993 through February 24, 2002, and from November 4,
2002 through November 1, 2004. Mr. Haub, son of Helga Haub, is a partner and
Co-Chief Executive Officer of Tengelmann Warenhandelsgesellschaft KG, a
partnership organized under the laws of the Federal Republic of Germany
("Tengelmann"). Mr. Haub is on the Board of Directors of the Food Marketing
Institute and on the Board of Trustees of St. Joseph's University in
Philadelphia, Pennsylvania.
Mr. Claus was appointed President & Chief Executive Officer, Canadian
Company on November 11, 2002. Prior to joining our Company, Mr. Claus served as
Chief Executive Officer of Co-Op Atlantic, between February 1997 and November
2002.
Ms. Galgano was appointed Senior Vice President and Corporate Controller
on November 1, 2004. Ms. Galgano served as Vice President, Corporate Controller
from February 2002 to November 2004, Assistant Corporate Controller of our
Company from July 2000 to February 2002 and Director of Corporate Accounting
from October 1999 to July 2000. Prior to joining our Company, Ms. Galgano was
with PricewaterhouseCoopers from July 1997 to July 1999 as Senior Manager and
Manager of the Audit and Business Advisory Services Group.
Mr. Goldstein was elected Executive Vice President and Chief Financial
Officer on November 1, 2004 and Secretary on December 9, 2004. From February
2002 to November 2004, Mr. Goldstein was Senior Vice President & Chief Financial
Officer, and from January 2000 to February 24, 2002, Mr. Goldstein was Senior
Vice President, Finance & Treasurer of our Company. Prior to joining our
Company, Mr. Goldstein was Chief Financial Officer from October 1998 to January
2000 and Vice President of Strategic Planning and Corporate Development from
September 1997 to October 1998 at Vlasic Foods International. Before that, he
was Director of Strategic Planning at the Campbell Soup Company. Vlasic Foods
International filed a petition under the Federal bankruptcy laws in January
2001. Mr. Goldstein is on the Board of Advisers of the Rutgers Business School.
Mr. Jueptner was appointed Executive Vice President of Retail
Development on November 1, 2004. Prior to that, Mr. Jueptner served as Executive
Vice President, A&P U.S. from November 2002 to November 2004, and Senior Vice
President, Chief Strategy Officer from October 2002 to November 2002. Prior to
joining our Company, Mr. Jueptner was Chief Commercial Officer of The Worldwide
Retail Exchange from December 2000 through July 2002. From 1997 through 2000,
Mr. Jueptner held various positions with Campbell Soup Company, lastly, General
Manager, Beverages & Latin America.
Mr. Metzger was appointed Senior Vice President, Chief Information
Officer on February 11, 2002, and has served as the Company's Chief
Information Officer since such date, with the exception of mid-September,
2004 through mid-November, 2004, when he served as the Company's Executive
Vice President, Fresh Store. Prior to that, he was Senior Vice President
and Business Process Initiative Business Leader from May 2001 to February
2002, and Vice President, Supply & Logistics from October 1999 to May 2001.
Prior to joining our Company, Mr. Metzger was Senior Vice President of CS
Integrated LLC from January 1998 to October 1999 and before that, Vice
President, Distribution & Procurement for General Mills Restaurants, Inc.
from October 1993 to November 1997. Mr. Metzger is a director of the
Institute for Standards & Collaboration Commerce, Inc.
Mr. Moss was appointed Vice President and Treasurer on February 24,
2002. Prior to that Mr. Moss was Vice President, Treasury Services and Risk
Management from 1992 to February 2002.
Mr. Piwek was appointed President and Chief Operating Officer on
November 1, 2004. Prior to that, Mr. Piwek served as President and Chief
Executive Officer, A&P U.S. from October 2002 to November 2004, Chairman,
President and Chief Executive Officer of The Great Atlantic & Pacific Company of
Canada, Limited from April 2002 through October 2002, Vice Chairman, President
and Chief Executive Officer of The Great Atlantic & Pacific Company of Canada,
Limited from February 2000 to October 2002, and Vice Chairman and Co-Chief
Executive Officer of The Great Atlantic & Pacific Company of Canada, Limited
from October 1997 through February 2000. Prior to joining the Company, he was
President of Overwaitea Food Group, a retailer and franchisor in British
Columbia and Alberta, Canada.
The information required regarding our directors, executive
compensation and our beneficial ownership reporting compliance is contained
under the captions "Election of Directors", "Executive Compensation" and
"Section 16(a) Beneficial Ownership Reporting Compliance", respectively, in the
Proxy Statement for our 2005 Annual Meeting of Stockholders, to be filed on or
about May 27, 2005 ("Proxy Statement"), and is herein incorporated by reference.
Audit Committee Financial Expert
- --------------------------------
The Board has determined that each member of the Audit Committee is
independent in accordance with the NYSE listing rules, the Company's Standards
of Independence and Rule 10A-3 of the Exchange Act. In addition, the Board has
determined that each member of the Audit Committee qualifies as an "audit
committee financial expert," as defined by the SEC.
Code of Business Conduct and Ethics
- -----------------------------------
Our Company has adopted a Code of Business Conduct and Ethics
applicable to all employees. This Code is applicable to Senior Financial
Executives including the chief executive officer, chief financial officer and
chief accounting officer of our Company. A&P's Code of Business Conduct and
Ethics is available on the Company's Web site at www.aptea.com under "Corporate
Governance." Our Company intends to post on its web site any amendments to, or
waivers from, its Code of Business Conduct and Ethics applicable to Senior
Financial Executives.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
Beneficial Ownership of More than 5% of the Company's Common Stock
The information required is contained in our Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners and Management", and is
herein incorporated by reference.
ITEM 13 - Certain Relationships and Related Transactions
The information required is contained in our Proxy Statement under the
heading "Certain Relationships and Transactions", and is herein incorporated by
reference.
ITEM 14 - Principal Accounting Fees and Services
The information required is contained in our Proxy Statement under the
heading "Independent Registered Public Accounting Firm", and is herein
incorporated by reference.
PART IV
ITEM 15 - Exhibits and Financial Statement Schedules
Documents filed as part of this report.
1) Financial Statements: The financial statements required by Item 8 are
included in the Fiscal 2004 Annual Report to Stockholders. The
following required items are herein incorporated by reference:
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required or do
not apply, or the required information is included elsewhere in the
Consolidated Financial Statements or Notes thereto.
3) Exhibits:
The following are filed as Exhibits to this Report:
EXHIBIT NO. DESCRIPTION
---------- -----------
3.1 Articles of Incorporation of The Great Atlantic
& Pacific Tea Company, Inc., as amended through
July 1987 (incorporated herein by reference to
Exhibit 3(a) to Form 10-K filed on May 27, 1988)
3.2 By-Laws of The Great Atlantic & Pacific Tea
Company, Inc., as amended through December 4,
2004 (incorporated herein by reference to
Exhibit 3.1 to Form 8-K filed on December 4,
2004)
4.1 Indenture, dated as of January 1, 1991 between
the Company and JPMorgan Chase Bank (formerly
The Chase Manhattan Bank as successor by merger
to Manufacturers Hanover Trust Company), as
trustee (the "Indenture") (incorporated herein by
reference to Exhibit 4.1 to Form 8-K)
4.2 First Supplemental Indenture, dated as of
December 4, 2001, to the Indenture, dated as of
January 1, 1991 between our Company and JPMorgan
Chase Bank, relating to the 7.70% Senior Notes
due 2004 (incorporated herein by reference to
Exhibit 4.1 to Form 8-K filed on December 4,
2001)
4.3 Second Supplemental Indenture, dated as of
December 20, 2001, to the Indenture between our
Company and JPMorgan Chase Bank, relating to the
9 1/8% Senior Notes due 2011 (incorporated
herein by reference to Exhibit 4.1 to Form 8-K
filed on December 20, 2001)
4.4 Successor Bond Trustee (incorporated herein by
reference to Exhibit 4.4 to Form 10-K filed on
May 9, 2003)
10.1 Employment Agreement, made and entered into as of
the 11th day of November, 2002, by and between
our Company and Eric Claus, and Offer Letter
dated the 22nd day of October, 2002 (incorporated
herein by reference to Exhibit 10.1 to Form 10-Q
filed on January 10, 2003)
10.2 Employment Agreement, made and entered into as of
the 1st day of November, 2000, by and between the
Company and William P. Costantini (incorporated
herein by reference to Exhibit 10 to Form 10-Q
filed on January 16, 2001) ("Costantini
Agreement")
10.3 Amendment to Costantini Agreement dated April
30, 2002 (incorporated herein by reference to
Exhibit 10.7 to Form 10-K filed on July 5, 2002)
10.4 Confidential Separation and Release Agreement by
and between William P. Costantini and The Great
Atlantic & Pacific Tea Company, Inc. dated
November 4, 2004 (incorporated herein by
reference to Exhibit 10.4 to Form 10-Q filed on
January 7, 2005)
10.5 Employment Agreement, made and entered into as
of the 16th day of June, 2003, by and between
our Company and Brenda Galgano (incorporated
herein by reference to Exhibit 10.9 to Form 10-Q
filed on October 17, 2003)
10.6 Employment Agreement, made and entered into as of
the 24th day of February, 2002, by and between
our Company and Mitchell P. Goldstein
(incorporated herein by reference to Exhibit 10.8
to Form 10-K filed on July 5, 2002)
10.7 Employment Agreement, made and entered into as of
the 2nd day of October, 2002, by and between our
Company and Peter Jueptner (incorporated herein
by reference to Exhibit 10.26 to Form 10-Q filed
on October 22, 2002) ("Jueptner Agreement")
10.8* Amendment to Jueptner Agreement dated November
10, 2004
10.9 Offer Letter dated the 18th day of September
2002, by and between our Company and Peter
Jueptner (incorporated herein by reference to
Exhibit 10.10 to Form 10-Q filed on January 10,
2003)
10.10 Employment Agreement, made and entered into as
of the 14th day of May, 2001, by and between our
Company and John E. Metzger, as amended February
14, 2002 (incorporated herein by reference to
Exhibit 10.13 to Form 10-K filed on July
5, 2002) ("Metzger Agreement")
10.11* Amendment to Metzger Agreement dated
September 13, 2004
10.12* Amendment to Metzger Agreement dated
October 25, 2004
10.13* Employment Agreement, made and entered into as
of the 1st day of March 2005, by and between our
Company and William J. Moss
10.14 Employment Agreement, made and entered into as
of the 28th day of October, 2002, by and between
our Company and Brian Piwek, and Offer Letter
dated the 23rd day of October, 2002
(incorporated herein by reference to Exhibit
10.14 to Form 10-Q filed on January 10, 2003)
("Piwek Agreement")
10.15* Amendment to Piwek Agreement dated February 4,
2005
10.16 Supplemental Executive Retirement Plan effective
as of September 1, 1997 (incorporated herein by
reference to Exhibit 10.B to Form 10-K filed on
May 27, 1998)
10.17 Supplemental Retirement and Benefit Restoration
Plan effective as of January 1, 2001
(incorporated herein by reference to Exhibit
10(j) to Form 10-K filed on May 23, 2001)
10.18 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.19 1998 Long Term Incentive and Share Award Plan
(incorporated herein by reference to Exhibit
10(k) to Form 10-K filed on May 19, 1999)
10.20* Form of Stock Option Grant
10.21* Description of 2005 Turnaround Incentive
Compensation Program
10.22* Form of Restricted Share Unit Award Agreement
10.23 1994 Stock Option Plan (incorporated herein by
reference to Exhibit 10(e) to Form 10-K filed on
May 24, 1995)
10.24 1994 Stock Option Plan for Non-Employee
Directors (incorporated herein by reference to
Exhibit 10(f) to Form 10-K filed on May 24,
1995)
10.25 2004 Non-Employee Director Compensation
effective as of July 14, 2004 (incorporated
herein by reference to Exhibit 10.15 to Form
10-Q filed on July 29, 2004)
10.26* Description of Management Incentive Plan
10.27 Credit Agreement dated as of February 23, 2001,
among our Company, The Great Atlantic & Pacific
Company of Canada, Limited and the other
Borrowers party hereto and the Lenders party
hereto, The Chase Manhattan Bank, as U.S.
Administrative Agent, and The Chase Manhattan
Bank of Canada, as Canadian Administrative Agent
("Credit Agreement") (incorporated herein by
reference to Exhibit 10 to Form 10-K filed on May
23, 2001)
10.28 Amendment No. 1 and Waiver, dated as of November
16, 2001 to Credit Agreement (incorporated
herein by reference to Exhibit 10.23 to Form
10-K filed on July 5, 2002)
10.29 Amendment No. 2 dated as of March 21, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.24 to Form 10-K filed on
July 5, 2002)
10.30 Amendment No. 3 dated as of April 23, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.25 to Form 10-K filed on
July 5, 2002)
10.31 Waiver dated as of June 14, 2002 to Credit
Agreement (incorporated herein by reference to
Exhibit 10.26 to Form 10-K filed on July 5, 2002)
10.32 Amendment No. 4 dated as of October 10, 2002 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.27 to Form 10-Q filed on
October 22, 2002)
10.33 Amendment No. 5 dated as of February 21, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.1 to Form 8-K filed on
March 7, 2003)
10.34 Amendment No. 6 dated as of March 25, 2003 to
Credit Agreement (incorporated herein by
reference to Exhibit 10.28 to Form 10-K filed on
May 9, 2003)
13* Fiscal 2004 Annual Report to Stockholders
14 Code of Business Conduct and Ethics
(incorporated herein by reference to
Exhibit 14 to Form 10-K filed on May 21, 2004)
16 Letter on Change in Certifying Accountant
(incorporated herein by reference to
Forms 8-K filed on September 18, 2002 and
September 24, 2002, and Form 8-K/A
filed on September 24, 2002)
18 Preferability Letter Issued by
PricewaterhouseCoopers LLP (incorporated herein
by reference to Exhibit 18 to Form 10-Q filed on
July 29, 2004)
21* Subsidiaries of Registrant
23* Consent of Independent Registered Public
Accounting Firm
31.1* Certification of the Chief Executive Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
31.2* Certification of the Chief Financial Officer
Pursuant Section 302 of the Sarbanes-Oxley Act
of 2002
32* Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed with this 10-K
<PAGE>
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedule
To the Stockholders and Board of Directors
of The Great Atlantic & Pacific Tea Company, Inc.:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting
and of the effectiveness of internal control over financial reporting referred
to in our report dated May 10, 2005 appearing in the Fiscal Year 2004 Annual
Report to Shareholders of The Great Atlantic & Pacific Tea Company, Inc.
(which report, consolidated financial statements and assessment are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 10, 2005
<PAGE>
<TABLE>
<CAPTION>
Schedule II
The Great Atlantic & Pacific Tea Company, Inc.
Valuation and Qualifying Accounts and Reserves
Years Ended February 22, 2003, February 28, 2004, and February 26, 2005
(in thousands)
Additions Additions
Allowance for Impact of Charged to Charged to
Bad Debts for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions (1) Exchange Balance
- -------------- ------------- ------------- ------------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Feb. 22, 2003 9,200 - 6,929 - (6,584) 254 9,799
Feb. 28, 2004 9,799 (4,200) 5,225 - (4,554) 46 6,316
Feb. 26, 2005 6,316 - (1,745) - 1,072 70 5,713
Additions Additions
Stock Loss Impact of Charged to Charged to
Reserve for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions Exchange Balance
- -------------- ------------- ------------- ------------- ------------- ------------- ------------ ---------
Feb. 22, 2003 7,326 - 709 - - 46 8,081
Feb. 28, 2004 8,081 - (1,147) - (251) 109 6,792
Feb. 26, 2005 6,792 - 3,016 - - 81 9,889
Deferred Tax Additions Additions
Valuation Impact of Charged to Charged to
Allowance for Beginning Adoption of Costs & Other Foreign Ending
Year Ended Balance FIN 46-R Expenses Accounts Deductions Exchange Balance
- -------------- ------------- ------------- ------------- ------------- ------------ ------------- ---------
Feb. 22, 2003 - - 161,495 - - - 161,495
Feb. 28, 2004 161,495 - 67,682 - - - 229,177
Feb. 26, 2005 229,177 - 89,632 - - - 318,809
(1) Deductions to allowance for Bad Debts represent write-offs of accounts
receivable balances.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
The Great Atlantic & Pacific Tea Company, Inc.
(registrant)
Date: May 10, 2005 By: /s/ Mitchell P. Goldstein
--------------------------------------------------
Mitchell P. Goldstein, Executive Vice President,
Chief Financial Officer & Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and as of the date indicated.
/s/ Christian W.E. Haub Chairman of the Board and
- ------------------------------------ Chief Executive Officer
Christian W.E. Haub
/s/ John D. Barline Director
- ------------------------------------
John D. Barline
/s/ Jens-Jurgen Bockel Director
- ------------------------------------
Jens-Jurgen Bockel
/s/ Bobbie A. Gaunt Director
- ------------------------------------
Bobbie Gaunt
/s/ Helga Haub Director
- ------------------------------------
Helga Haub
/s/ Dan P. Kourkoumelis Director
- ------------------------------------
Dan P. Kourkoumelis
/s/ Edward Lewis Director
- ------------------------------------
Edward Lewis
/s/ Richard L. Nolan Director
- ------------------------------------
Richard L. Nolan
/s/ Maureen B. Tart-Bezer Director
- ------------------------------------
Maureen B. Tart-Bezer
The above-named persons signed this report on behalf of the registrant on May
10, 2005.
/s/ Brenda M. Galgano Senior Vice President, Corporate Controller
- -----------------------------------
Brenda M. Galgano May 10, 2005
<PAGE>
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Section 302 Certification
I, Christian W.E. Haub, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Christian W. E. Haub Date: May 10, 2005
- ------------------------
Christian W. E. Haub
Chairman of the Board
and
Chief Executive Officer
<PAGE>
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Section 302 Certification
I, Mitchell P. Goldstein, certify that:
1. I have reviewed this annual report on Form 10-K of The Great Atlantic &
Pacific Tea Company, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
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 annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusion about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Mitchell P. Goldstein Date: May 10, 2005
- -------------------------
Mitchell P. Goldstein
Executive Vice President, Chief
Financial Officer & Secretary
<PAGE>
Exhibit 32
Certification Accompanying Periodic Report
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. ss. 1350)
The undersigned, Christian W. E. Haub, Chairman of the Board and Chief Executive
Officer of The Great Atlantic & Pacific Tea Company, Inc. ("Company"), and
Mitchell P. Goldstein, Executive Vice President, Chief Financial Officer &
Secretary of the Company, each hereby certifies that (1) the Annual Report of
the Company on Form 10-K for the period ended February 26, 2005 fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and (2) the information contained in the Report fairly presents, in all
material respects, the financial condition and the results of operations of the
Company.
Dated: May 10, 2005 /s/ Christian W. E. Haub
------------------------
Christian W. E. Haub
Chairman of the Board
and
Chief Executive Officer
Dated: May 10, 2005 /s/ Mitchell P. Goldstein
-------------------------
Mitchell P. Goldstein
Executive Vice President,
Chief Financial Officer &
Secretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>2
<FILENAME>ex10jueptneramendment.txt
<DESCRIPTION>EXHIBIT 10.8 - PETER JUEPTNER AMENDMENT
<TEXT>
Exhibit 10.8
Dear Peter:
As discussed, effective November 15, 2004 (the "Effective Date"), you will
assume the position of Executive Vice President Retail Development, reporting to
Brian Piwek, President and Chief Operating Officer.
The Company recognizes that this change has given you Good Reason to terminate
your employment pursuant to Paragraph 8(a) of the Employment Agreement between
you and The Great Atlantic & Pacific Tea Company, Inc., made and entered into on
October 2, 2002 (the "Agreement").
Whereas, in order to induce you not to terminate your employment within the 3
month period immediately following the Effective Date, and whereas, you would
prefer not to terminate your employment, it is agreed that with respect to your
reassignment on November 15, 2004, the 3-month period in the last sentence of
Paragraph 8(a) of the Agreement shall be changed to a 9-month period.
Except as indicated above, the Agreement, its terms and conditions shall remain
in full force and effect.
If the terms outlined above are acceptable, please sign below and return to me
an original executed copy of this letter agreement. Upon execution of this
letter agreement, the Agreement shall be deemed amended in accordance with
Paragraph 28 thereof.
Sincerely,
The Great Atlantic & Pacific Tea Company, Inc.
By: /s/Allan Richards
-------------------------------------
Allan Richards
Agreed to and accepted this 10th day of November, 2004.
/s/Peter Jueptner
- ------------------------------
Peter Jueptner
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>ex10metzger913agreement.txt
<DESCRIPTION>EXHIBIT 10.11 METZGER SEPT 13, 2004 AMENDMENT
<TEXT>
Exhibit 10.11
AMENDMENT
This AMENDMENT, effective as of September 13, 2004 (the "Amendment"),
temporarily amends the Employment Agreement made on May 14, 2001 and amended on
February 11, 2002 (as so amended, the "Agreement"), by and between The Great
Atlantic & Pacific Tea Company, Inc. and John Metzger.
W I T N E S S E T H
WHEREAS, the Company agrees that by reassigning the Employee on
September 13, 2004 (the "Effective Date") from Senior Vice President & Chief
Information Officer and everGReen Business Leader of the Company reporting
directly to the Chairman, President and Chief Executive Officer of the Company
to Executive Vice President - Fresh Store Development of A&P US reporting
directly to its President and Chief Executive Officer, the Company has given the
Employee Good Reason to terminate his employment;
WHEREAS, in order to induce the Employee not to terminate his
employment within the three (3) month period immediately following the Effective
Date, the Company has agreed to amend the Agreement; and
WHEREAS, the Employee would prefer not to terminate his employment;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and for other good and valuable consideration, the
parties, intending to be legally bound, agree as follows:
1. Temporary Amendment to Section 8.(a)
Until the first anniversary of the Effective Date, the last sentence
of Section 8.(a) of the Agreement shall be amended to read:
"If an event constituting a ground for termination of employment for
Good Reason occurs, and the Employee fails to give notice of
termination with three hundred, sixty-five (365) days after the
occurrence of such event, the Employee shall be deemed to have waived
his right to terminate employment for Good Reason in connection with
such event (but not for any other event for which the three hundred,
sixty-five (365) day period has not expired)."
2. If during the three hundred, sixty-five (365) days that the amendment
contained in Section 1 above shall be effective another Good Reason for the
Employee to terminate his employment shall occur and the Employee shall
terminate his employment, then and only then shall the Company extend the
exercise period from one year from the date of termination of employment to
three years therefrom for any and all options granted to the Employee to
purchase shares of the Company's $1.00 par value common stock granted under
The Great Atlantic & Pacific Tea Company, Inc. 1998 Long Term Incentive and
Share Award Plan which options shall have previously vested or shall vest
up to and including the day the Employee gives notice to the Company of the
termination of his employment for such subsequent Good Reason.
3. Except as temporarily amended herein, all other terms of the Agreement
shall remain in full force and effect.
4. All capitalized terms used herein but not defined herein shall have the
meaning assigned to them in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized Officer and the Employee has hereunto set his hand as
of the Effective Date.
THE GREAT ATLANTIC & PACIFIC
TEA COMPANY, INC.
/s/Christian W.E. Haub
------------------------------------
Christian W. E. Haub, Chairman,
President & Chief Executive Officer
/s/John Metzger
- -------------------------------
John Metzger
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>4
<FILENAME>ex10metzger1025agreement.txt
<DESCRIPTION>EXHIBIT 10.12 J. METZGER OCT. 25, 2004 AMENDMENT
<TEXT>
Exhibit 10.12
The Great Atlantic & Pacific Tea Company, Inc.
2 Paragon Drive
Montvale, New Jersey 07645
Christian W. E. Haub
Chairman of the Board
Chief Executive Officer
October 25, 2004
John Metzger
4205 Leslie Lane
Doylestown, PA 18901
Dear John:
This is to confirm our understanding that you will receive the company's SERP
benefit upon reaching age 55 (September 25, 2009) and still being employed in
the services of The Great Atlantic & Pacific Tea Co., Inc.
I am looking forward to your significant contributions to the company.
Sincerely,
/s/Christian Haub
- -----------------
Christian Haub
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>5
<FILENAME>ex10mossagreement.txt
<DESCRIPTION>EXHIBIT 10.13-MOSS AGREEMENT MARCH 1, 2005
<TEXT>
Exhibit 10.13
EMPLOYMENT AGREEMENT
AGREEMENT, made and entered into as of March 1, 2005, by and between
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC. (the "Company"), and WILLIAM J.
MOSS (the "Employee").
W I T N E S S E T H
In consideration of the promises and mutual covenants contained herein
and for other good and valuable consideration, the Parties, intending to be
legally bound, agree as follows:
1. Term of Employment.
(a) The Employment Period shall commence as of March 1, 2005 and,
subject only to the provisions of Sections 6 and 7 below relating to termination
of employment, shall continue until the close of business on February 28, 2007
or (ii) such later date as shall result from the operation of subparagraph (b)
below (the "Terminal Date").
(b) Commencing on September 1, 2006, and on the first business day of
each month thereafter (such date and each such first business day, the "Renewal
Date") the Terminal Date set forth in subparagraph (a) above shall be extended
so as to occur six months from the Renewal Date unless either the Company or the
Employee shall have given written notice to the other Party on or before such
Renewal Date that the Terminal Date is not to be extended.
2. Duties. The Employee will serve as Vice President, Treasurer or in
any other capacity as assigned by the Company and will devote his/her full
business time and attention to the affairs of the Company and his/her duties.
3. Salary and Bonus. The Company will pay the Employee a base salary at
an annual rate of not less than $200,000.00, which base salary will not be
reduced and will be reviewed periodically (at intervals of not more than twelve
(12) months). The Employee will be eligible to receive annually or otherwise any
bonus awards, whether payable in cash, shares of common stock of the Company or
otherwise, which the Company, the Compensation Committee of the Board or such
other authorized committee of the Board determines to award or grant.
4. Benefit Programs. The Employee will receive such benefits and awards
as the Compensation Committee of the Board shall determine and will be eligible
to participate in employee benefit plans and programs of the Company, including,
but not limited to, pension and other retirement plans, group life insurance,
hospitalization and surgical and major medical coverage, short term disability,
vacations and holidays, long-term disability, and such other benefits as are or
may be made available from time to time to senior executives of the Company.
5. Business Expenses. The Employee will be reimbursed for all
reasonable expenses incurred by him/her in connection with the conduct of the
business of the Company, provided he/she properly accounts therefor in
accordance with the Company's policies.
6. Termination of Employment by the Company.
6.1 Involuntary Termination by the Company Other Than For Cause. The
Company may terminate the Employee's employment at any time and for any reason
by giving him/her a written notice of termination to that effect at least 45
days before the date of termination. In the event the Company terminates the
Employee's employment for any reason other than for Cause, as provided in
Section 6.2, below, the Employee shall be entitled to the benefits described in
Section 8.
6.2 Termination for Cause. The Company may terminate the Employee's
employment for Cause if (i) the Employee willfully, substantially, and
continually fails to perform the duties for which he/she is employed by the
Company, (ii) the Employee willfully fails to comply with the reasonable
instructions of the Company, (iii) the Employee willfully engages in conduct
which is or would reasonably be expected to be materially and demonstrably
injurious to the Company, (iv) the Employee willfully engages in an act or acts
of dishonesty resulting in material personal gain to the Employee at the expense
of the Company, (v) the Employee is convicted of a felony, (vi) the Employee
engages in an act or acts of gross malfeasance in connection with his/her
employment hereunder, (vii) the Employee commits a material breach of the
confidentiality provision set forth in Section 10, (viii) the Employee exhibits
demonstrable evidence of alcohol or drug abuse having a substantial adverse
effect on his/her job performance hereunder, or (ix) the Employee is unable to
carry out his/her duties due to permanent and total disability.
7. Termination of Employment by the Employee. The Employee may
terminate his/her employment at any time and for any reason by giving the
Company a written notice of termination to that effect at least 45 days before
the date of termination.
8. Benefits Upon Termination Without Cause. If the Employee's
employment shall terminate pursuant to Section 6.1 other than for Cause, the
Employee, upon execution of a Confidential Separation and Release Agreement,
shall be entitled to the following:
(a) The Company shall pay to the Employee as a severance benefit for
each month during the 12 month period beginning with the month next following
the date of termination of the Employee's employment an amount equal to
one-twelfth of the sum of his/her annual rate of base salary immediately
preceding his/her termination of employment. Each such monthly benefit shall be
paid no later than the last day of the applicable month. In the event that the
Employee dies before the end of such 12-month period, the payments for the
remainder of such period shall be made to the Employee's estate.
(b) The Company shall pay to the Employee as a bonus for the fiscal
year in which the termination occurred an amount equal to a portion (determined
as provided in the next sentence) of the bonus that the Employee would actually
have received under the Company's annual management incentive bonus plan for the
fiscal year of termination of the Employee's employment if his/her employment
had not terminated (determined on the basis of his/her actual bonus opportunity
and the actual degree of achievement of the applicable performance goals) or, if
no bonus opportunity for that year had been established for the Employee at the
time of such termination of employment, such portion of the bonus awarded to
him/her under the Company's annual management incentive bonus plan for the
fiscal year immediately preceding the fiscal year of the termination of his/her
employment, with deferred bonuses counting for the fiscal year in which it was
earned rather than the year in which it was paid. Such portion shall be
determined by dividing the number of days of the Employee's employment during
such fiscal year up to his/her termination of employment by 365 (366 if a leap
year). Such payment shall be made on or about the date on which bonuses for the
applicable fiscal year are paid to executives of the Company generally under the
Company's annual management incentive bonus plan, and the Employee shall have no
right to any further bonuses under said plan.
(c) During the period of 12 months beginning on the date of the
Employee's termination of employment, the Employee shall remain covered by the
medical, dental, vision, life insurance, and, if reasonably commercially
available through nationally reputable insurance carriers, long-term disability
plans of the Company that covered him/her immediately prior to his/her
termination of employment as if he/she had remained in employment for such
period. In the event that the Employee's participation in any such plan is
barred, the Company shall arrange to provide the Employee with substantially
similar benefits (but, in the case of long-term disability benefits, only if
reasonably commercially available). Any medical insurance coverage for such
12-month period pursuant to this subsection (c) shall become secondary upon the
earlier of (i) the date on which the Employee begins to be covered by comparable
medical coverage provided by a new employer, or (ii) the earliest date upon
which the Employee becomes eligible for Medicare or a comparable Government
insurance program.
9. Non-Competition. The Employee agrees that during the term of this
Agreement and for a period of twelve months following termination of his/her
employment, the Employee will not, within any of the geographical areas of the
United States or Canada in which the Company is then conducting business (either
directly or through franchisees), directly or indirectly, own, manage, operate,
control, be employed by, participate in, provide consulting services to, or be
connected in any manner with the ownership, management, operation or control of
any business similar to any of the types of businesses conducted by the Company
to any significant extent during his/her employment or on the date of
termination of his/her employment, except the Employee may own for investment
purposes up to 1% of the capital stock of any company whose stock is publicly
traded, and during such twelve month period following termination of his/her
employment the Employee will not contact or solicit employees of the Company for
the purpose of inducing such employees to leave the employ of the Company.
10. Confidential Information and Trade Secrets. The Employee hereby
acknowledges that he/she will have access to and become acquainted with various
trade secrets and proprietary information of the Company and other confidential
information relating to the Company. The Employee covenants that he/she will
not, directly or indirectly, disclose or use such information except as is
necessary and appropriate in connection with his/her employment by the Company
and that he/she will otherwise adhere in all respects to the Company's policies
against the use or disclosure of such information.
11. Arbitration; Injunctive Relief. Any controversy or claim arising
out of or relating to this Agreement, directly or indirectly, or the performance
or breach thereof, will be settled by arbitration in accordance with the rules
of the American Arbitration Association, and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof. The
arbitration will be held in New York, New York, or such other place as may be
agreed upon at the time by the parties to the arbitration. The parties shall
bear their own expenses in connection with any arbitration or proceeding arising
out of or relating to this Agreement, directly or indirectly, or the performance
or breach thereof; provided, however, that in the event that the Employee
substantially prevails, the Company agrees promptly to reimburse the Employee
for all expenses (including costs and fees of witnesses, evidence and attorneys
fees and expenses) reasonably incurred by him/her in investigating, prosecuting,
defending, or preparing to prosecute or defend any action, proceeding or claim
arising out of or relating to this Agreement, directly or indirectly, or the
performance or breach thereof. The parties acknowledge and agree that a breach
of the Employee's obligations under Sections 9 or 10 could cause irreparable
harm to Company for which the Company would have no adequate remedy at law, and
further agree that, notwithstanding the agreement of the parties to arbitrate
controversies or claims as set forth above, the Company may apply to a court of
competent jurisdiction to seek to enjoin preliminarily or permanently any breach
or threatened breach of the Employee's obligations under Sections 9 and 10.
12. Deductions and Withholding. All amounts payable or which become
payable under any provision of this Agreement shall be subject to any deductions
authorized by the Employee and any deductions and withholdings required by law.
13. Governing Law. The validity, interpretation and performance of this
Agreement will be governed by the laws of the State of New Jersey without regard
to the conflict of law provisions.
14. Severability. If any one or more of the provisions contained in
this Agreement is held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability will not affect any other
provision hereof.
15. Successors and Assigns. This Agreement will be binding upon and
inure to the benefit of the Parties hereto and their personal representatives,
and, in the case of the Company, its successors and assigns. To the extent the
Company's obligations under this Agreement are transferred to any successor or
assign, such successor or assign shall be treated as the "Company" for purposes
of this Agreement. Other than as contemplated by this Agreement, the Employee
may not assign his/her rights or duties under this Agreement.
16. Continuing Effect. Wherever appropriate to the intention of the
Parties hereto, the respective rights and obligations of the Parties, including
but not limited to the obligations referred to in Sections 8, 9 and 10, hereof,
will survive any termination or expiration of the term of this Agreement.
17. Entire Agreement. This Agreement supersedes any and all other
agreements and understandings between the Parties with respect to the matters
addressed in this Agreement.
18. Amendment and Waiver. No amendment or waiver of any provision of
this Agreement shall be effective, unless the same shall be in writing and
signed by the Parties, and then such amendment, waiver or consent shall be
effective only in the specific instance or for the specific purpose for which
such amendment, waiver or consent was given.
19. Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed an original but all
of which together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer and the Employee has hereunto set
his/her hand as of the day and year first above written.
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
BY: __________________________
ITS: __________________________
DATE: __________________________
- -------------------------------- ------------------------
WILLIAM J. MOSS DATE
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>ex10piwek204agreement.txt
<DESCRIPTION>EXHIBIT 10.15 PIWEK AGREEMENT FEBRUARY 4, 2005
<TEXT>
Exhibit 10.15
February 4, 2005
Brian Piwek
28 Sherwood Downes
Park Ridge, NJ 07656
Re: Amendments to your Employment Agreement
Dear Brian:
As we have discussed, the Company recognizes that due to the changes
that took place on November 15, 2004 (the "Effective Date"), you have Good
Reason to terminate your employment pursuant to Paragraph 8(a) of the Executive
Employment Agreement between you and The Great Atlantic & Pacific Tea Company,
Inc., made and entered into on October 28, 2002 (the "Agreement").
Whereas, in order to induce you not to terminate your employment within
the 3 month period immediately following the Effective Date, and whereas, you
would prefer not to terminate your employment, it is agreed that with respect to
the changes that took place on November 15, 2004, the 3-month period in the last
sentence of Paragraph 8(a) of the Agreement shall be changed to a 12-month
period. To avoid any misunderstanding, this extension is a one-time extension
that applies only to the changes that occurred on November 15, 2004. For any
other event constituting Good Reason, you must give notice of your termination
for Good Reason within 3 months after the occurrence of such event.
Although it is the Company's hope that you do not terminate your
employment for Good Reason due to the changes that occurred on November 15,
2004, the Company agrees that if you do so (1) all stock options that have been
granted to you but are unvested as of your separation date will immediately vest
on that date and will be exercisable within one year and (2) you will be 100%
vested in the Supplemental Executive Retirement Plan (SERP) at the Cumulative
Benefit Payable that is applicable to ten years of service (which is 30% of the
highest five year average salary during the last ten years leading up to
retirement).
Except as indicated above, the Agreement, its terms and conditions
shall remain in full force and effect. If the terms outlined above are
acceptable, please sign below and return to me an original executed copy of this
letter agreement. Upon execution of this letter agreement, the Agreement shall
be deemed amended in accordance with Paragraph 28 thereof.
Sincerely,
The Great Atlantic & Pacific Tea Company, Inc.
By:/s/Christian Haub
Agreed to and accepted this 8th day of February, 2005.
/s/Brian Piwek
- ------------------------------
Brian Piwek
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>7
<FILENAME>ex1021stockoptiongrant.txt
<DESCRIPTION>EXHIBIT 10.20 FORM OF STOCK OPTION GRANT
<TEXT>
Exhibit 10.20
April 25, 2003
Dear: <<NAME>>
Reference: Grant of Non-Qualified Stock Options
This will confirm the terms and conditions of an option grant being made to you
pursuant to the Company's 1998 Long Term Incentive and Share Award Plan (the
"Plan"), a copy of which is attached hereto and made a part hereof.
1. On <<DATE OF GRANT>>, the Company granted to you an Option, as a
non-qualified stock option, to purchase from the Company up to a total of shares
of the Company's $1.00 par value Common Stock (the "Common Stock") at a price of
<<GRANT PRICE>> for each share purchased pursuant to this Option, such exercise
price being the closing price of the Common Stock on the New York Stock Exchange
on the date of grant, as reported in The Wall Street Journal.
The Option and the number of shares and price per share are
subject to adjustments as provided in the Plan. In any adjustments of the number
of shares of Common Stock, fractional shares shall be omitted from the shares
covered by this Option. Any adjustment of the price per share shall be computed
at the next higher cent.
2. (a) This Option shall have a term of ten years from the date of grant, and
shall vest and may be exercised with respect to 25% of the options granted
hereby as of the first anniversary of the date of grant of this Option and each
additional 25% of the options covered hereby on the second, third and fourth
anniversaries, respectively, of the date of grant of this Option, and in each
case during the remaining term of this Option; provided, however, that in the
event you attain age 64 while employed by the Company or a parent or subsidiary
of the Company, the entire remaining number of shares with respect to which this
Option then remains unexercised shall become exercisable during the remaining
term of this Option effective as of the later of (i) your attainment of age 64
or (ii) the date which is six (6) months after the date of grant. In no event
shall this Option be exercisable after ten years from the date of this
Agreement.
<PAGE>
(b) Except as provided in Section 3(b), 3(c), 3(d), 3(e), 3(f)
or 3(g) hereof, this Option may be exercised (i) only if you are, at all times
during the period beginning with the date hereof and ending on the day three
months before the date of exercise, an employee of either the Company, or a
parent or subsidiary of the Company, or of another corporation referred to in
Section 422(a)(2) of the Internal Revenue Code of 1986, as amended from time to
time (the "Code") and (ii) only with respect to shares exercisable during such
period of employment. The terms "parent" and "subsidiary" as used herein shall
have the meanings assigned to them by Section 425 of the Code.
(c) This Option may be exercised, with respect to shares as to
which the right to exercise has matured as herein provided in whole at any time
or in part from time to time, but not with respect to less than 25 shares in
each exercise or such lesser number with respect to which this Option remains
unexercised.
(d) This Option may be exercised by sending to the Company a
notice in writing, stating the number of shares being purchased hereunder and
transmitting with such notice a check in the appropriate amount of the number of
shares purchased.
(e) Anything herein to the contrary notwithstanding, this Option
shall become full exercisable in the event of a Change of Control (as defined in
Section 7(b) of the Plan as in effect on the date of grant of this Option).
3. (a) This Option is subject to all the terms, conditions, limitations
and restrictions contained in the Plan and may not be exercised, assigned or
transferred, in whole or in part, except as therein provided. Specifically, but
not by way of limitation, this Option is not transferable by you otherwise than
by will or the laws of descent and distribution and is exercisable during your
lifetime only by you.
(b) In the event you should die while employed by the Company,
or a parent or subsidiary of the Company, such person who shall have acquired,
by will or by the laws of descent and distribution, the right to exercise this
Option may exercise this Option with respect to all shares covered hereby at any
time prior to the expiration of the term of this Option, or prior to the first
anniversary of your death, whichever date is earlier.
(c) In the event you should die after termination of your
employment with the Company or a parent or subsidiary of the Company, but at a
time when you are still eligible to exercise all or any portion of this Option,
such person as shall have acquired, by will or by the laws of descent and
distribution, the right to exercise this Option may exercise this Option at any
time prior to the expiration of the term of this Option, or prior to the first
anniversary of your death, whichever date is earlier, but only with respect to
shares that became exercisable during your period of employment.
(d) In the event that you become disabled (within the meaning of
Section 22(e) (3) of the Code) while employed by the Company, or a parent or
subsidiary of the Company, you may exercise this Option at any time prior to the
expiration of the term of this Option, or prior to the first anniversary of your
becoming disabled, whichever date is earlier, but only with respect to shares
that became exercisable during your period of employment.
(e) In the event that you retire from the Company, or a parent
or subsidiary of the Company, (i) pursuant to a tax-qualified pension or
retirement plan of the Company, or a parent or subsidiary of the Company, or
(ii) after you have been employed by the Company, and/or a parent or subsidiary
of the Company, for not less than ten (10) years and have attained age 55, this
Option will become fully vested and you may exercise this Option at any time
prior to the expiration of the term of this Option, (provided, however, that
this option shall be treated as a non-qualified stock option rather than an
incentive stock option if it is exercised by you more than three months after
your retirement).
(f) In the event that your employment is terminated without "cause" (as defined
below) by the Company or a parent or subsidiary of the Company, or with the
written consent of the Company or a parent or subsidiary of the Company, you may
exercise this Option at any time prior to the expiration of the term of this
Option, or prior to the first anniversary of your termination of employment,
whichever date is earlier, but only with respect to shares that became
exercisable during your period of employment (provided, however, that this
option shall be treated as a non-qualified stock option rather than an incentive
stock option if it is exercised by you more than three months after your
termination of employment). For this purpose, "cause" shall mean any of the
following: (i) any act of gross negligence by you which results in material
injury to the Company or a parent or subsidiary of the Company, (ii) any willful
engagement by you in conduct which involves dishonesty, fraud or moral
turpitude, (iii) your conviction of a felony or any crime involving moral
turpitude, or (iv) any willful engagement by you in illegal or improper conduct
which results in material injury to the Company or a parent or subsidiary of the
Company or material personal enrichment to you at the expense of the Company or
a parent or subsidiary of the Company.
(g) In the event that your employment is terminated for "cause" (as defined in
Section 3(f) above) by the Company or a parent or subsidiary of the Company,
this Option shall terminate immediately upon such termination of employment, and
in no event shall you have any rights under this Option following such
termination of employment.
4. (a) Subject to the provisions of the Plan, the Company shall issue
certificates for stock purchased pursuant to this Option within a reasonable
time after notice of exercise of this Option and payment of the option price.
Each share of stock shall be fully paid and non-assessable.
(b) You shall not have any rights of a record holder with
respect to such shares until such certificates are actually paid for and issued
to you.
(c) You shall assume all risks incident to any change hereafter
in the applicable laws or regulations or incident to any change in the market
value of any shares issued to you upon the exercise of this Option in whole or
in part.
5. Nothing herein contained shall obligate the Company or any
subsidiary of the Company to continue your employment for any particular period
or on any particular basis of compensation, or constitute a request to postpone
your retirement date.
Very truly yours,
Chairman, President and Chief Executive Officer
THE GREAT ATLANTIC & PACIFIC TEA COMPANY, INC.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>8
<FILENAME>ex10restrictedstockgrant.txt
<DESCRIPTION>EX 10.22 RESTRICTED SHARE UNIT AWARD AGREEMENT
<TEXT>
Exhibit 10.22
Date
Name & Address
Dear:
Reference: 2005 Turnaround Incentive Compensation Program ("Program")
Restricted Share Unit Award Agreement ("Agreement")
This will confirm the terms and conditions of an Award being made to you
pursuant to The Great Atlantic & Pacific Tea Company, Inc. (the "Company") 1998
Long Term Incentive and Share Award Plan (the "Plan"), a copy of which is
attached hereto and made a part of this Agreement.
1. Restricted Share Units. Provided that you have signed and returned this
Agreement indicating your acceptance of its terms and conditions, the Company
will grant ________ Restricted Share Units ("Units") to you, subject to all of
the terms contained in this Agreement.
2. Shareholder Approval. The grant of the Units is contingent upon the
Shareholders approving an increase in the number of Shares reserved for issuance
under the Plan at the July 2005 Annual Meeting of Shareholders, and is subject
to the performance criteria outlined below.
3. Performance Criteria and Vesting Requirements. (a) If the Company achieves
After-Tax Profitability, as hereinafter defined, in fiscal year 2006, then 33.3%
of the Units awarded shall vest as of April 31, 2007, an additional 33.3% of the
Units awarded shall vest as of April 31, 2008 if After-Tax Profitability is
sustained in fiscal year 2007, and the remaining 33.3% of the Units awarded
shall vest as of April 31, 2009 if After-Tax Profitability is sustained in
fiscal years 2007 and 2008. If the Company does not achieve After-Tax
Profitability in fiscal year 2006 but does achieve After-Tax Profitability in
fiscal year 2007, then 50% of the Units awarded shall vest as of April 31, 2008
and an additional 50% of the Units awarded shall vest as of April 31, 2009 if
After-Tax Profitability is sustained in fiscal year 2008. For purposes of this
grant, After-Tax Profitability is defined as net income as defined by GAAP,
adjusted for the following items: Adjustments required as a result of changes in
GAAP or interpretations of GAAP; Impairment charges outside the normal course of
business (e.g., normal store closures and remodels); Restructuring charges
(including severance, impairments, vacancy and other exiting costs);
Discontinued operations; One-time costs associated with major transactions,
including: Refinancing costs and other costs associated with raising capital,
Acquisition costs, Disposal costs, Costs of establishing outsourcing
arrangements; Gains and losses on disposals of businesses relating either to a
restructuring or discontinued operation; Costs of special projects approved by
board; Costs associated with significant litigation; Costs associated with
regulatory changes (e.g., tax law changes, labor law changes, etc.); and, Other
items of a similar nature.
(b) The Units will vest only if you are, at all times during the period
beginning with the date hereof and ending on the dates of vesting, an employee
of the Company or a parent or subsidiary of the Company.
(c) As the Units vest, each vested Unit will be converted to one share
of the Company's Common Stock. Such vested Units will be delivered to you in the
form of a stock certificate as soon as practicable following each vesting date.
(d) The Units are subject to the terms, conditions, limitations and
restrictions contained in the Plan and may not be assigned or transferred, in
whole or in part, except as therein provided.
(e) In the event that your employment is terminated for any reason by
you or by the Company or a parent or subsidiary of the Company, you shall
forfeit the Units immediately upon such termination of employment.
4. Non-Competition. In exchange for the opportunity to participate in the
Program, you agree that during the term of your employment with the Company, and
for a period of eighteen months following termination of your employment for
whatever reason, you will not, within any of the geographical areas of the
United States or Canada in which the Company is then conducting business (either
directly or through franchisees), directly or indirectly, own, manage, operate,
control, be employed by, participate in, provide consulting services to, or be
connected in any manner with the ownership, management, operation or control of
any business engaged in retail sale of goods and products that are in direct
competition with any of the types of businesses conducted by the Company to any
significant extent during your employment or on the date of termination of your
employment, except that you may own for investment purposes up to 1% of the
capital stock of any company whose stock is publicly traded. For the same
eighteen-month period, you also agree to not contact or solicit employees of the
Company for the purpose of inducing such employees to leave the employ of the
Company.
5. Trade Secrets and Proprietary Information. You hereby acknowledge that you
have and/or will have access to and become acquainted with various trade secrets
and proprietary information of the Company and other confidential information
relating to the Company. You covenant that you will not, directly or indirectly,
disclose or use such information except (i) as is necessary and appropriate in
connection with your employment by the Company, (ii) as is required pursuant to
a judicial or administrative subpoena, or (iii) if such information is already
in the public domain (other than by reason of your breach of your obligations
hereunder). Subject to the exceptions set forth above, you agree that you will
adhere in all respects to the Company's policies against the use or disclosure
of such information.
6. Confidentiality. You further agree that your participation in the Program,
and the terms and conditions of this Agreement, are confidential and that you
will not in any manner publish, publicize, disclose or otherwise make known or
permit or cause to be made known to any third person your participation in the
Program or the terms and conditions of this Agreement. Nothing in this paragraph
shall be construed to prohibit the disclosure of this Agreement to your spouse
or any legal, tax or financial consultant retained by you, provided that the
persons to whom the disclosure is being made agree to be bound by the
confidentiality provisions of this paragraph.
7. Arbitration; Injunctive Relief. Any controversy or claim arising out of or
relating to this Agreement, directly or indirectly, or the performance or breach
thereof, will be settled by arbitration in accordance with the rules of the
American Arbitration Association, and judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. The
arbitration will be held in Bergen County or Passaic County in New Jersey, or
such other place as may be agreed upon at the time by the parties to the
arbitration. The parties shall bear their own expenses in connection with any
arbitration or proceeding arising out of or relating to this Agreement, directly
or indirectly, or the performance or breach thereof; provided, however, that in
the event that you substantially prevail, the Company agrees promptly to
reimburse you for all expenses (including costs and fees of witnesses, evidence
and attorneys fees and expenses) reasonably incurred by you in investigating,
prosecuting, defending, or preparing to prosecute or defend any action,
proceeding or claim arising out of or relating to this Agreement, directly or
indirectly, or performance or breach thereof. You acknowledge and agree that a
breach of your obligations under Sections 4, 5 and/or 6 of this Agreement could
cause irreparable harm for which the Company would have no adequate remedy at
law, and further agree that, notwithstanding the agreement to arbitrate
controversies or claims as set forth above, the Company may apply to a court of
competent jurisdiction to seek to enjoin preliminarily or permanently any breach
or threatened breach of your obligations under Sections 4, 5 and/or 6 of this
Agreement.
8. General. (a) Each share of stock awarded hereunder, once vested, shall be
fully paid and non-assessable.
(b) You shall not have any rights of a record holder with respect to
such shares until such certificates are actually issued to you.
(c) You shall assume all risks incident to any change hereafter in the
applicable laws or regulations or incident to any change in the market value of
any shares issued to you upon the vesting of the Units in whole or in part.
(d) Nothing herein contained shall obligate the Company, or any parent,
division, affiliate or subsidiary of the Company, to continue your employment
for any particular period or on any particular basis of compensation.
<PAGE>
9. Your Acceptance and Return of Agreement. To indicate your agreement and
acceptance, please sign the Agreement where indicated below. If you are located
in Montvale, return the signed original Agreement by hand delivery to Judy
Barbarino (3rd floor Hartford building, extension 4461) on or before Wednesday,
March 9, 2005. If you are located in Paterson, return the signed original
Agreement by hand delivery to Alexia Finley (1st floor Human Resources area,
extension 3713) on or before Wednesday, March 9, 2005. You should retain a
signed copy of the original Agreement for your records.
Very truly yours,
By:/s/Allan Richards
------------------------------------
ALLAN RICHARDS
Senior Vice President, Human Resources
and Labor Relations
Agreed and accepted:
By: _____________________________________
Signature
Print Name: ______________________________
Social Security No.: ________________________
Date: ____________________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>9
<FILENAME>ex1024longtermperfincentive.txt
<DESCRIPTION>EXHIBIT 10.24 DESC. LONG-TERM PERF. INCENTIVE
<TEXT>
Exhibit 10.21
Description of 2005 Turnaround Incentive Compensation Plan
Purpose: Attract, retain and reward key employees for completing a
successful and sustained turnaround.
No awards under this program will be made unless the Company has returned to
profitability for a full fiscal year during the performance period (fiscal years
2005 through 2007) and complete vesting of awards will not occur unless the
Company sustains that profitability.
Return to profitability will be met if net profit is achieved for total
fiscal year 2006 or 2007. For the purpose of complete vesting, net profitability
must be sustained through fiscal year 2008. For this purpose, net profit is
defined as positive Net Income, excluding extraordinary income or loss not
associated with on-going business operations.
Performance Period: Three years (2005 -2007)
Vesting: If profitability returns for total fiscal year 2006
33.3% - April 2007
33.3% - April 2008, if profitability is sustained in fiscal 2007
33.3% - April 2009, if profitability is sustained in fiscal 2007 & 2008
Vesting: If profitability returns for total fiscal year 2007
50% - April 2008
50% - April 2009, if profitability is sustained in fiscal 2008
Special Provision: Non-Compete Clause
Plan requires executive share ownership:
It is the view of the Board that senior executives with significant impact on
the future success of A&P have a substantial "at risk" personal equity
investment in A&P common stock.
Furthermore, the Board believes that it is necessary to link the economic
Interests of key managers with each other and with shareholders in general.
This will promote key management stability, retention, motivation and long-term
focus on corporate strategy. As such, the Compensation Committee recommended,
and the Board approved, the following executive share-ownership requirements:
Share-ownership value
CEO 3 X base salary
Executive Mgt Team: 2 X base salary
Senior Mgt Team: 1 X base salary
Executives will have up to five years to meet ownership requirement
This grant would be a one-time grant for the target period
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>10
<FILENAME>ex1025mgmtincentiveplan.txt
<DESCRIPTION>EX. 10.26 DESC. MANAGMENT INCENTIVE PLAN
<TEXT>
Exhibit 10.26
Description of Management Incentive Plan
- ----------------------------------------
Purpose: The Management Incentive Plan is designed to provide attractive and
competitive financial rewards when solid results are achieved. Incentives are
used to reward managers for continuous improvements in operating and financial
results and for growing the business in a profitable way. The plan allows
flexibility for rewarding individual performance.
The Company's Management Incentive Plan provided target annual incentive awards
for Fiscal 2004 contingent upon the attainment of the following performance
goals: sales; profitability; cash flow; and the executive's individual
performance objectives. With respect to Corporate Staff executives, 30% of the
incentive was based on the attainment of a net income goal, 30% on a free cash
flow goal and 40% on achieving individual performance goals. With respect to
operating unit executives, 25% of the incentive was based on the attainment of
sales goals, 25% on the attainment of operating income goals, 25% on the
attainment of operating cash flow goals and 25% on achieving individual
performance goals.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>11
<FILENAME>ex13annualreport.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
The Great Atlantic & Pacific Tea Company, Inc.
Fiscal 2004
Annual Report to Stockholders
<PAGE>
Table of Contents
CEO Letter to Stockholders.............................................. 3
Management's Discussion and Analysis................................... 6
Consolidated Statements of Operations.................................. 46
Consolidated Statements of Stockholders' Equity
And Comprehensive (Loss) Income................................. 47
Consolidated Balance Sheets............................................ 48
Consolidated Statements of Cash Flows.................................. 49
Notes to Consolidated Financial Statements............................. 50
Management's Annual Report on Internal Control over Financial Reporting 115
Report of Independent Registered Public Accounting Firm................ 116
Five Year Summary of Selected Financial Data........................... 118
Executive Officers..................................................... 120
Board of Directors..................................................... 120
Stockholder Information................................................ 121
Company Profile
- ---------------
The Great Atlantic & Pacific Tea Company, Inc. ("We," "Our," "Us" or "our
Company"), based in Montvale, New Jersey, operates combination food and drug
stores, conventional supermarkets and limited assortment food stores in 10 U.S.
states, the District of Columbia and Ontario, Canada, under the A&P(R),
Waldbaum's(TM), Super Foodmart, The Food Emporium(R), Super Fresh(R), Farmer
Jack(R), Sav-A-Center(R), Dominion(R), Ultra Food & Drug, Food Basics(R) and The
Barn Markets(R) trade names.
<PAGE>
CHAIRMAN and CEO LETTER TO STOCKHOLDERS
To Our Stockholders:
A&P made solid progress in fiscal 2004 toward the return to
profitability, with our operating results and financial position again improved.
Despite a difficult retailing environment, we grew sales, maintained market
share, and increased ongoing operating earnings.
The strong performance of A&P Canada, continued progress of our U.S.
operations and ongoing management of expenses and liquidity all contributed to
improved results and greater financial stability. In addition, we took steps to
accelerate our progress in the U.S. with organizational changes that have
sharpened our merchandising and operational execution while improving our cost
structure.
A&P Canada achieved one of its best years ever in fiscal 2004, with
significant year-over-year sales and profit improvement driven by our "Fresh
Obsessed" food marketing initiatives and the disciplined execution of our
Food Basics operations.
Our successful Fresh Box format is fully in place in nearly fifty
stores in Ontario, and many elements of our "Fresh Obsessed" merchandising and
service strategy are enhancing other mainstream stores as well. On the discount
side, the settlement of litigation brought by some Food Basics franchisees
resulted in our purchase of 24 previously franchised stores. The improvement of
those operations under Corporate direction contributed to the generally
strengthened performance of the entire Canadian Food Basics group.
Our U.S. business continued to improve, as we again emphasized
merchandising and store operating execution, expense management and productivity
measures. We successfully introduced our U.S. fresh store format in more than a
dozen locations in our core markets during Fiscal 2004 - and as of this writing
have nearly tripled that total. Customer reaction has been very positive, and we
are enthusiastic about the sales and profit potential of this format as we go
forward with its implementation.
We continued to develop and improve merchandising and operations in our
discount Food Basics stores in the U.S. to drive top-line growth and
productivity. Identical store sales in our well-established northeastern
locations have been excellent, and underline our confidence in the success of a
strong discount food presence in our core markets.
In November 2004, we implemented the next phase of our U.S. rebuilding
program by consolidating corporate and operating leadership, and centralizing
the management and support of our retail business. This has already resulted in
more effective merchandising and better store-level execution across our banner
operations. It will also reduce overhead costs substantially, with savings
estimated at $50 million in fiscal 2005 and a total of approximately $75 million
by the end of fiscal 2006.
On the financial side, we maintained diligent management of cash flow,
capital spending and debt levels to ensure adequate liquidity to operate and
invest as necessary. Capital spending was lower than initially anticipated,
reflecting our emphasis on preserving cash while maintaining the strength and
competitiveness of our operations. As a result, along with improved results, we
ended the year with liquidity in excess of $330 million.
In short, we moved closer to our objective of actual and sustainable
profitability by improving performance, upgrading operations, strengthening our
financial position, and implementing new and promising retail strategies.
Turning to the future, we announced on May 10, 2005 a major strategic
restructuring under which the Company will focus on growth in our core Northeast
U.S. markets, and devote a significantly greater portion of our resources going
forward to our operations there.
Specifically, we are at this writing actively pursuing the following
major initiatives:
o exploring strategic transactions to unlock the value of A&P Canada;
o planning the divestiture of our Farmer Jack and Food Basics operations and
support facilities in Michigan and Ohio;
o continuing the rollout of our fresh and discount retail formats
throughout our core Northeast markets, and
o pursuing initiatives to produce additional, significant reductions in
labor, operating, supply chain and administrative costs.
Our longstanding success in Ontario, combined with current conditions
in the Canadian retail marketplace, present us with a unique opportunity to
realize the substantial value of A&P Canada at this time. The proceeds of any
such transaction would improve our balance sheet and liquidity, helping to
establish a solid financial footing from which to achieve and sustain
profitability and growth in the U.S.
Although our Midwest U.S. operations are also improving and positioned
well in their markets, our strategy to focus investment and attention elsewhere
may result in a lesser allocation of resources than required to realize their
full potential; hence our decision to divest those operations at this time.
The decision to seek appropriate and committed buyers for our Canadian
and Midwest operations--both of which have long been a part of our North
American business--was not easy. We believe, however, that doing so now will
help us achieve our overarching objective of enhancing the value of our core
U.S. businesses and thereby creating long-term value and stability for all A&P
stakeholders.
Our strategic plan going forward is to grow The New A&P from a solid
platform that currently includes:
o 250 stores in the Metropolitan New York area, with the fresh
format expanding under the A&P, Waldbaum's and The Food
Emporium banners; and the discount operations growing under
the Food Basics name;
o 75 stores in the Mid-Atlantic region, with fresh stores being
developed under the SuperFresh banner and discount operations
as Food Basics, in the greater Philadelphia and Baltimore
markets; and
o 28 stores in the New Orleans market under the Sav-A-Center banner. While
not designated as a core business for expansion, our Sav-A-Center
operation remains a well-managed part of our business, with a solid
number-two market position and improving results.
Our strong and improving Metro New York area and Mid-Atlantic
operations will comprise the core business designated for ongoing development
and expansion. In fiscal 2004, they achieved positive same-store sales despite
difficult competitive conditions, maintaining strong market shares while
improving operating profitability.
With prime locations, successful fresh store development well
under way, and discount units contributing significant sales growth, those
businesses offer excellent potential, which would be realized through the
conversion of our store base to these new concepts and the pursuit of additional
locations. This would be facilitated by the de-leveraging of our Company's
balance sheet resulting from the contemplated transactions, and supported
thereafter by the lower overhead cost structure that will follow their
completion.
Over the past two years, we have taken major steps to improve our
results and financial position, rebuild our U.S. organization and operations,
and create attractive retail strategies for the future. I am confident that the
execution of the strategies we have announced, combined with significant,
additional operating efficiencies we are pursuing, will make possible our return
to sustainable profitability in the latter part of fiscal 2006.
On behalf of the entire Board of Directors and management team, I want
to thank our loyal associates throughout the Company for their continued
dedication and hard work in fiscal 2004 and beyond, and my appreciation to our
customers, suppliers and investors for their continuing support.
Christian Haub
Chairman of the Board
and Chief Executive Officer
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Management's Discussion and Analysis
INTRODUCTION
- ------------
The following Management's Discussion and Analysis is intended to help
the reader understand the financial position, operating results, and cash flows
of The Great Atlantic and Pacific Tea Company, Inc. It should be read in
conjunction with our financial statements and the accompanying notes ("Notes").
It discusses matters that Management considers relevant to understanding the
business environment, financial position, results of operations and our
Company's liquidity and capital resources. These items are presented as follows:
o Basis of Presentation - a discussion of our Company's fiscal year-end.
o Restatement of Previously Issued Financial Statements - a discussion of
our Company's restatement of previously issued financial statements
resulting from a correction in our accounting for leases.
o Changes in Accounting Methods - a discussion of our Company's adoption
of several changes in accounting methods during fiscal 2004.
o Overview -- a general description of our business; the value drivers of
our business; measurements; opportunities; challenges and risks; and
initiatives.
o 2005 Outlook -- a discussion of certain trends or business initiatives
for the upcoming year that Management wishes to share with the reader
to assist in understanding the business.
o Review of Continuing Operations and Liquidity and Capital Resources - a
discussion of results for fiscal 2004 and 2003, significant business
initiatives, current and expected future liquidity and the impact of
various market risks on our Company.
o Market Risk - a discussion of the impact of market changes on our
consolidated financial statements.
o Critical Accounting Estimates - a discussion of significant estimates
made by Management.
o Impact of New Accounting Pronouncements - a discussion of authoritative
pronouncements that have been or will be adopted by our Company.
BASIS OF PRESENTATION
- ---------------------
Our fiscal year ends on the last Saturday in February. Fiscal 2004
ended February 26, 2005, fiscal 2003 ended February 28, 2004 and fiscal 2002
ended February 22, 2003. Fiscal 2004 and fiscal 2002 were each comprised of 52
weeks, and fiscal 2003 was comprised of 53 weeks. Except where noted, all
amounts are presented in millions, and all net loss per share data presented is
both basic and diluted.
<PAGE>
RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
- -----------------------------------------------------
As discussed in Note 2 of our Consolidated Financial Statements, our
Company has restated our Consolidated Balance Sheet at February 28, 2004 and our
Consolidated Statements of Operations and Cash Flows for the years ended
February 28, 2004 and February 22, 2003 for corrections in our accounting for
leases. Note that the overall net impact to our results of operations and Net
loss per share from the correction in our accounting for leases for each year
was not considered material. We have restated our Consolidated Statements of
Operations for the years ended February 28, 2004 and February 22, 2003, and the
quarterly financial information for the years ended February 26, 2005 and
February 28, 2004, for the revision in classification between Store operating,
general and administrative expense and interest expense only. We have also
restated the applicable cash flow information for fiscal 2002 and 2003 and
financial information for fiscal 2000, 2001, 2002 and 2003 in this Annual
Report. Readers of the financial statements should read the restated information
in this Annual Report as opposed to the previously filed information. Throughout
this Annual Report, all referenced amounts for prior periods and prior period
comparisons reflect the balances and amounts on a restated basis.
CHANGES IN ACCOUNTING METHODS
- -----------------------------
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. Refer to
Note 3 - Changes in Accounting Methods for further discussion of these changes.
Accordingly, we have retroactively restated our Consolidated Balance
Sheet at February 28, 2004 and the Consolidated Statements of Operations and
Cash Flows for the years ended February 28, 2004 and February 22, 2003 in this
Annual Report. We have also restated the quarterly financial information for
fiscal 2003 to reflect the impact of adopting FIN 46-R, EITF 03-10, and the
change in our method of valuing certain of our inventories from the LIFO method
to the FIFO method. The impact of these changes on periods prior to fiscal 2002
has been reflected as an adjustment to retained earnings as of February 23, 2002
in the accompanying Consolidated Statements of Stockholders' Equity and
Comprehensive (Loss) Income. We have also restated the applicable financial
information for fiscal 2000, 2001, 2002 and 2003 in this Annual Report.
OVERVIEW
- --------
The Great Atlantic & Pacific Tea Company, Inc., based in Montvale, New
Jersey, operates conventional supermarkets, combination food and drug stores and
discount food stores in 10 U.S. states, the District of Columbia and Ontario,
Canada. The Company's business consists strictly of its retail operations, which
totaled 647 stores as of February 26, 2005.
United States retail operations consist of four regions: New York/New
Jersey/southern New England under the A&P, Waldbaum's, The Food Emporium and
Food Basics banners; Philadelphia/Baltimore/Washington, D.C. under the Super
Fresh and Food Basics banners; Detroit/Toledo under the Farmer Jack and Food
Basics banners, and New Orleans under the Sav-A-Center banner.
A&P Canada, based in Toronto, Ontario, operates five banner groups
across the Province, with stores operating under the A&P, Dominion, Food Basics,
Ultra Food & Drug and The Barn Market trade names. A&P Canada also serves as a
franchisor to certain Food Basics stores in Ontario.
Although our Company remained unprofitable overall in fiscal 2004, we
achieved improved trends in both sales and operating earnings through the year,
despite a continued difficult business environment. This was accomplished
through the continued profitability of A&P Canada; our ongoing focus on
merchandising and operating improvements in the U.S., and the rigorous
management of expenses, investment and liquidity throughout our Company.
A&P Canada achieved a solid year, driven by the growing consumer impact
and results of our fresh food marketing initiatives in mainstream stores,
coupled with the improving trend in our discount Food Basics operations. A&P
Canada's profits were down year on year primarily due to an internal charge for
Corporate and IT services which was increased significantly during last year's
fourth quarter. With final approval from Revenue Canada to deduct these amounts
for Canadian tax purposes, we received a significant tax benefit to the fourth
quarter and year overall.
Our U.S. banner operations maintained emphasis on improved
merchandising and store operating fundamentals; expense management and
productivity measures; the improvement of the U.S. Food Basics operation, and
the continued development of our new fresh concept - with several
additional fresh stores opening under our A&P and SuperFresh banners.
Improved marketing and merchandising execution in the U.S., enhanced by
the centralized management framework created by the reorganization of U.S.
operating management in November of 2004, contributed to our improved trends.
With all U.S. merchandising and promotional programs emanating from the central
leadership organization, and local banner managements focused on execution, we
generated an improved sales trend and cost effectiveness. A key element on the
marketing side was establishment of competitive weekly sales programs, which
consistently met objectives through the final quarter of the year.
On the financial side, we maintained close management of cash flow,
capital spending and debt levels, in order to ensure sufficient liquidity to
operate and invest strategically in the business. In particular, we continue to
manage capital spending closely and spent below our planned levels for the year
consistent with our goal to hold cash until we are ready to invest it.
Along with the significant cost benefits we anticipate with the
reorganization of our Company, day-to-day expense reduction remains a high
priority as we continue seeking ways to improve labor productivity,
administrative, advertising and occupancy expenses, and the cost of merchandise,
supplies and services.
2005 OUTLOOK
- ------------
Our continued progress in fiscal 2004 set the stage for a comprehensive
review of our Company's strategy during the fourth quarter of fiscal 2004 and
into early 2005 to establish and sustain a profitable business with long-range
growth potential.
That review, which was largely completed subsequent to our balance
sheet date, concluded with the plan that future effort and investment should be
focused on our core operations in the Northeastern United States, which account
for half of current total sales, our strongest market positions and we believe,
the best potential for profitable growth going forward. Therefore, we are moving
ahead to create a "New A&P" with our plan to divest our businesses in Canada and
the Midwestern United States, and concentrate future development in our
Northeastern markets. However, the completion of such divestitures is subject to
Board of Director approval.
Proceeds from the sales of the Canadian and Midwest businesses will be
used in part to reduce debt, providing a strong balance sheet for future
investment and growth. We expect that the divestiture process along with other
changes to focus and strengthen our Company will take the better part of Fiscal
2005 to complete.
The predominantly Northeast-focused Company that will result from these
changes is today a more viable and competitive business that we believe will be
significantly strengthened by full management focus and increased investment. It
consists of approximiately 350 stores operated under the A&P, The Food Emporium,
Waldbaum's, Super Fresh and Food Basics banners, with market-leading presence in
the Metro New York area.
The launch of the new fresh concept across our A&P, Waldbaum's and
Super Fresh banners in Fiscal 2004 introduced the leading edge of our
development in those mainstream banners. The customer response to these new
stores has been positive and has translated to better-than-expected sales and a
promising bottom line picture, underlining our confidence in this strategic
direction.
Our ability to accelerate the expansion of the fresh concept will be
accompanied by improved fundamental execution, through ongoing initiatives
addressing store operations, support services, merchandising and customer
service. These efforts have already contributed to better operating results in
the U.S., and we believe there is considerable opportunity for improvement going
forward.
While the successful execution of this plan remains ahead of us and has
numerous challenges, we believe it is now the correct strategy for the long-term
success of our Company. Our management team is fully aligned and committed to
realize the full benefit of this change to create a strong, profitable and
growth-oriented enterprise.
If these changes occur, we expect to incur certain significant costs to
exit parts of our business, including asset impairments, possible rent vacancy
charges, multiemployer Taft-Hartley plan withdrawal liabilities and other items.
We also anticipate that we will receive significant proceeds from the combined
asset sales. It is not possible to accurately estimate the amount of costs that
we will incur and proceeds that we will receive at this time, however our
objective is to strengthen the Company's balance sheet and, while we are
confident we will succeed, we do not intend to proceed with the divestitures and
other operating changes unless they achieve our goals of strengthening our
balance sheet and achieving appropriate value. Still, these are major changes
and there can be no assurance that we will be successful.
Various factors could cause us to fail to achieve this goal. These
include, among others, the following:
o Actions of competitors could adversely affect our sales and future profits.
The grocery retailing industry continues to experience fierce competition
from other food retailers, super-centers, mass merchandiser clubs,
warehouse stores, drug stores and restaurants. Our continued success is
dependent upon our ability to effectively compete in this industry and to
reduce operating expenses, including managing health care and pension costs
contained in our collective bargaining agreements. The competitive
practices and pricing in the food industry generally and particularly in
our principal markets may cause us to reduce our prices in order to gain or
maintain share of sales, thus reducing margins.
o Changes in the general business and economic conditions in our operating
regions, including the rate of inflation, population growth, the nature and
extent of continued consolidation in the food industry and employment and
job growth in the markets in which we operate, may affect our ability to
hire and train qualified employees to operate our stores. This would
negatively affect earnings and sales growth. General economic changes may
also affect the shopping habits and buying patterns of our customers, which
could affect sales and earnings. We have assumed economic and competitive
situations will not worsen in fiscal 2005 and 2006. However, we cannot
fully foresee the effects of changes in economic conditions, inflation,
population growth, customer shopping habits and the consolidation of the
food industry on A&P's business.
o Our capital expenditures could differ from our estimate if we are
unsuccessful in acquiring suitable sites for new stores, if development and
remodel costs vary from those budgeted, or if changes in financial markets
negatively affect our cost of capital or our ability to access capital.
o Our ability to achieve our profit goals will be affected by (i.) our
success in executing category management and purchasing programs that we
have underway, which are designed to improve our gross margins and reduce
product costs while making our product selection more attractive to
consumers, (ii.) our ability to achieve productivity improvements and
shrink reduction in our stores, (iii.) our success in generating
efficiencies in our distribution centers and our administrative offices,
and (iv.) our ability to eliminate or maintain a minimum level of supply
and/or quality control problems with our vendors.
o The vast majority of our employees are members of labor unions. While we
believe that our relationships with union leaderships and our
employees are satisfactory, we operate under collective bargaining
agreements which periodically must be renegotiated. In the coming
year, we have several contracts expiring and under negotiation. In
each of these negotiations rising health care and pension costs will
be an important issue, as will the nature and structure of work rules.
We are hopeful, but cannot be certain, that we can reach satisfactory
agreements without work stoppages in these markets. However, the
actual terms of the renegotiated collective bargaining agreements, our
future relationships with our employees and/or a prolonged work
stoppage affecting a substantial number of stores could have a
material effect on our results.
o The amount of contributions made to our pension and multi-employer plans
will be affected by the performance of investments made by the plans as
well as the extent to which trustees of the plans reduce the costs of
future service benefits.
o We have estimated our exposure to claims, administrative proceedings and
litigation and believe we have made adequate provisions for them, where
appropriate. Unexpected outcomes in both the costs and effects of these
matters could result in an adverse effect on our earnings.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward-looking statements made
by us or our representatives.
REVIEW OF CONTINUING OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------
Our consolidated financial information presents the (loss)
income related to our operations of discontinued businesses separate from the
results of our continuing operations. Both the discussion and analysis that
follows focus on continuing operations.
<PAGE>
FISCAL 2004 COMPARED WITH FISCAL 2003
- -------------------------------------
Sales for fiscal 2004 were $10.9 billion compared with $10.9 billion
for fiscal 2003, which was a 53-week year; comparable store sales, which
includes stores that have been in operation for two full fiscal years and
replacement stores, increased 0.1%. Loss from continuing operations decreased
from $213.2 million in fiscal 2003 to $184.0 million in fiscal 2004. Net loss
per share - basic and diluted for fiscal 2004 was $4.88 compared to $4.08 for
fiscal 2003, an increase of $0.80 per share.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2004 Fiscal 2003 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 10,854.9 $ 10,899.3 $ (44.4) (0.4%)
Increase in comparable store sales
for Company-operated stores 0.1% 0.9% NA NA
Loss from continuing operations (184.0) (213.2) 29.2 13.7
(Loss) income from discontinued
operations (4.1) 64.3 (68.4) (106.4)
Cumulative effect of a change in
accounting principle - FIN 46-R - (8.0) 8.0 100.0
Net loss (188.1) (156.9) (31.2) (19.9)
Net loss per share (4.88) (4.08) (0.80) (19.6)
</TABLE>
SALES
- -----
Sales for fiscal 2004 of $10,854.9 million decreased $44.4 million or
- -0.4% from sales of $10,899.3 million for fiscal 2003. The lower sales were due
to a decrease in U.S. sales of $213.3 million partially offset by an increase in
Canadian sales of $168.9 million. The increase in Canadian sales was primarily
due to the favorable impact of the Canadian exchange rate. The following table
presents sales for each of our operating segments for fiscal 2004 and fiscal
2003:
<TABLE>
<CAPTION>
(Decrease)
Fiscal 2004 Fiscal 2003 Increase % Change
----------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
United States $ 7,317.6 $ 7,530.9 $ (213.3) (2.8%)
Canada 3,537.3 3,368.4 168.9 5.0
----------------- ----------------- -------------------- ----------------
Total $ 10,854.9 $ 10,899.3 $ (44.4) (0.4%)
================= ================= ==================== ================
</TABLE>
The following details the dollar impact of several items affecting the
increase in sales by operating segment from fiscal 2003 to fiscal 2004:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store 53rd
Stores Stores Rate Sales Week Total
------------- ------------- -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
United States $ 252.5 $ (286.1) $ - $ (47.1) $ (132.6) $ (213.3)
Canada 315.7 (330.7) 215.0 33.6 (64.7) 168.9
------------- ------------- -------------- ------------- ------------- ------------
Total $ 568.2 $ (616.8) $ 215.0 $ (13.5) $ (197.3) $ (44.4)
============= ============= ============== ============= ============= ============
</TABLE>
The decrease in U.S. sales was attributable to the closing of 35 stores
since the beginning of fiscal 2003, of which 18 were closed in fiscal 2004,
decreasing sales by $286.1 million, the decrease in comparable store sales for
fiscal 2004 of $47.1 million or -0.6% as compared with fiscal 2003, and the
unfavorable impact of the 53rd week included in fiscal 2003 which decreased
sales by $132.6 million. These decreases were partially offset by the opening or
re-opening of 26 new stores since the beginning of fiscal 2003, of which 16 were
opened or re-opened in fiscal 2004, increasing sales by $252.5 million. Included
in the 35 stores closed since the beginning of fiscal 2003 were 6 stores closed
as part of the asset disposition initiative as discussed in Note 6 of our
Consolidated Financial Statements.
The increase in Canadian sales was attributable to the opening or
re-opening of 17 stores since the beginning of fiscal 2003, of which 8 were
opened or re-opened in fiscal 2004, increasing sales by $315.7 million, the
favorable effect of the Canadian exchange rate, which increased sales by $215.0
million, and the increase in comparable store sales for fiscal 2004 of $33.6
million or 1.0% for Company-operated stores and franchised stores combined, as
compared to fiscal 2003. These increases were partially offset by the closure of
23 stores since the beginning of 2003, of which 13 were closed in fiscal 2004,
decreasing sales by $330.7 million and the unfavorable impact of the 53rd week
included in fiscal 2003 which decreased sales by $64.7 million.
Average weekly sales per supermarket for the U.S. were approximately
$323,100 for fiscal 2004 versus $310,000 for the corresponding period of the
prior year, an increase of 4.2% primarily due to the impact of openings and
closings with net higher average weekly sales. Average weekly sales per
supermarket for Canada were approximately $285,900 for fiscal 2004 versus
$258,000 for the corresponding period of the prior year, an increase of 10.8%.
This increase was primarily due to the increase in the Canadian exchange rate
and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross
margin as a percentage of sales by operating segment for fiscal 2004 as compared
to fiscal 2003. Gross margin as a percentage of sales decreased 17 basis points
to 28.02% for fiscal 2004 from 28.19% for fiscal 2003. This 17 basis point
decrease was caused by the increase in Canadian sales (which has a lower gross
margin rate than the U.S. business) as a percentage of our total (approximately
10 basis points) and from the increase in U.S. Food Basics (which has the lowest
gross margin rate of all our banners) as a percentage of sales (approximately 7
basis points). We believe the impact on margin for changes in costs and special
reductions was not significant.
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
-------------------------------------------- --------------------------------------------
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
United States $ 2,177.9 29.76% $ 2,256.1 29.96%
Canada 863.2 24.40 816.0 24.23
-------------- --------------- -------------- --------------
Total $ 3,041.1 28.02% $ 3,072.1 28.19%
============== =============== ============== ==============
</TABLE>
The following table details the dollar impact of several items
affecting the gross margin dollar increase (decrease) from fiscal 2003 to fiscal
2004:
<TABLE>
<CAPTION>
Sales Volume Gross Margin Rate Exchange Rate Total
------------------ ----------------- ----------------- ---------------
<S> <C> <C> <C> <C>
United States $ (63.9) $ (14.3) $ - $ (78.2)
Canada (8.8) 5.4 50.6 47.2
---------------- ---------------- -------------- -------------
Total $ (72.7) $ (8.9) $ 50.6 $ (31.0)
================ ================ ============== =============
</TABLE>
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and
administrative expense ("SG&A") by operating segment, in dollars and as a
percentage of sales for fiscal 2004 compared to fiscal 2003. SG&A expense was
$3,114.1 million or 28.69% for fiscal 2004 as compared to $3,214.9 million or
29.50% for fiscal 2003.
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
United States $ 2,236.5 30.56% $ 2,439.9 32.40%
Canada 877.6 24.81 775.0 23.01
-------------- --------------- -------------- --------------
Total $ 3,114.1 28.69% $ 3,214.9 29.50%
============== =============== ============== ==============
</TABLE>
The U.S. had overall favorability of 184 basis points. While part of
the improvement in the U.S. is due to gains on the sale of certain of our
assets of $29.3 million, the absence of the Midwest goodwill impairment charge
of $27.0 million and a reduction in the vacation accrual of $8.6 million due to
a change in the vacation entitlement practice, most of the favorability is due
to very tight cost controls. Categories in which the U.S. experienced cost
reductions include advertising due to less spend ($26.4 million), labor ($36.2
million), and corporate administrative expenses due to increased information
technology charges to Canada ($47.4 million). The favorability in the U.S. was
partially offset by $8.9 million of severance and other charges relating to the
previously noted administrative reorganization and a $27.2 million increase in
our workers' compensation and general liability reserves in response to both
adverse development of prior year's costs and other developments including a
continuing trend of rising costs.
The increase in SG&A in Canada of $102.6 million is primarily due to
the increase in the Canadian exchange rate of $35.3 million, an increase in
labor of $28.5 million due mainly to increased sales, an increase in occupancy
of $17.9 million as a result of the opening of new stores, and increased group
overhead of $46.6 million mainly due to information technology costs previously
charged to the U.S. now charged to Canada, partially offset by a decrease in
advertising costs of $13.1 million due to less spend.
During fiscal 2004 and fiscal 2003, we recorded property impairment
losses in SG&A in our Consolidated Statements of Operations of $44.1 million and
$43.7 million as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
----------------------------------- -----------------------------------
U.S. Canada Total U.S. Canada Total
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business (1) (2) $ 6.0 $ 0.7 $ 6.7 $ 4.4 $ 1.7 $ 6.1
Impairments due to
unrecoverable assets (2) 34.7 - 34.7 33.1 - 33.1
Impairments related to
the 2001 Asset
Disposition (2) (3) 2.6 - 2.6 0.4 - 0.4
Impairments related to
the Farmer Jack
restructuring (2) (3) 0.1 - 0.1 4.1 - 4.1
-------- --------- --------- --------- --------- ---------
Total impairments $ 43.4 $ 0.7 $ 44.1 $ 42.0 $ 1.7 $ 43.7
======== ========= ========= ========= ========= =========
(1) Consists primarily of amounts that were impaired as a result of stores
that were or will be closed, converted or remodeled in the normal course
of business.
(2) Refer to Note 4 - Valuation of Goodwill and Long-Lived Assets.
(3) Refer to Note 6 - Asset Disposition Initiative.
</TABLE>
The table above does not include assets impaired as a result of our
exit of the northern New England and Kohls markets which are included in "(Loss)
gain on disposal of discontinued operations, net of tax" on our Consolidated
Statements of Operations. These impairments are discussed further in Note 5 -
Discontinued Operations. 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.
INTEREST EXPENSE
- ----------------
Interest expense of $114.1 million for fiscal 2004 increased from the
prior year amount of $103.1 million due primarily to higher interest expense
resulting from our on-balance sheet long-term real estate liabilities, which
includes sale leaseback of Company-owned properties entered into in the fourth
quarter of fiscal 2003 of approximately $15.6 million and sale leaseback of
locations for which we received landlord allowances of $3.6 million. This impact
was partially offset by lower interest from lower borrowings of approximately
$6.5 million.
INCOME TAXES
- ------------
The provision for income taxes from continuing operations for fiscal
2004 was $0.5 million (a $4.5 million provision for our U.S. operations and a
$4.0 million benefit from our Canadian operations) compared to a $30.6 million
benefit from income taxes from continuing operations for fiscal 2003 (a $42.3
million benefit from our U.S. operations and a $11.7 million provision for our
Canadian operations). Our U.S. tax benefit from continuing operations for fiscal
2003 was offset by a tax provision provided on discontinued operations of $46.6
million in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes". Consistent with prior year, we continue 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 fiscal 2004, our effective income tax rate of 0.3% changed from the
effective income tax rate of (12.5%) for fiscal 2003 as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
--------------------------------- ---------------------------------
Tax (Provision) Effective Tax Benefit Effective
Benefit Tax Rate (Provision) Tax Rate
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
United States $ (4,500) 2.5% $ 42,339 (17.3%)
Canada 3,972 (2.2%) (11,765) 4.8%
--------------- ---------------- --------------- ----------------
$ (528) 0.3% $ 30,574 (12.5%)
=============== ================ =============== ================
</TABLE>
The change in our effective tax rate was primarily due to the absence
of a tax benefit recorded on losses from continuing operations that was limited
to the tax provision recorded on income from discontinued operations in
accordance with SFAS 109. As discussed above, $46.6 million of benefit was
recognized for fiscal 2003 as compared to fiscal 2004, where no benefit was
recognized. The remaining provisions recorded in the U.S. of $4.5 million and
$4.3 million for fiscal 2004 and fiscal 2003, respectively, represent state and
local taxes. In addition, the change in our effective tax rate was partially
offset by the impact of the lower mix of Canadian income from continuing
operations as a percentage of our Company's loss from continuing operations for
fiscal 2004 as compared to fiscal 2003. Information regarding items included in
the reconciliation of the effective rate with the federal statutory rate is
disclosed in Note 10 to the consolidated financial statements.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early
part of the first quarter of fiscal 2003, we decided to sell our operations
located in Northern New England and Wisconsin, as well as our Eight O'Clock
Coffee business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for
fiscal 2004 was $1.4 million as compared to a loss from operations of
discontinued businesses, net of tax, of $32.7 million for fiscal 2003 and is
detailed by business as follows:
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 292 (981) (698) (1,387)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 292 (981) (698) (1,387)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 292 $ (981) $ (698) $ (1,387)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 626 (595) (698) (667)
Interest accretion on present value
of future occupancy costs (8) (740) - (748)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 292 $ (981) $ (698) $ (1,387)
--------------- ---------------- --------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2003
------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (42,536) (174,890) (60,179) (277,605)
------------- ------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (9,810) (51,661) 5,086 (56,385)
Tax benefit (provision) 4,120 21,698 (2,136) 23,682
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (5,690) $ (29,963) $ 2,950 $ (32,703)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,511) - (2,686)
Non-accruable closing costs (2,555) (2,890) (12,275) (17,720)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,670) (6,562) - (9,232)
Interest accretion on present value
of future occupancy costs (6) (353) - (359)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (7,754) $ (42,745) $ (12,275) $ (62,774)
--------------- ---------------- --------------- --------------
</TABLE>
The loss on disposal of discontinued operations, net of tax, was $2.7
million for fiscal 2004 as compared to gain on disposal of discontinued
operations, net of tax, of $97.0 million for fiscal 2003 and is detailed by
business as follows:
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Loss on disposal of discontinued
businesses
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
--------------- ---------------- --------------- --------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- --------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2003
------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Gain (loss) on disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 85,000 $ 186,255
Fixed asset impairments - (18,968) - (18,968)
------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses,
before tax 85,983 (3,696) 85,000 167,287
Tax (provision) benefit (36,113) 1,552 (35,700) (70,261)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 49,870 $ (2,144) $ 49,300 $ 97,026
============= ================ =============== ================
</TABLE>
FISCAL 2003 COMPARED WITH FISCAL 2002
- -------------------------------------
OVERALL
- -------
Sales for fiscal 2003 were $10.9 billion, compared with $10.1 billion for
fiscal 2002; comparable store sales, which include stores that have been in
operation for two full fiscal years and replacement stores, increased 0.9%. Net
loss per share - basic and diluted for fiscal 2003 was $4.08 compared to $5.05
for fiscal 2002, a decrease of $0.97 per share.
<TABLE>
<CAPTION>
Favorable /
Fiscal 2003 Fiscal 2002 (Unfavorable) % Change
--------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 10,899.3 $ 10,096.8 $ 802.5 7.9%
Increase in comparable store sales
for Company-operated stores 0.9% 0.4% NA NA
Loss from continuing operations (213.2) (202.3) (10.9) (5.4)
Income from discontinued
operations 64.3 7.6 56.7 NA
Cumulative effect of a change in
accounting principle - FIN 46-R (8.0) - (8.0) 100%
Net loss (156.9) (194.6) 37.7 19.4
Net loss per share (4.08) (5.05) 0.97 19.2
</TABLE>
SALES
- -----
Sales for fiscal 2003 of $10.9 billion increased $802.5 million or 7.9%
from sales of $10.1 billion for fiscal 2002. The higher sales were due to an
increase in U.S. sales of $103.9 million and an increase in Canadian sales of
$698.6 million. The increase in Canadian sales was primarily due to the
favorable impact of the Canadian exchange rate. The following table presents
sales for each of our operating segments for fiscal 2003 and fiscal 2002:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002 Increase % Change
----------------- ----------------- -------------------- ----------------
<S> <C> <C> <C> <C>
United States $ 7,530.9 $ 7,427.0 $ 103.9 1.4%
Canada 3,368.4 2,669.8 698.6 26.2
----------------- ----------------- -------------------- ----------------
Total $ 10,899.3 $ 10,096.8 $ 802.5 7.9%
================= ================= ==================== ================
</TABLE>
<PAGE>
The following details the dollar impact of several items affecting the
increase in sales by operating segment from fiscal 2002 to fiscal 2003:
<TABLE>
<CAPTION>
Impact of Impact of Foreign Comparable Impact of
New Closed Exchange Store 53rd Impact of
Stores Stores Rate Sales Week FIN 46R Total
------------- ------------- -------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
United States $ 238.5 $ (306.4) $ - $ 39.2 $ 132.6 $ - $ 103.9
Canada 229.6 (156.3) 388.9 40.1 64.7 131.6 698.6
------------- ------------- -------------- ------------- ------------- ------------ -----------
Total $ 468.1 $ (462.7) $ 388.9 $ 79.3 $ 197.3 $ 131.6 $802.5
============= ============= ============== ============= ============= ============ ===========
</TABLE>
The increase in U.S. sales was attributable to the opening of 28 stores
since the beginning of fiscal 2002, of which 10 were opened in fiscal 2003,
increasing sales by $238.5 million, the increase in comparable store sales for
fiscal 2003 on a 52 week basis of $39.2 million or 0.5% as compared to fiscal
2002, and the favorable impact of the 53rd week included in fiscal 2003 which
increased sales by $132.6 million. These increases were partially offset by the
closure or sale of 108 stores since the beginning of 2002, of which 75 were
closed or sold in 2003, decreasing sales by $306.4 million. Included in the 108
stores closed or sold since the beginning of fiscal 2002 were 21 stores closed
as part of the asset disposition initiative as discussed in Note 6 of our
Consolidated Financial Statements.
The increase in Canadian sales was attributable to the opening or
transfer from franchise operations of 22 stores since the beginning of fiscal
2002, of which 9 were opened in fiscal 2003, increasing sales by $229.6 million,
the favorable effect of the Canadian exchange rate, which increased sales by
$388.9 million, the increase in comparable store sales for fiscal 2003 on a 52
week basis of $40.1 million or 1.6% for Company-operated stores and franchised
stores combined, as compared to fiscal 2002, the favorable impact of the 53rd
week included in fiscal 2003 which increased sales by $64.7 million, and the
impact of adoption of FIN 46R during fiscal 2003 of $131.6 million. These
increases were partially offset by the closure of 19 stores since the beginning
of 2002, of which 10 were closed in 2003, decreasing sales by $156.3 million.
Average weekly sales per supermarket for the U.S. were approximately
$310,000 for fiscal 2003 versus $285,400 for the corresponding period of the
prior year, an increase of 8.6% due primarily to higher comparable store sales.
Average weekly sales per supermarket for Canada were approximately $258,000 for
fiscal 2003 versus $222,000 for the corresponding period of the prior year, an
increase of 16.2%. This increase was primarily due to the increase in the
Canadian exchange rate and higher comparable store sales.
GROSS MARGIN
- ------------
The following table presents gross margin dollar results and gross
margin as a percentage of sales by operating segment for fiscal 2003 as compared
to fiscal 2002. Gross margin as a percentage of sales increased 2 basis points
to 28.19% for fiscal 2003 from 28.17% for fiscal 2002. This 2 basis point
increase was caused by a combination of an increase in Canadian sales as a
percentage of our total (37 basis points) partially offset by continued
competitive pressures to drive sales volume and protect market share in the
current market. We believe the impact on margin for changes in costs and special
reductions was not significant.
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
Gross Margin Rate to Sales% Gross Margin Rate to Sales%
-------------- -------------- -------------- --------------
United States $ 2,256.1 29.96% $ 2,267.7 30.53%
Canada 816.0 24.23 576.6 21.60
-------------- --------------- -------------- --------------
Total $ 3,072.1 28.19% $ 2,844.3 28.17%
============== =============== ============== ==============
</TABLE>
<PAGE>
The following table details the dollar impact of several items
affecting the gross margin dollar increase by operating segment from fiscal
2002 to fiscal 2003:
<TABLE>
<CAPTION>
Sales Gross Exchange Impact of
Volume Margin Rate Rate FIN 46-R Total
--------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
United States $ 31.7 $ (43.3) $ - $ - $ (11.6)
Canada 34.5 (21.5) 83.9 142.5 239.4
--------------- --------------- ---------------- --------------- ---------------
Total $ 66.2 $ (64.8) $ 83.9 $ 142.5 $ 227.8
=============== =============== ================ =============== ===============
</TABLE>
STORE OPERATING, GENERAL AND ADMINISTRATIVE EXPENSE
- ---------------------------------------------------
The following table presents store operating, general and administrative
expense, by operating segment, in dollars and as a percentage of sales for
fiscal 2003 compared to fiscal 2002. SG&A expense was $3.2 billion or 29.50% for
fiscal 2003 as compared to $2.8 billion or 27.97% for fiscal 2002.
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
-------------------------------------------- --------------------------------------------
SG&A Rate to Sales% SG&A Rate to Sales%
------------------ ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
United States $ 2,439.9 32.40% $ 2,319.0 31.22%
Canada 775.0 23.01 505.0 18.92
------------ --------------- ------------ --------------
Total $ 3,214.9 29.50% $ 2,824.0 27.97%
============ =============== ============ ==============
</TABLE>
The U.S. had overall unfavorability of 118 basis points. While most of
the increase in SG&A in the U.S. in fiscal 2003 was due to increased costs
relating to our Farmer Jack restructuring program of $35.5 million as described
in Note 6 of our Consolidated Financial Statements, our Farmer Jack goodwill
impairment of $27.0 million and long-lived asset impairments of $33.1 million as
described in Note 4 of our Consolidated Financial Statements, the remaining
increase was primarily due to increased labor costs of $35.5 million, due mainly
to increased sales and increased health and welfare costs, and an increase in
occupancy expenses of $7.8 million mainly due to new stores, partially offset by
lower closed store and conversion expense for stores closed or converted in the
normal course of business of $21.4 million.
The increase in SG&A in Canada of $270.0 million is primarily due to
the consolidation of our Canadian franchisees in accordance with Financial
Accounting Standards Board Interpretation No. 46 ("FIN 46-R"), "Consolidation of
Variable Interest Entities - an interpretation of `Accounting Research Bulletin
No. 51'" adopted during fiscal 2003 of $137.9 million. The remaining increase
was primarily due to increased labor costs of $66.3 million, due mainly to
increased sales and increased health and welfare costs, an increase in occupancy
expenses of $26.9 million mainly due to new stores, an increase in the
Canadian exchange rate of $46.1 million, and higher closed store and conversion
expense for stores closed or converted in the normal course of
business of $3.7 million.
<PAGE>
During fiscal 2003 and fiscal 2002, we recorded property impairment
losses in SG&A in our Consolidated Statements of Operations of $43.7 million and
$24.5 million as follows:
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
----------------------------------- -----------------------------------
U.S. Canada Total U.S. Canada Total
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business (1) (2) $ 4.4 $ 1.7 $ 6.1 $ 21.3 $ 3.2 $ 24.5
Impairments due to
unrecoverable assets (2) 33.1 - 33.1 - - -
Impairments related to the
2001 Asset Disposition 0.4 - 0.4 - -
Impairments related to
the Farmer Jack
restructuring (2) (3) 4.1 - 4.1 - - -
-------- --------- --------- --------- --------- ---------
Total impairments $ 42.0 $ 1.7 $ 43.7 $ 21.3 $ 3.2 $ 24.5
======== ========= ========= ========= ========= =========
(1) Consists of amounts that were impaired as a result of stores that were
or will be closed, converted or remodeled in the normal course of
business.
(2) Refer to Note 4 - Valuation of Goodwill and Long-Lived Assets.
(3) Refer to Note 6 - Asset Disposition Initiative.
</TABLE>
The table above does not include assets impaired as a result of our
exit of the northern New England and Kohls markets which are included in "(Loss)
gain on disposal of discontinued operations, net of tax" on our Consolidated
Statements of Operations. These impairments are discussed further in Note 5 -
Discontinued Operations. The effects of changes in estimates of useful lives was
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.
INTEREST EXPENSE
- ----------------
Interest expense of $103.1 million for fiscal 2003 increased from the
prior year amount of $99.9 million due primarily to higher interest expense
resulting from our on-balance sheet long-term real estate liabilities, which
includes sale leaseback of Company-owned properties entered into in the fourth
quarter of fiscal 2003 of $1.8 million and sale leaseback of locations for which
we received landlord allowances of $6.1 million partially offset by lower
interest expense resulting from our open market purchase of $50.7 million of our
7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due
December 15, 2011, primarily during the fourth quarter of fiscal 2002 of $4.7
million.
INCOME TAXES
- ------------
The benefit from income taxes from continuing operations for fiscal
2003 was $30.6 million (a $42.3 million benefit from our U.S. operations and a
$11.7 million provision for our Canadian operations) compared to $130.6 million
provision for income taxes from continuing operations for fiscal 2002 (a $104.6
million provision for our U.S. operations and a $26.0 million provision for our
Canadian operations). Our U.S. tax benefit from continuing operations for fiscal
2003 was offset by a tax provision provided on discontinued operations of $46.6
million in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes" ("SFAS 109"). Consistent with prior year, we
continue 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 fiscal 2003, our effective income tax rate benefit of (12.5%)
changed from the effective income tax rate provision of 182.3% in fiscal 2002 as
follows:
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2003 Fiscal 2002
--------------------------------- ---------------------------------
Tax Benefit Effective Tax Effective
(Provision) Tax Rate Provision Tax Rate
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
United States $ 42,339 (17.3%) $ (104,620) 146.0%
Canada (11,765) 4.8% (26,010) 36.3%
--------------- ---------------- --------------- ----------------
$ 30,574 (12.5%) $ (130,630) 182.3%
=============== ================ =============== ================
</TABLE>
The change in our effective income tax rate on continuing operations primarily
resulted from:
(i.) a tax benefit recorded on losses from continuing operations
that was limited to the tax provision recorded on income from
discontinued operations in accordance with SFAS 109 of $46.6
million in fiscal 2003 as compared to no tax benefit recorded
during fiscal 2002;
(ii.) an increase in our valuation allowance recorded against our
U.S. net deferred tax assets during fiscal 2003 of
approximately $67.7 million compared to fiscal 2002 for the
tax effect of losses from continuing operations in excess of
income from discontinued operations;
(iii.) the impact of the lower mix of Canadian income from continuing
operations as a percentage of our Company's loss from
continuing operations in fiscal 2003 as compared to fiscal
2002; and
(iv.) a decrease in the Canadian statutory income tax rate of 1.8%.
Information regarding items included in the reconciliation of the effective rate
with the federal statutory rate is disclosed in Note 10 to the consolidated
financial statements.
DISCONTINUED OPERATIONS
- -----------------------
Beginning in the fourth quarter of fiscal year 2002 and in the early
part of the first quarter of fiscal 2003, we decided to sell our operations
located in Northern New England and Wisconsin, as well as our Eight O'Clock
Coffee business. These asset sales are now complete.
The loss from operations of discontinued businesses, net of tax, for
fiscal 2003 was $32.7 million as compared to income from operations of
discontinued businesses, net of tax, of $7.6 million for fiscal 2002 and are
detailed by business as follows:
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2003
------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (42,536) (174,890) (60,179) (277,605)
------------- ------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (9,810) (51,661) 5,086 (56,385)
Tax benefit (provision) 4,120 21,698 (2,136) 23,682
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (5,690) $ (29,963) $ 2,950 $ (32,703)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,511) - (2,686)
Non-accruable closing costs (2,555) (2,890) (12,275) (17,720)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,670) (6,562) - (9,232)
Interest accretion on present value
of future occupancy costs (6) (353) - (359)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (7,754) $ (42,745) $ (12,275) $ (62,774)
--------------- ---------------- --------------- --------------
Fiscal 2002
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses
Sales $ 284,434 $ 337,197 $ 75,958 $ 697,589
Operating expenses (278,514) (344,226) (61,668) (684,408)
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses, before
tax 5,920 (7,029) 14,290 13,181
Tax (provision) benefit (2,486) 2,952 (6,002) (5,536)
--------------- ---------------- --------------- ----------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 3,434 $ (4,077) $ 8,288 $ 7,645
=============== ================ =============== ================
</TABLE>
<PAGE>
The gain on disposal of discontinued operations, net of tax, was $97.0
million for fiscal 2003 as compared to nil for fiscal 2002 and is detailed by
business as follows:
<TABLE>
<CAPTION>
Fiscal 2003
-------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Gain (loss) on disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 85,000 $ 186,255
Fixed asset impairments - (18,968) - (18,968)
--------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses,
before tax 85,983 (3,696) 85,000 167,287
Tax (provision) benefit (36,113) 1,552 (35,700) (70,261)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 49,870 $ (2,144) $ 49,300 $ 97,026
============= ================ =============== ================
</TABLE>
ASSET DISPOSITION INITIATIVE
- ----------------------------
Overview
- --------
In fiscal 1998 and fiscal 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 activities recorded on our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for fiscal 2004, fiscal 2003, and fiscal
2002. 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".
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ----------- ------------- --------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet accruals
PV interest $ 1,922 $ 2,456 $ 687 $ 5,065 $ 2,638 $ 2,850 $ 56 $ 5,544
Occupancy - - 20,999 20,999
Severance - - 8,930 8,930
Total accrued to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets 1,922 2,456 687 5,065 2,638 2,850 29,985 35,473
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - (6,778) - (6,778)
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 1,613 - 1,613
Adjustments to
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
balance sheets - (4,488) - (4,488) - (4,174) - (4,174)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - 2,659 90 2,749 - 422 4,129 4,551
Inventory markdowns - - 291 291 - - 2,244 2,244
Closing costs - - 689 689 - 44 1,449 1,493
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 2,659 1,070 3,729 - 466 7,822 8,288
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (1,922) (2,456) (687) (5,065) (2,638) (2,850) (56) (5,544)
--------- ----------- ------------ ---------- ------------ ----------- ------------ ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (1,829) $ 1,070 $ (759) $ - $ (3,708) $ 37,751 $ 34,043
======== =========== =========== ========= =========== =========== =========== ==========
</TABLE>
<PAGE>
Fiscal 2002
----------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ------------ ------------- ---------
Balance Sheet accruals
PV interest $ 3,178 $ 4,094 $ - $ 7,272
Severance - 3,375 - 3,375
Total accrued to
balance sheets -------- ----------- ----------- ---------
3,178 7,469 - 10,647
-------- ----------- ----------- ---------
Occupancy reversals (3,645) (10,180) - (13,825)
Additional severance 639 250 - 889
Adjustments to
balance sheets -------- ----------- ----------- ---------
(3,006) (9,930) - (12,936)
-------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Gain on sale of property - (1,654) - (1,654)
Inventory markdowns - 1,263 - 1,263
Closing costs - 4,250 - 4,250
-------- ----------- ----------- ---------
Total non-accruable items - 3,859 - 3,859
----- ----------- ----------- ---------
Less PV interest (3,178) (4,094) - (7,272)
--------- ----------- ----------- ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ (3,006) $ (2,696) $ - $ (5,702)
========= =========== =========== =========
<PAGE>
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 fiscal 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 February 26,
2005, 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:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million and $1.9
million during fiscal 2002, 2003 and 2004, respectively, 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 $13.6 million, $20.0 million, and $5.6 million for
fiscal 2002, 2003 and 2004, respectively, represents payments made during
those periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $0.4 million,
$0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004,
respectively, 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.
</TABLE>
<PAGE>
We paid $98.4 million of the total occupancy charges from the time of
the original charges through February 26, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.9 million of the total net severance charges from
the time of the original charges through February 26, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $28.2 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 fiscal 2004, fiscal 2003 and
fiscal 2002. As such, there was no impact on the Consolidated Statements of
Operations from the 166 stores included in this phase of the initiative.
At February 26, 2005 and February 28, 2004, approximately $5.4 million
and $6.5 million, respectively, of the reserve were included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve
balances as of February 26, 2005 of $29.9 million for this phase of the asset
disposition initiative and have concluded that they are appropriate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of
Directors approved a plan resulting from our review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, our Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses (2 in the United States and 1 in Canada) should be closed and/or
sold, and certain administrative streamlining should take place. As of February
26, 2005, we had closed all stores and facilities related to this phase of the
initiative.
The following table summarizes the activity related to this phase of
the initiative recorded on the Consolidated Balance Sheets since the
announcement of the charge in November 2001:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
--------- -------- --------- -------- -------- -------- ---------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and
$2.4 million during fiscal 2002, 2003 and 2004, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge. The addition to
severance of $3.5 million during fiscal 2002 related to retention and
productivity incentives that were expensed as earned.
<PAGE>
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 million
during fiscal 2002, 2003 and 2004, respectively, represents payments
made during those periods for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $19.5 million, $3.5 million, and $2.3 million during
fiscal 2002, 2003 and 2004, respectively, represents payments made to
terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2002, we
recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of
$3.6 million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive environment
in the market in which that store is located of $3.3 million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which that
site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during
fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals
and subleases of locations at more favorable terms than originally
anticipated at the time of the original charge.
</TABLE>
We paid $39.2 million ($36.2 million in the U.S. and $3.0 million in
Canada) of the total occupancy charges from the time of the original charges
through February 26, 2005 which was primarily for occupancy related costs such
as rent, common area maintenance, real estate taxes and lease termination costs.
We paid $28.1 million ($19.1 million in the U.S. and $9.0 million in Canada) of
the total net severance charges from the time of the original charges through
February 26, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $31.9 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At February 26, 2005 and February 28, 2004 approximately $7.1 million
and $12.0 million of the reserve, respectively, was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Consolidated Statements of Operations for fiscal 2004,
fiscal 2003, and fiscal 2002 are the sales and operating results of the 39
stores that were identified for closure as part of this asset disposition. The
results of these operations are as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ - $ - $ 23,367
============= ============= =============
Operating loss $ - $ - $ (746)
============= ============= =============
</TABLE>
<PAGE>
Based upon current available information, we evaluated the reserve
balances as of February 26, 2005 of $32.0 million for this phase of the asset
disposition initiative and have concluded that they are appropriate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we
announced an initiative to close 6 stores and convert 13 stores to our Food
Basics banner in the Detroit, Michigan and Toledo, Ohio markets. During fiscal
2003 we recorded a charge of $37.7 million related to the last phase of this
initiative ($2.2 million in "Cost of merchandise sold" and $35.5 million in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations for fiscal 2003), excluding PV interest. During fiscal
2004 we recorded costs excluding PV interest in fiscal 2004 of $1.1 million
($0.3 million in "Cost of merchandise sold" and $0.8 million in "Store
operating, general and administrative expense"). These costs are detailed as
follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
---------------------- ----------------------
<S> <C> <C>
Occupancy related $ - $ 20,999
Severance and benefits - 8,930
Property writedowns 90 4,129
Inventory markdowns 291 2,244
Nonaccruable closing costs 689 1,449
-------------- ----------------
Total charges $ 1,070 $ 37,751
============== ================
</TABLE>
As of February 26, 2005, we had closed all 6 stores and completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writedowns as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
----------- ---------------- -------------
<S> <C> <C> <C>
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and fiscal
2004 represent interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge. The
original charge to severance during fiscal 2003 of $8.9 million related
to individual severings as a result of the store closures, as well as a
voluntary termination plan initiated in the Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $4.7 million during fiscal
2003 and fiscal 2004, respectively, represents payments made for costs
such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $4.1 million and $4.8
million during fiscal 2003 and fiscal 2004, respectively, represent
payments made to terminated employees during the period.
</TABLE>
We paid $5.8 million of the total occupancy charges from the time of
the original charge through February 26, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through February 26, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $15.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2014. The remaining severance
liability of less than $0.1 million relates to expected future payments for
severance and benefits to individual employees and will be fully paid out by
mid-2005.
Included in the Consolidated Statements of Operations for fiscal 2004,
fiscal 2003, and fiscal 2002 are the sales and operating results of the 6 stores
that were identified for closure as part of this phase of the initiative. The
results of these operations are as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
-------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 2,433 $ 50,760 $ 54,324
============= ============= ==============
Operating loss $ (46) $ (6,476) $ (4,299)
============== ============= ==============
</TABLE>
At February 26, 2005 and February 28, 2004, approximately $2.1 million
and $9.0 million, respectively, of the liability was included in "Other
accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $15.9 million as of February
26, 2005 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH FLOWS
- ----------
The following table presents excerpts from our Consolidated Statements
of Cash Flows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------- --------------- ---------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $ 114,458 $ (16,487) $ 193,990
--------------- --------------- ---------------
Net cash (used in) provided by investing activities $ (162,501) $ 103,649 $ (185,678)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities $ 4,164 $ (19,015) $ 20,026
--------------- --------------- ---------------
</TABLE>
<PAGE>
Net cash provided by operating activities of $114.5 million for fiscal
2004 primarily reflected our net loss of $188.1 million, adjusted for non-cash
charges of $268.1 million for depreciation and amortization and $34.7 million
for the Midwest long lived assets / goodwill impairment partially offset by a
gain on disposal of owned property and write-down of property, net of $28.7
million, a decrease in accounts receivable of $29.2 million, and an increase in
accounts payable of $46.3 million partially offset by an increase in inventories
of $12.6 million, an increase in prepaid assets and other current assets of $6.0
million, an increase in other assets of $19.0 million, and a decrease in other
accruals of $34.1 million. Refer to Working Capital below for discussion of
changes in working capital items. Net cash used in operating activities of $16.5
million for fiscal 2003 primarily reflected our net loss of $156.9 million
adjusted for non-cash charges of $60.1 million related to our Farmer Jack long
lived asset / goodwill impairment, $34.0 million related to our Farmer Jack
restructuring program, and depreciation and amortization of $276.5 million, and
a decrease in inventories of $44.1 million, partially offset by the gain on sale
of the discontinued operations of $167.3 million, a decrease in accounts payable
of $57.2 million and a decrease in other non-current liabilities of $51.4
million. Net cash provided by operating activities of $194.0 million for fiscal
2002 primarily reflected our net loss of $194.6 million adjusted for non-cash
charges of $264.6 million for depreciation and amortization and $157.6 million
related to our income tax provision partially offset by a decrease in accrued
salaries, wages and benefits, and taxes of $28.5 million.
Net cash used in investing activities of $162.5 million for fiscal 2004
primarily reflected property expenditures totaling $216.1 million, which
included 24 new supermarkets and 18 major remodels partially offset by cash
received from the sale of certain of our assets of $53.6 million. Net cash
provided by investing activities of $103.6 million for fiscal 2003 primarily
reflected cash received from the sale of our assets of $264.6 million (most of
which related to our discontinued operations), partially offset by property
expenditures totaling $161.0 million, which included 19 new supermarkets and 2
major remodels. Net cash used in investing activities of $185.7 million for
fiscal 2002 primarily reflected $242.4 million used for property expenditures,
which included 31 new supermarkets, 38 major remodels or enlargements and
capital expenditures related to the business process initiative, partially
offset by $56.7 million in proceeds from property disposals.
For fiscal 2005, we have planned capital expenditures of approximately
$225.0 to $250.0 million, which relate primarily to opening approximately 10 to
15 new supermarkets, converting 1 to 3 stores to new formats, and enlarging or
remodeling 100 - 110 supermarkets. We currently expect to close approximately 5
- - 10 stores during fiscal 2005.
Net cash provided by financing activities of $4.2 million for fiscal
2004 primarily reflected net proceeds from long term real estate liabilities of
$37.1 million partially offset by principal payments on capital leases of $13.5
million, a decrease in book overdrafts of $13.7 million and principal payments
on long term borrowings of $6.1 million. Net cash used in financing activities
of $19.0 million for fiscal 2003 primarily reflected $135.0 million in principal
payments on our revolving lines of credit, $47.1 million in principal payments
on long term borrowings, $10.3 million paid in deferred financing fees, and
$13.8 million in principal payments on capital leases, partially offset by
$193.8 million in net proceeds from long-term real estate liabilities. Net cash
provided by financing activities of $20.0 million for fiscal 2002 primarily
reflected $178.3 million in principal payments on our revolving lines of credit,
$95.0 million in principal payments on long-term borrowings, $25.6 million in
decreased book overdrafts, $5.7 million paid in deferred financing fees, and
$12.1 million in principal payments on capital leases, partially offset by
$313.3 million in proceeds under revolving lines of credit and $20.6 million in
net proceeds from long-term real estate liabilities.
<PAGE>
In the short term, we believe that our present cash resources,
including invested cash on hand, available borrowings from our revolving credit
agreement and other sources, are sufficient to meet our needs. We operate under
an annual operating plan which is reviewed and approved by our Board of
Directors and incorporates the specific operating initiatives we expect to
pursue and the anticipated financial results of our Company.
We reviewed our Company's strategy during the fourth quarter of fiscal
2004 and into early 2005 to establish and sustain a profitable business with
long-range growth potential. That review, which was largely completed subsequent
to our balance sheet date, concluded with the plan that future effort and
investment should be focused on our core operations in the Northeastern United
States, which account for half of current total sales, our strongest market
positions, and we believe, the best potential for profitable growth going
forward. Therefore, we have initiated efforts to divest our businesses in Canada
and the Midwestern U.S. However, the completion of such divestitures is subject
to Board of Director approval. Proceeds from the sales of the Canadian and
Midwest businesses will be used, among other things, to reduce debt, which we
believe will provide a stronger balance sheet and improved liquidity for future
investment and growth. We expect that the divestiture process along with other
changes to focus and strengthen our Company will take the better part of fiscal
2005 to complete.
We believe the proceeds to be received from the above divestitures will
be sufficient to both pursue our plans and programs and to repay the $214
million bonds maturing in April 2007, which under the terms of our revolving
credit agreement must be refinanced six months prior to maturity, and if
necessary, under its terms, or desirable, repay the $217 million bonds maturing
in December 2011. However, there is no assurance at this time that this will be
so.
Profitability, cash flow, asset sale proceeds and timing can be
impacted by certain external factors such as unfavorable economic conditions,
competition, labor relations and fuel and utility costs which could have a
significant impact on cash generation. If our profitability and cash flow do not
improve in line with our plans or if they do not otherwise provide sufficient
resources to operate effectively or if we are unsuccessful in selling either our
Canadian or Midwest businesses, we anticipate that we will be able to modify the
operating plan, by reducing capital investments and through other contingency
actions and financings, in order to ensure that we have appropriate resources.
However, there is no assurance that we will pursue such contingency actions or
that they will be successful in generating the resources necessary to operate
the business.
WORKING CAPITAL
- ---------------
We had working capital of $86.5 million at February 26, 2005 compared
to working capital of $115.7 million at February 28, 2004. We had cash and cash
equivalents aggregating $257.7 million at February 26, 2005 compared to $297.0
million at February 28, 2004. The decrease in working capital was attributable
primarily to the following:
o A decrease in cash and cash equivalents as detailed in the Consolidated
Statements of Cash Flows;
o A decrease in accounts receivable due to the timing of receipts; and
o An increase in accounts payable due to timing and the impact of the Canadian
exchange rate;
<PAGE>
Partially offset by the following:
o An increase in inventories mainly due to timing and the impact of the Canadian
exchange rate;
o A decrease in book overdrafts due to timing; and
o A decrease in accrued taxes.
REVOLVING CREDIT AGREEMENT
- --------------------------
During fiscal 2003, we amended and restated our Secured Credit
Agreement (the "Amended and Restated Credit Agreement") and decreased our
borrowing base to $400 million. Thus, at February 26, 2005, we had a $400
million secured revolving credit agreement with a syndicate of lenders enabling
us to borrow funds on a revolving basis sufficient to refinance short-term
borrowings and provide working capital as needed. This facility provides us with
greater operating flexibility and provides for increased capital spending. Under
the terms of this agreement, should availability fall below $50 million, a
borrowing block will be implemented which provides that no additional borrowings
be made unless we are able to maintain a fixed charge coverage ratio of 1.0 to
1.0. Although we do not meet the required ratio at this time, it is not
applicable as availability at February 26, 2005 totaled $227.3 million. In the
event that availability falls below $50 million and we do not maintain the ratio
required, unless otherwise waived or amended, the lenders may, at their
discretion, declare, in whole or in part, all outstanding obligations
immediately due and payable.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$86.8 million at February 26, 2005) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of February 26, 2005, there were no borrowings under these credit
agreements. As of February 26, 2005, after reducing availability for outstanding
letters of credit and borrowing base requirements, we had $227.3 million
available under the Amended and Restated Credit Agreement. Combined with the
cash we held in short-term investments of $104.0 million, we had total cash
availability of $331.3 million at February 26, 2005.
Under the Amended and Restated Credit Agreement, we are permitted to
make bond repurchases and may do so from time to time in the future.
<PAGE>
PUBLIC DEBT OBLIGATIONS
- -----------------------
Outstanding notes totaling $631 million at February 26, 2005 consisted
of $200 million of 9.375% Notes due August 1, 2039, $217 million of 9.125%
Senior Notes due December 15, 2011 and $214 million of 7.75% Notes due April 15,
2007. Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes can be redeemed after August 11, 2004, and the 9.125%
Notes may be redeemed after December 15, 2006. All of the notes outstanding are
unsecured obligations and were issued under the terms of our senior debt
securities indenture, which contains among other provisions, covenants
restricting the incurrence of secured debt. In addition, the 9.125% Notes
contain additional covenants, including among other things, limitations on asset
sales, on the payment of dividends, and on the incurrence of liens and
additional indebtedness. Our notes are not guaranteed by any of our
subsidiaries. Our notes are effectively subordinate to our secured revolving
credit agreement and do not contain cross default provisions.
During fiscal 2004, we repurchased in the open market $6.0 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax gain due to the early extinguishment of debt of $0.8
million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this gain
has been classified within loss from operations.
During fiscal 2003, we repurchased in the open market $9.8 million of
our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within loss from operations in accordance with SFAS 145.
During fiscal 2002, we repurchased in the open market $50.7 million of
our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $12.2 million. In accordance with SFAS 145,
this gain has been reclassified to be within income from operations for fiscal
2002.
OTHER
- -----
During fiscal 2004, we sold 2 properties and simultaneously leased them
back from the purchaser. The properties subject to this sale had a carrying
value of approximately $8.6 million. Net proceeds received related to these
transactions amounted to approximately $26.3 million. Both of these properties
were sold for a profit resulting in a gain, after deducting expenses, of $17.6
million, which will be recognized as an offset to rent expense over the
remaining life of the leases.
In addition, during fiscal 2004 and fiscal 2003, we sold 5 and 13
properties, respectively, and simultaneously leased them back from the
purchaser. However, due to our Company's continuing involvement with these
properties as we (i.) receive sublease income that is more than 10% of the fair
market value of these properties, and (ii.) are obligated to repurchase the
properties if certain circumstances occur, the sales did not qualify for
sale-leaseback accounting in accordance with SFAS 98, "Accounting for Leases"
but rather as long-term real estate liabilities under the provisions of SFAS 66.
In accordance with SFAS 66, the carrying value of these properties of
approximately $8.9 million and $73.6 million remained on our Consolidated
Balance Sheets at February 26, 2005 and February 28, 2004, respectively, and no
sale was recognized. Instead, the sales price of these properties of $23.3
million and $166.5 million was recorded as a long-term real estate liability
with a maturity of 20 years, with the exception of one property that has a
maturity of 22 years, within "Long-term real estate liabilities" on our
Consolidated Balance Sheets at February 26, 2005 and February 28, 2004,
respectively. In addition, all lease payments are being charged to "Interest
expense" in our Consolidated Statements of Operations. Of the 5 and 13
properties sold during fiscal 2004 and fiscal 2003, respectively, all were sold
for a profit resulting in a gain, after deducting expenses, which has been
deferred and will not be recognized until the end of the respective leases when
our continuing involvement ceases. There were no such transactions during fiscal
2002.
<PAGE>
In addition, prior to fiscal 2002, we sold 2 properties and
simultaneously leased them back from the purchaser, which were originally
recorded as off balance sheet operating leases. However, due to our Company's
continuing involvement with these 2 properties as we receive sublease income
that is more than 10% of the fair market value of these properties, in the
fourth quarter of fiscal 2003, an adjustment was made to record these two
transactions as long-term real estate liabilities under the provisions of SFAS
66 "Accounting for Sales of Real Estate" ("SFAS 66"). The impact of these
adjustments was immaterial to the fourth quarter and fiscal 2003 as well as to
the prior periods to which they relate. The carrying value of these 2 properties
of approximately $8.3 million has been recorded on our Consolidated Balance
Sheets and the sale has been reversed. In addition, the sales prices of these
properties of $14.9 million have been recorded as long-term real estate
liabilities with maturities of 17 and 22 years, respectively, within "Long-term
real estate liabilities" on our Consolidated Balance Sheets at February 28,
2004.
"Long-term real estate liabilities" on our Consolidated Balance Sheets
at February 26, 2005 and February 28, 2004 also include various leases in which
our Company received landlord allowances to offset the costs of structural
improvements we made to the leased space. As we had paid directly for a
substantial portion of the structural improvement costs, we were considered the
owner of the building during the construction period. In all situations upon
completion of the construction, we were unable to meet the requirements under
SFAS 98, "Accounting for Leases" to qualify for sale-leaseback treatment; thus,
the landlord allowances have been recorded as long-term real estate liabilities
on our Consolidated Balance Sheets and have been amortized over the lease term
based on rent payments designated in the lease agreements. Refer to Note 2 -
Restatement of Previously Issued Financial Statements for further information.
These leases have terms ranging between 12 and 25 years and effective annual
percentage rates between 2.68% and 51.54%. These effective annual percentage
rates were implicitly calculated based upon technical accounting guidance.
We expect to enter into similar transactions for other owned properties
from time to time in the future.
We currently have active Registration Statements dated January 23, 1998
and June 23, 1999, allowing us to offer up to $75 million of debt and/or equity
securities as of February 26, 2005 at terms contingent upon market conditions at
the time of sale.
Our Company's policy is to not pay dividends. As such, we have not made
dividend payments in the previous three years and do not intend to pay dividends
in the normal course of business in fiscal 2005. In addition, our Company is
prohibited, under the terms of our Revolving Credit Agreement, to pay cash
dividends on common shares.
<PAGE>
As of February 26, 2005, we have the following contractual obligations
and commitments:
<TABLE>
<CAPTION>
Payments Due by Period (in millions)
Contractual Less than
Obligations Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C> <C> <C>
Debt (1) $ 636.3 $ 2.3 $ 216.2 $ 0.2 $ 417.6
Capital Leases (2) 106.7 13.3 21.5 16.3 55.6
Operating Leases (2) 3,125.9 256.0 500.6 456.2 1,913.1
Long-term Real Estate
Liabilities (2) 917.7 49.4 99.2 100.1 669.0
Pension Obligations (3) 60.4 10.5 11.4 11.2 27.3
Postretirement
Obligations (4) 44.9 2.2 4.0 4.1 34.6
Occupancy Payments (5) 240.2 33.9 55.4 39.9 111.0
Severance and other
related items (6) 13.1 9.1 2.3 0.4 1.3
Interest (7) 815.6 55.2 95.8 77.2 587.4
Environmental Liability (8) 1.9 0.9 1.0 - -
Postemployment
Obligations (9) 28.7 4.6 9.2 9.2 5.7
Defined Contribution
Plans (10) 10.5 10.5 - - -
Multi-employer Pension
Plans (10) 44.4 44.4 - - -
Purchase Commitments (11):
-------------------------
Equipment Purchases 0.3 0.3 - - -
Equipment Rentals 52.4 37.7 10.6 3.6 0.5
Suppliers 2,675.6 735.1 1,159.5 781.0 -
Manufacturers/Vendors 59.4 40.8 16.0 0.9 1.7
Service Contracts 321.4 82.5 137.8 101.1 -
Consulting 10.5 5.7 4.8 - -
---------------- ------------- --------------- --------------- --------------------
Total $ 9,165.9 $1,394.4 $2,345.3 $ 1,601.4 $ 3,824.8
================ ============= =============== =============== ====================
(1) Amounts represent contractual amounts due. Refer to Note 7 of our
Consolidated Financial Statements for information regarding long-term debt.
We expect to settle such long-term debt by several methods, including cash
flows from operations.
(2) Amounts represent contractual amounts due. Refer to Note 9 of our
Consolidated Financial Statements for information regarding capital leases,
operating leases and long-term real estate liabilities.
(3) Amounts represent future benefit payments that were actuarially determined
for our unfunded defined benefit pension plans as well as future
contributions to our funded defined benefit pension plans. Refer to Note 11
of our Consolidated Financial Statements for information regarding our
defined benefit pension plans.
(4) Amounts represent future benefit payments that were actuarially determined
for our unfunded postretirement benefit obligation. Refer to Note 11 of our
Consolidated Financial Statements for information regarding our
postretirement benefits.
(5) Amounts represent our future occupancy payments primarily relating to our
asset disposition initiatives (refer to Note 6 of our Consolidated
Financial Statements), discontinued operations (refer to Note 5 of our
Consolidated Financial Statements) and store closures made during the
normal course of business.
(6) Amounts represent our future severance obligations and other related items
primarily relating to our normal course of business, asset disposition
initiatives, and discontinued operations.
(7) Amounts represent contractual amounts due. Refer to Note 7 of our
Consolidated Financial Statements for information regarding our interest
payments. Note that amounts presented exclude estimates on future variable
interest rate payments as we do not have any variable interest rate debt as
of the balance sheet date.
(8) Amounts represent our future contractual amounts payable.
(9) Amounts represent our future benefit payments that were actuarially
determined for our short and long term disability programs. Refer to Note
11 of our Consolidated Financial Statements for information regarding our
postemployment obligations.
(10) Amounts represent our best estimate of our immediate funding requirements
of our defined contribution and multiemployer plans in which we
participate. Refer to Note 11 of our Consolidated Financial Statements for
information regarding these obligations.
(11) The purchase commitments include agreements to purchase goods or services
that are enforceable and legally binding and that specify all significant
terms, including open purchase orders. We expect to fund these commitments
with cash flows from operations.
<CAPTION>
Expiration of Commitments (in millions)
Other Less than
Commitments Total 1 Year 1 - 3 Years 4 - 5 Years Thereafter
---------------------- ------------- -------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C> <C>
Guarantees $ 2.0 $ 0.2 $ 0.5 $ 0.5 $ 0.8
============= ============== ============= ============= ====================
</TABLE>
We are the guarantor of a loan of $2.0 million related to a shopping
center, which will expire in 2011.
In the normal course of business, we have assigned to third parties
various leases related to former operating stores (the "Assigned Leases"). When
the Assigned Leases were assigned, we generally remained secondarily liable with
respect to these lease obligations. As such, if any of the assignees were to
become unable to continue making payments under the Assigned Leases, we could be
required to assume the lease obligation. As of February 26, 2005, 193 Assigned
Leases remain in place. Assuming that each respective assignee became unable to
continue to make payments under an Assigned Lease, an event we believe to be
remote, we estimate our maximum potential obligation with respect to the
Assigned Leases to be approximately $383.8 million, which could be partially or
totally offset by reassigning or subletting such leases.
<PAGE>
Our existing senior debt rating was Caa1 with negative implications with
Moody's Investors Service ("Moody's") and B- with negative implications with
Standard & Poor's Ratings Group ("S&P") as of February 26, 2005. Our liquidity
rating was SGL3 with Moody's as of February 26, 2005. Our recovery rating was 1
with S&P as of February 26, 2005 indicating a high expectation of 100% recovery
of our senior debt to our lenders. Future rating changes could affect the
availability and cost of financing to our Company.
MARKET RISK
- -----------
Market risk represents the risk of loss from adverse market changes
that may impact our consolidated financial position, results of operations or
cash flows. Among other possible market risks, we are exposed to such risk in
the areas of interest rates and foreign currency exchange rates.
From time to time, we may enter hedging agreements in order to manage
risks incurred in the normal course of business including forward exchange
contracts to manage our exposure to fluctuations in foreign exchange rates.
Interest Rates
- --------------
Our exposure to market risk for changes in interest rates relates
primarily to our debt obligations. We do not have cash flow exposure due to rate
changes on our $636.3 million in total indebtedness as of February 26, 2005
because they are at fixed interest rates. However, we do have cash flow exposure
on our committed bank lines of credit due to our variable floating rate pricing.
Accordingly, during fiscal 2004, fiscal 2003, and fiscal 2002, a presumed 1%
change in the variable floating rate would have impacted interest expense by nil
as there were minimal borrowings on our committed bank lines of credit, $0.2
million, and $1.5 million, respectively.
During fiscal 2002, we had three interest rate swaps with commercial
banks with an aggregate notional amount of $150 million maturing on April 15,
2007, designated as fair value hedging instruments, to effectively convert a
portion of our 7.75% Notes due April 15, 2007 from fixed rate debt to floating
rate debt. In January 2003, these hedging instruments were terminated, resulting
in a gain of $10.2 million. This gain has been deferred and is being amortized
as an offset to interest expense over the life of the underlying debt
instrument. Such amount is classified as "Long term debt" in our Consolidated
Balance Sheets.
Foreign Exchange Risk
- ---------------------
We are exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. During fiscal 2004, fiscal 2003, and fiscal
2002, a change in the Canadian currency of 10% would have resulted in a
fluctuation in net loss of $2.6 million, $0.7 million and $4.0 million,
respectively. We do not believe that a change in the Canadian currency of 10%
will have a material effect on our financial position or cash flows.
<PAGE>
CRITICAL ACCOUNTING ESTIMATES
- -----------------------------
Critical accounting estimates are those accounting estimates that we
believe are important to the portrayal of our financial condition and results of
operations and require our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("U.S. GAAP")
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Self-Insurance Reserves
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. We estimate the
required liability of such claims on a discounted basis, utilizing an actuarial
method, which is based upon various assumptions, which include, but are not
limited to, our historical loss experience, projected loss development factors,
actual payroll and other data. The total current and non-current liability for
self-insurance reserves recorded at February 26, 2005 related to our United
States segment was $122.4 million, which includes a $20.9 million increase in
our workers' compensation and general liability reserves in response to both
adverse development of prior years' costs and other developments including a
continuing trend of rising costs. As of February 26, 2005, the self-insurance
reserves relating to our Canada segment was not significant. The discount rate
used at February 26, 2005 was 4.0% and was based on the timing of the projected
cash flows of future payments to be made for claims. A 1% increase in the
discount rate would decrease the required liability by $3.1 million. Conversely,
a 1% decrease in the discount rate would increase the required liability by $3.3
million. The required liability is also subject to adjustment in the future
based upon the changes in claims experience, including changes in the number of
incidents (frequency) and changes in the ultimate cost per incident (severity).
Long-Lived Assets
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is based upon
groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets is recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a risk free rate.
During fiscal 2004, we recorded property impairment losses of $44.7
million as follows:
<TABLE>
<CAPTION>
Fiscal 2004
-----------------------------------
U.S. Canada Total
--------- --------- ---------
<S> <C> <C> <C>
Impairments due to closure or conversion in the normal course
of business (1) (2) $ 6.0 $ 0.7 $ 6.7
Impairments due to unrecoverable assets (2) 34.7 - 34.7
Impairments related to the 2001 Asset Disposition (2) (3) 2.6 - 2.6
Impairments related to The Farmer Jack restructuring (2) (3) 0.1 - 0.1
Impairments related to our exit of the northern New England and
Kohls markets (2) (4) 0.6 - 0.6
--------- --------- ---------
Total impairments $ 44.0 $ 0.7 $ 44.7
========= ========= =========
(1) Consists primarily of amounts that were impaired as a result of stores
that were or will be closed, converted or remodeled in the normal course
of business.
(2) Refer to Note 4 - Valuation of Goodwill and Long-Lived Assets.
(3) Refer to Note 6 - Asset Disposition Initiative.
(4) Refer to Note 5 - Discontinued Operations.
</TABLE>
All of these amounts with the exception of the impairments related to
our exit of the northern New England and Kohls markets are included in SG&A in
our Consolidated Statements of Operations. The impairments related to our exit
of the northern New England and Kohls markets are included in "(Loss) gain on
disposal of discontinued operations, net of tax" on our Consolidated Statements
of Operations. 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.
Closed Store Reserves
For closed stores that are under long-term leases, we record a
discounted liability using a risk free rate for the future minimum lease
payments and related costs, such as utilities and taxes, from the date of
closure to the end of the remaining lease term, net of estimated probable
recoveries from projected sublease rentals. If estimated cost recoveries exceed
our liability for future minimum lease payments, the excess is recognized as
income over the term of the sublease. We estimate future net cash flows based on
our experience in and our knowledge of the market in which the closed store is
located. However, these estimates project net cash flow several years into the
future and are affected by variable factors such as inflation, real estate
markets and economic conditions. While these factors have been relatively stable
in recent years, variation in these factors could cause changes to our
estimates. As of February 26, 2005, we had recorded liabilities for estimated
probable obligations of $114 million, which related to 53 vacant stores and 193
subleased or assigned stores. Of this amount, $21 million relates to stores
closed in the normal course of business, $76 million relates to stores closed as
part of the asset disposition initiative (see Note 6 of our Consolidated
Financial Statements) and $17 million relates to stores closed as part of our
exit of the northern New England and Kohl's businesses (see Note 5 of our
Consolidated Financial Statements).
Employee Benefit Plans
The determination of our obligation and expense for pension and other
postretirement benefits is dependent, in part, on our selection of certain
assumptions used by our actuaries in calculating these amounts. These
assumptions are disclosed in Note 11 of our Consolidated Financial Statements
and include, among other things, the discount rate, the expected long-term rate
of return on plan assets and the rates of increase in compensation and health
care costs. In accordance with U.S. GAAP, actual results that differ from our
Company's assumptions are accumulated and amortized over future periods and,
therefore, affect our recognized expense and recorded obligation in such future
periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our pension and other post-retirement obligations and our
future expense.
<PAGE>
An example of how changes in these assumptions can affect our financial
statements occurred in fiscal 2004. Based on our review of market interest
rates, actual return on plan assets and other factors, we lowered our discount
rate for U.S. plans to 5.75% at year-end 2004 from 6.00% at year-end 2003. We
also lowered our expected return on plan assets for U.S. plans to 6.75% at
year-end 2004 from 7.00% at year-end 2003. These rates are applied to the
calculated value of plan assets and liabilities, which results in an amount that
is included in pension expense or income in the following years. When not
considering other changes in assumptions or actual return on plan assets, a 1%
change in the discount rate alone would either increase the benefit obligation
by $20.1 million or decrease the benefit obligation by $17.0 million, and a 1%
change in expected return on plan assets alone would either increase or decrease
2004 U.S. pension expense by $1.8 million.
When not considering other changes in assumptions for our
post-retirement benefits, a 1% change in the U. S. discount rate alone would
either increase or decrease U.S. 2004 service and interest cost by $0.04
million, while the accumulated post-retirement benefit obligation would either
increase by $2.2 million or decrease by $1.8 million. The effect of a 1% change
in the assumed health care cost trend rate for each future year on the sum of
U.S. 2004 service and interest cost would either be an increase or decrease of
$0.1 million, while accumulated post-retirement benefit obligation would either
increase by $1.3 million or decrease by $1.1 million.
Refer to Note 11 - Retirement Plans and Benefits in the Notes to
Consolidated Financial Statements for a full discussion of our Company's
employee benefit plans.
Inventories
We evaluate inventory shrinkage throughout the year based on actual
physical counts in our stores and distribution centers and record reserves based
on the results of these counts to provide for estimated shrinkage between the
store's last inventory and the balance sheet date.
Income Taxes
Our Company has net operating loss carryforwards from our Canadian
operations of $4.6 million. This net operating loss carryforward will expire in
February 2012. Our Company assessed our ability to utilize the Canadian net
operating loss carryforwards and concluded that no valuation allowance currently
is required since our Company believes that it is more likely than not that the
net operating loss carryforwards will be utilized either by generating taxable
income or through tax planning strategies. However, this cannot be assured.
Accordingly, some portions of these net operating loss carryforwards may expire
before they can be utilized by our Company to reduce our income tax obligations.
Our Company has net operating loss carryforwards from our U.S. operations of
$674.8 million. As discussed in Note 10 of the Consolidated Financial
Statements, our Company recorded a valuation allowance for the entire U.S. net
deferred tax asset since, in accordance with SFAS 109, it was more likely than
not that the net deferred tax asset would not be utilized based on historical
cumulative losses. Under SFAS 109, this valuation allowance could be reversed in
future periods if our Company experiences improvement in our U.S. operations
prior to the expiration of the U.S. net operating loss carryforwards between
2019 and 2025.
<PAGE>
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
- ---------------------------------------
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.
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 $48.7 million and $47.2 million for fiscal 2004 and fiscal 2003,
respectively.
Refer to Note 3 - Changes in Accounting Methods regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our Consolidated Financial Statements.
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 years ended February 26, 2005 and February 28, 2004 in Note 11 - 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 11 - Retirement
Plans and Benefits regarding the impact of adoption of FAS 106-2 in our
Consolidated Financial Statements.
In November 2004, the FASB issued SFAS 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 requires that
handling costs and waste material (spoilage) be recognized as current-period
charges regardless of whether they meet the previous requirement of being
abnormal. In addition, this Statement requires that allocations of fixed
overhead to the cost of inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for our 2006 fiscal year and we are
currently assessing the impact of this statement on our Consolidated Financial
Statements; however, we do not expect it to have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123R (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB
No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash
Flows." The provisions of SFAS 123R are similar to those of SFAS 123; however,
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements as
compensation cost based on their fair value on the date of grant. Fair value of
share-based awards will be determined using option-pricing models and
assumptions that appropriately reflect the specific circumstances of the awards.
Compensation cost will be recognized over the vesting period based on the fair
value of awards that actually vest.
SFAS 123R is effective for all public companies no later than the first
annual period beginning after June 15, 2005 (the quarter ended June 17, 2006 for
our Company) and applies to all outstanding and unvested share-based payment
awards at a company's adoption date. We have elected to early adopt this
pronouncement beginning in the first quarter of fiscal 2005 using the
modified-prospective transition method. Under this method, compensation cost
will be recognized in the financial statements issued subsequent to the date of
adoption for all shared-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. As we previously adopted only the pro forma disclosures
under SFAS 123, we will recognize compensation cost relating to the unvested
portion of awards granted prior to the date of adoption using the same estimate
of grant-date fair value and the same option pricing model used to determine the
pro forma disclosures under SFAS 123.
CAUTIONARY NOTE
- ---------------
This presentation may contain forward-looking statements about the
future performance of our Company, and is based on our assumptions and beliefs
in light of information currently available. We assume no obligation to update
this information. These forward-looking statements are subject to uncertainties
and other factors that could cause actual results to differ materially from such
statements including but not limited to: competitive practices and pricing in
the food industry generally and particularly in our principal markets; our
relationships with our employees; the terms of future collective bargaining
agreements; the costs and other effects of lawsuits and administrative
proceedings; the nature and extent of continued consolidation in the food
industry; changes in the financial markets which may affect our cost of capital
or the ability to access capital; supply or quality control problems with our
vendors; and changes in economic conditions, which may affect the buying
patterns of our customers.
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Restated - See Notes 2 & 3
Fiscal 2004 Fiscal 2003 Fiscal 2002
---------------------- --------------------- ----------------------
<S> <C> <C> <C>
Sales $ 10,854,911 $ 10,899,308 $ 10,096,781
Cost of merchandise sold (7,813,771) (7,827,211) (7,252,457)
--------------- --------------- ----------------
Gross margin 3,041,140 3,072,097 2,844,324
Store operating, general
and administrative expense (3,114,062) (3,214,938) (2,824,017)
--------------- --------------- -----------------
(Loss) income from operations (72,922) (142,841) 20,307
Interest expense (114,107) (103,098) (99,863)
Interest income 2,776 2,282 7,897
Minority interest in earnings of
consolidated franchisees 772 (142) -
-------------- --------------- ---------------
Loss from continuing operations
before income taxes (183,481) (243,799) (71,659)
(Provision for) benefit from income
taxes (528) 30,574 (130,630)
--------------- -------------- ----------------
Loss from continuing operations (184,009) (213,225) (202,289)
Discontinued operations:
(Loss) income from operations of
discontinued businesses, net of
tax benefit of $0 and $23,682 for
the years ended February 26, 2005,
and February 28, 2004, respectively, and
tax provision of $5,536 for the year
ended February 22, 2003 (1,387) (32,703) 7,645
(Loss) gain on disposal of discontinued
operations, net of tax provision
of $0 and $70,261 for the years ended
February 26, 2005, and February 28,
2004, respectively (2,702) 97,026 -
--------------- -------------- ---------------
(Loss) income from discontinued
operations (4,089) 64,323 7,645
------------- -------------- ---------------
Loss before cumulative effect of change in
accounting principle (188,098) (148,902) (194,644)
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax - (8,047) -
-------------- --------------- ---------------
Net loss $ (188,098) $ (156,949) $ (194,644)
============== ============== ===============
Net loss per share - basic and diluted:
Continuing operations $ (4.77) $ (5.54) $ (5.25)
Discontinued operations (0.11) 1.67 0.20
Cumulative effect of change in
accounting principle - FIN 46-R - (0.21) -
-------------- --------------- ---------------
Net loss per share - basic and diluted $ (4.88) $ (4.08) $ (5.05)
=============== =============== ===============
Weighted average common shares outstanding:
Basic 38,558,598 38,516,750 38,494,812
============== ============== ===============
Diluted 38,558,598 38,516,750 38,494,812
============== ============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Retained
Accumulated earnings
Common stock Additional other (accumu- Total
----------------------------- paid-in comprehensive lated stockholders'
Shares Amount capital (loss) income deficit) equity
------------- -------------- ----------- ------------------ ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at 2/23/02, as previously
reported 38,367,628 $ 38,368 $ 456,753 $ (77,029) $254,896 $ 672,988
Add adjustment for the cumulative
effect on prior years of applying
retroactively the new method
of accounting for inventory
(LIFO to FIFO) 18,597 18,597
------------- ----------- ----------- ---------------- ----------- -------------
Balance at 2/23/02, as adjusted 38,367,628 $ 38,368 $ 456,753 $ (77,029) $273,493 $ 691,585
Net loss (194,644) (194,644)
Stock options exercised 148,178 148 2,658 2,806
Other comprehensive income 15,906 15,906
------------- ----------- ----------- ----------------- ----------- --------------
Balance at 2/22/03, Restated -
See Notes 2 & 3 38,515,806 38,516 459,411 (61,123) 78,849 515,653
Net loss (156,949) (156,949)
Stock options exercised 3,099 3 168 171
Other comprehensive income 33,884 33,884
------------- ----------- ----------- ---------------- ----------- --------------
Balance at 2/28/04, Restated -
See Notes 2 & 3 38,518,905 38,519 459,579 (27,239) (78,100) 392,759
Net loss (188,098) (188,098)
Stock options exercised 246,094 246 1,380 1,626
Other share based awards 3,584 3,584
Other comprehensive income 23,931 23,931
------------- ----------- ----------- ---------------- ----------- -------------
Balance at 2/26/05 38,764,999 $ 38,765 $ 464,543 $ (3,308) $ (266,198) $ 233,802
============= =========== =========== ================ =========== =============
<CAPTION>
Restated - See Notes 2 & 3
------------------------------------------
Comprehensive (loss) income Fiscal 2004 Fiscal 2003 Fiscal 2002
- --------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Net loss $ (188,098) $ (156,949) $ (194,644)
----------- ----------- -------------
Foreign currency translation adjustment 26,927 38,604 15,363
Reclassification adjustment for gains included in
net loss, net of tax - - (933)
Minimum pension liability adjustment, net of tax (3,211) (1,547) (1,539)
Net unrealized gain (loss) on derivatives, net of tax 215 (3,173) 3,015
----------- ------------ ------------
Other comprehensive income, net of tax 23,931 33,884 15,906
----------- ----------- ------------
Total comprehensive loss $ (164,167) $ (123,065) $ (178,738)
=========== =========== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated Other Comprehensive Loss Balances
- --------------------------------------------- Accumulated
Foreign Reclass- Net Unrealized Minimum Other
Currency ification Gain / (Loss) Pension Comprehensive
Translation Adjustment on Derivatives Liability (Loss) Income
--------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at February 23, 2002 $ (77,859) $ 933 - $ (103) $ (77,029)
Current period change 15,363 (933) 3,015 (1,539) 15,906
------------ ------------ ---------- ------------ -----------
Balance at February 22, 2003 (62,496) - 3,015 (1,642) (61,123)
Current period change, Restated
- See Notes 2 & 3 38,604 - (3,173) (1,547) 33,884
------------ ----------- ----------- ------------ -----------
Balance at February 28, 2004, Restated
- See Notes 2 & 3 (23,892) - (158) (3,189) (27,239)
Current period change 26,927 - 215 (3,211) 23,931
------------ ----------- ---------- ------------ -----------
Balance at February 26, 2005 $ 3,035 $ - $ 57 $ (6,400) (3,308)
============ =========== ========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Restated - See Notes 2 & 3
-------------------------------
February 26, 2005 February 28, 2004
------------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 257,748 $ 297,008
Accounts receivable, net of allowance for doubtful
accounts of $5,713 and $6,316 at February 26, 2005
and February 28, 2004, respectively 145,507 171,835
Inventories 720,799 694,120
Prepaid expenses and other current assets 40,627 35,987
------------ ------------
Total current assets 1,164,681 1,198,950
------------ ------------
Property:
Land 80,221 77,915
Buildings 307,933 317,596
Equipment 999,556 983,734
Leasehold improvements 1,193,318 1,209,312
------------ ------------
Total - at cost 2,581,028 2,588,557
Less accumulated depreciation and amortization (1,104,454) (1,052,767)
------------ ------------
Property owned, net 1,476,574 1,535,790
Property under capital leases, net 39,126 49,920
------------ ------------
Property - net 1,515,700 1,585,710
Other assets 121,587 118,186
------------ ------------
Total assets $ 2,801,968 $ 2,902,846
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,278 $ 2,271
Current portion of obligations under capital leases 8,331 15,901
Accounts payable 543,481 480,712
Book overdrafts 83,306 96,273
Accrued salaries, wages and benefits 181,173 177,142
Accrued taxes 51,991 74,698
Other accruals 207,642 236,238
------------ ------------
Total current liabilities 1,078,202 1,083,235
------------ ------------
Long-term debt 634,028 642,296
Long-term obligations under capital leases 52,184 55,243
Long-term real estate liabilities 328,316 289,184
Other non-current liabilities 471,382 432,957
Minority interest in consolidated franchisees 4,054 7,172
------------ ------------
Total liabilities 2,568,166 2,510,087
------------ ------------
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 - 38,764,999 and
38,518,905 shares at February 26, 2005 and
February 28, 2004, respectively 38,765 38,519
Additional paid-in capital 464,543 459,579
Accumulated other comprehensive loss (3,308) (27,239)
Accumulated deficit (266,198) (78,100)
------------- ------------
Total stockholders' equity 233,802 392,759
------------ ------------
Total liabilities and stockholders' equity $ 2,801,968 $ 2,902,846
============ ============
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Restated - See Notes 2 & 3
---------------------------------
Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (188,098) $ (156,949) $ (194,644)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Midwest long-lived asset / goodwill impairment charge 34,688 60,082 -
Other property impairments 8,629 8,660 24,478
Asset disposition initiative (759) 34,043 (5,702)
Depreciation and amortization 268,105 276,545 264,584
Deferred income tax (benefit) provision (1,370) 8,670 157,566
(Gain) loss on disposal of owned property and
write-down of property, net (28,704) 348 (1,140)
Loss (gain) on disposal of discontinued operations 2,702 (167,287) -
Minority interest (3,542) (742) -
Cumulative effect of change in accounting principle - FIN 46-R - 8,047 -
Realized gain on sale of securities - - (1,717)
Other changes in assets and liabilities:
Decrease (increase) in receivables 29,223 (3,779) 47,583
(Increase) decrease in inventories (12,614) 44,121 47,840
(Increase) decrease in prepaid expenses and other
current assets (6,024) (43,427) 44,766
(Increase) decrease in other assets (19,041) 5,334 15,419
Increase (decrease) in accounts payable 46,295 (57,150) (54,575)
(Decrease) increase in accrued salaries, wages and
benefits, and taxes (24,170) 4,958 (28,511)
(Decrease) increase in other accruals (34,121) 16,623 (63,051)
Increase (decrease) in other non-current liabilities 41,902 (51,446) (59,844)
Other, net 1,357 (3,138) 938
------------ ----------------- -----------
Net cash provided by (used in) operating activities 114,458 (16,487) 193,990
------------ ----------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property (216,142) (160,951) (242,409)
Proceeds from disposal of property 53,641 264,600 56,731
------------ ------------ ------------
Net cash (used in) provided by investing activities (162,501) 103,649 (185,678)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under revolving lines of credit - - 313,253
Principal payments on revolving lines of credit - (135,000) (178,253)
Proceeds from short-term borrowings 3,000 217,600 161,000
Principal payments on short-term borrowings (3,000) (217,600) (161,000)
Proceeds from long-term borrowings - - 153
Principal payments on long-term borrowings (6,068) (47,137) (95,039)
Net proceeds from long-term real estate liabilities 37,086 193,810 20,605
Principal payments on capital leases (13,454) (13,828) (12,138)
Decrease in book overdrafts (13,665) (6,562) (25,617)
Deferred financing fees (1,334) (10,319) (5,744)
Proceeds from exercises of stock options 1,599 21 2,806
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,164 (19,015) 20,026
------------ ------------- ------------
Initial impact of FIN 46-R - 20,921 -
Effect of exchange rate changes on cash and
cash equivalents 4,619 8,926 2,056
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (39,260) 97,994 30,394
Cash and cash equivalents at beginning of year 297,008 199,014 168,620
------------ ------------ ------------
Cash and cash equivalents at end of year $ 257,748 $ 297,008 $ 199,014
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
The Great Atlantic & Pacific Tea Company, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands, except share amounts, and where noted)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
- ---------------------------------------
The consolidated financial statements include the accounts of our
Company, all majority-owned subsidiaries and franchise operations. Significant
intercompany accounts and transactions have been eliminated.
We operate retail supermarkets in the United States and Canada. The
U.S. operations are mainly in the Eastern part of the U.S. and certain parts of
the Midwest. See the following footnotes for additional information on our
Canadian Operations: Note 7 - Indebtedness, Note 10 - Income Taxes, Note 11 -
Retirement Plans and Benefits, Note 13 - Commitments and Contingencies, and Note
14 - Operating Segments. Our principal stockholder, Tengelmann
Warenhandelsgesellschaft KG ("Tengelmann"), owned 56.7% of our common stock as
of February 26, 2005.
Fiscal Year
- -----------
Our fiscal year ends on the last Saturday in February. Fiscal 2004
ended February 26, 2005, fiscal 2003 ended February 28, 2004, and fiscal 2002
ended February 22, 2003. Fiscal 2004 and fiscal 2002 were each comprised of 52
weeks, and Fiscal 2003 was comprised of 53 weeks.
Restatement of Previously Issued Financial Statements
- -----------------------------------------------------
As discussed in Note 2 - Restatement of Previously Issued Financial
Statements, our Company has restated our Consolidated Balance Sheet at February
28, 2004 and our Consolidated Statements of Operations and Cash Flows for the
years ended February 28, 2004 and February 22, 2003 for corrections in our
accounting for leases. Note that the overall net impact to our results of
operations and Net loss per share from the correction in our accounting for
leases for each year was not considered material. We have restated our
Consolidated Statements of Operations for the years ended February 28, 2004 and
February 22, 2003, and the quarterly financial information for the years ended
February 26, 2005 and February 28, 2004, for the revision in classification
between Store operating, general and administrative expense and interest expense
only. We have also restated the applicable cash flow information and footnote
disclosure for fiscal 2002 and 2003. Readers of the financial statements should
read this restated information as opposed to the previously filed information.
All referenced amounts for prior periods reflect the balances and amounts on a
restated basis.
Changes in Accounting Methods
- -----------------------------
As discussed in Note 3 - Changes in Accounting Methods, 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.
<PAGE>
Accordingly, we have retroactively restated our Consolidated Balance
Sheet at February 28, 2004 and the Consolidated Statements of Operations and
Cash Flows for the years ended February 28, 2004 and February 22, 2003. We have
also restated the quarterly financial information for fiscal 2003 to reflect the
impact of adopting FIN 46-R, EITF 03-10, and the change in our method of valuing
certain of our inventories from the LIFO method to the FIFO method. The impact
of these changes on periods prior to fiscal 2002 has been reflected as an
adjustment to retained earnings as of February 23, 2002 in the accompanying
Consolidated Statements of Stockholders' Equity and Comprehensive (Loss) Income.
We have also restated the applicable financial information for fiscal 2002 and
2003.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Retail revenue is recognized at point-of-sale. Discounts that we
provide to customers are accounted for as a reduction to sales upon sale.
Cost of Merchandise Sold
- ------------------------
Cost of merchandise sold includes cost of inventory sold during the
period, including purchasing and distribution costs. These costs include inbound
freight charges, purchasing and receiving costs, warehouse inspection costs,
warehousing costs, internal transfer costs and other costs of our distribution
network.
Vendor Allowances
- -----------------
Vendor allowances that relate to our Company's buying and merchandising
activities consist primarily of advertising, promotional and slotting
allowances. With the exception of allowances described below, all allowances are
recognized as a reduction of cost of goods sold when the related performance is
completed and the related inventory is sold. Lump-sum payments received for
multi-year contracts are generally amortized on a straight line basis over the
life of the contracts. Vendor rebates or refunds that are contingent upon our
Company completing a specified level of purchases or remaining a reseller for a
specified time period are recognized as a reduction of cost of goods sold based
on a systematic and rational allocation of the rebate or refund to each of the
underlying transactions that results in progress toward earning that rebate or
refund, assuming that we can reasonably estimate the rebate or refund and it is
probable that the specified target will be obtained. If we believe attaining the
milestone is not probable, the rebate or refund is recognized as the milestone
is achieved.
<PAGE>
In November 2003, the Emerging Issues Task Force confirmed as a
consensus EITF Issue No. 03-10, "Application of EITF Issue No. 02-16, Accounting
by a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor, by Resellers to Sales Incentives Offered to Consumers by Manufacturers."
EITF 03-10 will not impact our Company's existing accounting and reporting
policies for manufacturers' coupons that can be presented at any retailer that
accepts coupons. For arrangements with vendors that are entered into or modified
after February 28, 2004, our Company is required to record the vendor
reimbursement as a reduction of cost of sales (instead of sales) if the coupon
can only be redeemed at a Company retail store. Refer to Note 3 - Changes in
Accounting Methods for further discussion.
Advertising Costs
- -----------------
Advertising costs incurred to produce media advertising are expensed in
the period the advertisement is first shown. Other advertising costs, primarily
costs to produce circulars, place advertisements and pay advertising agency
fees, are expensed when incurred. We recorded advertising expense of $120.2
million for fiscal 2004, $143.2 million for fiscal 2003 and $136.5 million for
fiscal 2002.
Pre-opening Costs
- -----------------
Non-capital expenditures incurred in opening new stores or remodeling
existing stores are expensed as incurred. Rent incurred during the construction
period is capitalized and amortized over the primary lease term.
Software Costs
- --------------
We capitalize externally purchased software and amortize it over five
years. Amortization expense related to software costs for fiscal 2004, 2003 and
2002 was $6.4 million, $6.4 million and $7.5 million, respectively.
We apply the provisions of the American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires
the capitalization of certain internally generated software costs. In fiscal
2004, 2003 and 2002, we capitalized $8.6 million, $4.0 million and $26.7
million, respectively, of such software costs. These costs are amortized over 5
years. For fiscal 2004, 2003 and 2002, we recorded related amortization expense
of $14.6 million, $13.4 million and $7.6 million, respectively.
Externally purchased and internally developed software are classified
in "Property - Equipment" on our Consolidated Balance Sheets.
Earnings Per Share
- ------------------
We calculate earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") 128, "Earnings Per Share" ("SFAS 128").
SFAS 128 requires dual presentation of basic and diluted earnings per share
("EPS") on the face of the Consolidated Statements of Operations and requires a
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations. Basic EPS is computed by dividing net income (loss) by the
weighted average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if options to issue common stock were
exercised and converted to common stock.
<PAGE>
The weighted average shares outstanding utilized in the basic EPS
calculation were 38,558,598 for fiscal 2004, 38,516,750 for fiscal 2003 and
38,494,812 for fiscal 2002. The additional common stock equivalents for fiscal
2004, 2003 and 2002 would have been 294,884, 391,915 and 387,040, respectively;
however, such shares were antidilutive and thus excluded from the diluted EPS
calculation.
Translation of Canadian Currency
- --------------------------------
Assets and liabilities denominated in Canadian currency are translated
at year-end rates of exchange, and revenues and expenses are translated at
average rates of exchange during the year. Gains and losses resulting from
translation adjustments are accumulated as a separate component of accumulated
other comprehensive loss within Stockholders' Equity.
Cash and Cash Equivalents
- -------------------------
Short-term investments that are highly liquid with an original maturity
of three months or less are deemed to be cash equivalents. These balances as
well as credit card receivables are included in "Cash and cash equivalents" on
our Consolidated Balance Sheets.
Inventories
- -----------
Store inventories are stated principally at the lower of cost or market
with cost determined under the retail method on a first-in, first-out basis.
Perishables and pharmacy inventories are stated at the lower of cost or market
with cost determined under the gross profit method. Warehouse and other
inventories are stated primarily at the lower of cost or market with cost
determined on a first-in, first-out basis.
We evaluate inventory shrinkage throughout the year based on the
results of our periodic physical counts in our stores and distribution centers
and record reserves based on the results of these counts to provide for
estimated shrinkage as of the balance sheet date.
Properties Held for Sale
- ------------------------
Properties held for sale include those properties, which have been
identified for sale by our Company and are recorded at the lower of their
carrying value or fair value less cost to sell. Once properties are identified
as held for sale, they are no longer depreciated and are reclassified to
"Prepaid expenses and other current assets" on our Consolidated Balance Sheets.
Long-Lived Assets
- -----------------
We review the carrying values of our long-lived assets for possible
impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. Such review is based upon
groups of assets and the undiscounted estimated future cash flows from such
assets to determine if the carrying value of such assets is recoverable from
their respective cash flows. If such review indicates an impairment exists, we
measure such impairment on a discounted basis using a probability weighted
approach and a risk free rate.
<PAGE>
During fiscal 2004, fiscal 2003, and fiscal 2002, we recorded property
impairment losses as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------------------------- ------------------------------- -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
------- --------- --------- ------- --------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business (1) (2) $ 6.0 $ 0.7 $ 6.7 $ 4.4 $ 1.7 $ 6.1 $ 21.3 $ 3.2 $ 24.5
Impairments due to
unrecoverable assets (2) 34.7 - 34.7 33.1 - 33.1 - - -
Impairments related to
the 2001 Asset
Disposition (2) (3) 2.6 - 2.6 0.4 - 0.4 - - -
Impairments related to
the Farmer Jack
restructuring (2) (3) 0.1 - 0.1 4.1 - 4.1 - - -
Impairments related to
our exit of the northern
New England and
Kohls markets (2) (4) 0.6 - 0.6 19.0 - 19.0 - - -
------- ------- ------- ------- ------- ------ ------ ------- ------
Total impairments $ 44.0 $ 0.7 $ 44.7 $ 61.0 $ 1.7 $ 62.7 $ 21.3 $ 3.2 $ 24.5
======= ======= ======= ======= ======= ====== ====== ======= ======
(1) Consists primarily of amounts that were impaired as a result of stores
that were or will be closed, converted or remodeled in the normal course
of business.
(2) Refer to Note 4 - Valuation of Goodwill and Long-Lived Assets.
(3) Refer to Note 6 - Asset Disposition Initiative.
(4) Refer to Note 5 - Discontinued Operations.
</TABLE>
All of these amounts with the exception of the impairments related to
our exit of the northern New England and Kohls markets are included in Store
operating, general and administrative expense in our Consolidated Statements of
Operations. The impairments related to our exit of the northern New England and
Kohls markets are included in "(Loss) gain on disposal of discontinued
operations, net of tax" on our Consolidated Statements of Operations. The
effects of changes in estimates of useful lives were not material to ongoing
depreciation expense.
Property
- --------
Depreciation and amortization are calculated on the straight-line basis
over the estimated useful lives of the assets. Buildings are depreciated based
on lives varying from twenty to fifty years and equipment is depreciated based
on lives varying from three to twelve years. Leasehold improvements are
amortized over the lesser of their estimated useful lives and the remaining
available lease terms. Property leased under capital leases is amortized over
the lives of the respective leases or over their economic useful lives,
whichever is less. During fiscal 2004, 2003 and 2002, in addition to the
impairment losses discussed above, we disposed of and/or wrote down certain
assets, which resulted in a pretax net gain of $28.7 million, pretax net loss of
$0.3 million, and a pretax net gain of $1.1 million, respectively.
<PAGE>
Goodwill and Other Intangible Assets
- ------------------------------------
In accordance with SFAS 142 "Goodwill and Other Intangible Assets,"
goodwill is no longer required to be amortized, but tested for impairment at
least annually by reassessing the appropriateness of the goodwill balance based
on forecasts of cash flows from operating results on a discounted basis in
comparison to the carrying value of such operations. If the results of such
comparison indicate that an impairment may exist, we determine the implied fair
market value of the goodwill using a purchase price allocation approach and
compare this value to the balance sheet amount. If such comparison indicates
that an impairment exists, we will recognize a charge to operations at that time
based upon the difference between the implied fair market value of the goodwill
and the balance sheet amount. During fiscal 2003, we determined that goodwill
relating to the Farmer Jack reporting unit was entirely impaired; thus, we
recorded an impairment charge of $27.0 million as a component of operating
income in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations. Refer to Note 4 - Valuation of Goodwill
and Long Lived Assets in the Notes to our Consolidated Financial Statements for
further discussion relating to the impairment charges recorded.
The book value of goodwill and other intangible assets acquired at
February 26, 2005 and February 28, 2004 was $6.1 million and $5.9 million,
respectively, net of accumulated amortization of $1.4 million and $1.1 million,
respectively. During fiscal 2004, we determined that a portion of the remaining
goodwill and other intangible assets had a definite life and recorded
amortization expense of $0.3 million. No amortization expense was recorded for
fiscal 2003 and fiscal 2002. Amortization expense for each of the five
succeeding fiscal years 2005 through 2010 is estimated to be $0.3 million per
year.
Current Liabilities
- -------------------
Certain accounts payable checks issued but not presented to banks
frequently result in negative book balances for accounting purposes. Such
amounts are classified as "Book overdrafts" on our Consolidated Balance Sheets.
We accrue for vested vacation pay earned by our employees. Liabilities
for compensated absences of $67.3 million and $77.3 million at February 26, 2005
and February 28, 2004, respectively, are included in "Accrued salaries, wages
and benefits" on our Consolidated Balance Sheets.
Self Insurance Reserves
- -----------------------
Our Consolidated Balance Sheets include liabilities with respect to
self-insured workers' compensation and general liability claims. The current
portion of these liabilities is included in "Other accruals" and the non-current
portion is included in "Other non-current liabilities" on our Consolidated
Balance Sheets. We estimate the required liability of such claims on a
discounted basis, utilizing an actuarial method, which is based upon various
assumptions, which include, but are not limited to, our historical loss
experience, projected loss development factors, actual payroll and other data.
The required liability is also subject to adjustment in the future based upon
the changes in claims experience, including changes in the number of incidents
(frequency) and changes in the ultimate cost per incident (severity). During
fiscal 2004, fiscal 2003, and fiscal 2002, we recorded a $20.9 million, a $9.5
million, and $11.1 million, respectively, increase in our workers' compensation
and general liability reserves in response to both adverse development of prior
years' costs and other developments including a continuing trend of rising
costs. These amounts were recorded within "Store operating, general and
administrative expense" in our Consolidated Statements of Operations.
<PAGE>
Closed Store Reserves
- ---------------------
For stores closed that are under long-term leases, we record a
discounted liability using a risk free rate for future minimum lease payments
and related costs, such as utilities and taxes, from the date of closure to the
end of the remaining lease term, net of estimated probable recoveries from
projected sublease rentals. If estimated cost recoveries exceed our liability
for future minimum lease payments, the excess is recognized as income over the
term of the sublease. We estimate net future cash flows based on our experience
in and knowledge of the market in which the closed store is located. However,
these estimates project net cash flow several years into the future and are
affected by variable factors such as inflation, real estate markets and economic
conditions. While these factors have been relatively stable in recent years,
variation in these factors could cause changes to our estimates.
Income Taxes
- ------------
We provide deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax regulations. A valuation allowance is recorded to
reduce a deferred tax asset to the amount expected to be realized.
Comprehensive Loss
- -------------------
Our Company's other comprehensive loss relates to changes in foreign
currency translation, minimum pension liability and unrealized gains or losses
on derivatives and securities held for sale.
Changes in other comprehensive loss for the years ended February 26,
2005, February 28, 2004, and February 22, 2003 related to:
<TABLE>
<CAPTION>
Deferred Tax
Gross Benefit/(Provision) Net
------------------ ------------------- ----------------
<S> <C> <C> <C>
Foreign currency translation adjustment $ 26,927 $ - $ 26,927
Minimum pension liability adjustment (3,211) - (3,211)
Unrealized gain on securities held for sale 189 26 215
------------------ -------------------- ----------------
For the year ended 2/26/05 $ 23,905 $ 26 $ 23,931
================== ==================== ================
Foreign currency translation adjustment $ 38,604 $ - $ 38,604
Minimum pension liability adjustment (1,547) - (1,547)
Unrealized loss on derivatives (4,972) 1,799 (3,173)
------------------ -------------------- ----------------
For the year ended 2/28/04 $ 32,085 $ 1,799 $ 33,884
================== ==================== ================
Foreign currency translation adjustment $ 15,363 $ - $ 15,363
Reclassification adjustment for gains
included in net loss (1,609) 676 (933)
Minimum pension liability adjustment (1,613) 74 (1,539)
Unrealized gain on derivatives 4,917 (1,902) 3,015
------------------ -------------------- ----------------
For the year ended 2/22/03 $ 17,058 $ (1,152) $ 15,906
================== ==================== ================
</TABLE>
<PAGE>
Stock-Based Compensation
- ------------------------
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") with pro forma disclosure of compensation expense, net
income or loss and earnings or loss per share as if the fair value based method
prescribed by SFAS 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
and SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148") had been applied.
Had compensation cost for our stock options been determined based on
the fair value at the grant dates for awards under those plans consistent with
the fair value methods prescribed by SFAS 123 and SFAS 148, our net loss and net
loss per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------- --------------- -------------
<S> <C> <C> <C>
Net loss, as reported: $ (188,098) $ (156,949) $ (194,644)
Deduct/(Add): Stock-based employee
compensation income (expense)
included in reported net loss, net of
related tax effects (1,617) (151) 449
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (4,180) (6,509) (8,016)
-------------- --------------- -------------
Pro forma net loss $ (190,661) $ (163,307) $ (203,109)
============== =============== =============
Net loss per share - basic and diluted:
As reported $ (4.88) $ (4.08) $ (5.05)
Pro forma $ (4.94) $ (4.24) $ (5.28)
</TABLE>
The pro forma effect on net loss and net loss per share may not be
representative of the pro forma effect in future years because it includes
compensation cost on a straight-line basis over the vesting periods of the
grants.
The fair value of the fiscal 2004, 2003 and 2002 option grants was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------------ ------------------ ------------------
<S> <C> <C> <C>
Expected life 7 years 7 years 7 years
Volatility 54% 51% 47%
Dividend yield range 0% 0% 0%
Risk-free interest rate range 3.17%-4.51% 2.71%-4.01% 3.33%-5.18%
</TABLE>
New Accounting Pronouncements
- -----------------------------
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.
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 $48.7 million and $47.2 million for the fiscal 2004 and fiscal 2003,
respectively.
Refer to Note 3 - Changes in Accounting Methods regarding the impact of
adoption of FIN 46-R and EITF 03-10 in our consolidated financial statements.
<PAGE>
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 years ended February 26, 2005 and February 28, 2004 in Note 11 - 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 11 - Retirement
Plans and Benefits regarding the impact of adoption of FAS 106-2 in our
consolidated financial statements.
In November 2004, the FASB issued SFAS 151, "Inventory Costs, an
Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 requires that
handling costs and waste material (spoilage) be recognized as current-period
charges regardless of whether they meet the previous requirement of being
abnormal. In addition, this Statement requires that allocations of fixed
overhead to the cost of inventory be based on the normal capacity of the
production facilities. SFAS 151 is effective for our 2006 fiscal year and we are
currently assessing the impact of this statement on our consolidated financial
statements; however, we do not expect it to have a material impact on our
consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS 123R (revised 2004),
"Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, supersedes APB
No. 25 and related interpretations and amends SFAS No. 95, "Statement of Cash
Flows." The provisions of SFAS 123R are similar to those of SFAS 123; however,
SFAS 123R requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements as
compensation cost based on their fair value on the date of grant. Fair value of
share-based awards will be determined using option-pricing models and
assumptions that appropriately reflect the specific circumstances of the awards.
Compensation cost will be recognized over the vesting period based on the fair
value of awards that actually vest.
SFAS 123R is effective for all public companies no later than the first
annual period beginning after June 15, 2005 (the quarter ended June 17, 2006 for
our Company) and applies to all outstanding and unvested share-based payment
awards at a company's adoption date. We have elected to early adopt this
pronouncement beginning in the first quarter of fiscal 2005 using the
modified-prospective transition method. Under this method, compensation cost
will be recognized in the financial statements issued subsequent to the date of
adoption for all shared-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. As we previously adopted only the pro forma disclosures
under SFAS 123, we will recognize compensation cost relating to the unvested
portion of awards granted prior to the date of adoption using the same estimate
of grant-date fair value and the same option pricing model used to determine the
pro forma disclosures under SFAS 123.
<PAGE>
Reclassifications
- -----------------
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
Note 2 - Restatement of Previously Issued Financial Statements
In connection with the preparation of our fiscal 2004 consolidated
financial statements, our Company completed a review of our historical lease
accounting to determine whether our accounting for leases was in accordance with
generally accepted accounting principles. As a result of our review, we
corrected our accounting for leases in fiscal 2004 and restated our historical
financial statements and certain financial information for prior periods,
primarily to correct our accounting for landlord allowances.
In certain situations, we receive allowances from our landlords in the
form of direct cash reimbursements to offset the costs of structural
improvements to the leased space. Historically, we have netted these
reimbursements against the related leasehold improvement assets on the
consolidated balance sheets and against capital expenditures in investing
activities on the consolidated statements of cash flows. In accordance with SFAS
13, "Accounting Leases," Emerging Issues Task Force ("EITF") 97-10, "The Effect
of Lessee Involvement in Asset Construction" and Question 2 of FASB Technical
Bulletin 88-1 ("FTB 88-1"), "Issues Relating to Accounting for Leases," we
should have accounted for our landlord allowances as follows:
o In those situations where we did not meet the criteria of EITF
97-10 for being deemed the owner of the construction projects
during the construction period, we should have recorded the
landlord allowances as deferred credits as opposed
to an offset to leasehold improvements on the consolidated
balance sheets and as a component of operating activities as
opposed to a component of investing activities on the
consolidated statements of cash flows. In addition, the deferred
credits should have been amortized over the term of the lease as
a decrease to rent expense as opposed to an offset to
depreciation expense.
o In those situations where we did meet the criteria of EITF 97-10
for being deemed the owner of the construction projects, we should
have been considered the owner of the construction projects
during the construction period and we should have recorded the
associated landlord allowances as long-term real estate
liabilities as opposed to an offset to leasehold improvements as
we had paid directly for a substantial portion of the structural
improvement costs. In all situations upon completion of the
construction, we were unable to meet the requirements under
SFAS 98, "Accounting for Leases" to qualify for sale-leaseback
treatment; thus, the long-term real estate liabilities should
have been amortized based on rent payments designated in the
lease agreements as opposed to an offset to depreciation expense.
<PAGE>
These adjustments resulted in a correction of an understatement
of Property - net, Long-term real estate liabilities and Other non-current
liabilities on our consolidated balance sheets, an overstatement of rent expense
and an understatement of interest on our consolidated statements of operations
for the related periods. Additionally, in fiscal 2004, three of these leased
properties had understated impairment under SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" based on the original
classification of these landlord allowances. The initial impairment calculation
did not properly consider the actual net book value of the assets had these
landlord allowances been classified appropriately.
The cumulative impact of correcting the items discussed above in our
accounting for leases increased our net loss by $0.8 million ($0.3 million
pre-tax) in the fourth quarter of fiscal 2004. The overall net impact to our
results of operations and Net loss per share from these adjustments for each
year was not considered material. We have restated our Consolidated
Statements of Operations for fiscal years 2003 and 2002 as well as the quarterly
financial information for fiscal years 2004 and 2003 for the revision in
classification between Store operating, general and administrative expense and
interest expense only. Additionally, we have restated our consolidated financial
statements for fiscal years 2003 and 2002 to correct the classification of these
amounts in our Consolidated Balance Sheets and Consolidated Statements of Cash
Flows.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Consolidated
A&P for the
52 weeks ended Consolidated
Feb. 26, 2005 Corrections to A&P for the
prior to lease 52 weeks ended
corrections accounting Feb. 26, 2005
------------------ --------------- ------------------
<S> <C> <C> <C>
Sales $ 10,854,911 $ - $ 10,854,911
Cost of merchandise sold (7,813,771) - (7,813,771)
--------------- ------------- ----------------
Gross margin 3,041,140 - 3,041,140
Store operating, general and administrative
expense (3,138,573) 24,511 (3,114,062)
--------------- ------------- ----------------
(Loss) income from operations (97,433) 24,511 (72,922)
Interest expense (89,244) (24,863) (114,107)
Interest income 2,776 - 2,776
Minority interest in earnings of consolidated
franchisees 772 - 772
--------------- ------------- ----------------
Loss from continuing operations before
income taxes (183,129) (352) (183,481)
Provision for income taxes (57) (471) (528)
--------------- -------------- -----------------
Loss from continuing operations (183,186) (823) (184,009)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (1,387) - (1,387)
Loss on disposal of discontinued
operations, net of tax (2,702) - (2,702)
---------------- ------------- -----------------
Loss from discontinued operations (4,089) - (4,089)
---------------- ------------- -----------------
Net loss $ (187,275) $ (823) $ (188,098)
================ ============== ================
Net loss - basic & diluted $ (4.85) $ (0.02) $ (4.88)
================ ============== ================
Depreciation $ (269,001) $ 896 $ (268,105)
--------------- ------------- ----------------
<CAPTION>
Selected Consolidated Statement of Cash Flow data:
Prior to
corrections Corrections to
to Lease Lease Consolidated
Accounting Accounting A&P
------------- ------------- -------------
<S> <C> <C> <C>
Other property impairments $ 6,718 $ 1,911 $ 8,629
Depreciation and amortization 269,001 (896) 268,105
Deferred income tax (benefit) provision (1,841) 471 (1,370)
(Increase) decrease in prepaid expenses and other current assets (6,171) 147 (6,024)
(Increase) decrease in other assets (21,624) 2,583 (19,041)
Increase in other non-current liabilities 39,937 1,965 41,902
Net cash provided by operating activities 109,100 5,358 114,458
Expenditures for property (197,728) (18,414) (216,142)
Net cash used in investing activities (144,087) (18,414) (162,501)
Net proceeds from long-term real estate liabilities 23,318 13,768 37,086
Principal payments on capital leases (13,577) 123 (13,454)
Net cash (used in) provided by financing activities (9,727) 13,891 4,164
Effect of exchange rate changes on cash and cash equivalents 5,454 (835) 4,619
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------------------
Consolidated
A&P for the Consolidated
53 weeks ended A&P as
Feb. 28, 2004 Corrections to Restated for the
prior to lease 53 weeks ended
Restatement accounting Feb. 28, 2004
------------- ------------- -----------------
<S> <C> <C> <C>
Sales $ 10,899,308 $ - $ 10,899,308
Cost of merchandise sold (7,827,211) - (7,827,211)
------------- ------------- ----------------
Gross margin 3,072,097 - 3,072,097
Store operating, general and administrative
expense (3,236,222) 21,284 (3,214,938)
------------- ------------- ----------------
(Loss) income from operations (164,125) 21,284 (142,841)
Interest expense (81,814) (21,284) (103,098)
Interest income 2,282 - 2,282
Minority interest in earnings of consolidated
franchisees (142) - (142)
-------------- ------------- -----------------
Loss from continuing operations
before income taxes (243,799) - (243,799)
Benefit from income taxes 30,574 - 30,574
------------- ------------- ----------------
Loss from continuing operations (213,225) - (213,225)
Discontinued operations:
Loss from operations of discontinued
businesses, net of tax (32,703) - (32,703)
Gain on disposal of discontinued
operations, net of tax 97,026 - 97,026
------------- ------------- ----------------
Gain from discontinued operations 64,323 - 64,323
------------- ------------- ----------------
Loss before cumulative effect of change in
accounting principle (148,902) - (148,902)
Cumulative effect of change in accounting
principle - FIN 46-R, net of tax (8,047) - (8,047)
-------------- ------------- -----------------
Net loss $ (156,949) $ - $ (156,949)
============== ============= ================
Net loss - basic & diluted $ (4.08) $ - $ (4.08)
============== ============= ================
Depreciation $ (272,650) $ (2,285) $ (274,935)
-------------- ------------- ----------------
<CAPTION>
Selected Consolidated Statement of Cash Flow data:
Prior to
corrections to Corrections to Consolidated
Lease Lease A&P
Accounting Accounting As Restated
------------- -------------- --------------
<S> <C> <C> <C>
Other property impairments $ 6,109 $ 2,551 $ 8,660
Depreciation and amortization 274,260 2,285 276,545
(Increase) decrease in prepaid expenses and other current assets (43,561) 134 (43,427)
Decrease (increase) in other assets 6,152 (818) 5,334
Decrease in other non-current liabilities (48,440) (3,006) (51,446)
Net cash (used in) provided by operating activities (17,633) 1,146 (16,487)
Expenditures for property (134,677) (26,274) (160,951)
Net cash provided by (used in) investing activities 129,923 (26,274) 103,649
Proceeds from long-term borrowings 166,548 (166,548) -
Net proceeds from long-term real estate liabilities - 193,810 193,810
Principal payments on capital leases (13,563) (265) (13,828)
Net cash (used in) provided by financing activities (46,012) 26,997 (19,015)
Effect of exchange rate changes on cash and cash equivalents 10,795 (1,869) 8,926
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- ---------------------------------------------------------------------------------------------------------
Consolidated
A&P for the Consolidated
52 weeks ended A&P as
Feb. 22, 2003 Corrections to Restated for the
prior to lease 52 weeks ended
Restatement accounting Feb. 22, 2003
---------------- ------------- -----------------
<S> <C> <C> <C>
Sales $ 10,096,781 $ - $ 10,096,781
Cost of merchandise sold (7,252,457) - (7,252,457)
--------------- ------------- ----------------
Gross margin 2,844,324 - 2,844,324
Store operating, general and administrative
expense (2,839,201) 15,184 (2,824,017)
--------------- ------------- ----------------
Income from operations 5,123 15,184 20,307
Interest expense (84,679) (15,184) (99,863)
Interest income 7,897 - 7,897
--------------- ------------- ----------------
Loss from continuing operations before
income taxes (71,659) - (71,659)
Provision for income taxes (130,630) - (130,630)
--------------- ------------- ----------------
Loss from continuing operations (202,289) - (202,289)
Discontinued operations:
Gain from operations of discontinued
businesses, net of tax 7,645 - 7,645
Gain on disposal of discontinued
operations, net of tax - - -
--------------- ------------- ----------------
Gain from discontinued operations 7,645 - 7,645
--------------- ------------- ----------------
Net loss $ (194,644) $ - $ (194,644)
=============== ============= ================
Net loss - basic & diluted $ (5.05) $ - $ (5.05)
================ ============= ================
Depreciation $ (250,070) $ (999) $ (251,069)
--------------- -------------- ----------------
<CAPTION>
Selected Consolidated Statement of Cash Flow data:
Prior to
corrections to Corrections to Consolidated
Lease Lease A&P
Accounting Accounting As Restated
------------- ------------- -------------
<S> <C> <C> <C>
Depreciation and amortization $ 263,585 $ 999 $ 264,584
Decrease in prepaid expenses and other current assets 44,631 135 44,766
Decrease in other assets 13,670 1,749 15,419
(Decrease) increase in other non-current liabilities (59,905) 61 (59,844)
Net cash provided by operating activities 191,046 2,944 193,990
Expenditures for property (219,530) (22,879) (242,409)
Net cash used in investing activities (162,799) (22,879) (185,678)
Net proceeds from long-term real estate liabilities - 20,605 20,605
Principal payments on capital leases (12,167) 29 (12,138)
Net cash (used in) provided by financing activities (608) 20,634 20,026
Effect of exchange rate changes on cash and cash equivalents 2,755 (699) 2,056
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------------------------------
Consolidated
A&P at
Feb. 26, 2005 Corrections to Consolidated
prior to lease A&P at
corrections accounting Feb. 26, 2005
----------------- --------------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 257,748 $ - $ 257,748
Accounts receivable 145,507 - 145,507
Inventories 720,799 - 720,799
Prepaid expenses and other current assets 38,056 2,571 40,627
----------------- --------------- ----------------
Total current assets 1,162,110 2,571 1,164,681
----------------- --------------- ----------------
Non-current assets:
Property:
Property owned, net 1,327,085 149,489 1,476,574
Property leased under capital leases, net 54,580 (15,454) 39,126
----------------- ---------------- ----------------
Property, net 1,381,665 134,035 1,515,700
Other assets 121,587 - 121,587
----------------- --------------- ----------------
Total assets $ 2,665,362 $ 136,606 $ 2,801,968
================= =============== ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,278 $ - $ 2,278
Current portion of obligations under capital
leases 8,331 - 8,331
Accounts payable 543,481 - 543,481
Book overdrafts 83,306 - 83,306
Accrued salaries, wages and benefits 181,173 - 181,173
Accrued taxes 51,991 - 51,991
Other accruals 207,642 - 207,642
----------------- --------------- ----------------
Total current liabilities 1,078,202 - 1,078,202
----------------- --------------- ----------------
Non-current liabilities:
Long-term debt 634,028 - 634,028
Long-term obligations under capital leases 71,458 (19,274) 52,184
Long-term real estate liabilities 204,761 123,555 328,316
Other non-current liabilities 438,234 33,148 471,382
Minority interest in consolidated franchisees 4,054 - 4,054
----------------- --------------- ----------------
Total liabilities 2,430,737 137,429 2,568,166
----------------- --------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,765 - 38,765
Additional paid-in capital 464,543 - 464,543
Accumulated other comprehensive
loss (3,308) - (3,308)
Accumulated deficit (265,375) (823) (266,198)
----------------- ---------------- ----------------
Total stockholders' equity 234,625 (823) 233,802
----------------- ---------------- ----------------
Total liabilities and stockholders'equity $ 2,665,362 $ 136,606 $ 2,801,968
================= =============== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- ---------------------------------------------------------------------------------------------------------
Consolidated
A&P at Consolidated
Feb. 28, 2004 Corrections to A&P as
prior to lease Restated at
Restatement accounting Feb. 28, 2004
---------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 297,008 $ - $ 297,008
Accounts receivable 171,835 - 171,835
Inventories 694,120 - 694,120
Prepaid expenses and other current assets 33,796 2,191 35,987
---------------- --------------- ----------------
Total current assets 1,196,759 2,191 1,198,950
---------------- --------------- ----------------
Non-current assets:
Property:
Property owned, net 1,405,925 129,865 1,535,790
Property leased under capital leases, net 65,632 (15,712) 49,920
---------------- ---------------- ----------------
Property, net 1,471,557 114,153 1,585,710
Other assets 115,500 2,686 118,186
---------------- --------------- ----------------
Total assets $ 2,783,816 $ 119,030 $ 2,902,846
================ =============== ================
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 480,712 - 480,712
Book overdrafts 96,273 - 96,273
Accrued salaries, wages and benefits 177,142 - 177,142
Accrued taxes 74,698 - 74,698
Other accruals 236,238 - 236,238
---------------- --------------- ----------------
Total current liabilities 1,083,235 - 1,083,235
---------------- --------------- ----------------
Non-current liabilities:
Long-term debt 642,296 - 642,296
Long-term obligations under capital leases 73,980 (18,737) 55,243
Long-term real estate liabilities 181,442 107,742 289,184
Other non-current liabilities 402,932 30,025 432,957
Minority interest in consolidated franchisees 7,172 - 7,172
---------------- --------------- ----------------
Total liabilities 2,391,057 119,030 2,510,087
---------------- --------------- ----------------
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 (27,239) - (27,239)
Accumulated deficit (78,100) - (78,100)
---------------- --------------- ----------------
Total stockholders' equity 392,759 - 392,759
---------------- --------------- ----------------
Total liabilities and
stockholders' equity $ 2,783,816 $ 119,030 $ 2,902,846
================ =============== ================
</TABLE>
<PAGE>
Note 3 - Changes in Accounting Methods
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 February 26, 2005, we served 42 franchised stores in Canada.
These franchisees are required to purchase inventory from our Company, which
acts as a wholesaler to the franchisees. During fiscal 2004, fiscal 2003, and
fiscal 2002, we had sales to these franchised stores of $732.5 million, $813.8
million and $712.5 million, 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.
<PAGE>
Also refer to Note 13 - 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 $48.7 million and $47.2 million for the fiscal 2004 and fiscal 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 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, 2002 of approximately $18.6
million.
<PAGE>
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.
($27.5 million for fiscal 2004 as compared to $32.1 million for fiscal 2003) and
Canadian ($21.2 million for fiscal 2004 as compared to $15.1 million for fiscal
2003) 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.
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- -------------------------------------------------------------------------------------------------------------------------
Consolidated
A&P for the
52 weeks ended
Consolidated Feb. 26, 2005
A&P for the Impact of Impact of prior to
52 weeks ended adoption of adoption of corrections
Feb. 26, 2005 FIN 46-R EITF 03-10 in Note 2
------------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 10,754,364 $ 149,293 $ (48,746) $ 10,854,911
Cost of merchandise sold (7,851,399) (11,118) 48,746 (7,813,771)
------------- -------------- ------------- ---------------
Gross margin 2,902,965 138,175 - 3,041,140
Store operating, general and administrative
expense (3,014,698) (123,875) - (3,138,573)
------------- ------------- ------------- ---------------
(Loss) income from operations (111,733) 14,300 - (97,433)
Interest expense (89,244) - - (89,244)
Interest income 7,213 (4,437) - 2,776
Minority interest in earnings
of consolidated franchisees - 772 - 772
------------- ------------- ------------- ---------------
(Loss) income from continuing
operations before income taxes (193,764) 10,635 - (183,129)
Benefit from (provision for)
income taxes 735 (792) - (57)
------------- ------------- ------------- ---------------
(Loss) income from
continuing operations (193,029) 9,843 - (183,186)
Discontinued operations:
Loss from operations of
discontinued businesses, net of tax (1,387) - - (1,387)
Loss on disposal of
discontinued operations, net of tax (2,702) - - (2,702)
-------------- ------------- ------------- ----------------
Loss from discontinued operations (4,089) - - (4,089)
-------------- ------------- ------------- ---------------
Net (loss) income $ (197,118) $ 9,843 $ - $ (187,275)
============= ============= ============= ===============
Net (loss) income - basic & diluted $ (5.11) $ 0.26 $ - $ (4.85)
============== ============= ============= ===============
Depreciation $ (264,691) $ (4,310) $ - $ (269,001)
------------- ------------- ------------- ---------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- ---------------------------------------------------------------------------------------------------------------
Consolidated
Consolidated A&P for the
A&P as 53 weeks ended
previously Feb. 28, 2004
reported for the Impact of Impact of Change from prior to
53 weeks ended adoption of adoption of LIFO to Restatement
Feb. 28, 2004 FIN 46-R EITF 03-10 FIFO in Note 2
--------------- ------------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Sales $ 10,812,462 $ 134,054 $ (47,208) $ - $ 10,899,308
Cost of merchandise sold (7,882,646) 8,404 47,208 (177) (7,827,211)
---------------- ------------- ------------- -------------- ----------
Gross margin 2,929,816 142,458 - (177) 3,072,097
Store operating, general
and administrative
expense (3,098,305) (137,917) - - (3,236,222)
---------------- ------------- ------------- ------------- ---------------
(Loss) income from
operations (168,489) 4,541 - (177) (164,125)
Interest expense (81,814) - - - (81,814)
Interest income 7,285 (5,003) - - 2,282
Minority interest in
earnings of consolidated
franchisees - (142) - - (142)
---------------- ------------- ------------- ------------- ----------------
Loss from continuing
operations before
income taxes (243,018) (604) - (177) (243,799)
Benefit from (provision
for) income taxes 31,671 (1,097) - - 30,574
---------------- ------------- ------------- ------------- ----------------
Loss from continuing
operations (211,347) (1,701) - (177) (213,225)
Discontinued operations:
Loss from operations
of discontinued
businesses, net of tax (32,703) - - - (32,703)
Gain on disposal of
discontinued
operations, net of tax 97,026 - - - 97,026
--------------- ------------- ------------- ------------- ---------------
Income from
discontinued
operations 64,323 - - - 64,323
--------------- ------------- ------------- ------------- ---------------
Loss before cumulative
effect of change in
accounting principle (147,024) (1,701) - (177) (148,902)
Cumulative effect of
change in accounting
principle - FIN 46-R,
net of tax - (8,047) - - (8,047)
--------------- -------------- ------------- ------------- ----------------
Net loss $ (147,024) $ (9,748) $ - $ (177) $ (156,949)
================ ============== ============= ============== ================
Net loss - basic & diluted $ (3.82) $ (0.25) $ - $ (0.01) $ (4.08)
================ ============= ============= ============= ================
Depreciation $ (267,155) $ (5,495) $ - $ - $ (272,650)
---------------- ------------- ------------- ------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statement of Operations
- --------------------------------------------------------------------------------------------------------
Consolidated Consolidated
A&P as A&P for the
previously 52 weeks ended
reported for Feb. 22, 2003
the 52 weeks Change from prior to
ended LIFO Restatement
Feb. 22, 2003 to FIFO in Note 2
------------------ --------------- ----------------
<S> <C> <C> <C>
Sales $ 10,096,781 $ - $ 10,096,781
Cost of merchandise sold (7,251,322) (1,135) (7,252,457)
---------------- -------------- ----------------
Gross margin 2,845,459 (1,135) 2,844,324
Store operating, general and administrative
expense (2,839,201) - (2,839,201)
--------------- ------------- ----------------
Income (loss) from operations 6,258 (1,135) 5,123
Interest expense (84,679) - (84,679)
Interest income 7,897 - 7,897
--------------- ------------- ----------------
Loss from continuing operations
before income taxes (70,524) (1,135) (71,659)
Provision for income taxes (130,630) - (130,630)
--------------- ------------- ----------------
Loss from continuing operations (201,154) (1,135) (202,289)
Discontinued operations:
Gain from operations of discontinued
businesses, net of tax 7,645 - 7,645
Gain on disposal of discontinued
operations, net of tax - - -
--------------- ------------- ----------------
Gain from discontinued operations 7,645 - 7,645
--------------- ------------- ----------------
Net loss $ (193,509) $ (1,135) $ (194,644)
================ ============== ================
Net loss - basic & diluted $ (5.02) $ (0.03) $ (5.05)
=============== ============= ================
Depreciation $ (250,070) $ - $ (250,070)
--------------- ------------- ----------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------------------------------
Consolidated
A&P at
Feb. 26, 2005
Consolidated Impact of prior to
A&P at adoption of corrections
Feb. 26, 2005 FIN 46-R in Note 2
---------------- ----------------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 241,363 $ 16,385 $ 257,748
Accounts receivable 160,429 (14,922) 145,507
Inventories 703,111 17,688 720,799
Prepaid expenses and other current assets 38,059 (3) 38,056
----------------- ---------------- ----------------
Total current assets 1,142,962 19,148 1,162,110
----------------- --------------- ----------------
Non-current assets:
Property:
Property owned, net 1,315,407 11,678 1,327,085
Property leased under capital leases, net 54,580 - 54,580
----------------- --------------- ----------------
Property, net 1,369,987 11,678 1,381,665
Other assets 145,904 (24,317) 121,587
----------------- --------------- ----------------
Total assets $ 2,658,853 $ 6,509 $ 2,665,362
================= =============== ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 2,278 $ - $ 2,278
Current portion of obligations under capital
leases 8,331 - 8,331
Accounts payable 542,936 545 543,481
Book overdrafts 83,306 - 83,306
Accrued salaries, wages and benefits 179,236 1,937 181,173
Accrued taxes 49,534 2,457 51,991
Other accruals 207,735 (93) 207,642
----------------- ---------------- ----------------
Total current liabilities 1,073,356 4,846 1,078,202
----------------- --------------- ----------------
Non-current liabilities:
Long-term debt 634,028 - 634,028
Long-term obligations under capital leases 71,458 - 71,458
Long-term real estate liabilities 204,761 - 204,761
Other non-current liabilities 439,250 (1,016) 438,234
Minority interest in consolidated franchisees - 4,054 4,054
----------------- --------------- ----------------
Total liabilities 2,422,853 7,884 2,430,737
----------------- --------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - - -
Common stock 38,765 - 38,765
Additional paid-in capital 464,543 - 464,543
Accumulated other comprehensive loss (1,839) (1,469) (3,308)
Accumulated (deficit) earnings (265,469) 94 (265,375)
----------------- --------------- -----------------
Total stockholders' equity 236,000 (1,375) 234,625
----------------- --------------- ----------------
Total liabilities and stockholders'equity $ 2,658,853 $ 6,509 $ 2,665,362
================= =============== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
- --------------------------------------------------------------------------------------------------------
Consolidated
A&P at
Feb. 28, 2004
Consolidated Impact of Impact of prior to
A&P at adoption of change from Restatement
Feb. 28, 2004 FIN 46-R LIFO to FIFO in Note 2
-------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
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, net 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 642,296 - - 642,296
Long-term obligations under
capital leases 73,980 - - 73,980
Long-term real estate liabilities 181,442 - - 181,442
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) earnings (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
=============== ================ =============== ================
</TABLE>
<PAGE>
Note 4 - Valuation of Goodwill and Long-Lived Assets
Goodwill
- --------
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). As disclosed previously, goodwill will no
longer be amortized but will be subject to impairment tests on an annual basis
and whenever events or circumstances occur indicating that the goodwill may be
impaired. SFAS 142 was effective for our Company on February 24, 2002. We
completed our initial impairment review during the second quarter of fiscal 2002
and concluded a transitional impairment charge from the adoption of the standard
was not required.
In accordance with the standard, we selected our fiscal fourth quarter
to conduct our annual impairment test for goodwill. However, through the third
quarter of fiscal 2003, we experienced operating losses for the past two years
for one of our Midwest asset groups, which we believe was a triggering event
under Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144") for potential
impairment of the asset group's long-lived assets. In addition, the triggering
event under SFAS 144 also triggered testing the Midwest's goodwill for potential
impairment under SFAS 142.
To assess the Midwest's goodwill for impairment under SFAS 142, we
performed an assessment of the carrying value of the reporting unit to determine
if the fair value of the reporting unit was below its carrying value. The fair
value of the Midwest reporting unit was determined through internal analysis and
a valuation performed by an independent third party appraiser, primarily using
the discounted cash flow approach based on forward looking information regarding
revenues and costs of the Midwest. This valuation was based on a number of
estimates and assumptions, including the projected future operating results of
the Midwest, discount rate, and long term growth rate. As a result of this
review, we determined that the fair value of the Midwest was below its carrying
value and that the carrying value of the reporting unit goodwill exceeded its
implied fair value (defined as the fair value of the reporting unit less the
fair value of all assets and liabilities other than goodwill). Further, based
upon the analysis, we concluded that the Midwest's goodwill was entirely
impaired and we recorded an impairment charge of $27.0 million as a component of
operating loss in "Store operating, general and administrative expense" in our
Consolidated Statement of Operations for the year ended February 28, 2004.
Long-Lived Assets
- -----------------
In accordance with SFAS 144, 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.
<PAGE>
During fiscal 2004, fiscal 2003 and fiscal 2002, we recorded property
impairment losses as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------------------------- ------------------------------- -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
------- --------- --------- ------- --------- --------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Impairments due to
closure or conversion
in the normal course
of business $ 6.0 $ 0.7 $ 6.7 $ 4.4 $ 1.7 $ 6.1 $ 21.3 $ 3.2 $ 24.5
Impairments due to
unrecoverable assets 34.7 - 34.7 33.1 - 33.1 - - -
Impairments related to
the 2001 Asset
Disposition (1) 2.6 - 2.6 0.4 - 0.4 - - -
Impairments related to
the Farmer Jack
restructuring (1) 0.1 - 0.1 4.1 - 4.1 - - -
Impairments related to
our exit of the northern
New England and
Kohls markets (2) 0.6 - 0.6 19.0 - 19.0 - - -
------- ------- ------- ------- ------- ------ ------ ------- ------
Total impairments $ 44.0 $ 0.7 $ 44.7 $ 61.0 $ 1.7 $ 62.7 $ 21.3 $ 3.2 $ 24.5
======= ======= ======= ======= ======= ====== ====== ======= ======
(1) Refer to Note 6 - Asset Disposition Initiative
(2) Refer to Note 5 - Discontinued Operations
</TABLE>
Impairments due to closure or conversion in the normal course of business
- -------------------------------------------------------------------------
We review assets in stores planned for closure or conversion for
impairment upon determination that such assets will not be used for their
intended useful life. During fiscal 2004, fiscal 2003, and fiscal 2002, we
recorded impairment losses on property, plant and equipment of $5.8 million,
$6.1 million, and $24.5 million, respectively, related to stores that were or
will be closed in the normal course of business.
Our impairment reviews may also be triggered by appraisals of or offers
for our long-lived assets we receive in the normal course of business. During
fiscal 2004, we recorded an impairment loss of $0.9 million in the U.S. 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. There were no such amounts recorded during fiscal 2003
or fiscal 2002.
All of these amounts were included in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations.
<PAGE>
Impairments due to unrecoverable assets
- ---------------------------------------
During the third quarter of fiscal 2003 and in connection with the
goodwill impairment test discussed above, we reviewed the carrying value of all
of the Midwest's long-lived assets for potential impairment under SFAS 144. We
estimated the Midwest's future cash flows from its long-lived assets, primarily
equipment and leasehold improvements, based on internal analysis and valuations
performed by an independent third party appraiser. For those asset groups for
which the carrying value was not recoverable from their future cash flows, we
determined the fair value of the related assets based on the same analysis,
primarily using the discounted cash flow approach. As a result of this review,
we recorded an impairment charge for the Midwest's long-lived assets of $33.1
million as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the
year ended February 28, 2004.
During the third quarter of fiscal 2004, we updated our review of the
carrying value of several of the Midwest's long-lived assets for potential
impairment under SFAS 144 as we experienced operating losses for the past two
years for several of our Midwest asset groups. We estimated the Midwest's future
cash flows from their long-lived assets, primarily equipment and leasehold
improvements, based on internal analysis and valuations performed by an
independent third party appraiser. For those asset groups for which the carrying
value was not recoverable from their future cash flows, we determined the fair
value of the related assets based on the same analysis, primarily using the
discounted cash flow approach. As a result of this review, we recorded
impairment charges for the Midwest's long-lived assets of $34.7 million, which
was recorded as a component of operating loss in "Store operating, general and
administrative expense" in our Consolidated Statements of Operations for the
year ended February 26, 2005.
Impairments related to the 2001 Asset Disposition
- -------------------------------------------------
During fiscal 2004 and fiscal 2003, we recorded additional impairments
related to the 2001 Asset Disposition of $2.6 million and $0.4 million,
respectively as a result of not realizing the original expectations of
redeploying idle assets. These amounts were included in "Store operating,
general and administrative expense" in our Consolidated Statements of
Operations for the years ended February 26, 2005 and February 28, 2004.
Impairments related to the Farmer Jack Restructuring
- ---------------------------------------------------
During fiscal 2004 and fiscal 2003, we recorded impairment losses on
property, plant and equipment of $0.1 million and $4.1, respectively, million
related to property writedowns as a result of the Farmer Jack restructuring as
discussed in Note 6 - Asset Disposition Initiative. These amounts were
included in "Store operating, general and administrative expense" in our
Consolidated Statements of Operations for the years ended February 26, 2005 and
February 28, 2004.
Impairments related to our exit of the northern New England and Kohls markets
- -----------------------------------------------------------------------------
During fiscal 2004 and fiscal 2003, we recorded impairment losses of
$0.6 million and $19.0 million, respectively, related to stores closed as a
result of our exit of the northern New England and Kohl's markets. These
amounts were included in our Consolidated Statements of Operations under the
caption "(Loss) gain on disposal of discontinued operations, net of tax"
(see Note 5 of our Consolidated Financial Statements).
<PAGE>
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.
Note 5 -- Discontinued Operations
In February 2003, we announced the sale of a portion of our non-core
assets, including nine of our stores in northern New England and seven stores in
Madison, Wisconsin. In March 2003, we entered into an agreement to sell an
additional eight stores in northern New England.
Also, during fiscal 2003, we adopted a formal plan to exit the
Milwaukee, Wisconsin market, where 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
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.
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 fiscal 2004,
fiscal 2003, and fiscal 2002, 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 fiscal years 2004 and
2003.
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2004
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Income (loss) from operations of
discontinued businesses
Sales $ - $ - $ - $ -
Operating expenses 292 (981) (698) (1,387)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 292 (981) (698) (1,387)
Tax provision - - - -
------------- ---------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 292 $ (981) $ (698) $ (1,387)
=============== ================ =============== =============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Severance and benefits $ (326) $ - $ - $ (326)
Reversal of previously accrued
occupancy related costs - 354 - 354
Non-accruable closing costs 626 (595) (698) (667)
Interest accretion on present value
of future occupancy costs (8) (740) - (748)
--------------- ---------------- --------------- -------------
Total disposal related costs $ 292 $ (981) $ (698) $ (1,387)
--------------- ---------------- --------------- -------------
Loss on disposal of discontinued
businesses
Property impairments $ - $ (602) $ - $ (602)
Loss on sale of business - - (2,100) (2,100)
--------------- ---------------- --------------- -------------
Loss on disposal of discontinued
businesses, before tax - (602) (2,100) (2,702)
Tax provision - - - -
--------------- ---------------- --------------- -------------
Loss on disposal of discontinued
businesses, net of tax $ - $ (602) $ (2,100) $ (2,702)
=============== ================ =============== =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2003
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
(Loss) income from operations of
discontinued businesses
Sales $ 32,726 $ 123,229 $ 65,265 $ 221,220
Operating expenses (42,536) (174,890) (60,179) (277,605)
------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, before
tax (9,810) (51,661) 5,086 (56,385)
Tax benefit (provision) 4,120 21,698 (2,136) 23,682
--------------- ---------------- --------------- -------------
(Loss) income from operations of
discontinued businesses, net of
tax $ (5,690) $ (29,963) $ 2,950 $ (32,703)
=============== ================ =============== ==============
Disposal related costs included in operating expenses above:
- -----------------------------------------------------------
Pension withdrawal liability $ - $ (6,500) $ - $ (6,500)
Occupancy related costs (3,993) (28,387) - (32,380)
Reversal of previously accrued
occupancy related costs - 4,458 - 4,458
Non-accruable inventory costs (175) (2,511) - (2,686)
Non-accruable closing costs (2,555) (2,890) (12,275) (17,720)
Gain on sale of inventory 1,645 - - 1,645
Severance and benefits (2,670) (6,562) - (9,232)
Interest accretion on present value
of future occupancy costs (6) (353) - (359)
--------------- ---------------- --------------- --------------
Total disposal related costs $ (7,754) $ (42,745) $ (12,275) $ (62,774)
--------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses
Gain on sale of fixed assets $ 85,983 $ 15,272 $ 85,000 $ 186,255
Fixed asset impairments - (18,968) - (18,968)
--------------- ---------------- --------------- --------------
Gain (loss) on disposal of
discontinued businesses,
before tax 85,983 (3,696) 85,000 167,287
Tax (provision) benefit (36,113) 1,552 (35,700) (70,261)
------------- ---------------- --------------- ----------------
Gain (loss) on disposal of
discontinued businesses,
net of tax $ 49,870 $ (2,144) $ 49,300 $ 97,026
============= ================ =============== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2002
--------------------------------------------------------------------
Eight
Northern O'Clock
New England Kohl's Coffee Total
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Income (loss) from operations of
discontinued businesses
Sales $ 284,434 $ 337,197 $ 75,958 $ 697,589
Operating expenses (278,514) (344,226) (61,668) (684,408)
------------- --------------- --------------- -------------
Income (loss) from operations of
discontinued businesses, before
tax 5,920 (7,029) 14,290 13,181
Tax (provision) benefit (2,486) 2,952 (6,002) (5,536)
--------------- ---------------- --------------- --------------
Income (loss) from operations of
discontinued businesses, net of
tax $ 3,434 $ (4,077) $ 8,288 $ 7,645
=============== ================ =============== =============
</TABLE>
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 ($49.9 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 fiscal 2003. In addition, as part of
the exit of this business, we reported a loss of $9.8 million ($5.7 million
after tax) for fiscal 2003, which was included in "(Loss) income from operations
of discontinued businesses, net of tax" on our Consolidated Statements of
Operations. During fiscal 2004, we recorded gains of $0.3 million primarily due
to favorable results of winding down this business. This amount is included in
"(Loss) income from operations of discontinued businesses, net of tax" in our
Consolidated Statements of Operations.
The following table summarizes the reserve activity related to the exit
of the northern New England market since the charge was recorded:
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
--------- -------- --------
<S> <C> <C> <C>
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) 8 326 334
Utilization (3) (460) (384) (844)
-------- ------- --------
Balance at
February 26, 2005 $ - $ - $ -
======== ======= ========
(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 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.
</TABLE>
As of February 26, 2005, we had paid approximately $3.0 million in
severance and benefits costs, which resulted from the termination of
approximately 300 employees.
At February 26, 2005 and February 28, 2004, nil and $0.3 million,
respectively, of the northern New England exit reserves were included in "Other
accruals" and nil and $0.2 million, respectively, were included in "Other
non-current liabilities" on our Consolidated Balance Sheets. As of February 26,
2005, we have disposed of all locations in the northern New England market.
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 fiscal 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 $19.0 million during fiscal 2003.
Further, during fiscal 2004, we recorded additional impairment losses of $0.6
million as a result of originally estimated proceeds on the disposal of these
assets not being achieved. This net loss is also included in "(Loss) gain on
disposal of discontinued operations, net of tax" on our Consolidated Statements
of Operations.
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 $51.7 million for fiscal 2003. This charge is detailed in the
tables above and included in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations for fiscal
2003. During fiscal 2004, we recorded costs of $1.0 million primarily due to the
costs of winding down this business.
<PAGE>
The following table summarizes the reserve activity since the charge
was recorded:
<TABLE>
<CAPTION>
Severance
and Fixed
Occupancy Benefits Assets Total
--------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
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) 688 52 602 1,342
Utilization (3) (1,918) (2,201) (602) (4,721)
Adjustments (4) (354) - - (354)
-------- -------- -------- -------
Balance at
February 26, 2005 $17,455 $ 2,685 $ - $20,140
======= ======== ======== =======
(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 and severance and benefits represent the
interest accretion on future occupancy costs and future obligations for
early withdrawal from multi-employer union pension plans which were
recorded at present value at the time of the original charge. The
addition to fixed assets represents additional impairment losses recorded
as a result of originally estimated proceed on the disposal of these
assets not being achieved.
(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 occupancy 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. During fiscal 2004, we recorded a
reversal of previously accrued occupancy related costs due to favorable
results of terminating leases.
</TABLE>
As of February 26, 2005, we had paid approximately $10.4 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 2005.
At February 26, 2005, and February 28, 2004, $5.9 million and $5.2
million, respectively, of the Kohl's exit reserves were included in "Other
accruals" and $14.2 million and $18.7 million, respectively, were included in
"Other non-current liabilities" on our Consolidated Balance Sheets. We have
evaluated the liability balance of $20.1 million as of February 26, 2005 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.
<PAGE>
Eight O'Clock Coffee
- --------------------
During fiscal 2003, we completed the sale of our Eight O'Clock Coffee
business, generating gross proceeds of $107.5 million and a net gain after
transaction related costs 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 fiscal 2003, we incurred costs of $12.3 million related to
the sale, which was included in "Income (loss) from operations of discontinued
businesses, net of tax" on our Consolidated Statements of Operations. During
fiscal 2004, we incurred costs of $2.1 million which consisted of a post-sale
working capital settlement between the buyer and our Company for which the
amount was not determinable at the time of the sale. This amount is included in
"(Loss) gain on disposal of discontinued operations, net of tax" in our
Consolidated Statements of Operations. Further, during fiscal 2004, we incurred
costs of $0.7 million related to winding down this business subsequent to its
sale and included this amount in "Income (loss) from operations of discontinued
businesses, net of tax" in our Consolidated Statements of Operations.
Note 6 - Asset Disposition Initiative
Overview
- --------
In fiscal 1998 and fiscal 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 activities recorded on our
Consolidated Balance Sheets, Consolidated Statements of Operations and
Consolidated Statements of Cash Flows for fiscal 2004, fiscal 2003, and fiscal
2002. 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".
<PAGE>
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
---------------------------------------------- ------------------------------------------------
Project 2001 Farmer Project 2001 Farmer
Great Asset Jack Great Asset Jack
Renewal Disposition Restructuring Total Renewal Disposition Restructuring Total
-------- ----------- ------------- -------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet accruals
----------------------
PV interest $ 1,922 $ 2,456 $ 687 $ 5,065 $ 2,638 $ 2,850 $ 56 $ 5,544
Occupancy - - - - - - 20,999 20,999
Severance - - - - - - 8,930 8,930
Total accrued to
balance sheets -------- ----------- ----------- --------- ----------- ----------- ----------- ---------
1,922 2,456 687 5,065 2,638 2,850 29,985 35,473
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Occupancy reversals - (4,488) - (4,488) - (6,778) - (6,778)
Additional occupancy
accrual - - - - - 991 - 991
Additional severance - - - - - 1,613 - 1,613
Adjustments to
balance sheets -------- ----------- ----------- --------- ----------- ----------- ----------- ---------
- (4,488) - (4,488) - (4,174) - (4,174)
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Property writedowns - 2,659 90 2,749 - 422 4,129 4,551
Inventory markdowns - - 291 291 - - 2,244 2,244
Closing costs - - 689 689 - 44 1,449 1,493
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Total non-accruable
items - 2,659 1,070 3,729 - 466 7,822 8,288
-------- ----------- ----------- --------- ----------- ----------- ----------- ---------
Less PV interest (1,922) (2,456) (687) (5,065) (2,638) (2,850) (56) (5,544)
--------- ----------- ------------ ---------- ------------ ----------- ------------ ----------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ - $ (1,829) $ 1,070 $ (759) $ - $ (3,708) $ 37,751 $ 34,043
======== =========== =========== ========= =========== =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Fiscal 2002
----------------------------------------------
Project 2001 Farmer
Great Asset Jack
Renewal Disposition Restructuring Total
-------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance Sheet accruals
----------------------
PV interest $ 3,178 $ 4,094 $ - $ 7,272
Severance - 3,375 - 3,375
Total accrued to
balance sheets -------- ----------- ----------- ---------
3,178 7,469 - 10,647
-------- ----------- ----------- ---------
Occupancy reversals (3,645) (10,180) - (13,825)
Additional severance 639 250 - 889
Adjustments to
balance sheets -------- ----------- ----------- ---------
(3,006) (9,930) - (12,936)
-------- ----------- ----------- ---------
Non-accruable items
recorded on Statements
of Operations
Gain on sale of property - (1,654) - (1,654)
Inventory markdowns - 1,263 - 1,263
Closing costs - 4,250 - 4,250
-------- ----------- ----------- ---------
Total non-accruable
items - 3,859 - 3,859
-------- ----------- ----------- ---------
Less PV interest (3,178) (4,094) - (7,272)
--------- ----------- ----------- ---------
Total amount recorded
on Statements of
Operations and
Statements of Cash
Flows excluding
PV interest $ (3,006) $ (2,696) $ - $ (5,702)
========= =========== =========== =========
</TABLE>
<PAGE>
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 fiscal 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 February 26,
2005, 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:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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) 1,902 20 1,922 - - - 1,902 20 1,922
Utilization (2) (5,410) (222) (5,632) (497) - (497) (5,907) (222) (6,129)
-------- -------- -------- --------- -------- -------- --------- --------- ---------
Balance at
February 26, 2005 $ 27,964 $ 250 $ 28,214 $ 1,660 $ - $ 1,660 $ 29,624 $ 250 $ 29,874
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $3.2 million, $2.6 million and $1.9
million during fiscal 2002, 2003 and 2004, respectively, 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 $13.6 million, $20.0 million, and $5.6 million for
fiscal 2002, 2003 and 2004, respectively, represents payments made during
those periods for costs such as rent, common area maintenance, real estate
taxes and lease termination costs. Severance utilization of $0.4 million,
$0.3 million, and $0.5 million for fiscal 2002, 2003 and 2004,
respectively, 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.
</TABLE>
We paid $98.4 million of the total occupancy charges from the time of
the original charges through February 26, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $29.9 million of the total net severance charges from
the time of the original charges through February 26, 2005, which resulted from
the termination of approximately 3,400 employees. The remaining occupancy
liability of $28.2 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 fiscal 2004, fiscal 2003 and
fiscal 2002. As such, there was no impact on the Consolidated Statements of
Operations from the 166 stores included in this phase of the initiative.
<PAGE>
At February 26, 2005 and February 28, 2004, approximately $5.4 million
and $6.5 million, respectively, of the reserve were included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Based upon current available information, we evaluated the reserve
balances as of February 26, 2005 of $29.9 million for this phase of the asset
disposition initiative and have concluded that they are appropriate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
2001 Asset Disposition
- ----------------------
During the third quarter of fiscal 2001, the Company's Board of
Directors approved a plan resulting from our review of the performance and
potential of each of the Company's businesses and individual stores. At the
conclusion of this review, our Company determined that certain underperforming
operations, including 39 stores (30 in the United States and 9 in Canada) and 3
warehouses (2 in the United States and 1 in Canada) should be closed and/or
sold, and certain administrative streamlining should take place. As of February
26, 2005, we had closed all stores and facilities related to this phase of the
initiative.
The following table summarizes the activity related to this phase of
the initiative recorded on the Consolidated Balance Sheets since the
announcement of the charge in November 2001:
<TABLE>
<CAPTION>
Occupancy Severance and Benefits Total
------------------------------ ------------------------------ -------------------------------
U.S. Canada Total U.S. Canada Total U.S. Canada Total
-------- -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
February 23, 2002 $ 78,386 $ 1,937 $ 80,323 13,743 $ 6,217 $ 19,960 $ 92,129 $ 8,154 $ 100,283
Addition (1) 4,041 49 4,090 2,578 966 3,544 6,619 1,015 7,634
Utilization (2) (18,745) (1,642) (20,387) (12,508) (6,952) (19,460) (31,253) (8,594) (39,847)
Adjustments (3) (10,180) - (10,180) - 250 250 (10,180) 250 (9,930)
--------- -------- --------- -------- -------- -------- --------- --------- ---------
Balance at
February 22, 2003 $ 53,502 $ 344 $ 53,846 $ 3,813 $ 481 $ 4,294 $ 57,315 $ 825 $ 58,140
Addition (1) 2,847 3 2,850 - - - 2,847 3 2,850
Utilization (2) (9,987) (974) (10,961) (2,457) (1,026) (3,483) (12,444) (2,000) (14,444)
Adjustments (3) (6,778) 1,002 (5,776) 955 603 1,558 (5,823) 1,605 (4,218)
-------- -------- -------- -------- -------- -------- --------- --------- ---------
Balance at
February 28, 2004 $ 39,584 $ 375 $ 39,959 $ 2,311 $ 58 $ 2,369 $ 41,895 $ 433 $ 42,328
Addition (1) 2,449 - 2,449 - - - 2,449 - 2,449
Utilization (2) (5,646) (375) (6,021) (2,197) (58) (2,255) (7,843) (433) (8,276)
Adjustments (3) (4,488) - (4,488) - - - (4,488) - (4,488)
--------- -------- --------- -------- -------- -------- ---------- --------- ---------
Balance at
February 26, 2005 $ 31,899 $ - $ 31,899 $ 114 $ - $ 114 $ 32,013 $ - $ 32,013
======== ======== ======== ======== ======== ======== ========= ========= =========
(1) The additions to store occupancy of $4.1 million, $2.9 million, and
$2.4 million during fiscal 2002, 2003 and 2004, respectively, represent
the interest accretion on future occupancy costs which were recorded at
present value at the time of the original charge. The addition to
severance of $3.5 million during fiscal 2002 related to retention and
productivity incentives that were expensed as earned.
(2) Occupancy utilization of $20.4 million, $11.0 million, and $6.0 million
during fiscal 2002, 2003 and 2004, respectively, represents payments
made during those periods for costs such as rent, common area
maintenance, real estate taxes and lease termination costs. Severance
utilization of $19.5 million, $3.5 million, and $2.3 million during
fiscal 2002, 2003 and 2004, respectively, represents payments made to
terminated employees during the period.
(3) At each balance sheet date, we assess the adequacy of the reserve
balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. During fiscal 2002, we
recorded adjustments of $10.2 million related to reversals of
previously accrued occupancy related costs due to the following:
o Favorable results of assigning leases at certain locations of $3.6
million;
o The decision to continue to operate one of the stores previously
identified for closure due to changes in the competitive
environment in the market in which that store is located of $3.3
million; and
o The decision to proceed with development at a site that we had
chosen to abandon at the time of the original charge due to
changes in the competitive environment in the market in which
that site is located of $3.3 million.
During fiscal 2003, we recorded net adjustments of $5.8 million related
to reversals of previously accrued occupancy costs due to favorable
results of subleasing, assigning and terminating leases. We also
accrued $1.6 million for additional severance and benefit costs that
were unforeseen at the time of the original charge. Finally, during
fiscal 2004, we recorded adjustments of $4.5 million related to the
reversals of previously accrued occupancy costs due to the disposals
and subleases of locations at more favorable terms than originally
anticipated at the time of the original charge.
</TABLE>
<PAGE>
We paid $39.2 million ($36.2 million in the U.S. and $3.0 million in
Canada) of the total occupancy charges from the time of the original charges
through February 26, 2005 which was primarily for occupancy related costs such
as rent, common area maintenance, real estate taxes and lease termination costs.
We paid $28.1 million ($19.1 million in the U.S. and $9.0 million in Canada) of
the total net severance charges from the time of the original charges through
February 26, 2005, which resulted from the termination of approximately 1,100
employees. The remaining occupancy liability of $31.9 million primarily relates
to expected future payments under long term leases through 2017. The remaining
severance liability of $0.1 million relates to expected future payments for
severance and benefits payments to individual employees and will be fully paid
out by 2006.
At February 26, 2005 and February 28, 2004 approximately $7.1 million
and $12.0 million of the reserve, respectively, was included in "Other accruals"
and the remaining amount was included in "Other non-current liabilities" on the
Company's Consolidated Balance Sheets.
Included in the Consolidated Statements of Operations for fiscal 2004,
fiscal 2003, and fiscal 2002 are the sales and operating results of the 39
stores that were identified for closure as part of this asset disposition. The
results of these operations are as follows:
Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------- --------------- ---------------
Sales $ - $ - $ 23,367
=============== =============== ===============
Operating loss $ - $ - $ (746)
=============== =============== ===============
Based upon current available information, we evaluated the reserve
balances as of February 26, 2005 of $32.0 million for this phase of the asset
disposition initiative and have concluded that they are appropriate to cover
expected future costs. The Company will continue to monitor the status of the
vacant properties and adjustments to the reserve balances may be recorded in the
future, if necessary.
<PAGE>
Farmer Jack Restructuring
- -------------------------
As previously stated, during the fourth quarter of fiscal 2003, we
announced an initiative to close 6 stores and convert 13 stores to our Food
Basics banner in the Detroit, Michigan and Toledo, Ohio markets. During fiscal
2003 we recorded a charge of $37.7 million related to the last phase of this
initiative ($2.2 million in "Cost of merchandise sold" and $35.5 million in
"Store operating, general and administrative expense" in our Consolidated
Statements of Operations for fiscal 2003), excluding PV interest. During fiscal
2004 we recorded costs excluding PV interest in fiscal 2004 of $1.1 million
($0.3 million in "Cost of merchandise sold" and $0.8 million in "Store
operating, general and administrative expense"). These costs are detailed as
follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003
---------------------- ----------------------
<S> <C> <C>
Occupancy related $ - $ 20,999
Severance and benefits - 8,930
Property writedowns 90 4,129
Inventory markdowns 291 2,244
Nonaccruable closing costs 689 1,449
-------------- ----------------
Total charges $ 1,070 $ 37,751
============== ================
</TABLE>
As of February 26, 2005, we had closed all 6 stores and completed the
conversions related to this phase of the initiative. The following table
summarizes the activity to date related to the charges recorded for the
aforementioned initiatives all of which were in the U.S. The table does not
include property writedowns as they are not part of any reserves maintained on
the balance sheet. It also does not include non-accruable closing costs and
inventory markdowns since they are expensed as incurred in accordance with
generally accepted accounting principles.
<TABLE>
<CAPTION>
Severance
and
Occupancy Benefits Total
--------- ---------------- -------------
<S> <C> <C> <C>
Original charge (1) $ 20,999 $ 8,930 $ 29,929
Addition (1) 56 - 56
Utilization (2) (1,093) (4,111) (5,204)
------------ ------------- ----------
Balance at
February 28, 2004 $ 19,962 $ 4,819 $ 24,781
Addition (1) 687 - 687
Utilization (2) (4,747) (4,813) (9,560)
------------ ------------- ----------
Balance at
February 26, 2005 $ 15,902 $ 6 $ 15,908
============ ============= ==========
(1) The original charge to occupancy during fiscal 2003 represents charges
related to closures and conversions in the Detroit, Michigan market of
$21.0 million. The additions to occupancy during fiscal 2003 and fiscal
2004 represent interest accretion on future occupancy costs which were
recorded at present value at the time of the original charge. The
original charge to severance during fiscal 2003 of $8.9 million related
to individual severings as a result of the store closures, as well as a
voluntary termination plan initiated in the Detroit, Michigan market.
(2) Occupancy utilization of $1.1 million and $4.7 million during fiscal
2003 and fiscal 2004, respectively, represents payments made for costs
such as rent, common area maintenance, real estate taxes and lease
termination costs. Severance utilization of $4.1 million and $4.8
million during fiscal 2003 and fiscal 2004, respectively, represent
payments made to terminated employees during the period.
</TABLE>
We paid $5.8 million of the total occupancy charges from the time of
the original charge through February 26, 2005 which was primarily for occupancy
related costs such as rent, common area maintenance, real estate taxes and lease
termination costs. We paid $8.9 million of the total net severance charges from
the time of the original charges through February 26, 2005, which resulted from
the termination of approximately 300 employees. The remaining occupancy
liability of $15.9 million relates to expected future payments under long term
leases and is expected to be paid out in full by 2014. The remaining severance
liability of less than $0.1 million relates to expected future payments for
severance and benefits to individual employees and will be fully paid out by
mid-2005.
Included in the Consolidated Statements of Operations for fiscal 2004,
fiscal 2003, and fiscal 2002 are the sales and operating results of the 6 stores
that were identified for closure as part of this phase of the initiative. The
results of these operations are as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
------------- ------------- -------------
<S> <C> <C> <C>
Sales $ 2,433 $ 50,760 $ 54,324
============= ============= ==============
Operating loss $ (46) $ (6,476) $ (4,299)
============== ============= ==============
</TABLE>
At February 26, 2005 and February 28, 2004, approximately $2.1 million
and $9.0 million, respectively, of the liability was included in "Other
accruals" and the remaining amount was included in "Other non-current
liabilities" on our Consolidated Balance Sheets.
We have evaluated the liability balance of $15.9 million as of February
26, 2005 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.
<PAGE>
Note 7 - Indebtedness
Debt consists of the following:
<TABLE>
<CAPTION>
February 26, February 28,
2005 2004
--------------- ----------------
<S> <C> <C>
9.375% Notes, due August 1, 2039 $ 200,000 $ 200,000
9.125% Senior Notes, due December 15, 2011 216,500 216,500
7.75% Notes, due April 15, 2007 213,515 219,515
Deferred gain from termination of interest rate swaps 5,190 7,600
Mortgages and Other Notes, due 2005 through 2018
(average interest rates at each year end of 8.00%) 1,607 1,676
Less unamortized discount on 7.75% Notes (506) (724)
----------- -----------
636,306 644,567
Less current portion of long-term debt (2,278) (2,271)
----------- -----------
Long-term debt $ 634,028 $ 642,296
=========== ===========
</TABLE>
REVOLVING CREDIT AGREEMENT
- --------------------------
During fiscal 2003, we amended and restated our Secured Credit
Agreement (the "Amended and Restated Credit Agreement") and decreased our
borrowing base to $400 million. Thus, at February 26, 2005, we had a $400
million secured revolving credit agreement with a syndicate of lenders enabling
us to borrow funds on a revolving basis sufficient to refinance short-term
borrowings and provide working capital as needed. This facility provides us with
greater operating flexibility and provides for increased capital spending. Under
the terms of this agreement, should availability fall below $50 million, a
borrowing block will be implemented which provides that no additional borrowings
be made unless we are able to maintain a fixed charge coverage ratio of 1.0 to
1.0. Although we do not meet the required ratio at this time, it is not
applicable as availability at February 26, 2005 totaled $227.3 million. In the
event that availability falls below $50 million and we do not maintain the ratio
required, unless otherwise waived or amended, the lenders may, at their
discretion, declare, in whole or in part, all outstanding obligations
immediately due and payable.
The Amended and Restated Credit Agreement is comprised of a U.S. credit
agreement amounting to $330 million and a Canadian credit agreement amounting to
$70 million (C$86.8 million at February 26, 2005) and is collateralized by
inventory, certain accounts receivable and certain pharmacy scripts. Borrowings
under the Amended and Restated Credit Agreement bear interest based on LIBOR and
Prime interest rate pricing. This agreement expires in December 2007.
As of February 26, 2005, there were no borrowings under these credit
agreements. As of February 26, 2005, after reducing availability for outstanding
letters of credit and borrowing base requirements, we had $227.3 million
available under the Amended and Restated Credit Agreement.
Under the Amended and Restated Credit Agreement, we are permitted to
make bond repurchases and may do so from time to time in the future.
<PAGE>
PUBLIC DEBT OBLIGATIONS
- -----------------------
Outstanding notes totaling $631 million at February 26, 2005 consisted
of $200 million of 9.375% Notes due August 1, 2039, $217 million of 9.125%
Senior Notes due December 15, 2011 and $214 million of 7.75% Notes due April 15,
2007. Interest is payable quarterly on the 9.375% Notes and semi-annually on the
9.125% and 7.75% Notes. The 7.75% Notes are not redeemable prior to their
maturity. The 9.375% notes can be redeemed after August 11, 2004, and the 9.125%
Notes may be redeemed after December 15, 2006. All of the notes outstanding are
unsecured obligations and were issued under the terms of our senior debt
securities indenture, which contains among other provisions, covenants
restricting the incurrence of secured debt. In addition, the 9.125% Notes
contain additional covenants, including among other things, limitations on asset
sales, on the payment of dividends, and on the incurrence of liens and
additional indebtedness. Our notes are not guaranteed by any of our
subsidiaries. Our notes are effectively subordinate to our secured revolving
credit agreement and do not contain cross default provisions.
During fiscal 2004, we repurchased in the open market $6.0 million of
our 7.75% Notes due April 15, 2007. The cost of this open market repurchase
resulted in a pretax gain due to the early extinguishment of debt of $0.8
million. In accordance with SFAS No. 145, "Rescission of FASB Statements 4, 44
and 64, Amendment of FASB 13, and Technical Corrections" ("SFAS 145"), this gain
has been classified within loss from operations.
During fiscal 2003, we repurchased in the open market $9.8 million of
our 7.75% Notes due April 15, 2007 and $14.0 million of our 9.125% Notes due
December 15, 2011. These open market repurchases resulted in a net gain due to
the early extinguishment of debt of $1.9 million, which has been classified
within income from operations in accordance with SFAS 145.
During fiscal 2002, we repurchased in the open market $50.7 million of
our 7.75% Notes due April 15, 2007 and $44.5 million of our 9.125% Notes due
December 15, 2011. This tender offer and these open market repurchases resulted
in a net gain due to the early extinguishment of debt of $12.2 million. In
accordance with SFAS 145, this gain has been reclassified within income from
operations for fiscal 2002.
As of February 26, 2005 and February 28, 2004, we had no borrowings
under uncommitted lines of credit.
The net book value of real estate pledged as collateral for our $400
million Secured Credit Agreement amounted to $16.1 million at February 26, 2005
and $22.8 million at February 28, 2004 under the prior year agreement. This
decrease in properties pledged as collateral is mainly due to the sale of a
property in fiscal 2004 as part of our sale leaseback transactions.
<PAGE>
Our Company's policy is to not pay dividends. As such, we have not made
dividend payments in the previous three years and do not intend to pay dividends
in the normal course of business in fiscal 2005. In addition, our Company is
prohibited, under the terms of our Revolving Credit Agreement, to pay cash
dividends on common shares.
Maturities for the next five fiscal years and thereafter are: 2005 -
$2.3 million; 2006 - $2.3 million; 2007 - $213.9 million; 2008 - $0.1 million;
2009 - $0.1 million; 2010 and thereafter - $417.6 million. Interest payments on
indebtedness were approximately $56 million for fiscal 2004, $63 million for
fiscal 2003 and $68 million for fiscal 2002.
Note 8 - Fair Value of Financial Instruments
The estimated fair values of our financial instruments are as follows:
<TABLE>
<CAPTION>
February 26, 2005 February 28, 2004
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
9.375% Notes, due August 1, 2039 $ 200,000 $ 190,720 $ 200,000 $ 180,080
9.125% Senior Notes, due December 15, 2011 216,500 204,593 216,500 186,731
7.75% Notes, due April 15, 2007 218,199 214,583 226,391 198,398
Mortgages and Other Notes, due 2005
through 2018 1,607 1,607 1,676 1,676
Derivative - Energy 197 197 270 270
Derivative - Cardboard Swap 64 64 325 325
</TABLE>
Fair value for the public debt securities and cardboard swap derivative
is based on quoted market prices. Fair value of our energy derivative is based
on estimated market prices on the balance sheet date. As of February 26, 2005
and February 28, 2004, the carrying values of cash and cash equivalents,
accounts receivable and accounts payable approximated fair values due to the
short-term maturities of these instruments.
Note 9 - Lease Obligations
We operate primarily in leased facilities. Lease terms generally range
up to twenty-five years for store leases and thirty years for other leased
facilities, with options to renew for additional periods. In addition, we also
lease some store equipment and trucks. The majority of the leases contain
escalation clauses relating to real estate tax increases and certain store
leases provide for increases in rentals when sales exceed specified levels.
Depending on the specific terms of the leases, our obligations are in
three forms: capital leases, operating leases and long-term real estate
liabilities.
<PAGE>
The Consolidated Balance Sheets include the following capital leases:
<TABLE>
<CAPTION>
February 26, February 28,
2005 2004
--------------- ----------------
<S> <C> <C>
Property under capital leases $ 118,011 $ 159,942
Accumulated amortization (78,885) (110,022)
----------- -----------
Net property under capital leases $ 39,126 $ 49,920
=========== ===========
</TABLE>
During fiscal 2004 and fiscal 2003, we did not enter into any new
capital leases. During fiscal 2002, we entered into new capital leases totaling
$9 million. These capital lease amounts are non-cash transactions and,
accordingly, have been excluded from the Consolidated Statements of Cash Flows.
Interest paid as part of capital lease obligations was approximately $7.5
million in fiscal 2004, $8.3 million in fiscal 2003 and $9.4 million in fiscal
2002.
Rent expense for operating leases during the last three fiscal years
consisted of the following:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
---------------- --------------- ---------------
<S> <C> <C> <C>
Minimum rentals $ 245,503 $ 264,227 $ 257,213
Contingent rentals 5,324 5,617 4,551
----------- ----------- -----------
Total rent expense $ 250,827 $ 269,844 $ 261,764
=========== =========== ===========
</TABLE>
Future minimum annual lease payments for capital leases and
noncancelable operating leases in effect at February 26, 2005 are shown in the
table below.
<TABLE>
<CAPTION>
Operating Leases
--------------------------------------------------------------------------
Net
Future Minimum Rental Payments Future Future
------------------------------------------- Minimum Minimum
Capital Open Closed Sublease Rental
Leases Stores Stores Total Rentals Payments
----------- ------------ ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal
- ------
2005 $ 13,284 $ 256,045 $ 33,945 $ 289,990 $ 34,341 $ 255,649
2006 11,607 254,268 29,701 283,969 29,574 254,395
2007 9,878 246,311 25,728 272,039 24,222 247,817
2008 8,379 232,452 21,599 254,051 17,524 236,527
2009 7,921 223,772 18,328 242,100 13,154 228,946
2010 and thereafter 55,637 1,913,080 111,031 2,024,111 56,131 1,967,980
----------- ------------ ----------- ------------ ----------- ------------
Net minimum rentals 106,706 $ 3,125,928 $ 240,332 $ 3,366,260 $ 174,946 $ 3,191,314
============ =========== ============ =========== ============
Less interest portion (46,191)
------------
Present value of future
minimum rentals $ 60,515
===========
</TABLE>
Included in the future minimum rental payments of closed stores of
$240.3 million are amounts that are included in current and non-current
liabilities on our Consolidated Balance Sheets. The amounts included in our
Consolidated Balance Sheets are estimated net cash flows based on our experience
and knowledge of the market in which the closed store is located. Refer to our
discussion of Closed Store Reserves in Note 1 - Summary of Significant
Accounting Policies.
During fiscal 2004 and fiscal 2003, we sold 5 and 13 properties,
respectively, and simultaneously leased them back from the purchaser. However,
due to our Company's continuing involvement with these properties as we (i.)
receive sublease income that is more than 10% of the fair market value of these
properties, and (ii.) are obligated to repurchase the properties if certain
circumstances occur, the sales did not qualify for sale-leaseback accounting in
accordance with SFAS 98, "Accounting for Leases" but rather as long-term real
estate liabilities under the provisions of SFAS 66. In accordance with SFAS 66,
the carrying value of these properties of approximately $8.9 million and $73.6
million remained on our Consolidated Balance Sheets at February 26, 2005 and
February 28, 2004, respectively, and no sale was recognized. Instead, the sales
price of these properties of $23.3 million and $166.5 million was recorded as a
long-term real estate liability with a maturity of 20 years, with the exception
of one property that has a maturity of 22 years, within "Long-term real estate
liabilities" on our Consolidated Balance Sheets at February 26, 2005 and
February 28, 2004, respectively. In addition, all lease payments are being
charged to "Interest expense" in our Consolidated Statements of Operations. Of
the 5 and 13 properties sold during fiscal 2004 and fiscal 2003, respectively,
all were sold for a profit resulting in a gain, after deducting expenses, which
has been deferred and will not be recognized until the end of the respective
leases when our continuing involvement ceases. There were no such transactions
during fiscal 2002.
In addition, prior to fiscal 2002, we sold 2 properties and
simultaneously leased them back from the purchaser, which were originally
recorded as off balance sheet operating leases. However, due to our Company's
continuing involvement with these 2 properties as we receive sublease income
that is more than 10% of the fair market value of these properties, in the
fourth quarter of fiscal 2003, an adjustment was made to record these two
transactions as long-term real estate liabilities under the provisions of SFAS
66 "Accounting for Sales of Real Estate" ("SFAS 66"). The impact of these
adjustments was immaterial to the fourth quarter and fiscal 2003 as well as to
the prior periods to which they relate. The carrying value of these 2 properties
of approximately $8.3 million has been recorded on our Consolidated Balance
Sheets and the sale has been reversed. In addition, the sales prices of these
properties of $14.9 million have been recorded as long-term real estate
liabilities with maturities of 17 and 22 years, respectively, within "Long-term
real estate liabilities" on our Consolidated Balance Sheets at February 28,
2004.
"Long-term real estate liabilities" on our Consolidated Balance Sheets
also include various leases in which our Company received landlord allowances to
offset the costs of structural improvements we made to the leased space. As we
had paid directly for a substantial portion of the structural improvement costs,
we were considered the owner of the building during the construction period. In
all situations upon completion of the construction, we were unable to meet the
requirements under SFAS 98, "Accounting for Leases" to qualify for
sale-leaseback treatment; thus, the landlord allowances have been recorded as
long-term real estate liabilities on our Consolidated Balance Sheets and have
been amortized over the lease term based on rent payments designated in the
lease agreements. Refer to Note 2 - Restatement of Previously Issued Financial
Statements for further information. These leases have terms ranging between 12
and 25 years and effective annual percentage rates between 2.68% and 51.54%. The
effective annual percentage rates were implicitly calculated based upon
technical accounting guidance.
<PAGE>
The future minimum annual lease payments relating to these leases as
well as those leases for properties that we previously owned but did not qualify
for sale-leaseback treatment have been included in the table below.
<TABLE>
<CAPTION>
Long-term Real Estate Liabilities
-------------------------------------------
Net
Future Future Future
Minimum Minimum Minimum
Rental Sublease Rental
Payments Rentals Payments
----------- ----------- -----------
<S> <C> <C> <C>
Fiscal
- ------
2005 $ 49,382 $ 4,297 $ 45,085
2006 49,508 3,698 45,810
2007 49,727 2,905 46,822
2008 49,905 2,217 47,688
2009 50,181 1,825 48,356
2010 and thereafter 668,996 3,843 665,153
----------- ----------- -----------
917,699 18,785 898,914
Less interest portion (589,383) - (589,383)
------------ ----------- ------------
Present value of future minimum
rental payments $ 328,316 $ 18,785 $ 309,531
=========== =========== ===========
</TABLE>
During fiscal 2004, we sold 2 properties and simultaneously leased them
back from the purchaser. The properties subject to this sale had a carrying
value of approximately $8.6 million. Net proceeds received related to these
transactions amounted to approximately $26.3 million. Both of these properties
were sold for a profit resulting in a gain after deducting expenses of $17.6
million, which will be recognized as an offset to rent expense over the
remaining life of the leases.
During fiscal 2004, fiscal 2003, and fiscal 2002, we recognized gains
related to all of our sale leaseback transactions of $2.6 million, $4.7 million,
of which $2.3 million related to the deferred gain that was recognized as a
result of the sale of the Landover coffee plant, and $3.0 million, respectively.
The remaining deferred gain at February 26, 2005 and February 28, 2004 amounted
to $58.5 million and $43.4 million, respectively.
We expect to enter into similar transactions for other owned properties
from time to time in the future.
<PAGE>
Note 10 - Income Taxes
The components of loss from continuing operations before income taxes
are as follows:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
---------------- --------------- ---------------
<S> <C> <C> <C>
United States $ (153,827) $ (270,894) $(137,872)
Canada (29,654) 27,095 66,213
------------ ------------ -----------
Total $ (183,481) $ (243,799) $ (71,659)
============ ============ ============
</TABLE>
The benefit from (provision for) income taxes from continuing
operations consists of the following:
<TABLE>
<CAPTION>
Fiscal 2004 Fiscal 2003 Fiscal 2002
---------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 24,166
Canadian 2,603 (3,095) (1,162)
State and local (4,500) (4,239) (3,104)
------------ ------------ -------------
(1,897) (7,334) 19,900
------------ ------------ -------------
Deferred:
Federal - 40,058 (106,664)
Canadian 1,369 (8,670) (24,848)
State and local - 6,520 (19,018)
----------- ------------ ------------
1,369 37,908 (150,530)
----------- ------------ ------------
(Provision for) benefit from income taxes $ (528) $ 30,574 $ (130,630)
============ ============ ============
</TABLE>
The deferred income tax (provision) benefit resulted primarily from the
annual change in temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax
regulations, net operating loss ("NOL") carryforwards and, in fiscal 2004,
fiscal 2003 and fiscal 2002, the U.S. valuation allowance.
The deferred tax benefit recorded in fiscal 2004 for our Canadian
operations of approximately $1.4 million reflects temporary differences.
During fiscal 2004, the U.S. valuation allowance was increased by $89.6 million.
The deferred tax provision recorded in fiscal 2003 for our Canadian
operations of approximately $8.7 million reflects the utilization of $7.1
million of NOL carryforwards and other temporary differences. The deferred tax
benefit recorded in fiscal 2003 for our U.S. operations of approximately $46.6
million was offset by a tax provision provided on discontinued operations in
accordance with Statement of Financial Accounting Standards 109, "Accounting for
Income Taxes." During fiscal 2003, the U.S. valuation allowance was increased by
$67.7 million.
<PAGE>
The deferred tax provision recorded in fiscal 2002 for our Canadian
operations of approximately $24.8 million reflects utilization of $12.0 million
of NOL carryforwards and other temporary differences. The deferred tax provision
recorded in fiscal 2002 for our U.S. operations of approximately $125.7 million
mainly relates to NOL carryforwards and the U.S. related valuation allowance. In
accordance with SFAS 109 "Accounting for Income Taxes", a valuation allowance is
created and offset against the net deferred tax asset if, based on existing
facts and circumstances, it is more likely than not that some portion or all of
the deferred tax asset will not be realized. Based upon our continued assessment
of the realization of our U.S. net deferred tax asset and historic cumulative
losses, and in particular, the significant increase in U.S. operating losses
during the second quarter of fiscal 2002, we concluded that it was appropriate
to establish a full valuation allowance for our U.S. net deferred tax asset in
the amount of $133.7 million during the second quarter of fiscal 2002. During
the remainder of fiscal 2002, the valuation allowance was increased by $27.8
million, totaling $161.5 million for the fiscal year. In future p