================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ____________________
Commission File Number 1-3657
---------------------
WINN-DIXIE STORES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0514290
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5050 Edgewood Court, Jacksonville, Florida 32254-3699
(Address of principal executive offices) (Zip Code)
(904) 783-5000
(Registrant's telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year,
if changed since last report)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of April 2, 2003, there were 140,821,631 shares outstanding of the
registrant's common stock, $1 par value.
================================================================================
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
Part I: Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Statements of Operations 1 - 2
(Unaudited), For the 12 and 40 Weeks Ended
April 2, 2003 and April 3, 2002
Condensed Consolidated Balance Sheets 3
April 2, 2003 (Unaudited) and June 26, 2002 (Note A)
Condensed Consolidated Statements of Cash Flows 4
(Unaudited), For the 40 Weeks Ended
April 2, 2003 and April 3, 2002
Notes to Condensed Consolidated Financial Statements 5 - 16
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial 17 - 23
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 - 25
Item 4. Controls and Procedures 26
Part II: Other Information
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29 - 30
Part I: Financial Information
Item 1. Financial Statements
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Amounts in thousands except per share data
For the 12 Weeks Ended
MOST RECENT QUARTER April 2, 2003 April 3, 2002
------------- -------------
Net sales $2,822,327 2,901,631
Cost of sales, including warehouse and delivery expenses 2,031,226 2,104,248
---------- ----------
Gross profit on sales 791,101 797,383
Other operating and administrative expenses 698,617 697,795
---------- ----------
Operating income 92,484 99,588
Interest expense, net 14,095 16,055
---------- ----------
Earnings from continuing operations before income taxes 78,389 83,533
Income taxes (Note K) 27,822 32,161
---------- ----------
Net earnings from continuing operations 50,567 51,372
---------- ----------
Discontinued operations (Note P)
Loss from discontinued operations - (11,523)
Income tax benefit - (4,437)
---------- ----------
Net loss from discontinued operations - (7,086)
---------- ----------
Net earnings $ 50,567 44,286
========== ==========
Basic earnings per share:
Earnings from continuing operations $ 0.36 0.37
Loss from discontinued operations - (0.05)
---------- ----------
Basic earnings per share $ 0.36 0.32
========== ==========
Diluted earnings per share:
Earnings from continuing operations $ 0.36 0.36
Loss from discontinued operations - (0.05)
---------- ----------
Diluted earnings per share $ 0.36 0.31
========== ==========
Dividends per share $ 0.05 0.05
========== ==========
Weighted average common shares outstanding - basic 140,473 140,288
========== ==========
Weighted average common shares outstanding - diluted 140,835 140,626
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Amounts in thousands except per share data
For the 40 Weeks Ended
FISCAL YEAR-TO-DATE April 2, 2003 April 3, 2002
------------- -------------
Net sales $9,441,577 9,477,654
Cost of sales, including warehouse and delivery expenses 6,756,484 6,875,843
---------- ----------
Gross profit on sales 2,685,093 2,601,811
Other operating and administrative expenses 2,425,714 2,331,729
---------- ----------
Operating income 259,379 270,082
Bank agreement termination income (Note F) 52,740 -
---------- ----------
312,119 270,082
Interest expense, net 38,150 51,508
---------- ----------
Earnings from continuing operations before income taxes 273,969 218,574
Income taxes (Note K) 97,237 84,151
---------- ----------
Net earnings from continuing operations 176,732 134,423
---------- ----------
Discontinued operations (Note P)
Loss from discontinued operations - (41,670)
Income tax benefit - (16,043)
---------- ----------
Net loss from discontinued operations - (25,627)
---------- ----------
Net earnings $ 176,732 108,796
========== ==========
Basic earnings per share:
Earnings from continuing operations $ 1.26 0.96
Loss from discontinued operations - (0.18)
---------- ----------
Basic earnings per share $ 1.26 0.78
========== ==========
Diluted earnings per share:
Earnings from continuing operations $ 1.26 0.95
Loss from discontinued operations - (0.18)
---------- ----------
Diluted earnings per share $ 1.26 0.77
========== ==========
Dividends per share $ 0.150 0.305
========== ==========
Weighted average common shares outstanding - basic 140,405 140,286
========== ==========
Weighted average common shares outstanding - diluted 140,822 140,711
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollar amounts in thousands except par value
April 2, 2003 June 26, 2002
------------- -------------
ASSETS (Unaudited) (Note A)
- ------
Current Assets:
Cash and cash equivalents $ 52,931 227,846
Marketable securities 19,089 18,606
Trade and other receivables 143,905 116,154
Merchandise inventories less LIFO reserve of
$220,873 ($215,873 as of June 26, 2002) 1,053,265 1,063,288
Prepaid expenses and other assets 47,855 53,934
Deferred income taxes 152,484 158,478
----------- -----------
Total current assets 1,469,529 1,638,306
----------- -----------
Cash surrender value of life insurance, net 11,501 16,197
Property, plant and equipment, net 973,424 966,752
Goodwill 87,808 87,808
Non-current deferred income taxes 99,446 113,291
Other assets, net 139,505 115,224
----------- -----------
Total assets $ 2,781,213 2,937,578
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 272 2,739
Current obligations under capital leases 3,446 3,471
Accounts payable 563,182 509,704
Reserve for insurance claims and self-insurance 75,752 98,450
Accrued wages and salaries 107,019 111,556
Accrued rent 109,522 144,597
Accrued expenses 102,436 174,805
Income taxes payable 77,670 64,582
----------- -----------
Total current liabilities 1,039,299 1,109,904
----------- -----------
Reserve for insurance claims and self-insurance 160,734 160,226
Long-term debt 310,795 540,612
Obligations under capital leases 22,138 24,787
Defined benefit plan 53,965 52,887
Lease liability on closed stores, net of current portion 164,984 180,785
Other liabilities 53,044 55,993
----------- -----------
Total liabilities 1,804,959 2,125,194
----------- -----------
Commitments and contingent liabilities (Notes J, K, M, P, & Q)
Shareholders' Equity: Common stock $1 par value. Authorized 400,000,000 shares
issued and outstanding 140,821,631 as of April 2, 2003 and 140,592,009 as of
June 26, 2002 140,822 140,592
Retained earnings 836,077 676,322
Accumulated other comprehensive loss (645) (4,530)
----------- -----------
Total shareholders' equity 976,254 812,384
----------- -----------
Total liabilities and shareholders' equity $ 2,781,213 2,937,578
=========== ===========
See accompanying notes to condensed consolidated financial statements
3
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Dollar amounts in thousands
For the 40 weeks Ended
April 2, 2003 April 3, 2002
------------- -------------
Cash flows from operating activities:
Net earnings $ 176,732 108,796
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Gain on sale of facility - (12,697)
Depreciation and amortization 127,135 134,747
Deferred income taxes 17,358 13,428
Defined benefit plan 1,078 2,515
Reserve for insurance claims and self-insurance (22,190) 3,054
Stock compensation plans 2,847 3,603
Change in operating assets and liabilities:
Trade and other receivables (27,750) (2,572)
Merchandise inventories 10,023 (27,172)
Prepaid expenses and other assets 13,860 (3,133)
Accounts payable 59,101 (42,774)
Income taxes payable 43,248 43,569
Other current accrued expenses (98,446) (27,971)
------------ ------------
Subtotal 302,996 193,393
Income taxes paid on company owned life insurance (52,002) -
------------ ------------
Net cash provided by operating activities 250,994 193,393
------------ ------------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (135,724) (55,035)
Increase in investments and other assets (31,886) (19,875)
Proceeds from sale of facilities 10,361 21,297
Increase in marketable securities - (13,333)
------------ ------------
Net cash used in investing activities (157,249) (66,946)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (246,255) (154,251)
Principal payments on capital lease obligations (2,673) (2,515)
Purchase of common stock (40) (38)
Proceeds of sales under associates' stock purchase plan - 1,746
Dividends paid (21,110) (42,870)
Other 1,418 699
------------ ------------
Net cash used in financing activities (268,660) (197,229)
------------ ------------
Decrease in cash and cash equivalents (174,915) (70,782)
Cash and cash equivalents at beginning of year 227,846 121,061
------------ ------------
Cash and cash equivalents at end of period $ 52,931 50,279
============ ============
Supplemental cash flow information:
Interest paid $ 41,647 54,416
Interest and dividends received $ 1,698 1,584
Income taxes paid $ 88,635 14,354
See accompanying notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(A) Basis of Presentation: The accompanying unaudited Condensed Consolidated
Financial Statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the quarter and year-to-date
ended April 2, 2003, are not necessarily indicative of the results that may
be expected for the year ending June 25, 2003.
The balance sheet at June 26, 2002, has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Winn-Dixie Stores, Inc. and subsidiaries
annual report on Form 10-K for the fiscal year ended June 26, 2002. The
Condensed Consolidated Financial Statements include the accounts of
Winn-Dixie Stores, Inc. and its subsidiaries, which operate as a major food
retailer in twelve states and the Bahama Islands. Reference to the
"Company" includes Winn-Dixie Stores, Inc. and all of its subsidiaries,
collectively.
(B) Cash and Cash Equivalents: Cash equivalents consist of highly liquid
investments with maturity of three months or less when purchased. Cash and
cash equivalents are stated at cost plus accrued interest, which
approximates market.
(C) Marketable Securities: Marketable securities consist principally of fixed
income securities categorized as available-for-sale. Available-for-sale
securities are recorded at fair value. Unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and reported as a
separate component of shareholders' equity until realized. A decline in the
fair value of available-for-sale securities below cost that is deemed other
than temporary is charged to earnings, resulting in the establishment of a
new cost basis for the security. Realized gains and losses are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
(D) Inventories: Inventories are stated at the lower of cost or market. The
"dollar value" last-in, first-out (LIFO) method is used to determine the
cost of approximately 84% of inventories consisting primarily of
merchandise in stores and distribution warehouses. Manufacturing, pharmacy
and produce inventories are valued at the lower of first-in, first-out
(FIFO), cost or market. Elements of cost included in manufacturing
inventories consist of material, direct labor and plant overhead.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(E) Revenue Recognition: Revenue is recognized at the point of sale for retail
sales. Sales discounts are offered to customers at the time of purchase as
part of the Company's Customer Reward Card program as well as other
promotional events. All sales discounts are recorded as a reduction of
sales at the time of purchase.
Additionally, the Company offers awards to customers based on an
accumulation of points as part of its Customer Reward Card program. The
Company establishes a reserve for outstanding points.
(F) Bank Agreement Termination: During the second quarter of fiscal year 2003,
Canadian Imperial Bank of Commerce ("CIBC") terminated its in-store bank
agreement with the Company and paid a termination fee of $60.0 million. The
Company will be responsible for the costs associated with the
de-installation of the in-store Marketplace Bank locations and other
related costs, which are estimated to be approximately $7.3 million. As a
result, the Company recorded other income in the amount of $52.7 million
($34.0 million net of tax, or $0.24 per diluted share) in the second
quarter of fiscal year 2003. Refer to Management's Discussion and Analysis
of Financial Condition and Results of Operations for additional
information.
(G) Merchandise Cost: The Company adopted EITF 02-16, "Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor" on
a prospective basis during the current quarter. Issue 02-16 provides
guidance for the accounting of cash consideration given to a reseller from
a vendor. The adoption of issue 02-16 had no material impact on the
Company's operations.
Vendor allowances and credits that relate to the Company's merchandising
activities are recorded as a reduction of cost of sales as they are earned
according to the underlying agreement with the vendor. Allowances consist
primarily of promotional allowances, quantity discounts and payments under
merchandising agreements. Amounts received under promotional or other
merchandising allowance agreements that require specific performance are
recognized when the performance is satisfied, the amount is fixed and
determinable and the collection is reasonably assured. Lump sum payments
received in advance of performance are recorded as deferred income in other
liabilities, either current or non-current as appropriate, and recognized
over the life of the agreement.
Amounts received in payment for assets or services are recorded as revenue
(or other income, as appropriate). Amounts received for reimbursement of
costs incurred by the Company to sell the vendor's products are recorded as
a reduction of cost.
(H) LIFO: Results for the quarter reflect a pre-tax LIFO inventory charge of
$2.0 million in fiscal year 2003 and $1.5 million in the fiscal year 2002.
The year-to-date LIFO charge is $5.0 million in fiscal year 2003 and $8.5
million for fiscal year 2002.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(H) LIFO, continued: If the FIFO method had been used for the current quarter,
net earnings from continuing operations would have been $51.9 million, or
$0.37 per diluted share, as compared with net earnings from continuing
operations for the corresponding quarter of fiscal year 2002 of $52.3
million, or $0.37 per diluted share. If the FIFO method had been used for
the year, net earnings from continuing operations would have been $180.0
million, or $1.28 per diluted share, as compared with net earnings from
continuing operations of $139.7 million, or $0.99 per diluted share, in the
previous year. An actual valuation of inventory under the LIFO method can
be made only at the end of each fiscal year based on the inventory levels
and costs at that time. Accordingly, interim LIFO calculations must be
based on management's estimates of expected year-end inventory levels and
costs. Because these are subject to forces beyond management's control,
interim results are subject to the final year-end LIFO inventory
valuations.
(I) Comprehensive Income: Comprehensive income differs from net income for the
quarter and year-to-date due to changes in the fair value of the Company's
marketable securities. Comprehensive income from continuing operations for
the quarter ended April 2, 2003, was $52.9 million, or $0.38 per diluted
share, compared to $53.4 million, or $0.38 per diluted share, for the
corresponding quarter of the previous year. For the year, comprehensive
income from continuing operations was $180.6 million, or $1.28 per diluted
share, at April 2, 2003, compared to $132.7 million, or $0.94 per diluted
share, in the previous year.
(J) Debt:
April 2, 2003 June 26, 2002
------------- -------------
364-day $100,000 revolving credit facility due 2004;
interest payable at LIBOR plus 2.50% $ - -
Five-year $200,000 revolving credit facility due 2006;
interest payable at LIBOR plus 2.50% - -
Mortgage note payable with interest at 9.40% and
monthly $22 principal and interest payments
and 10.0% of principal paid annually each October 1,179 1,434
Six-year term loan due 2007; interest payable
at LIBOR plus 2.75% and $1,000 quarterly
principal payments - 246,000
8.875% senior notes due 2008; interest payable
semiannually on April 1 and October 1 309,888 295,917
-------- ---------
Total 311,067 543,351
Less current portion 272 2,739
-------- ---------
Long-term portion $310,795 540,612
======== =========
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(J) Debt, continued: On March 24, 2003, the Company renewed the 364-day
revolving credit facility in the amount of $100.0 million due to expire on
March 25, 2004. The senior secured credit facilities and senior unsecured
notes contain certain covenants as defined in the credit agreement and
indenture, as amended. The Company was in compliance with these covenants
at April 2, 2003. During the quarter, the Company prepaid $143.0 million on
the six-year term loan. For the year, the Company prepaid $243.0 million on
the six-year term loan.
In accordance with Statement of Financial Account Standards No. 145,
"Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"), the unamortized
debt issue cost associated with the early extinguishment of the debt is
recorded in continuing operations as interest expense. The Company
recognized $3.8 million ($2.5 million net of tax) of debt issue cost in the
current quarter compared to $3.8 million ($2.3 million net of tax) in the
corresponding quarter of fiscal year 2002. For the year, debt issue cost
recognized was $6.4 million ($4.1 million net of tax) compared to $3.8
million ($2.3 million net of tax) in the previous year. The current quarter
and fiscal year interest expense includes payments to unwind the interest
rate swaps of $4.2 million and $7.5 million, respectively.
As of April 2, 2003, the Company had $64.3 million in outstanding letters
of credit used to support insurance obligations and inventory purchases.
The Company entered into an interest rate swap agreement, designated as a
fair value hedge as defined under SFAS 133, "Accounting for Derivative
Instruments and Hedge Activities," with a notional amount totaling $300.0
million and a variable interest rate, which is fixed semi-annually on the
first of April and October based on the six-month LIBOR. This agreement was
entered to exchange the fixed interest rate on the Company's 8.875% senior
notes for a variable interest rate. In accordance with SFAS 133, changes in
the fair value of the interest rate swap agreements offset changes in the
fair value of the fixed rate debt due to changes in the market interest
rate. Accordingly, the Company's $300.0 million 8.875% senior notes as of
April 2, 2003 has a fair value of $309.9 million, which reflects a $14.0
million change in the fair value from June 26, 2003. The corresponding
change of $14.0 million in the hedge was recorded as an increase in other
assets of $9.9 million and a decrease in other liabilities of $4.1 million.
The agreement is deemed to be a perfectly effective fair value hedge and
therefore qualifies for the short-cut method of accounting under SFAS 133.
As a result, no ineffectiveness is expected to be recognized in the
Company's earnings associated with the interest rate swap agreement on the
8.875% senior notes.
(K) Income Taxes: The provision for income taxes reflects management's best
estimate of the effective tax rate expected for the fiscal year. The
effective tax rate on earnings from continuing operations for fiscal years
2003 and 2002 is 35.5% and 38.5%, respectively. The current year effective
tax rate decreased due to contributions made to the State of Florida for
the Nonprofit Scholarship Funding Organizations Program for which the
Company will receive a tax credit for 100% of the contribution amount.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(K) Income Taxes, continued: The Company has contributed $3.8 million in fiscal
year 2003 and expects to contribute the maximum contribution of $5.0
million within the current fiscal year. In addition, the current year
effective tax rate was affected by the expected utilization of previously
unrecognized tax benefits arising from state net operating loss carry
forwards. The Company has a reserve established for taxes and interest
related to the company-owned life insurance (COLI) tax liability. In July
2002, the Company paid $52.0 million to the Internal Revenue Service from
the reserve. Additional amounts, if any, will be paid upon receiving a
final assessment from the Internal Revenue Service and, in the opinion of
management, will not have any additional material adverse impact on the
Company's financial condition or results of operations.
(L) Reclassification: Certain other prior year amounts have been reclassified
to conform to the current year's presentation.
(M) Lease Liability on Closed Stores: The Company accrues for the obligation
related to closed store locations based on the present value of expected
future rental payments, net of sub-lease income. The following amounts are
included in accrued rent and lease liability on closed stores, as of April
2, 2003:
Lease Liability on
Closed Stores
---------------
Balance at June 26, 2002 $ 264,386
Additions/adjustments 28,182
Utilization (68,322)
--------------
Balance at April 2, 2003 $ 224,246
==============
The additions/adjustments amount includes the effect on earnings from the
accretion of the present value of the expected future rental payments,
additional leases added to the accrual and adjustments due to the
settlement of certain existing leases. The utilization amount includes
payments made for rent and related costs and the buyout of twenty-one
leases. The lease liability on closed stores includes $114.0 million
related to restructure and $53.3 million related to the discontinued
operations. The additions/adjustments and the utilization for restructure
were $7.8 million and $32.2 million, respectively for the year. The current
portion of the accrued balance at April 2, 2003 totals $59.3 million and is
included in accrued rent.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(N) Goodwill and Intangible Assets: Goodwill is not amortized but is tested for
impairment, for each reporting unit, on an annual basis and between annual
tests in certain circumstances. In accordance with the guidelines in
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), the Company determined it has one
reporting unit. The Company has performed an impairment review during the
current fiscal year, and concluded that there were no necessary
adjustments. Other intangible assets consist of a non-compete fee and the
cost of purchasing pharmacy prescription files. The Company reassessed the
useful lives of other intangible assets and determined the useful lives are
appropriate in determining amortization expense. The balance, which is a
component of other assets on the Condensed Consolidated Balance Sheets, as
of April 2, 2003 is as follows:
Other
Intangible
Assets
---------
Other intangible assets $ 7,759
Less: Accumulated amortization 3,475
---------
Other intangible assets, net $ 4,284
=========
Amortization expense for other intangible assets for the quarters ended
April 2, 2003, and April 3, 2002, was $276 and $270, respectively. For the
year, amortization expense was $928 and $912 for April 2, 2003 and April 3,
2002, respectively. The estimated remaining amortization expense for each
of the fiscal years subsequent to June 26, 2002 is as follows:
Amortization
Expense
-----------
Remaining for year ended June 25, 2003 $ 278
For year ended June 30, 2004 1,173
For year ended June 29, 2005 1,119
For year ended June 28, 2006 429
For year ended June 27, 2007 123
Thereafter 1162
-----------
$ 4,284
===========
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(O) Guarantor Subsidiaries: During the second quarter of fiscal year 2001, the
Company filed a registration statement with the Securities and Exchange
Commission to authorize the issuance of up to $1 billion in debt
securities. The debt securities may be jointly and severally, fully and
unconditionally guaranteed by substantially all of the Company's operating
subsidiaries. The guarantor subsidiaries are 100% owned subsidiaries of the
Company. Condensed consolidating financial information for the Company and
its guarantor subsidiaries is as follows:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands)
12 Weeks ended April 2, 2003
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------- ------------ ------------
Net sales $1,297,075 1,525,252 - 2,822,327
Cost of sales 933,680 1,097,546 - 2,031,226
---------- ---------- ---------- ----------
Gross profit on sales 363,395 427,706 - 791,101
Other operating and administrative expenses 304,214 394,403 - 698,617
---------- ---------- ---------- ----------
Operating income 59,181 33,303 - 92,484
Equity in earnings of consolidated subsidiaries 21,483 - (21,483) -
Interest expense, net 14,095 - - 14,095
---------- ---------- ---------- ----------
Earnings before income taxes 66,569 33,303 (21,483) 78,389
Income taxes 16,002 11,820 - 27,822
---------- ---------- ---------- ----------
Net earnings $ 50,567 21,483 (21,483) 50,567
========== ========== ========== ==========
40 Weeks ended April 2, 2003
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------- ------------ ------------
Net sales $4,278,578 5,162,999 - 9,441,577
Cost of sales 3,069,300 3,687,184 - 6,756,484
---------- ---------- ---------- ----------
Gross profit on sales 1,209,278 1,475,815 - 2,685,093
Other operating and administrative expenses 1,043,167 1,382,547 - 2,425,714
---------- ---------- ---------- ----------
Operating income 166,111 93,268 - 259,379
Equity in earnings of consolidated subsidiaries 60,165 - (60,165) -
Bank agreement termination income 52,740 - - 52,740
Interest expense, net 38,150 - - 38,150
---------- ---------- ---------- ----------
Earnings before income taxes 240,866 93,268 (60,165) 273,969
Income taxes 64,134 33,103 - 97,237
---------- ---------- ---------- ----------
Net earnings $ 176,732 60,165 (60,165) 176,732
========== ========== ========== ==========
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(O) Guarantor Subsidiaries, continued:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(Amounts in thousands)
12 Weeks ended April 3, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Net sales $1,372,885 1,528,746 - 2,901,631
Cost of sales 991,022 1,113,226 - 2,104,248
---------- ---------- ---------- ----------
Gross profit on sales 381,863 415,520 - 797,383
Other operating and administrative expenses 313,694 384,101 - 697,795
---------- ---------- ---------- ----------
Operating income 68,169 31,419 - 99,588
Equity in earnings of consolidated subsidiaries 12,236 - (12,236) -
Interest expense, net 16,055 - - 16,055
---------- ---------- ---------- ----------
Earnings from continuing operations before income taxes 64,350 31,419 (12,236) 83,533
Income taxes 20,064 12,097 - 32,161
---------- ---------- ---------- ----------
Net earnings from continuing operations 44,286 19,322 (12,236) 51,372
Net loss from discontinued operations - (7,086) - (7,086)
---------- ---------- ---------- ----------
Net earnings $ 44,286 12,236 (12,236) 44,286
========== ========== ========== ==========
40 Weeks ended April 3, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Net sales $4,344,301 5,133,353 - 9,477,654
Cost of sales 3,159,985 3,715,858 - 6,875,843
---------- ---------- ---------- ----------
Gross profit on sales 1,184,316 1,417,495 - 2,601,811
Other operating and administrative expenses 1,031,329 1,300,400 - 2,331,729
---------- ---------- ---------- ----------
Operating income 152,987 117,095 - 270,082
Equity in earnings of consolidated subsidiaries 46,386 - (46,386) -
Interest expense, net 51,508 - - 51,508
---------- ---------- ---------- ----------
Earnings from continuing operations before income taxes 147,865 117,095 (46,386) 218,574
Income taxes 39,069 45,082 - 84,151
---------- ---------- ---------- ----------
Net earnings from continuing operations 108,796 72,013 (46,386) 134,423
Net loss from discontinued operations - (25,627) - (25,627)
---------- ---------- ---------- ----------
Net earnings $ 108,796 46,386 (46,386) 108,796
========== ========== ========== ==========
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(O) Guarantor Subsidiaries, continued:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(Amounts in thousands)
April 2, 2003
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Merchandise inventories $ 314,751 738,514 - 1,053,265
Other current assets 245,063 171,201 - 416,264
---------- ---------- ---------- ----------
Total current assets 559,814 909,715 - 1,469,529
Property, plant and equipment, net 416,480 556,944 - 973,424
Other non-current assets 219,519 118,741 - 338,260
Investments in and advances to/from subsidiaries 738,131 - (738,131) -
---------- ---------- ---------- ----------
Total assets $1,933,944 1,585,400 (738,131) 2,781,213
========== ========== ========== ==========
Accounts payable $ 125,007 438,175 - 563,182
Other current liabilities 291,050 185,067 - 476,117
---------- ---------- ---------- ----------
Total current liabilities 416,057 623,242 - 1,039,299
Long-term debt 310,795 - - 310,795
Other non-current liabilities 230,838 224,027 - 454,865
Common stock of $1 par value 140,822 6,237 (6,237) 140,822
Retained earnings and other shareholders' equity 835,432 731,894 (731,894) 835,432
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $1,933,944 1,585,400 (738,131) 2,781,213
========== ========== ========== ==========
June 26, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Merchandise inventories $ 320,515 742,773 - 1,063,288
Other current assets 387,696 187,322 - 575,018
---------- ---------- ---------- ----------
Total current assets 708,211 930,095 - 1,638,306
Property, plant and equipment, net 375,029 591,723 - 966,752
Other non-current assets 213,434 119,086 - 332,520
Investments in and advances to/from subsidiaries 900,911 - (900,911) -
---------- ---------- ---------- ----------
Total assets $2,197,585 1,640,904 (900,911) 2,937,578
========== ========== ========== ==========
Accounts payable $ 146,128 363,576 - 509,704
Other current liabilities 461,251 138,949 - 600,200
---------- ---------- ---------- ----------
Total current liabilities 607,379 502,525 - 1,109,904
Long-term debt 540,612 - - 540,612
Other non-current liabilities 237,210 237,468 - 474,678
Common stock of $1 par value 140,592 6,238 (6,238) 140,592
Retained earnings and other shareholders' equity 671,792 894,673 (894,673) 671,792
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $2,197,585 1,640,904 (900,911) 2,937,578
========== ========== ========== ==========
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(O) Guarantor Subsidiaries, continued:
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(Amounts in thousands)
40 Weeks ended April 2, 2003
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Net cash (used in) provided by operating activities $ (39,645) 290,639 - 250,994
--------- --------- --------- ---------
Purchases of property, plant and equipment, net (93,350) (42,374) - (135,724)
Decrease (increase) in other assets 150,403 (9,148) (162,780) (21,525)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 57,053 (51,522) (162,780) (157,249)
--------- --------- --------- ---------
Principal payments on long-term debt (246,253) - - (246,253)
Dividends paid (21,110) - - (21,110)
Other 66,299 (230,376) 162,780 (1,297)
--------- --------- --------- ---------
Net cash used in financing activities (201,064) (230,376) 162,780 (268,660)
--------- --------- --------- ---------
(Decrease) increase in cash and cash equivalents (183,656) 8,741 - (174,915)
Cash and cash equivalents at the beginning of the year 228,981 (1,135) - 227,846
--------- --------- --------- ---------
Cash and cash equivalents at end of the period $ 45,325 7,606 - 52,931
========= ========= ========= =========
40 Weeks ended April 3, 2002
Guarantor
Parent Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------
Net cash (used in) provided by operating activities $ (24,486) 217,879 - 193,393
--------- --------- --------- ---------
Purchases of property, plant and equipment, net (13,110) (41,925) - (55,035)
Decrease (increase) in other assets 133,947 (343,890) 190,068 (19,875)
Proceeds from sale of facility - 21,297 - 21,297
Increase in marketable securities (13,333) - - (13,333)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities 107,504 (364,518) 190,068 (66,946)
--------- --------- --------- ---------
Dividends paid (42,870) - - (42,870)
Other (114,944) 150,653 (190,068) (154,359)
--------- --------- --------- ---------
Net cash (used in) provided by financing activities (157,814) 150,653 (190,068) (197,229)
--------- --------- --------- ---------
(Decrease) increase in cash and cash equivalents (74,796) 4,014 - (70,782)
Cash and cash equivalents at the beginning of the year 111,136 9,925 - 121,061
--------- --------- --------- ---------
Cash and cash equivalents at end of the period $ 36,340 13,939 - 50,279
========= ========= ========= =========
The Company allocates all cost incurred by its headquarters, which is not
specifically identifiable to each subsidiary, based on its relative size to
the Company as a whole. Taxes payable and deferred taxes are obligations of
the Company. Expenses related to both current and deferred income taxes are
allocated to each subsidiary based on the consolidated Company's effective
tax rates.
Expenses incurred by the guarantor subsidiaries, if they operated on a
stand-alone basis, may or may not have been higher were it not for the
benefit derived from related-party transactions and the headquarters
functions described above.
14
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(P) Discontinued Operations: On May 6, 2002, the Company announced a formal
plan to exit the Texas and Oklahoma operations, which consisted of 71 store
locations, a dairy plant and a distribution center in Texas and five store
locations in Oklahoma. In addition, seven leases were in effect on stores
that were previously closed. The Company decided to discontinue these
operations as a result of continued operational losses and reductions in
market share. In accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), the Texas and Oklahoma operations are considered
components of an entity, which requires the Company to disclose the exit as
a discontinued operation. At June 26, 2002, the Company had exited these
operations, either by sale or abandonment.
There was no revenue from discontinued operations for the quarter ended
April 2, 2003, compared to gross revenue of $144.5 million for the quarter
ended April 3, 2002.
A summary of the accruals and loss on disposal of discontinued operations
follows:
Employee
Termination and Lease
Other Location Termination
Closing Costs Costs Total
Balance at June 26, 2002 $ 9,034 72,401 81,435
Utilization (9,034) (19,108) (28,142)
------- ------- -------
Balance at April 2, 2003 $ - 53,293 53,293
======= ======= =======
The Company has $4.1 million in held for sale assets relating to the
exiting of the Texas and Oklahoma operations. During the second quarter of
fiscal year 2003, the Company sold the distribution center in Texas for
$9.6 million. The held for sale assets are reported in the prepaid expenses
and other assets section of the Condensed Consolidated Balance Sheet. The
held for sale assets consist mainly of land, land improvements, buildings,
leasehold improvements and store and office equipment.
(Q) Litigation: There are pending against the Company various claims and
lawsuits arising in the normal course of business, including suits charging
violations of certain employment laws and various proceedings arising under
federal, state or local regulations protecting the environment. Among the
suits charging violation of certain employment laws, there are actions that
purport to be class-actions and actions which allege violation of fair
labor standard laws, a pattern and practice of race-based and/or
gender-based discriminatory treatment of employees and applicants, sexual
harassment and retaliation.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Dollar amounts in thousands except per share data, unless otherwise noted
(Q) Litigation, continued: The plaintiffs seek, among other relief,
certification of the suits as proper class actions, declaratory judgment
that the Company's practices are unlawful, back pay, front pay, benefits
and other compensatory damages, punitive damages, injunctive relief and
reimbursement of attorneys' fees and costs.
The Company is committed to full compliance with all applicable civil
rights laws. Consistent with this commitment, the Company has firm and
long-standing policies in place prohibiting discrimination and harassment.
The Company denies the allegations of the various complaints and is
vigorously defending the actions.
While the ultimate outcome of litigation cannot be predicted with
certainty, in the opinion of management, the ultimate resolution of these
actions will not have a material adverse effect on the Company's financial
condition or results of operations.
(R) Accounting Pronouncements: Emerging Issues Task Force (EITF) No. 02-16,
"Accounting by a Customer for Certain Consideration Received from a Vendor"
provides guidance for the accounting of cash consideration given to a
reseller from a vendor. The adoption of issue 02-16 had no material impact
on the Company's operations.
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
Technical Corrections" ("SFAS 145"), became effective for the Company in
July 2002. The adoption of SFAS 145 requires that losses on early
extinguishment of debt be included in continuing operations rather than as
an extraordinary item. See Note J - Debt.
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), provides
guidance on the recognition and measurement of liabilities for costs
associated with exit or disposal activities. This provision is effective
for the Company for exit or disposal activities that are initiated after
December 31, 2002.
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment to FASB
Statement No. 123" ("SFAS 148"), provides alternative methods of transition
for a voluntary change in fair value based method of accounting for
stock-based compensation and requires prominent disclosures in both annual
and interim financial statements. Since the Company already follows
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", SFAS 148 will have no impact on the Company's
financial position or results of operations.
16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
This analysis should be read in conjunction with the Condensed Consolidated
Financial Statements.
Results of Operations
Continuing Operations. Sales for the 12 weeks ended April 2, 2003 were $2.8
billion, a decrease of $79.3 million, or 2.7%, compared with the same quarter
last year. For the 40 weeks ended April 2, 2003, sales were $9.4 billion, a
decrease of $36.1 million, or 0.4%, compared with the prior year. Identical
store sales, which include the sales from enlarged stores but exclude the sales
from stores that opened or closed during the period, decreased 2.0% for the
quarter and increased 0.5% for the year. Comparable store sales, which include
the sales from replacement stores, decreased 2.0% for the quarter and increased
0.5% for the year. The previous year sales included sales from the Easter
holiday, which was in the third quarter of fiscal year 2002 compared to the
fourth quarter of fiscal year 2003. The Easter holiday represented a decrease in
sales for the quarter as compared to the previous year of approximately 1.0%.
The timing of Easter as well as economic uncertainty and aggressive pricing and
promotion by our competitors impacted the results of the quarter.
The Company's Customer Reward Card program allows the customer to receive
certain ongoing benefits, such as merchandise discounts, automatic entry into
various sweepstakes, notification of special events, participation in specialty
merchandise clubs, discounts on services provided by select marketing partners
and other special incentives. The Customer Reward Card is part of a major
initiative to focus on superior customer relationship marketing that reinforces
the Company's "real deal" branding initiative. The Customer Reward Card is
currently in use in all of the Company's stores, except for Save Rite and
Bahamas locations.
For the 40 weeks ended April 2, 2003, the Company opened seven new stores and
closed ten existing stores. A total of 1,070 locations were in operation on
April 2, 2003, compared to 1,150 on April 3, 2002. During the fourth quarter of
fiscal year 2002, the Company closed 76 stores related to discontinued
operations. As of April 2, 2003, retail space totaled 47.4 million square feet
compared to 51.0 million square feet in the prior year. The Company has eight
new stores under construction.
Gross profit decreased $6.3 million for the quarter and increased $83.3 million
for the year. As a percentage of sales, gross profit for the current quarter and
the corresponding quarter of fiscal year 2002 were 28.0% and 27.5%,
respectively. For the year, gross profit, as a percent of sales, was 28.4% for
the current fiscal year compared to 27.5% for the previous fiscal year. The
decrease in gross profit dollars for the quarter was primarily due to the Easter
holiday, which was in the third quarter of fiscal year 2002 as compared to the
fourth quarter of fiscal year 2003. The increase in gross profit dollars for the
year is primarily due to lower cost of products through improvements in
centralized procurement and improved sales as a result of the Save Rite
conversions and the Company's marketing initiatives.
17
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations, continued:
Other operating and administrative expenses increased $0.8 million for the
current quarter as compared to the corresponding quarter in fiscal year 2002.
For the year, operating and administrative expenses increased $94.0 million. As
a percentage of sales, other operating and administrative expenses for the
current quarter and the corresponding quarter of the previous year were 24.7%
and 24.1%, respectively. For the year, operating and administrative expenses as
a percent of sales were 25.7% compared to 24.6% for the previous fiscal year.
The increase in other operating and administrative expenses for the year was due
primarily to an increase in professional fees and other related costs associated
with the implementation of various information technology initiatives, an
increase in the accrual for closed store leases, and the impact of advertising
and retail operating expenses in connection with the startup of the Customer
Reward Card. As noted below, the loss of sub-lease income increased other
operating and administrative expense by $3.0 million for the current quarter and
$5.5 million for the fiscal year. In addition, retail salaries were positively
impacted in the current quarter due to improved scheduling and the timing of the
Easter holiday.
Rent expense for the quarter on operating leases was $78.9 million, as compared
to $78.4 million in the previous year.
During the second quarter of fiscal year 2003, bank agreement termination income
totaled $52.7 million ($34.0 million net of tax, or $0.24 per diluted share).
The Company was paid a $60.0 million termination fee from Canadian Imperial Bank
of Commerce ("CIBC") for terminating its in-store bank agreement. The Company
will be responsible for the costs associated with the de-installation of the
in-store Marketplace Bank locations and other related costs, which are estimated
to be approximately $7.3 million. Sub-lease income, which is a component of
other operating and administrative expenses, for the current quarter decreased
by $3.0 million ($1.9 million net of tax, or $0.01 per diluted share) as
compared to the corresponding quarter of fiscal year 2002 due to the termination
of the bank agreement. Sub-lease income for fiscal year 2003 will be reduced by
a total of $8.4 million ($5.4 million net of tax, or $0.04 per diluted share).
The net impact on pretax profit for fiscal year 2003 is expected to be an
increase of $44.3 million ($28.6 million net of tax, or $0.20 per diluted
share).
Interest expense totaled $14.1 million for the current quarter and $16.1 million
for the corresponding quarter of the previous year. For the current year,
interest expense was $38.2 million compared to $51.5 million in the previous
fiscal year. Interest expense is primarily interest on long-term debt and the
interest on capital leases. Interest expense for the current quarter includes
$3.8 million for the write-off of unamortized debt issue costs and $4.2 million
for the payment to unwind the associated interest rate swap. The corresponding
quarter of the previous year includes $3.8 million for the write-off of
unamortized debt issue costs. The current year interest expense includes $6.4
million compared to $3.8 million in the previous year for the write-off of
unamortized debt issue costs and a $7.5 million payment to unwind the swaps
associated with the early extinguishment of debt compared to fiscal year 2002.
18
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations, continued:
Earnings from continuing operations before income taxes were $78.4 million for
the current quarter compared to $83.5 million in the corresponding quarter of
fiscal year 2002. For the year, earnings from continuing operations before
income taxes were $274.0 million compared to $218.6 million in the previous
fiscal year. The decrease in earnings from continuing operations in the current
quarter as compared to the corresponding quarter of the previous year was
primarily due to the decrease in gross profit dollars and sublease income as
previously discussed, partially offset by a decrease in retail salaries and
interest expense. The increase in earnings from continuing operations for the
year was primarily due to the bank agreement termination income of $52.7
million.
The effective tax rates on earnings from continuing operations for fiscal years
2003 and 2002 are 35.5% and 38.5%, respectively. The decline in the current year
effective tax rate is primarily due to the expected utilization of previously
unrecognized tax benefits arising from state net operating loss carry forwards
and the tax credit benefit from scholarship contributions (See Note K - Income
Taxes).
Net earnings from continuing operations for the current quarter amounted to
$50.6 million, or $0.36 per diluted share, as compared to $51.4 million, or
$0.36 per diluted share, for the corresponding quarter of the previous year. For
the current year, net earnings from continuing operations were $176.7 million,
or $1.26 per diluted share, compared to $134.4 million, or $0.95 per diluted
share, in the previous fiscal year.
For the current quarter, the LIFO charge reduced net earnings from continuing
operations by $1.3 million or $0.01 per diluted share, compared to $0.9 million
or $0.01 per diluted share, for the corresponding quarter of the previous year.
For the current year, the LIFO charge reduced net earnings from continuing
operations by $3.2 million, or $0.02 per diluted share, compared to $5.2
million, or $0.04 per diluted share, for the previous year (See Note H - LIFO).
Discontinued Operations. During the fourth quarter of fiscal year 2002, the
Company exited its Texas and Oklahoma operations, which consisted of 76 stores,
a distribution center and a dairy plant. Net loss from discontinued operations
was $7.1 million, or $0.05 per diluted share, for the quarter ended April 3,
2002 (See Note P - Discontinued Operations).
Liquidity and Capital Resources
Cash and marketable securities amounted to $72.0 million at April 2, 2003
compared to $246.5 million at June 26, 2002. Working capital amounted to $430.2
million at April 2, 2003, compared to $528.4 million at June 26, 2002. Cash
decreased due to a $243.0 million prepayment on the six-year term loan, a
payment of $52.0 million to the Internal Revenue Service, a $20.0 million
contribution to the profit sharing program and an increase of capital
expenditures, which were partially offset by receipt of $60.0 million for the
bank service agreement termination (See Note J - Debt and Note K - Income
Taxes).
19
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, continued:
The prepayment of debt was funded from cash from operating activities and the
improvement in working capital. During the current quarter and year, excess cash
was invested in highly liquid overnight investments with an average interest
rate received of approximately 2.1% and 2.2%, respectively.
Net cash provided by operating activities amounted to $251.0 million for the 40
weeks ended April 2, 2003, compared to $193.4 million in the previous year. The
increase in net cash provided by operations is largely due to the receipt of
$60.0 million for the bank service agreement termination and an increase of
$59.1 million in accounts payable, which was partially offset by a payment of
$52.0 million to the Internal Revenue Service, and a $20.0 million contribution
to the profit sharing plan.
Net cash used in investing activities was $157.2 million for the 40 weeks ended
April 2, 2003, compared to $66.9 million in the previous year. The change was
primarily due to an increase in capital expenditures. Capital expenditures for
fiscal year 2003 totaled $135.7 million compared to $55.0 million for fiscal
year 2002.
The Company estimates that total capital investment in Company retail and
support facilities, including operating leases, will be $235.0 million in fiscal
year 2003. The Company has no material construction or purchase commitments
outstanding as of April 2, 2003.
Net cash used in financing activities was $268.7 million for the 40 weeks ended
April 2, 2003, compared to $197.2 million in the previous year. In the current
year, the Company prepaid $243.0 million on the six-year term loan and reduced
dividend payments by $21.8 million.
The Company is a party to various proceedings arising under federal, state and
local regulations protecting the environment. Management is of the opinion that
any liability, which might result from any such proceedings, will not have a
material adverse effect on the Company's consolidated financial condition or
results of operation.
Impact of Inflation
The Company's primary costs, inventory and labor, increase with inflation.
Recovery of these costs must come from improved operating efficiencies, and to
the extent permitted by our competition, through improved gross profit margins.
Critical Accounting Policies
The Condensed Consolidated Financial Statements and Notes to Condensed
Consolidated Financial Statements contain information that is pertinent to
Management's Discussion and Analysis. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about future events that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities. Future events and their effects cannot be determined with absolute
certainty.
20
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies, continued:
Therefore, the determination of estimates requires the exercise of judgment
based on various assumptions and other factors such as historical experience,
current and expected economic conditions, and in some cases, actuarial
calculations. The Company constantly reviews these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from estimated results determined using the
factors described above.
The following is a discussion of the accounting policies considered to be most
critical to the Company. These accounting policies are both most important to
the portrayal of the Company's financial condition and results and require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
Self-insurance reserves. It is the Company's policy to self-insure for certain
insurable risks consisting primarily of physical loss to property, business
interruptions, workers' compensation, commercial general and auto liability.
Insurance coverage is obtained for catastrophic property and casualty exposures
as well as those risks required to be insured by law or contract. Based on an
independent actuary's estimate of the aggregate liability for claims incurred, a
provision for claims under the self-insured program is recorded and revised
annually. The actuarial estimates are subject to uncertainty from various
sources, including changes in claim reporting patterns, claim settlement
patterns, judicial decisions, legislation, and economic conditions. Although the
Company believes that the actuarial estimates are reasonable, significant
differences related to the items noted above could materially affect the
Company's self-insurance obligations and future expense.
Long-lived assets. The Company periodically evaluates the period of depreciation
or amortization for long-lived assets to determine whether current circumstances
warrant revised estimates of useful lives. The Company reviews its property,
plant and equipment for impairment whenever events or changes in circumstances
indicate the carrying value of an asset may not be recoverable. Recoverability
is measured by a comparison of the carrying amount to the net undiscounted cash
flows expected to be generated by the asset. An impairment loss would be
recorded for the excess of net book value over the fair value of the asset
impaired. The fair value is estimated based on expected discounted future cash
flows.
With respect to owned property and equipment associated with closed stores, the
value of the property and equipment is adjusted to reflect recoverable values
based on the Company's prior history of disposing of similar assets and current
economic conditions.
The results of impairment tests are subject to management's estimates and
assumptions of projected cash flows and operating results. The Company believes
that, based on current conditions, materially different reported results are not
likely to result from long-lived asset impairments. However, a change in
assumptions or market conditions could result in a change in estimated future
cash flows and the likelihood of materially different reported results.
21
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies, continued:
Intangible assets and goodwill. In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets." SFAS 142 requires companies to cease
amortizing goodwill that existed at the time of adoption and establish a new
method for testing goodwill for impairment on an annual basis at the reporting
unit level (or an interim basis if an event occurs that might reduce the fair
value of a reporting unit below its carrying value). The Company has determined
that it is contained within one reporting unit and, as such, impairment is
tested at the company level. SFAS 142 also requires that an identifiable
intangible asset that is determined to have an indefinite useful economic life
not be amortized, but separately tested for impairment using a fair value based
approach.
The evaluation of goodwill and intangibles with indefinite useful lives for
impairment requires management to use significant judgments and estimates
including, but not limited to, projected future revenue and cash flows. The
Company believes that, based on current conditions, materially different
reported results are not likely to result from goodwill and intangible
impairments. However, a change in assumptions or market conditions could result
in a change in estimated future cash flows and the likelihood of materially
different reported results.
Store closing costs. The Company provides for closed store liabilities relating
to the estimated post-closing lease liabilities and other related exit costs
associated with the store closing commitments. The closed store liabilities are
usually paid over the lease terms associated with the closed stores having
remaining terms ranging from one to 20 years. The Company estimates the lease
liabilities, net of estimated sub-lease income only to the extent of the
liability, using a discount rate based on long-term rates with a remaining lease
term based on an estimated disposition date to calculate the present value of
the anticipated rent payments on closed stores. Other exit costs include
estimated real estate taxes, common area maintenance, insurance and utility
costs to be incurred after the store closes over the anticipated lease term.
Store closings are generally completed within one year after the decision to
close.
Adjustments to closed store liabilities and other exit costs primarily relate to
changes in subtenants and actual exit costs differing from original estimates.
Adjustments are made for changes in estimates in the period in which the change
becomes known. Any excess accrued store closing liability remaining upon
settlement of the obligation is reversed to income in the period that such
settlement is determined. Inventory write-downs, if any, in connection with
store closings, are classified in cost of sales. Costs to transfer inventory and
equipment from closed stores are expensed as incurred. Severance costs are
rarely incurred in connection with ordinary store closings.
Store closing liabilities are reviewed quarterly and adjusted to ensure that any
accrued amount is properly stated. Although the Company believes that the
estimates used are reasonable, significant differences related to the items
noted above or a change in market conditions could materially affect the
Company's reserve for store closing obligations and future expense.
22
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Critical Accounting Policies, continued:
COLI litigation. The Company was a party to litigation arising from its
interpretation of certain provisions of the U.S. tax code. The Company received
an unfavorable court decision related to the deduction of interest expense on
Company Owned Life Insurance (COLI). See Note K - Income Taxes for further
discussion. Appeals have been unsuccessful in reversing the decision. The
Company has recorded a reserve based on consultations with outside legal counsel
and historical negotiations of similar cases. The Company has and will continue
to negotiate the ultimate settlement of this matter. There are uncertainties in
any litigation of this nature and the ultimate settlement could vary from the
amounts recorded in the Consolidated Financial Statements. While the ultimate
outcome of this matter cannot be predicted with certainty, in the opinion of
management, the ultimate resolution of this matter will not have any additional
material adverse impact on the Company's financial condition or results of
operations.
Cautionary Statement Regarding Forward-Looking Information and Statements
This Form 10-Q contains certain information that constitutes "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve certain risks and
uncertainties. Actual results may differ materially from the results described
in the forward-looking statements.
Factors that may cause actual results to differ materially from those projected
include, but are not limited to:
o heightened competition, including specifically the intensification of price
competition, the entry of new competitors, or the expansion of existing
competitors in one or more operating regions;
o the Company's ability to achieve the benefits contemplated from the various
operational changes being implemented by management;
o changes in federal, state or local legislation or regulations affecting
food manufacturing, food distribution, or food retailing, including
environmental compliance;
o the possible impact of changes in the ratings assigned to the Company's
debt instruments by nationally recognized rating agencies; and
o general business and economic conditions in the Company's operating
regions, including conditions arising from the current state of the economy
generally, the recent stock market decline, the war with Iraq and against
terrorism generally, the rate of inflation/deflation, changes in
population, consumer demands and spending, and the availability of new
employees.
Please refer to discussions of these and other factors in this Form 10-Q and
other Company filings with the Securities and Exchange Commission. The Company
disclaims any intent or obligation to revise or update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise. Readers are cautioned not to place undue reliance on these
forward-looking statements.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash Flow Hedge: On January 29, 2003, the Company unwound the interest rate swap
with a notional amount of $100.0 million and a maturity of March 29, 2004. The
swap was unwound in conjunction with the $143.0 million pay down of the six-year
term loan on January 29, 2003.
On July 26, 2002, the Company unwound the interest rate swap with a notional
amount of $150.0 million and a maturity of March 29, 2003. The swap was unwound
in conjunction with the $100.0 million pay down of the related debt on July 29,
2002.
Fair Value Hedge: On January 22, 2003, the Company reentered into interest rate
swap agreements in which the Company effectively exchanged the $300.0 million
fixed rate 8.875% interest on the senior notes for the two variable rates in the
notional amount of $200.0 and $100.0 million at six-month LIBOR plus 525 and 497
basis points, respectively. The Company received $8.4 million on the initial
swaps, to be amortized over the remaining life of the senior notes as an offset
to interest expense. The variable interest rates, which are based on six-month
LIBOR, are fixed semiannually on the first day of April and October. The
six-month LIBOR was 1.23% on April 1, 2003. The maturity dates of the interest
rate swap agreements match those of the underlying debt.
On August 2, 2002, the Company reentered into interest rate swap agreements in
which the Company effectively exchanged the $300.0 million fixed rate 8.875%
interest on the senior notes for two variable rates in the notional amount of
$200.0 and $100.0 million at six-month LIBOR plus 428 and 424 basis points,
respectively. The Company received $6.5 million on the initial swaps, to be
amortized over the remaining life of the senior notes as an offset to interest
expense.
In accordance with SFAS 133, the Company designated the interest rate swap
agreements on the senior notes as perfectly effective fair value hedges and,
accordingly, uses the short-cut method of evaluating effectiveness. As permitted
by the short-cut method, the change in fair value of the interest rate swaps
will be reflected in earnings and an equivalent amount will be reflected as a
change in the carrying value of the swaps, with an offset to earnings. There is
no ineffectiveness to be recorded. As of April 1, 2003, the Company increased
the fair value of the 8.875% senior notes by $9.9 million and recorded the
corresponding interest rate swap asset in the investments and other assets
section of the Condensed Consolidated Balance Sheets.
The Company's objectives for entering into these swaps were to reduce the
Company's exposure to changes in the fair value of the debt and to obtain
variable rate financing at an attractive cost. The swaps effectively converted
the fixed-rate debt to a floating rate. The agreements involve receipt of fixed
rate amounts in exchange for floating rate interest payments over the life of
the agreements without an exchange of the underlying principal amount.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to these financial instruments. However, counterparties to
these agreements are major financial institutions and the risk of loss due to
nonperformance is considered by management to be minimal. The Company does not
hold or issue interest rate swaps for trading purposes.
24
Quantitative and Qualitative Disclosures About Market Risk
The following table presents the future principal cash flows and
weighted-average interest rates expected on the Company's existing long-term
debt instruments and interest rate swap agreements. Fair values have been
determined based on quoted market prices as of April 2, 2003.
Expected Maturity Date
(Dollar amounts in thousands)
2004 2005 2006 2007 2008 Thereafter Total Fair Value
---------- ---------- ---------- --------- ------------ ---------- --------- ----------
Liabilities:
Long-term debt
Fixed Rate $ 272 269 266 263 300,109 - $ 301,179 $ 317,199
Average interest rate 9.40% 9.40% 9.40% 9.40% 8.88% - 8.88%
Interest rate derivatives:
Fixed to Variable $ - - - - 300,000 - $ 300,000 $ 9,888
Average pay rate - - - - 10.12% - 10.12%
Average receive rate - - - - 8.88% - 8.88%
25
Item 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to
the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with the Company's Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
26
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
Part II: Other Information
Item 1. Legal Proceedings
See Note Q - Litigation of the Notes to Condensed Consolidated
Financial Statements, included herein, regarding various claims and
lawsuits pending against the Company.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Mark W. Matta, formerly the Senior Vice President of Human Resources
for OfficeMax, was elected Senior Vice President of Human Resources on
March 24, 2003.
David F. Henry, formerly the Vice President of Marketing, was elected
Senior Vice President of Marketing on February 6, 2003.
Richard C. Judd, formerly the Vice President of Warehousing and
Distribution, was elected Senior Vice President of Logistics,
Manufacturing and the Enterprise Program Management Office on February
6, 2003.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350.
99.2 Written Statement of the Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K
Not applicable.
27
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINN-DIXIE STORES, INC.
Date: April 23, 2003 /S/ RICHARD P. MC COOK
-----------------------------------
Richard P. McCook
Senior Vice President and
Chief Financial Officer
Date: April 23, 2003 /S/ D. MICHAEL BYRUM
-------------------------------------
D. Michael Byrum
Vice President, Corporate Controller and
Chief Accounting Officer
28
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Allen R. Rowland, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Winn-Dixie Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 23, 2003
By: /S/ Allen R. Rowland
------------------------------------------
Allen R. Rowland
President and Chief Executive Officer
29
WINN-DIXIE STORES, INC. AND SUBSIDIARIES
CERTIFICATIONS
I, Richard P. McCook, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Winn-Dixie Stores,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 23, 2003
By:/S/ Richard P. McCook
----------------------------------------------------
Richard P. McCook
Senior Vice President and Chief Financial Officer
30