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<SEC-DOCUMENT>0000043300-99-000006.txt : 19990520
<SEC-HEADER>0000043300-99-000006.hdr.sgml : 19990520
ACCESSION NUMBER: 0000043300-99-000006
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19990227
FILED AS OF DATE: 19990519
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: 0228
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-04141
FILM NUMBER: 99630396
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
<TEXT>
Conformed Copy
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year Commission file number 1-4141
ended February 27, 1999
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) (Zip Code)
Registrant's telephone number, including area code 201-573-9700
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock - $1 par value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
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 ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at May 3, 1999 was $546,085,554.
The number of shares of common stock outstanding at May 3, 1999 was
38,290,716.
Documents Incorporated by Reference
The information required by Part I, Items 1(d) and 3, and Part II, Items 5,
6, 7 and 8 are incorporated by reference from the Registrant's 1998 Annual
Report to Shareholders. The Registrant has filed with the S.E.C. since the
close of its last fiscal year ended February 27, 1999, a definitive proxy
statement. Certain information required by Part III, Items 10, 11, 12 and 13
is incorporated by reference from the proxy statement in this Form 10-K.
PART I
ITEM 1. Business
General
The Great Atlantic & Pacific Tea Company, Inc. ("A&P" or the "Company") is
engaged in the retail food business. The Company operated 839 stores
averaging approximately 35,247 square feet per store as of February 27, 1999.
In addition, the Company began franchising its Canadian Food Basics stores in
fiscal 1995. As of February 27, 1999, the Company had 55 Food Basics
Franchise stores in Canada averaging approximately 27,953 square feet per
store. On the basis of reported sales for fiscal 1998, the Company believes
that it is one of the ten largest retail food chains in the United States and
that it had the largest market share in metropolitan New York and Detroit,
and the second largest market share in the Province of Ontario, the Company's
largest single markets in the United States and Canada.
Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack,
Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and
Food Basics, the Company sells 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 its retail operations, the Company
also operates one coffee roasting plant in the United States. Through its
Compass Foods Division, the Company manufactures and distributes a line of
whole bean coffees under the Eight O'Clock, Bokar and Royale labels, for sale
through its own stores as well as other food and convenience retailers. The
other private label products sold in the Company's stores are sold under the
Company's own brand names which include America's Choice, Master Choice,
Health Pride, Savings Plus and The Farm.
Building upon a broad base of A&P supermarkets, the Company has expanded and
diversified within the retail food business through the acquisition of other
supermarket chains and the development of several alternative store types.
The Company now operates its stores with merchandise, pricing and identities
tailored to appeal to different segments of the market, including buyers
seeking gourmet and ethnic foods, unusual produce, a wide variety of premium
quality private label goods and health and beauty aids along with the array
of traditional grocery products.
Modernization of Facilities
The Company is engaged in a continuing program of modernizing its operations
and retail stores. During fiscal 1998, the Company expended approximately
$438 million for capital projects which included 46 new supermarkets, 3 new
Food Basics franchised stores and 69 remodels or enlargements. The Company's
plans for fiscal 1999 anticipate capital expenditures of approximately $500
million, which include the opening of 55 new supermarkets and the remodeling
or expansion of 75 stores. In addition, the Company is developing plans to
open approximately 65 new supermarkets in fiscal 2000 and approximately 70 to
80 new supermarkets per year thereafter for several years. Further, the
Company expects to remodel or enlarge an average of 75 stores per year for
the next several years.
Sources of Supply
The Company obtains the merchandise sold in its stores from a variety of
suppliers located primarily in the United States and Canada. The Company has
long-standing and satisfactory relationships with its suppliers.
The Company maintains a processing facility that produces coffee products.
The main ingredients for coffee products are purchased principally from
Brazilian and Central American sources. Other ingredients are obtained from
domestic suppliers.
Employees
As of February 27, 1999, the Company had approximately 83,400 employees, of
which 70% were employed on a part-time basis. Approximately 88% of the
Company's employees are covered by union contracts.
Competition
The supermarket business is highly competitive throughout the marketing areas
served by the 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. The
Company competes for sales and store locations with a number of national and
regional chains as well as with many independent and cooperative stores and
markets.
Foreign Operations
The information required is contained in the 1998 Annual Report to
Shareholders on pages 30, 31, 33, 34, 36, 39 and 40 and is herein
incorporated by reference.
ITEM 2. Properties
At February 27, 1999, the Company operated 839 retail stores and serviced 55
franchised stores. Approximately 7% of the Company's stores are owned, while
the remainder are leased. These stores are geographically located as
follows:
The Great Atlantic & Pacific Tea Company, Inc. ("A&P" or the "Company") is
engaged in the retail food business. The Company operated 839 stores
averaging approximately 35,247 square feet per store as of February 27, 1999.
In addition, the Company began franchising its Canadian Food Basics stores in
fiscal 1995. As of February 27, 1999, the Company had 55 Food Basics
Franchise stores in Canada averaging approximately 27,953 square feet per
store. On the basis of reported sales for fiscal 1998, the Company believes
that it is one of the ten largest retail food chains in the United States and
that it had the largest market share in metropolitan New York and Detroit,
and the second largest market share in the Province of Ontario, the Company's
largest single markets in the United States and Canada.
Operating under the trade names A&P, Super Fresh, Sav-A-Center, Farmer Jack,
Kohl's, Food Emporium, Waldbaum's, Super Food Mart, Ultra Mart, Dominion, and
Food Basics, the Company sells 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 its retail operations, the Company
also operates one coffee roasting plant in the United States. Through its
Compass Foods Division, the Company manufactures and distributes a line of
whole bean coffees under the Eight O'Clock, Bokar and Royale labels, for sale
through its own stores as well as other food and convenience retailers. The
other private label products sold in the Company's stores are sold under the
Company's own brand names which include America's Choice, Master Choice,
Health Pride, Savings Plus and The Farm.
Building upon a broad base of A&P supermarkets, the Company has expanded and
diversified within the retail food business through the acquisition of other
supermarket chains and the development of several alternative store types.
The Company now operates its stores with merchandise, pricing and identities
tailored to appeal to different segments of the market, including buyers
seeking gourmet and ethnic foods, unusual produce, a wide variety of premium
quality private label goods and health and beauty aids along with the array
of traditional grocery products.
Modernization of Facilities
The Company is engaged in a continuing program of modernizing its operations
and retail stores. During fiscal 1998, the Company expended approximately
$438 million for capital projects which included 46 new supermarkets, 3 new
Food Basics franchised stores and 69 remodels or enlargements. The Company's
plans for fiscal 1999 anticipate capital expenditures of approximately $500
million, which include the opening of 55 new supermarkets and the remodeling
or expansion of 75 stores. In addition, the Company is developing plans to
open approximately 65 new supermarkets in fiscal 2000 and approximately 70 to
80 new supermarkets per year thereafter for several years. Further, the
Company expects to remodel or enlarge an average of 75 stores per year for
the next several years.
Sources of Supply
The Company obtains the merchandise sold in its stores from a variety of
suppliers located primarily in the United States and Canada. The Company has
long-standing and satisfactory relationships with its suppliers.
The Company maintains a processing facility that produces coffee products.
The main ingredients for coffee products are purchased principally from
Brazilian and Central American sources. Other ingredients are obtained from
domestic suppliers.
Employees
As of February 27, 1999, the Company had approximately 83,400 employees, of
which 70% were employed on a part-time basis. Approximately 88% of the
Company's employees are covered by union contracts.
Competition
The supermarket business is highly competitive throughout the marketing areas
served by the 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. The
Company competes for sales and store locations with a number of national and
regional chains as well as with many independent and cooperative stores and
markets.
Foreign Operations
The information required is contained in the 1998 Annual Report to
Shareholders on pages 30, 31, 33, 34, 36, 39 and 40 and is herein
incorporated by reference.
ITEM 2. Properties
At February 27, 1999, the Company operated 839 retail stores and serviced 55
franchised stores. Approximately 7% of the Company's stores are owned, while
the remainder are leased. These stores are geographically located as
follows:
Company Stores:
New England States:
Connecticut 43
Massachusetts 19
New Hampshire 1
Vermont 2
----
Total 65
Middle Atlantic States:
District of Columbia 1
Delaware 8
Maryland 48
New Jersey 105
New York 167
Pennsylvania 41
----
Total 370
Mid-Western States:
Michigan 100
Wisconsin 43
----
Total 143
Southern States:
Alabama 2
Georgia 36
Louisiana 20
Mississippi 5
North Carolina 3
South Carolina 2
Virginia 11
----
Total 79
----
Total United States 657
----
Ontario, Canada 182
----
Total Stores 839
====
Franchised Stores:
Ontario, Canada 55
----
Total Franchised Stores 55
====
The total area of all retail stores is approximately 28.7 million square feet
averaging approximately 34,250 square feet per store. Excluding liquor
stores and Food Emporium stores the average store size is approximately
35,247. The total area of all franchised stores is approximately 1.5 million
square feet averaging approximately 27,953 square feet per store. The 46 new
supermarkets opened in fiscal 1998 had a range in size from 25,037 to 65,078
square feet, with an average size of approximately 49,389 square feet. The
stores built by the Company over the past several years and those planned for
fiscal 1999, generally range in size from 45,000 to 65,000 square feet with
an average of approximately 55,000 square feet. The selling area of the
store is approximately 74% of the total square footage.
The Company operates one coffee roasting plant in the United States. In
addition, the Company maintains 14 warehouses that service its store network.
These warehouses are geographically located as follows:
Company Warehouses:
Georgia 1
Indiana 1
Louisiana 1
Maryland 1
Michigan 2
New Jersey 2
New York 2
Pennsylvania 1
Wisconsin 1
----
Total United States 12
----
Ontario, Canada 2
----
Total Warehouses 14
====
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $9 million as of February 27, 1999.
ITEM 3. Legal Proceedings
The information required is contained in the 1998 Annual Report to
Shareholders on page 39 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 1998.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The information required is contained in the 1998 Annual Report to
Shareholders on pages 41 and 43 and is herein incorporated by reference.
ITEM 6. Selected Financial Data
The information required is contained on page 43 of the 1998 Annual Report to
Shareholders and is herein incorporated by reference.
ITEM 7. Management's Discussion and Analysis
The information required is contained in the 1998 Annual Report to
Shareholders on pages 15 through 22 and is herein incorporated by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required is contained in the 1998 Annual Report to
Shareholders on page 21 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 14 of this report. Except for the
pages included herein by reference, the Company's 1998 Annual Report to
Shareholders is not deemed to be filed as part of this report.
(b) Selected Quarterly Financial Data: The information required is contained
on page 41 of the 1998 Annual Report to Shareholders and is herein
incorporated by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
ITEMS 10 and 11. Directors and Executive Officers of the Registrant and
Executive Compensation
Executive Officers of the Company
Name Age Current Position
Christian W.E. Haub 34 President and Chief Executive Officer
Fred Corrado 59 Vice Chairman of the Board and Chief Financial
Officer
Michael J. Larkin 57 Senior Executive Vice President - Chief Operating
Officer
Aaron Malinsky 50 Vice Chairman - Development and Strategic Planning
George Graham 49 Executive Vice President - Chief Merchandising
Officer
Peter J. O'Gorman 60 Executive Vice President - International Store
and Product Development
Laurane S. Magliari 48 Senior Vice President - People Resources and
Services
Cheryl M. Palmer 41 Senior Vice President - Strategic Marketing
John Dunne 60 Chairman and Co-Chief Executive Officer - The
Great Atlantic & Pacific Company of Canada, Limited
Brian Piwek 52 Vice Chairman and Co-Chief Executive Officer - The
Great Atlantic & Pacific Company of Canada Limited
Craig C. Sturken 55 Chairman and Chief Executive Officer - Mid-West
Operations
Robert G. Ulrich 64 Senior Vice President - General Counsel and
Secretary
Executive officers of the Company are chosen annually and serve at the
pleasure of the Chief Executive Officer with the consent of the Board of
Directors.
Mr. Haub was elected President and Chief Executive Officer on May 1, 1998.
Prior to assuming his present position he was President and Co-Chief
Executive Officer from April 2, 1997 to April 30, 1998. Prior thereto he was
President and Chief Operating Officer of the Company since December 7, 1993
and served as Corporate Vice President, Development and Strategic Planning,
since joining the Company in 1991. Mr. Haub has been a member of the Board
of Directors of the Company since December 3, 1991 and an ex officio member
of the Executive, Finance and Retirement Benefits Committees.
Mr. Corrado was elected Vice Chairman of the Board on October 6, 1992. He
also serves as Chief Financial Officer since joining the Company in January
1987. Mr. Corrado also served as Treasurer of the Company in 1987 and from
April 18, 1989 through December 5, 1995. Mr. Corrado has been a member of
the Board of Directors of the Company since December 4, 1990, and is
currently the Vice Chairman of the Executive Committee and a member of the
Finance and Retirement Benefits Committees.
Mr. Larkin was elected Senior Executive Vice President - Chief Operating
Officer on June 30, 1997. Prior to rejoining the Company, Mr. Larkin owned
and operated two supermarkets in the Pennsylvania area from April 1995
through June 1997. Prior thereto and for the past five years, Mr. Larkin was
Executive Vice President - Operations with the Company.
Mr. Malinsky was appointed Vice Chairman of the Company on July 28, 1998.
Upon rejoining the Company on August 1, 1996, he was elected Executive Vice
President, Development and Strategic Planning. For the five years prior
thereto, Mr. Malinsky was Chairman and President of Victory Markets, Inc. and
New Almacs, Inc.
Mr. Graham was elected Executive Vice President - Chief Merchandising Officer
on August 1, 1997. Prior to assuming his present position and for the past
five years, he was successively Executive Vice President - U.S. Operations,
and Senior Vice President - Chief Merchandising Officer.
Mr. O'Gorman was elected Executive Vice President - International Store and
Product Development on June 26, 1995. During the past five years he was
Executive Vice President - Development and Strategic Planning, and Executive
Vice President - Development.
Ms. Magliari was elected Senior Vice President, People Resources and Services
on February 16, 1999. Prior to joining the Company and for the past five
years, Ms. Magliari was Vice President, Human Resources - Publishers Clearing
House and Vice President, Global Marketing - The Chase Manhattan Bank.
Ms. Palmer was appointed Senior Vice President, Strategic Marketing May 3,
1999. Prior to joining the Company and for the past five years, Ms. Palmer
was Group Vice President/General Manager for Allied Domecq Spirits & Wines
and held various management positions for Cadbury Beverages, Inc.
Mr. Dunne was elected by The Great Atlantic & Pacific Company of Canada,
Limited as Chairman and Co-Chief Executive Officer on October 5, 1997. Prior
thereto and for the past five years, Mr. Dunne was successively Chairman and
Chief Executive Officer, President and Chief Operating Officer, and Vice
Chairman and Chief Merchandising Officer of The Great Atlantic & Pacific
Company of Canada, Limited. Mr. Dunne also served as Chairman and Chief
Executive Officer of Food Basics Limited from December 1995 through September
1996.
Mr. Piwek was elected by The Great Atlantic & Pacific Company of Canada,
Limited as Vice Chairman and Co-Chief Executive Officer on October 2, 1997.
Prior thereto and for the past five years, Mr. Piwek was President of
Overwaitea Food Group, a retailer and franchisor in British Columbia and
Alberta, Canada.
Mr. Sturken was appointed Chairman and Chief Executive Officer - Mid-West
Operations on April 7, 1997. Prior thereto and for the past five years Mr.
Sturken was successively Group Vice President Michigan and Chairman and Chief
Executive Officer - The Great Atlantic & Pacific Company of Canada, Limited.
Mr. Ulrich was elected Senior Vice President and General Counsel and
Secretary on March 26, 1999. Prior thereto he served as Senior Vice
President and General Counsel since April 1981.
Mr. James Wood was elected Chairman of the Board and Chief Executive Officer
on April 29, 1980. On April 2, 1997 he was elected Co-Chief Executive
Officer and retired from that office on April 30, 1998. He is Chairman of
the Executive Committee of the Board of Directors.
Mr. William Louttit was appointed Chairman and Chief Executive Officer -
Greater Metro New York Operations on April 7, 1997. Prior thereto and for
the past five years Mr. Louttit was Executive Vice President and Chief
Operating Officer of the Grand Union Company. Mr. Louttit resigned from the
Company effective May 17, 1999.
Mr. Joseph McCaig was appointed Executive Assistant to the Chief Executive
Officer on September 8, 1997. Prior thereto and for the past five years he
was President and Chief Executive Officer of the Grand Union Company. Mr.
McCaig resigned from the Company effective March 12, 1999.
Dr. Ivan Szathmary was elected Executive Vice President and Chief Services
Officer on July 11, 1996. Prior thereto, he was Senior Vice President and
Chief Services Officer since July 1986. Effective April 11, 1998 Dr.
Szathmary resigned from the Company.
The Company has filed with the Commission since the close of its fiscal year
ended February 27, 1999 a definitive proxy statement pursuant to Regulation
14A, involving the election of directors. Accordingly, the information
required in Items 10 and 11, except as provided above, appears on pages 1
through 12 and is incorporated by reference from the proxy statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required is contained in the Company's fiscal 1998 definitive
proxy statement on pages 1 and 5 and is herein incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions
The information required is contained in the Company's fiscal 1998 definitive
proxy statement on pages 1, 6 and 7 and is herein incorporated by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report
1) Financial Statements: The financial statements required by Item 8,
are included in the fiscal 1998 Annual Report to Shareholders. The
following required items, appearing on pages 23 through 42 of the 1998
Annual Report to Shareholders, are herein incorporated by reference:
Statements of Consolidated Operations
Statements of Consolidated Shareholders' Equity and Comprehensive
(Loss) Income
Consolidated Balance Sheets
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Independent Auditors' Report
2) Financial Statement Schedules are omitted because they are not
required or do not apply, or the information is included elsewhere in
the financial statements or notes thereto.
3) Exhibits:
Exhibit Incorporation by reference
Numbers Description (If applicable)
2) Not Applicable
3) Articles of Incorporation
and By-Laws
a) Articles of Incorporation Exhibit 3)a) to Form 10-K
as amended through for fiscal year ended
July 1987 February 27, 1988
b) By-Laws as amended through Exhibit 3)b) to Form 10-K
March 1989 for fiscal year ended
February 25, 1989
4) Instruments defining the Exhibit A to Form 10-Q
rights of security holders, for the quarter ended
including indentures August 27, 1977; and
Registration Statement
No. 33-14624 on Form S-3
filed May 29, 1987
9) Not Applicable
10) Material Contracts
a) Management Compensation Exhibit 10)b) to Form 10-K
Agreements for the fiscal years ended
February 25, 1989,
February 24, 1990, and
Exhibit 10)a) for the fiscal
years ended
February 26, 1994,
February 25, 1995,
February 22, 1997,
February 28, 1998 and attached
b) Supplemental Executive Exhibit 10)b) to Form 10-K
Retirement Plan, amended for the fiscal year ended
and restated February 27, 1993
c) 1975 Stock Option Plan, Exhibit 10) to Form 10-K for
as amended the fiscal year ended
February 23, 1985
Incorporated by reference
(If applicable)
10)d) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K
as amended for the fiscal year ended
February 23, 1991
e) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K
for the fiscal year ended
February 25, 1995
f) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K
for Non-Employee Directors for the fiscal year ended
February 25, 1995
g) Competitive Advance and Exhibit 10) to Form 10-Q
Revolving Credit Facilities for the quarter ended
Agreement dated as of December 2, 1995, filed on
December 12, 1995. Form SE.
h) Directors' Deferred Exhibit 10)h) to Form 10-K
Payment Plan for the fiscal year ended
February 22, 1997.
i) Competitive Advance and Exhibit 10) to Form 8-K
Revolving Credit Facilities filed on June 12, 1997;
Agreement dated as of and attached
June 10, 1997 and amendment
dated February 17, 1999.
j) Project Great Renewal Exhibit 99.1) to Form 8-K
dated as of December 8, 1998 filed December 9, 1998
k) 1998 Long Term Incentive Attached
and Share Award plan
Exhibit Incorporation by reference
Numbers Description (If applicable)
11) Not Applicable
12) Not Applicable
13) 1998 Annual Report to Shareholders
18) Not Applicable
21) Subsidiaries of Registrant
22) Not Applicable
23) Independent Auditors' Consent
24) Not Applicable
27) Financial Data Schedule
28) Not Applicable
(b) Reports on Form 8-K
Report on Form 8-K with respect to the Company's "Project Great
Renewal" was filed on December 9, 1998. The project was embarked upon
as of December 8, 1998, and encompasses a program of strategic
initiatives designed for growth, improved shareholder value and to
position the Company as a leader in North America food retailing.
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 11, 1999 By: /s/ Fred Corrado
(Signature)
Fred Corrado
Vice Chairman of the Board and
Chief Financial Officer
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/ James Wood Chairman of the Board and Director
James Wood
/s/ Christian W.E. Haub President, Chief Executive Officer and
Christian W.E. Haub Director
/s/ Fred Corrado Vice Chairman of the Board,
Fred Corrado Chief Financial Officer and Director
/s/ John D. Barline Director
John D. Barline
/s/ Rosemarie Baumeister Director
Rosemarie Baumeister
/s/ Christopher F. Edley Director
Christopher F. Edley
/s/ Helga Haub Director
Helga Haub
/s/ Barbara Barnes Hauptfuhrer Director
Barbara Barnes Hauptfuhrer
/s/ William A. Liffers Director
William A. Liffers
/s/ Fritz Teelen Director
Fritz Teelen
/s/ R.L. "Sam" Wetzel Director
R.L. "Sam" Wetzel
The above-named persons signed this report on behalf of the registrant on
May 11, 1999.
/s/ Kenneth A. Uhl Vice President, Controller May 18, 1999
Kenneth A. Uhl Date
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>2
<TEXT>
COMPARATIVE HIGHLIGHTS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except per share amounts)
- ------------------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
(52 weeks) (53 weeks) (52 weeks)
----------- ----------- -----------
Sales $10,179,358 $10,262,243 $10,089,014
(Loss) income from operations (164,391) 155,259 169,303
(Loss) income before
extraordinary item (67,164) 63,586 73,032
Net (loss) income (67,164) 63,042 73,032
Net (loss)income per share
before extraordinary item -
basic and diluted (1.75) 1.66 1.91
Net (loss) income per share -
basic and diluted (1.75) 1.65 1.91
Cash dividends per share .40 .40 .20
Expenditures for property 438,345 267,623 296,878
Depreciation and amortization 233,663 234,236 230,748
Working capital 89,974 262,097 215,374
Shareholders' equity 837,257 926,632 890,072
Debt to total capitalization .51 .48 .49
Book value per share 21.87 24.22 23.27
New store openings 46 40 30
Number of stores at year end 839 936 973
Number of franchised stores
served at year end 55 52 49
NOTE: The comparative highlights for the fiscal 1998 52-week period ended
February 27, 1999 includes a pre-tax store and facilities exit charge of
$224,580. (See the "Store and Facilities Exit Costs" footnote to the
Consolidated Financial Statements).
Company Profile
The Great Atlantic & Pacific Tea Company, Inc. ("the Company"), based in
Montvale, New Jersey, operates combination food and drug stores,
conventional supermarkets and limited assortment food stores in 18 U.S.
states, the District of Columbia and Ontario, Canada, under the A&P,
Waldbaum's, Super Foodmart, Food Emporium, Super Fresh, Farmer Jack, Kohl's,
Sav-A-Center, Dominion, Ultra Mart and Food Basics trade names. As of
fiscal year ended February 27, 1999, the Company operated 839 stores and
served 55 franchised stores. Through its Compass Foods Division, the
Company also manufactures and distributes a line of whole bean coffees under
the Eight O'Clock, Bokar and Royale labels, both for sale through its own
stores as well as other food and convenience retailers.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Fiscal 1998 Compared with 1997
Sales for fiscal 1998 were $10,179 million, a net decrease of $83 million or
0.8% when compared to fiscal 1997 (a 53-week year) sales of $10,262 million.
Total Company same store sales, which include replacement stores ("same store
sales" referred to herein includes replacement stores) for fiscal 1998
increased 1.9% from the prior year. Average weekly sales per supermarket
were approximately $210,500 in fiscal 1998 versus $199,400 in fiscal 1997,
resulting in a 5.6% increase. During fiscal 1998, the Company opened 46 new
supermarkets, remodeled or expanded 69 stores and closed 143 stores. The
Company serviced 55 Food Basics franchised stores at the end of fiscal 1998,
versus 52 at the end of fiscal 1997.
The sales decrease of $83 million from last year was the result of the
extra week in fiscal 1997 coupled with a decline in the Canadian exchange
rate. The extra week of sales in fiscal 1997 amounted to approximately $174
million and the lower Canadian exchange rate reduced fiscal 1998 sales by
approximately $131 million. Excluding the impact of the extra week in fiscal
1997 and the lower Canadian exchange rate, sales increased approximately $222
million or 2.2% from fiscal 1997. This increase is the result of new store
openings and an increase in comparable store sales partially offset by store
closures. The opening of 44 new stores, excluding 40 replacement stores,
since the beginning of fiscal 1997 increased sales by approximately $274
million or 2.7% in fiscal 1998. In addition, the increase in comparable
store sales of 1.9% increased sales by $177 million and wholesale sales to
the Food Basics franchised stores increased $47 million or 13.8% to $387
million for fiscal 1998, which increased total Company sales by 0.5%. These
sales increases were partially offset by the closure of 178 stores, excluding
replacement stores, which reduced sales by $327 million or 3.2%. Included in
the 178 store closures and $327 million sales impact are 66 stores relating
to the exit stores that were closed during the fourth quarter which had an
impact of $44 million. U.S. sales decreased $68 million or 0.8% compared to
fiscal 1997. U.S. same store sales increased 1.4% from the prior year. In
Canada, sales decreased $15 million or 0.8% from fiscal 1997 to $1,903
million. Canada same store sales increased 4.6% from the prior year.
Gross margin as a percent of sales increased 0.1% to 28.7% from 28.6% for
the prior year. The gross margin dollar decrease of $16 million is primarily
the result of a lower Canadian exchange rate which decreased margin by $31
million, offset by an increase in sales volume which had an impact of
increasing margin by $8 million and an increase in gross margin rates of $7
million. The U.S. gross margin decreased $3 million principally as a result
of a decrease in sales volume which had an impact of decreasing margin by $20
million and an increase in gross margin rates of $17 million. The Canadian
operations gross margin decreased $13 million, which was primarily the result
of the lower Canadian exchange rate.
Store operating, general and administrative expense of $3,084 million in
fiscal 1998 increased by approximately $304 million from fiscal 1997. As a
percent of sales, store operating, general and administrative expense for
fiscal 1998 increased to 30.3% from 27.1% for the prior year. Included in
fiscal 1998 store operating, general and administrative expenses are charges
recorded in both the third and fourth quarters relating to the Company's
store and facilities exit program which amounted to $225 million. The store
and facilities exit program relates to a decision made in both the third and
fourth quarters of fiscal 1998 to exit the market areas of 132
underperforming stores and to exit four facilities (see "Store and Facilities
Exit Costs" footnote for further discussion). Excluding the store and
facilities exit charges, store operating, general and administrative expense
increased $79 million from fiscal 1997 and a rate to sales basis of 28.1% for
fiscal 1998 as compared to 27.1% in fiscal 1997. Also included in store
operating, general and administrative expense for fiscal 1998 are shut-down
costs of stores and facilities amounting to approximately $9 million relating
to 66 stores and three facilities closed in the third and fourth quarters of
fiscal 1998, and $6 million of incurred professional fees associated with the
identification and implementation of the store and facilities exit program.
Further, store operating, general and administrative expense for fiscal 1998
also includes a $7 million write-down of a property no longer held for a
potential store site and a $4 million litigation charge. During fiscal 1998,
the Company accelerated its store modernization program and closed an
additional 77 stores, for total store closures in fiscal 1998 of 143. As a
result of the 77 store closures, the Company incurred $25 million of higher
store closing charges in fiscal 1998 than the prior year. The remaining
increase from the prior year of $28 million is mainly related to the
occupancy costs of the new generation superstores which increased $20 million
from the prior year.
In May 1998, the Company named a sole Chief Executive Officer of the
Company. Following such announcement, the Company initiated a vigorous
assessment of all aspects of its business operations in order to identify the
Page 15
factors that were impacting the performance of the Company.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities, a coffee plant and a
bakery plant in Canada. In connection with the exit plan, the Company
recorded a charge of approximately $11 million which is included in "Store
operating, general and administrative expense" in the accompanying Statements
of Consolidated Operations. The $11 million charge was comprised of $7
million of severance, $3 million of facilities occupancy costs for the period
subsequent to closure and $1 million to write-down the facilities to their
estimated fair value. The Company has paid $3 million of the severance cost
as of February 27, 1999, and expects the remainder to be paid by the end of
fiscal 1999. As of February 27, 1999, the Company has paid $0.3 million of
occupancy costs.
At February 27, 1999, the Company had closed and terminated operations
with respect to the warehouses and the coffee plant. The volume associated
with the two warehouses has been transferred to other warehouses in close
geographic proximity. Further, the manufacturing processes of the coffee
plant have been transferred to the Company's remaining coffee processing
facility. The processing associated with the Canadian bakery has been
outsourced effective January 1999.
In addition, on December 8, 1998, the Company's Board of Directors
approved a plan which included the exit of 127 underperforming stores
throughout the United States and Canada and the disposal of two other
properties. Included in the 127 stores are 31 stores representing the entire
Richmond, Virginia market. Further on January 28, 1999, the Board of
Directors approved the closure of five additional underperforming stores. In
connection with the Company's plan to exit these 132 stores and the write-
down of two properties, the Company recorded a fourth quarter charge of
approximately $215 million.
This $215 million charge was comprised of $8 million of severance, $1
million of facilities occupancy costs, $114 million of store occupancy costs,
which principally relates to the present value of future lease obligations,
net of anticipated sublease recoveries, which extend through fiscal 2028, an
$83 million write-down of store fixed assets and a $9 million write-down to
estimated fair value of the two properties which are held for sale. To the
extent fixed assets included in those stores identified for closure could be
utilized in other continuing store locations, the Company has or will
transfer such assets to those continuing stores. To the extent such fixed
assets cannot be transferred, the Company will scrap such fixed assets, and
accordingly, the write-down was calculated utilizing an estimated scrap
value. This fourth quarter charge of $215 million was reduced by
approximately $2 million due to changes in estimates of pension withdrawal
liabilities and fixed asset write-downs from the time the original charge was
recorded. The net charge of $213 million is included in "Store operating,
general and administrative expense" in the accompanying Statement of
Operations. The Company has paid $1 million of the severance costs as of
February 27, 1999 and expects the remainder to be paid by May 2000. In
addition, the Company also paid $1 million of store occupancy costs since the
date of closure of the 66 stores closed as of February 27, 1999. The total
severance charge of approximately $15 million resulted from the termination
of 1,273 employees.
As of February 27, 1999, the Company has closed 66 of the 132 stores
identified, including all 31 stores in the Richmond, Virginia market. The
remaining 66 stores will be closed over the next three quarters of fiscal
1999. Further, during the first three quarters of fiscal 1999, the Company
expects to incur pre-tax losses related to this plan in the range of $80 to
$100 million which are currently not accruable. Such amount principally
represents operating losses of the identified stores prior to closure, the
potential impact of selling inventory at reduced prices and employee
termination costs which have not been communicated to such employees as of
February 27, 1999.
On April 26, 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta market, two of which were
previously included in the Company's store exit program (see "Store and
Facilities Exit Costs" footnote). In conjunction with the sale, the Company
decided to exit the entire Atlanta market and close the remaining 22 stores,
as well as the distribution center and administrative office. Accordingly,
the Company expects to record a fiscal 1999 first quarter pre-tax charge, net
of proceeds from asset sales, in the range of $15 million to $20 million.
This charge will include fixed and intangible asset write-offs, severance and
lease commitments, and will be recorded as "store operating, general and
administrative expense".
In addition to the charge, during the first quarter of fiscal 1999, the
Company will incur pre-tax costs in the range of $10 million to $20 million.
The amount principally represents the cost to close the identified stores and
distribution center and the potential impact of selling inventory at reduced
prices.
Interest expense decreased $9 million from the previous year, primarily
due to a decrease in average debt of approximately
Page 16
$55 million. The decrease in debt is mainly the result of the Company
issuing $300 million 10-year notes in April 1997 to refinance 10-year notes
that were becoming due in January 1998. Accordingly, the Company had higher
debt throughout fiscal 1997 until the fourth quarter of fiscal 1997 when the
$200 million 10-year notes were paid.
Interest income decreased $1 million from the previous year, primarily due
to a lower amount of short-term investments.
Loss before taxes and extraordinary item for fiscal 1998 was $229 million
as compared to income of $83 million in fiscal 1997 for a decrease of $312
million. The loss before income taxes for fiscal 1998 includes the store and
facilities exit charge of $225 million and other costs noted in store
operating, general and administrative expense. Loss before taxes for U.S.
operations amounted to $244 million, which was a decrease of $290 million
from income of $46 million in fiscal 1997. Excluding the store and
facilities exit charge, the U.S. loss before income taxes was $30 million for
fiscal 1998 resulting in a $76 million decrease from fiscal 1997. The U.S.
decrease of $75 million is the result of the charges noted in store
operating, general and administrative expense relating to the property write-
down, litigation, professional fees, shut-down costs and higher store closing
costs which in total amounted to $46 million. The Canadian income before
taxes for fiscal 1998 amounted to $15 million, which was a decrease of $22
million from the fiscal 1997 amount of $37 million. The $22 million decrease
includes $10 million of the store and facilities exit charge and $6 million
of higher store closing costs as noted in store operating, general and
administrative expense.
The Company recorded income tax benefits amounting to $162 million in
fiscal 1998 as compared to income tax provision of $19 million for fiscal
1997. The fiscal 1998 benefit of $162 million includes reversals of the
Canadian operations deferred tax valuation allowance. During the first
three quarters of fiscal 1998, the Company reversed approximately $9 million
of the Canadian valuation allowance to the extent that the Canadian
operations had taxable income. In addition, at the beginning of the fourth
quarter of fiscal 1998, the Company concluded that it was more likely than
not that the net deferred tax assets related to the Canadian operations
would be realized and accordingly, the Company reversed the remaining
portion of the Canadian deferred tax valuation allowance amounting to
approximately $60 million. The deferred tax benefit recorded for U.S.
operations of approximately $103 million mainly relates to book and tax
differences of the store and facilities exit costs recorded in fiscal 1998.
The fiscal 1997 income tax provision includes a reversal of the Canadian
valuation allowance of $17 million. The reversal was recorded to the extent
that the Canadian operations had taxable income. However, Management had
still concluded that it was more likely than not that the Canadian net
deferred tax assets would not be realized and through the end of fiscal
1997, the Company provided a full valuation allowance for its Canadian net
deferred tax assets, principally net operating loss carryforwards. During
the first three quarters of fiscal 1998, the Company continued to fully
reserve its Canadian net deferred tax assets. At the beginning of the
fourth quarter of fiscal 1998, based upon Management's plan to close
underperforming stores in Canada (see "Store and Facilities Exit Costs"
footnote), the implementation of certain tax strategies and the continued
performance improvements of the Canadian operations, Management has
concluded that it is more likely than not that the Canadian deferred tax
assets will be realized. As such, as of December 6, 1998, the Company
reversed the remaining deferred tax asset valuation allowance amounting to
approximately $60 million. (See "Income Taxes" footnote for further
discussion).
Net loss for fiscal 1998 was $67 million or $1.75 per share - basic and
diluted, as compared to net income of $63 million or $1.65 per share - basic
and diluted, after recording an extraordinary charge of $0.01 per share -
basic and diluted for fiscal 1997. The decrease in net income of $130
million to a net loss of $67 million in fiscal 1998 is mainly the result of
the store and facilities exit costs pre-tax charge of $225 million, partially
offset by the reversal of the remaining Canadian valuation allowance.
Fiscal 1997 Compared with 1996
Sales for fiscal 1997 were $10,262 million, a net increase of $173 million or
1.7% when compared to fiscal 1996 sales of $10,089 million. Total Company
same store sales, which include replacement stores ("same store sales"
referred to herein includes replacement stores), for fiscal 1997 decreased
1.6% from the prior year. Average weekly sales per supermarket were
approximately $199,400 in fiscal 1997 versus $195,200 in fiscal 1996 for a
2.2% increase. During fiscal 1997, the Company opened 33 new supermarkets, 3
new liquor stores and 4 new Food Basics franchised stores, remodeled or
expanded 45 stores, and closed 74 stores, of which 11 in the Carolina market
were sold.
The sales increase of $173 million from last year was mainly the result of
new store openings and an extra week of sales in fiscal 1997. The Company
opened 36 stores, excluding 32 stores that replaced 32 older, outmoded
stores, since the beginning of fiscal 1996, which increased sales by
approximately $262 million or 2.6% in fiscal 1997. In addition, wholesale
sales to the Food Basics franchised stores increased $135 million or 66% to
$340 million for fiscal
Page 17
1997, which increased total Company sales by 1.3%. In fiscal 1997, sales
increased $174 million or 1.7% as a result of an extra week of sales during
this 53-week year compared to a 52-week year in fiscal 1996. These increases
were partially offset by the closure of 114 stores, excluding replacement
stores, since the beginning of fiscal 1996, of which 11 were sold in the
Carolina market, reducing total sales by approximately $218 million or 2.1%
in fiscal 1997. The store closures include 24 stores that were subsequently
converted to Food Basics franchised stores. The 1.6% decrease in same store
sales resulted in a sales decrease of $153 million in fiscal 1997, while a
lower Canadian exchange rate resulted in a sales decrease of $45 million in
fiscal 1997. U.S. sales increased $62 million or 0.8% compared to fiscal
1996. U.S. same store sales were 2.0% below the prior year. In Canada,
sales increased $111 million or 6.1% from fiscal 1996 to $1,918 million.
Canada same store sales were up 0.6% from the prior year.
Gross margin as a percent of sales decreased 0.4% to 28.6% from 29.0% for
the prior year resulting primarily from the increase of the lower margin
wholesale sales from 2.0% to 3.3% of total Company sales in fiscal 1997,
partially offset by an increase in the retail supermarket margin rate in the
U.S. The gross margin percentage in the retail stores remained flat from the
prior year. The gross margin dollar increase of $13 million is primarily the
result of an increase in sales volume which had an impact of increasing
margin by $66 million, partially offset by a decrease in gross margin rates
of $40 million and a lower Canadian exchange rate which decreased margin by
$13 million. The U.S. gross margin increased $24 million principally as a
result of an increase in sales volume, which had an impact of increasing
margin by $19 million and an increase in gross margin rates of $5 million.
The Canadian operations gross margin decreased $11 million, which was
primarily the result of the lower margin wholesale sales which increased from
the prior year.
Store operating, general and administrative expense of $2,780 million in
fiscal 1997 increased by approximately $27 million from fiscal 1996. As a
percent of sales, store operating, general and administrative expense for
fiscal 1997 decreased to 27.1% from 27.3% for the prior year. U.S. expenses
increased $36 million, principally as a result of increased store labor and
occupancy costs of the new superstores opened in fiscal 1997. In addition,
store closing costs increased by $8 million which were offset by gains on
sales of real estate of $11 million. Canadian expenses decreased $9 million,
principally as a result of reduced store labor and occupancy costs due to
converting 24 stores to Food Basics franchised stores.
Interest expense increased $7 million from the previous year, primarily
due to an increase in average debt of approximately $95 million. The
increase in debt is mainly the result of the Company issuing $300 million 10-
year notes in April 1997 to refinance 10-year notes that were becoming due in
January 1998. The debt outstanding in April 1997 subsequent to the issuance
of the $300 million 10-year notes was approximately $862 million, which was
reduced to $712 million at February 28, 1998.
Interest income increased $3 million from the previous year, primarily due
to interest income on equipment leases relating to the Food Basics franchise
business and higher interest income on short-term investments. The interest
income on short-term investments was mainly the result of the Company
investing a portion of the proceeds from the $300 million 10-year notes in
April 1997 prior to the use of the cash to refinance the bonds due in January
1998.
Income before taxes and extraordinary item for fiscal 1997 was $83 million
as compared to $101 million in fiscal 1996 for a decrease of $18 million or
18%. Income before taxes for U.S. operations decreased $23 million from $68
million in fiscal 1996 to $45 million in fiscal 1997. The U.S. decrease was
partially offset by an increase in Canadian operations income before taxes of
$5 million to $37 million in fiscal 1997 from $32 million in fiscal 1996.
The effective tax rate for fiscal 1997 was 23.3% as compared to an
effective tax rate of 27.4% in fiscal 1996. During fiscal 1997, since the
Canadian operations generated pretax earnings, the Company reversed
approximately $17 million of the valuation allowance, which was an increase
of $3 million from the fiscal 1996 reversal of $14 million. Accordingly, the
decrease in the effective tax rate is mainly attributable to the change in
the Canadian income tax valuation allowance. The Company is reversing the
income tax valuation allowance to the extent that its Canadian operations
generate taxable income.
Although Canada generated pretax earnings in fiscal 1997 of $37 million
and $32 million in fiscal 1996, the Company was unable to conclude that the
Canadian deferred tax assets were more likely than not to be realized. This
conclusion was based in part on Management's assessment of the competitive
Canadian marketplace and the level of the Canadian earnings. Accordingly,
at February 28, 1998, the Company continued to fully reserve its Canadian
net deferred tax asset. The Canadian pretax income for financial statement
purposes is higher than the taxable income for tax purposes due to certain
differences between the financial statement and income tax treatment of
certain items. This is of further significance since the largest portion of
the Canadian deferred tax asset relates to net operating loss carryforwards
which
Page 18
expire between fiscal 1999 and fiscal 2002 (see "Income Taxes" footnote for
further discussion).
In the second quarter of fiscal 1997, the Company recorded an
extraordinary charge of $0.5 million, net of a tax benefit of $0.4 million
relating to the early extinguishment of debt which amounted to $0.01 per
share - basic and diluted. The Company retired at a premium approximately
$20 million in mortgages with a weighted average interest rate of 9.4%.
Net income for fiscal 1997 after recording an extraordinary charge of
$0.01 per share - basic and diluted, was $63 million or $1.65 per share -
basic and diluted, as compared to $73 million or $1.91 per share - basic and
diluted, for fiscal 1996. The decrease in net income is the result of higher
store operating, general and administrative expenses of $27 million,
partially offset by higher gross margins of $13 million coupled with a lower
effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the 1998 fiscal year with working capital of $90 million
compared to $262 million and $215 million at February 28, 1998 and February
22, 1997, respectively. The Company had cash and short-term investments
aggregating $137 million at the end of fiscal 1998 compared to $71 million
and $99 million at the end of fiscal 1997 and 1996, respectively.
On June 10, 1997, the Company executed an unsecured five year $465
million U.S. credit agreement and a five year C$50 million Canadian credit
agreement (the "1997 Credit Agreement") with a syndicate of banks, enabling
it to borrow funds on a revolving basis sufficient to refinance short-term
borrowings. The Company pays a facility fee of 0.25% per annum on the total
commitment of the U.S. and Canadian revolving credit facilities. Borrowings
under the U.S. revolving credit agreement were $130 million and $90 million
at February 27, 1999 and February 28, 1998, respectively. The Canadian
subsidiary had no outstanding borrowings at February 27, 1999 or February
28, 1998. As of February 27, 1999, the Company has available $335 million
under its U.S. credit agreement and C$50 million (U.S. $33 million at
February 27, 1999) under the Canadian credit agreement. As of February 28,
1998, the Company had available $375 million under its U.S. revolver and
C$50 million (U.S. $35 million at February 28, 1998) under the Canadian
credit agreement. In addition, the U.S. has uncommitted lines of credit
with various banks amounting to $211 million and $149 million as of February
27, 1999 and February 28, 1998, respectively. Borrowings under these
uncommitted lines of credit amounted to $23 million and $38 million as of
February 27, 1999 and February 28, 1998, respectively.
As of February 27, 1999, the Company had outstanding a total of $575
million of unsecured, non-callable public debt securities in the form of $75
million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due
January 15, 2004 and $300 million 7.75% Notes due April 15, 2007. As of
February 27, 1999, the Company had $368 million available under the 1997
Credit Agreement and $188 million in uncommitted lines of credit.
The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of
Canada, Ltd. ("A&P Canada"), has outstanding $75 million 5 year Notes
denominated in U.S. dollars that were issued in October 1995 and are due on
November 1, 2000. In conjunction with the issuance of the notes, A&P Canada
entered into a five year cross-currency swap agreement expiring November 1,
2000. The cross-currency swap was executed for protection against the effect
of a decrease in Canadian exchange rates on both the semi-annual interest
payments and the final principal payment due to the Company's U.S.
bondholders. The cross-currency swap enables the Company to pay in Canadian
dollars a fixed rate of interest of 9.23% on a notional amount of C$100
million for the $75 million 7.78% Notes denominated in U.S. dollars. The
cost of the cross-currency swap of 1.45% is charged to interest expense. The
Company records an asset or liability to the extent that an eventual
transaction gain or loss is expected to be recorded upon the settlement of
the notional amount of the underlying debt. Accordingly, the Company has
recorded in other assets the receivable due from the counterparty amounting
to approximately $8.4 million and $4.5 million as of February 27, 1999 and
February 28, 1998, respectively. The fair value of the cross-currency swap
was favorable to the Company by $6.9 million and $1 million as of February
27, 1999 and February 28, 1998, respectively. The Company is exposed to
credit losses in the event of nonperformance by the counterparty to its
currency swap. However, the Company anticipates that the counterparty will
be able to fully satisfy its obligations under the contracts.
On April 15, 1997, A&P Canada entered into an interest rate swap agreement
with a notional amount of C$100 million expiring November 1, 2000 where A&P
Canada receives a fixed rate of interest and pays a variable rate of
interest. In August of 1998, A&P Canada assigned the interest rate swap
agreement and received consideration of $0.6 million. The consideration
received is amortized as a reduction to interest expense until November 1,
2000.
Page 19
The fair value of the interest rate swap was favorable to the Company by $1.4
million as of February 28, 1998.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. As a result of the
store exit charge recorded on December 8, 1998 (see "Store and Facilities
Exit Costs" in the accompanying financial statements), the Company would not
have been in compliance with certain of its covenants as of February 27,
1999, relating to the 1997 Credit Agreement. The Company amended the 1997
Credit Agreement prior to February 27, 1999. Accordingly, the Company was in
compliance with all such financial covenants, as amended, as of February 27,
1999, and believes that it will continue to be in compliance.
During fiscal 1998, the Company funded its capital expenditures, debt
repayments and cash dividends through internally generated funds combined
with proceeds from bank borrowings.
U.S. bank borrowings were $153 million at February 27, 1999 as compared to
$128 million at February 28, 1998. U.S. bank borrowings during fiscal 1998
were at an average interest rate of 5.3% compared to 6.0% in fiscal 1997.
Pursuant to a Shelf Registration Statement dated January 23, 1998, the
Company may offer up to $500 million of debt and equity securities at terms
determined by market conditions at the time of sale.
Capital expenditures totaled $438 million during fiscal 1998, which
included 46 new supermarkets, and 69 remodels and enlargements.
For fiscal 1999, the Company has planned capital expenditures of
approximately $500 million and plans to open 55 new supermarkets and remodel
or expand 75 stores. In addition, in March 1999, the Company signed a
definitive agreement to purchase 6 stores in the New Orleans market. The
total capital investment, including costs to remodel the stores will be
approximately $80 million. The Company expects to complete the transaction
during the first quarter of fiscal 1999. It has been the Company's
experience over the past several years that it typically takes 12 to 15
months after opening for a new store to recoup its opening costs and become
profitable thereafter. Risks inherent in retail real estate investments are
primarily associated with competitive pressures in the marketplace.
Beginning in fiscal 1999 through fiscal 2000, the Company intends to improve
the use of technology to improve customer service, store operations,
warehousing/distribution and merchandising and to intensify advertising and
promotions. The Company currently expects to close a total of approximately
100 stores in fiscal year 1999 of which 34 stores relate to the Company's
store modernization program to replace older outmoded stores and 66 stores
relating to the store exit program.
The Company plans to open approximately 65 new supermarkets in fiscal 2000
and approximately 70 to 80 new supermarkets per year thereafter for several
years, with an attendant increase in square footage of approximately 3% per
year. In addition, the Company also plans to remodel or enlarge an average
of 70 to 80 stores per year. The Company's concentration will be on larger
stores in the 50,000 to 65,000 square foot range. Costs of each project will
vary significantly based upon size, marketing format, geographic area and
development involvement required from the Company. The planned costs of
these projects approximate $4 million for a new store and $1 million for a
remodel or enlargement. Traditionally, the Company leases real estate and
expends capital on leasehold improvements and store fixtures and fittings.
Consistent with the Company's history, most new store activity will be
directed into those areas where the Company achieves its best profitability.
Remodeling and enlargement programs are normally undertaken based upon
competitive opportunities and usually involve updating a store to a more
modern and competitive format.
The fiscal 1998 quarterly dividend was $0.10 per share and amounted to
$15.3 million. The Company expects to maintain the same dividend amount for
fiscal 1999.
At fiscal year end 1998, the Company's existing senior debt rating was Ba1
with Moody's Investors Service and BBB- with Standard & Poor's Ratings Group.
A change in either of these ratings could affect the availability and cost of
financing.
The Company's current cash resources, together with cash generated from
operations, will be sufficient for the Company's 1999 capital expenditure
program, mandatory scheduled debt repayments and dividend payments throughout
fiscal 1999.
MARKET RISK
Market risk represents the risk of loss that may impact the consolidated
financial position, results of operations or cash flows of the Company. The
Company is exposed to market risk in the areas of interest rates and foreign
currency exchange rates.
Page 20
Interest Rates
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $575 million and $500 million in notes as
of February 27, 1999 and February 28, 1998, respectively. However, the
Company does have cash flow exposure on its committed and uncommitted bank
lines of credit due to its variable LIBOR pricing. Accordingly, as of fiscal
1998, a 1% change in LIBOR will result in interest expense fluctuating
approximately $1.5 million. As of fiscal 1997, the Company also had $75
million in notes that had variable pricing. Accordingly, as of fiscal 1997 a
1% change in LIBOR would have resulted in interest expense fluctuating
approximately $2.5 million.
Foreign Exchange Risk
The Company is exposed to foreign exchange risk to the extent of adverse
fluctuations in the Canadian dollar. Based upon historical Canadian currency
movement, the Company does not believe that reasonably possible near-term
change in the Canadian currency of 10% will result in a material effect on
future earnings, financial position or cash flows of the Company.
The Company entered into a five year cross-currency swap agreement to
hedge five year notes in Canada that are denominated in U.S. dollars. The
Company does not have any currency risk regarding the Canadian five year
notes. The Company is exposed to currency risk in the event of default by
the counterparty. Such default is remote, as the counterparty is a widely
recognized investment banker. The fair value of the cross-currency swap
agreement was favorable to the Company by $6.9 million and $1 million as of
February 27, 1999 and February 28, 1998, respectively. A 10% change in
Canadian exchange rates would have resulted in the fair value fluctuating
approximately $6.7 million in fiscal 1998 and approximately $7.3 million in
fiscal 1997.
YEAR 2000 COMPLIANCE
The Company has formed an ongoing task force to review the entire range of
the Company's operations relating to the Year 2000 issues. This task force
reports to the Vice Chairman of the Board of Directors. Assessment of those
functions of the business that require attention and resources to achieve
Year 2000 compliance is in progress throughout the entire organization. Both
the Information Technology ("IT") and the non-IT area assessments are 100%
complete. The current estimate of the remediation effort (including new
programs and components) is approximately 75% complete in the IT area and 35%
complete in the non-IT area. Testing of the systems and implementation of
renovated and new systems are currently in progress. A number of renovated
and new systems that are Year 2000 compliant are currently being used in
operations.
The costs to address the Company's Year 2000 issues are estimated to be
approximately $5 million. Approximately $3.5 million of these costs have
been incurred through fiscal 1998. In addition, the Company will incur
additional capital expenditures of approximately $5 million in order to
replace equipment that is not Year 2000 compliant. To date, the Company has
made capital expenditures of $1.5 million for such equipment purchases. Some
non-essential IT projects have been deferred due to the Year 2000 project;
however, the Company believes that such a deferral will not affect the
Company's financial performance.
From an IT perspective, the task force is responsible for assessing the
extent of affected software/hardware and developing procedures to resolve the
potential problems associated with that software/hardware. The procedures
developed include making the necessary changes to the affected software,
adequately testing the changes and phasing in the Year 2000 compliant
programs to limit disruption or delay in the Company's normal business
activities. The Company is also in the process of updating vendor software
packages to the latest versions to insure all Company software is Year 2000
compliant. Some in-store IT systems as well as other support area IT systems
will also need remediation to become Year 2000 compliant. The risks from an
IT perspective involves potential business disruption due to software and
computer systems not functioning properly. During the latter part of 1999,
the IT staff has committed resources to perform extended integrated testing
with its key supply chain business partners to address such risks.
The risks of Year 2000 issues from a non-IT area are principally as
follows: electrical outages resulting in breakdown of point-of-sale systems,
lighting and refrigeration equipment and the loss of utility service. In
addition, certain store equipment may have embedded chips or microprocessors
that are not Year 2000 compliant. The Company has identified such equipment
and is either replacing the affected chips or microprocessors or purchasing
new equipment
Page 21
that is compliant. The events noted above could severely affect Company
operations. The Company plans to mitigate the potential effect of such
issues by preparing a contingency plan as discussed below.
Significant risk also arises out of the possible failure of vendors to
respond to Year 2000 issues. The Company is meeting with its major vendors
and suppliers to determine their state of readiness and to review the
contingency plans that they have developed. Companies that are compliant and
have prepared for contingencies will have a status as preferred suppliers.
With respect to other vendors that either are not Year 2000 compliant, or do
not have adequate contingency or remediation plans, the Company will seek
alternative sources when possible. To date, the Company has communicated
with all of its major vendors and suppliers all of which have addressed the
Year 2000 issue and have contingency plans.
With respect to contingencies, the Company has developed a crisis
management plan in order to perform necessary functions to fully run the
Company's operations. The crisis management plan is being revised on a
continuous basis. The Company will continue to expand its contingency plans
and detailed procedures in order to mitigate the effects of the Year 2000
issues that might affect the Company. The Company currently believes that
the most reasonably likely worst case scenario concerning the Year 2000
involves potential business disruption among third parties with whom it
conducts significant business, specifically getting continuous electrical
power and communications with the stores and warehouses.
The Company believes that it has allocated sufficient resources to resolve
all significant Year 2000 issues in a timely manner. Accordingly, the
Company plans to be Year 2000 compliant by October 1999.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires that all derivative instruments be measured at fair value and
recognized in the statement of financial position as either assets or
liabilities. In addition, the accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative
and the resulting designation. For a derivative designated as a hedge the
change in fair value will be recognized as a component of other comprehensive
income; for a derivative not designated as a hedge the change in the fair
value will be recognized in the statement of operations. Currently the
Company has one derivative instrument in the form of a cross-currency swap.
The Company will adopt SFAS 133 in the second quarter of fiscal 1999. The
cross-currency swap will impact the Company's statement of operations and
balance sheet to the extent that there is a change in the fair value of the
derivative instrument.
CAUTIONARY NOTE
This report contains certain forward-looking statements about the future
performance of the Company which are based on Management's assumptions and
beliefs in light of the information currently available to it. The Company
assumes no obligation to update the information contained herein. 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 the Company's principal markets; the
Company's relationships with its employees and the terms of future
collective bargaining agreements; the costs and other effects of legal and
administrative cases and proceedings; the nature and extent of continued
consolidation in the food industry; changes in the financial markets which
may affect the Company's cost of capital and the ability of the Company to
access the public debt and equity markets to refinance indebtedness and fund
the Company's capital expenditure program on satisfactory terms; supply or
quality control problems with the Company's vendors; changes in economic
conditions which affect the buying patterns of the Company's customers; and
the ability of the Company and its vendors, financial institutions and
others to resolve Year 2000 processing issues in a timely manner.
Page 22
STATEMENTS OF CONSOLIDATED OPERATIONS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except per share amounts)
-----------------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
(52 weeks) (53 weeks) (52 weeks)
----------- ------------ -----------
Sales $10,179,358 $10,262,243 $10,089,014
Cost of merchandise sold (7,260,110) (7,327,365) (7,167,315)
----------- ----------- -----------
Gross margin 2,919,248 2,934,878 2,921,699
Store operating, general
and administrative expense (3,083,639) (2,779,619) (2,752,396)
----------- ----------- -----------
(Loss) income from operations (164,391) 155,259 169,303
Interest expense (71,497) (80,152) (73,208)
Interest income 6,604 7,793 4,496
----------- ----------- -----------
(Loss) income before income taxes
and extraordinary item (229,284) 82,900 100,591
Benefit (provision) for income taxes 162,120 (19,314) (27,559)
----------- ----------- -----------
(Loss) income before extraordinary
item (67,164) 63,586 73,032
Extraordinary loss on early
extinguishment of debt (net
of income tax benefit of $394) - (544) -
----------- ----------- -----------
Net (loss) income $ (67,164) $ 63,042 $ 73,032
=========== =========== ===========
Basic (loss) earnings per share:
(Loss) income before extraordinary
item $ (1.75) $ 1.66 $ 1.91
Extraordinary loss on early
extinguishment of debt - (0.01) -
----------- ----------- -----------
Net (loss) income per share - basic $ (1.75) $ 1.65 $ 1.91
=========== =========== ===========
Diluted (loss) earnings per share:
(Loss) income before extraordinary
item $ (1.75) $ 1.66 $ 1.91
Extraordinary loss on early
extinguishment of debt - (0.01) -
----------- ----------- ----------
Net (loss) income per share -
diluted $ (1.75) $ 1.65 $ 1.91
=========== =========== ==========
See Notes to Consolidated Financial Statements.
Page 23
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
AND COMPREHENSIVE (LOSS) INCOME
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except share amounts)
- --------------------------------------------
Fiscal 1998 Fiscal 1997 Fiscal 1996
----------- ----------- -----------
Common stock:
Shares:
Issued and outstanding
at beginning of year 38,252,966 38,247,716 38,220,333
Stock options exercised 37,750 5,250 27,383
---------- ---------- ---------
Issued and outstanding
at end of year 38,290,716 38,252,966 38,247,716
========== ========== ==========
Balance at beginning of year $ 38,253 $ 38,247 $ 38,220
Stock options exercised 38 6 27
---------- ---------- ----------
Balance at end of year $ 38,291 $ 38,253 $ 38,247
========== ========== ==========
Capital surplus:
Balance at beginning of year $ 453,894 $ 453,751 $ 453,121
Stock options exercised 1,077 143 630
---------- ---------- ----------
Balance at end of year $ 454,971 $ 453,894 $ 453,751
========== ========== ==========
Accumulated other comprehensive
(loss) income:
Balance at beginning of year $ (61,025) $ (49,694) $ (50,936)
Comprehensive (loss) income (8,014) (11,331) 1,242
---------- ---------- ----------
Balance at end of year $ (69,039) $ (61,025) $ (49,694)
========== ========== ==========
Retained earnings:
Balance at beginning of year $ 495,510 $ 447,768 $ 382,380
Net (loss) income (67,164) 63,042 73,032
Cash dividends (15,312) (15,300) (7,644)
---------- ---------- ----------
Balance at end of year $ 413,034 $ 495,510 $ 447,768
========== ========== ==========
Comprehensive (loss) income
- ---------------------------
Net (loss) income $ (67,164) $ 63,042 $ 73,032
---------- ---------- ----------
Foreign currency translation
adjustment (9,936) (5,121) 1,242
Minimum pension liability
adjustment 1,922 (6,210) -
---------- ---------- ----------
Accumulated other comprehensive
(loss) income (8,014) (11,331) 1,242
---------- ---------- ----------
Total comprehensive (loss) income $ (75,178) $ 51,711 $ 74,274
========== ========== ==========
See Notes to Consolidated Financial Statements.
Page 24
CONSOLIDATED BALANCE SHEETS
The Great Atlantic & Pacific Tea Company, Inc.
February 27, February 28,
(Dollars in thousands) 1999 1998
- --------------------- ------------ -----------
Assets
Current assets:
Cash and short-term investments $ 136,810 $ 70,937
Accounts receivable 204,700 227,703
Inventories 841,030 882,229
Prepaid expenses and other current assets 41,497 36,358
---------- ----------
Total current assets 1,224,037 1,217,227
---------- ----------
Property:
Land 141,061 138,139
Buildings 406,122 368,201
Equipment and leasehold improvements 2,147,418 2,122,860
---------- ----------
Total-at cost 2,694,601 2,629,200
Less accumulated depreciation
and amortization (1,097,142) (1,122,381)
---------- ----------
1,597,459 1,506,819
Property leased under capital leases 89,028 90,058
---------- ----------
Property-net 1,686,487 1,596,877
Other assets 231,217 181,149
---------- ----------
$3,141,741 $2,995,253
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 4,956 $ 16,824
Current portion of obligations
under capital leases 11,483 12,293
Accounts payable 557,318 441,149
Book overdrafts 160,288 151,846
Accrued salaries, wages and benefits 152,107 146,064
Accrued taxes 54,819 57,856
Other accruals 193,092 129,098
---------- ----------
Total current liabilities 1,134,063 955,130
---------- ----------
Long-term debt 728,390 695,292
---------- ----------
Long-term obligations under capital leases 115,863 120,980
---------- ----------
Deferred income taxes 23,309 120,618
---------- ----------
Other non-current liabilities 302,859 176,601
---------- ----------
Commitments and contingencies
Shareholders' 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 38,290,716 and
38,252,966 shares, respectively 38,291 38,253
Capital surplus 454,971 453,894
Accumulated other comprehensive loss (69,039) (61,025)
Retained earnings 413,034 495,510
---------- ----------
Total shareholders' equity 837,257 926,632
---------- ----------
$3,141,741 $2,995,253
========== ==========
See Notes to Consolidated Financial Statements.
Page 25
STATEMENTS OF CONSOLIDATED CASH FLOWS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands) Fiscal 1998 Fiscal 1997 Fiscal 1996
- --------------------- ----------- ----------- -----------
Cash Flows From Operating Activities:
Net (loss) income $ (67,164) $ 63,042 $ 73,032
Adjustments to reconcile net (loss) income
to cash provided by operating
activities:
Store/Facilities exit charge and
asset write-off 224,580 - -
Depreciation and amortization 233,663 234,236 230,748
Deferred income tax provision (benefit)
on (loss) income before
extraordinary item (165,672) 11,425 (1,067)
(Gain) loss on disposal of owned
property, and write-down of
property, net 4,541 (11,363) 1,338
(Increase) decrease in receivables 19,562 (14,116) (5,615)
(Increase) decrease in inventories 34,762 (6,090) (53,672)
(Increase) decrease in prepaid
expenses and other current assets 6,816 (2,630) 6,401
(Increase) decrease in other assets 2,071 (1,435) (26,753)
Increase (decrease) in accounts payable 122,251 (24,542) 15,950
Increase (decrease) in accrued expenses 2,633 8,594 (2,657)
Increase (decrease) in other accruals 43,604 4,250 (17,855)
Increase (decrease) in non-current
other liabilities 28,203 15,906 (4,051)
Other, net (2,764) (1,050) 270
--------- --------- ---------
Net cash provided by operating activities 487,086 276,227 216,069
--------- --------- ---------
Cash Flows From Investing Activities:
Expenditures for property (438,345) (267,623) (296,878)
Proceeds from disposal of property 12,546 31,783 19,408
--------- --------- ---------
Net cash used in investing activities (425,799) (235,840) (277,470)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds under revolving lines of credit 451,523 947,148 459,312
Payments on revolving lines of credit (411,632) (991,296) (439,591)
Proceeds from long-term borrowings 3,685 304,213 41,978
Payment on long-term borrowings (22,456) (267,848) (6,155)
Principal payments on capital leases (12,139) (13,711) (13,166)
Increase (decrease) in book overdrafts 12,079 (28,145) 24,901
Deferred financing fees - (2,471) -
Proceeds from stock options exercised 1,115 149 657
Cash dividends (15,312) (15,300) (7,644)
--------- --------- ----------
Net cash provided by (used in)
financing activities 6,863 (67,261) 60,292
--------- --------- ---------
Effect of exchange rate changes on cash
and short-term investments (2,277) (1,019) 167
--------- --------- ---------
Net Increase (Decrease) in Cash and
Short-term Investments 65,873 (27,893) (942)
Cash and Short-term Investments
at Beginning of Year 70,937 98,830 99,772
--------- --------- ---------
Cash and Short-term Investments
at End of Year $ 136,810 $ 70,937 $ 98,830
========= ========= =========
See Notes to Consolidated Financial Statements.
Page 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all majority-owned subsidiaries. The Company operates 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 the Canadian
Operations: Segment and Geographic Information, Food Basics Franchise
Business, Income Taxes and Retirement Plans and Benefits.
Revenue Recognition
Retail revenue is recognized at point-of-sale while wholesale revenue is
recognized when goods are shipped.
Fiscal Year
The Company's fiscal year ends on the last Saturday in February. Fiscal
1998 ended February 27, 1999, fiscal 1997 ended February 28, 1998 and fiscal
1996 ended February 22, 1997. Fiscal 1998 and fiscal 1996 were each
comprised of 52 weeks while fiscal 1997 was comprised of 53 weeks.
Common Stock
The principal shareholder of the Company, Tengelmann
Warenhandelsgesellschaft, owned 54.92% of the Company's common stock as of
February 27, 1999.
Cash and Short-term Investments
Short-term investments that are highly liquid with an original maturity of
three months or less are included in cash and short-term investments and are
deemed to be cash equivalents.
Inventories
Store inventories are valued principally at the lower of cost or market with
cost determined under the retail method. Warehouse and other inventories
are valued primarily at the lower of cost or market with cost determined on
a first-in, first-out basis. Inventories of certain acquired companies are
valued using the last-in, first-out method, which was their practice prior
to acquisition.
Advertising Costs
Advertising costs are expensed as incurred. The Company recorded
advertising expense of $136 million for fiscal 1998 and $138 million for
both fiscal years 1997 and 1996.
Properties
Depreciation and amortization are provided 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 based on lives
varying from three to ten years. Real 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 1998 and 1997, the Company
disposed of certain assets which resulted in a pretax gain of $2 million
and $11 million, respectively.
Pre-opening Costs
The costs of opening new stores are expensed in the year incurred.
Software Costs
The Company capitalizes externally purchased software and amortizes it over
three years. Amortization expense for fiscal 1998, fiscal 1997 and fiscal
1996 was $0.8 million, $0.4 million and $0.2 million, respectively.
Effective February 29, 1998, the Company early adopted the provisions of
the American Institute of Certified Public Accountants' Statement of
Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software
Development or Obtained for Internal Use". SOP 98-1 requires the
capitalization of certain internally generated software costs. Such
software is amortized over three years and for fiscal 1998, the Company
capitalized $1.4 million of such software costs and recorded amortization
expense of $0.1 million.
Earnings Per Share
In the fourth quarter of fiscal 1997, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires dual presentation of basic and diluted earnings
per share ("EPS") on the face of the statements of consolidated 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 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.
The weighted average shares outstanding utilized in the basic EPS
calculation were 38,273,859 for fiscal 1998, 38,249,832 for fiscal 1997 and
38,221,329 for fiscal 1996. The common stock equivalents that were added to
the weighted average shares outstanding for purposes of diluted EPS were
19,926 for fiscal 1997 and 66,260 for fiscal 1996. The common stock
equivalents for fiscal 1998 would have been 47,772; however, such shares
were antidilutive and thus excluded from the diluted EPS calculation for
fiscal 1998.
Page 27
Excess of Cost over Net Assets Acquired
The excess of cost over fair value of net assets acquired is amortized on a
straight-line basis over forty years. The Company recorded amortization
expense of $1.5 million for each of the three fiscal years in the period
ended February 27, 1999. The accumulated amortization relating to goodwill
amounted to $13.2 million and $11.7 million at February 27, 1999 and
February 28, 1998, respectively. At each balance sheet date, Management
reassesses the appropriateness of the goodwill balance based on forecasts of
cash flows from operating results on an undiscounted basis. If the results
of such comparison indicate that an impairment may exist, the Company will
recognize a charge to operations at that time based upon the difference
between the present value of the expected cash flows from future operating
results (utilizing a discount rate equal to the Company's average cost of
funds at that time) and the balance sheet value. The recoverability of
goodwill is at risk to the extent the Company is unable to achieve its
forecast assumptions regarding cash flows from operating results. At
February 27, 1999, the Company estimates that the cash flows projected to be
generated by the respective businesses on an undiscounted basis should be
sufficient to recover the existing goodwill balance over its remaining life.
Long-Lived Assets
In accordance with SFAS 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" which establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held
and used and for long-lived assets and certain identifiable intangibles to
be disposed of, the Company reviews the carrying values of its long-lived
and identifiable intangible 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 are recoverable from their respective cash flows.
The Company recorded impairment losses during the year ended February 27,
1999 (see "Store and Facilities Exit Costs" footnote).
Income Taxes
The Company provides deferred income taxes on temporary differences between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws.
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" in the accompanying balance sheets.
The Company accrues for vested and non-vested vacation pay. Liabilities
for compensated absences of $79 million at both February 27, 1999 and
February 28, 1998 are included in the balance sheet caption "Accrued
salaries, wages and benefits".
Stock-Based Compensation
Effective February 25, 1996, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"). In conjunction with the adoption,
the Company will continue to apply the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" with pro forma disclosure of net
income and earnings per share as if the fair value based method prescribed by
SFAS 123 had been applied.
Comprehensive Income
Effective March 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires that all components of
comprehensive income be reported prominently in the financial statements.
Currently, the Company has other comprehensive income relating to foreign
currency translation adjustment and minimum pension liability adjustment.
Accumulated other comprehensive loss as of February 27, 1999 includes
foreign currency translation of $64.8 million and an additional minimum
pension liability adjustment of $4.3 million, net of income tax benefit of
$3.4 million. The accumulated other comprehensive loss as of February 28,
1998 includes foreign currency translation of $54.8 million and an
additional minimum pension liability adjustment of $6.2 million. For fiscal
1997, the additional minimum pension liability adjustment related to the
Canadian operations and thus no tax benefit was recorded due to the Canadian
deferred tax assets being fully reserved by a valuation allowance.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
Page 28
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The accompanying balance sheets include liabilities with respect to self-
insured workers' compensation and general liability claims. The Company
determines the required liability of such claims based upon various
assumptions which include, but are not limited to, the Company's historical
loss experience, industry loss standards, projected loss development
factors, projected payroll, employee headcount and other internal data. It
is reasonably possible that the final resolution of some of these claims may
require significant expenditures by the Company in excess of its existing
reserves, over an extended period of time and in a range of amounts that
cannot be reasonably estimated.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
New Accounting Pronouncements Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
requires that all derivative instruments be measured at fair value and
recognized in the statement of financial position as either assets or
liabilities. In addition, the accounting for changes in the fair value of a
derivative (gains and losses) depends on the intended use of the derivative
and the resulting designation. For a derivative designated as a hedge the
change in fair value will be recognized as a component of other comprehensive
income; for a derivative not designated as a hedge the change in the fair
value will be recognized in the statement of operations. Currently the
Company has one derivative instrument in the form of a cross-currency swap.
The Company will adopt SFAS 133 in the second quarter of fiscal 1999. The
cross-currency swap will impact the Company's statement of operations and
balance sheet to the extent that there is a change in the fair value of the
derivative instrument.
STORE AND FACILITIES EXIT COSTS
In May 1998, the Company named a sole Chief Executive Officer of the Company.
Following such announcement, the Company initiated a vigorous assessment of
all aspects of its business operations in order to identify the factors that
were impacting the performance of the Company.
As a result of the above assessment, in the third quarter of fiscal 1998,
the Company decided to exit two warehouse facilities, a coffee plant and a
bakery plant in Canada. In connection with the exit plan, the Company
recorded a charge of approximately $11 million which is included in "Store
operating, general and administrative expense" in the accompanying Statement
of Operations. The $11 million charge was comprised of $7 million of
severance, $3 million of facilities occupancy costs for the period subsequent
to closure and $1 million to write-down the facilities to their estimated
fair value. The Company has paid $3 million of the severance cost as of
February 27, 1999, and expects the remainder to be paid by the end of fiscal
1999. As of February 27, 1999, the Company has incurred $0.3 million of
occupancy costs.
At February 27, 1999, the Company had closed and terminated operations
with respect to the warehouses and the coffee plant. The volume associated
with the two warehouses has been transferred to other warehouses in close
geographic proximity. Further, the manufacturing processes of the coffee
plant have been transferred to the Company's remaining coffee processing
facility. The processing associated with the Canadian bakery has been
outsourced effective January 1999.
In addition, on December 8, 1998, the Company's Board of Directors
approved a plan which included the exit of 127 underperforming stores
throughout the United States and Canada and the disposal of two other
properties. Included in the 127 stores are 31 stores representing the entire
Richmond, Virginia market. Further on January 28, 1999, the Board of
Directors approved the closure of five additional underperforming stores. In
connection with the Company's plan to exit these 132 stores and the write-
down of two properties, the Company recorded a fourth quarter charge of
approximately $215 million. This $215 million charge was comprised of $8
million of severance, $1 million of facilities occupancy costs, $114 million
of store occupancy costs, which principally relates to the present value of
future lease obligations, net of anticipated sublease recoveries, which
extend through fiscal 2028, an $83 million write-down of store fixed assets
and a $9 million write-down to estimated fair value of the two properties
which are held for sale. To the extent fixed assets included in those stores
identified for closure could be utilized in other continuing store locations,
the Company has or will transfer such assets to
Page 29
those continuing stores. To the extent such fixed assets cannot be
transferred, the Company will scrap such fixed assets and accordingly, the
write-down was calculated utilizing an estimated scrap value. This fourth
quarter charge of $215 million was reduced by approximately $2 million due to
changes in estimates of pension withdrawal liabilities and fixed asset write-
downs from the time the original charge was recorded. The net charge of $213
million is included in "Store operating, general and administrative expense"
in the accompanying Statement of Operations. The Company has paid $1
million of the severance costs as of February 27, 1999 and expects the
remainder to be paid by May 2000. In addition, the Company also paid $1
million of store occupancy costs since the date of closure of the 66 stores
closed as of February 27, 1999. The total severance charge of approximately
$15 million resulted from the termination of 1,273 employees.
The following tabular reconciliation summarizes the activity related to
the aforementioned third quarter charges of $11 million and the fourth
quarter charges of $215 million.
Reserve
Balance at
Original Utiliz- Addition Adjustment Feb. 27,
Dollars in thousands Charge ation (1) (2) 1999
- -------------------- -------- ------- -------- ---------- ---------
Store Occupancy $113,732 $ (1,100) $1,900 $ - $114,532
Fixed Assets 93,355 (92,639) - (716) -
Severance and benefits 15,102 (3,794) - (1,242) 10,066
Facilities occupancy 4,018 (311) - 331 4,038
-------- -------- ------ ------- --------
Total $226,207 $(97,844) $1,900 $(1,627) $128,636
======== ======== ====== ======= ========
(1) The addition represents an increase to the store occupancy reserve for
the present value interest accrued.
(2) The adjustment represents changes in estimates from the original date
the respective charges were recorded. The adjustment to severance and
benefits relates to a change in the estimate of the calculated pension
withdrawal liability.
As of February 27, 1999, the Company has closed 66 of the 132 stores
identified, including all 31 stores in the Richmond, Virginia market. The
remaining 66 stores will be closed over the next three quarters of fiscal
1999.
At February 27, 1999, $45.4 million of the reserve is included in "Other
accruals" and $83.2 million is included in "Other non-current liabilities" in
the accompanying consolidated balance sheet.
Based upon current available information, Management evaluated the reserve
balance as of February 27, 1999 and has concluded that it is adequate.
Included in the accompanying statement of operations are the operating
results of the 132 underperforming stores which the Company is exiting. The
operating results of such stores are as follows:
Fiscal Fiscal Fiscal
(Dollars in thousands) 1998 1997 1996
- ---------------------- -------- -------- ----------
Sales $788,014 $928,671 $1,000,364
======== ======== ==========
Operating Loss $(57,462) $(34,448) $ (14,543)
======== ======== ==========
INVENTORY
Approximately 18% and 20% of the Company's inventories are valued using the
last-in, first-out ("LIFO") method at February 27, 1999 and February 28,
1998, respectively. Such inventories would have been $19 million and $14
million higher at February 27, 1999 and February 28, 1998, respectively, if
the retail and first-in, first-out methods were used. The Company recorded
LIFO charges of approximately $1 million during both fiscal years 1998 and
1996. During fiscal year 1997, the Company recorded a LIFO credit of $0.4
million. Liquidation of LIFO layers in the periods reported did not have a
significant effect on the results of operations.
FOOD BASICS FRANCHISE BUSINESS
The Company serviced 55 Food Basics franchised stores as of February 27,
1999 and 52 stores as of February 28, 1998. These franchised stores are
required to purchase inventory exclusively from the Company which acts as a
wholesaler to the franchisees. During fiscal 1998 and 1997, the Company had
wholesale sales to these franchised stores of $387 million and $340 million,
respectively. A majority of the Food Basics franchised stores were
converted from Company operated supermarkets. The Company subleases the
stores and leases the equipment in the stores to the franchisees. The
Company also provides merchandising, advertising, accounting and other
consultative services to the franchisees for which it receives a nominal fee
which mainly represents the reimbursements of costs incurred to provide such
services (see "Lease Obligations" footnote).
Included in other assets are Food Basics franchised business receivables,
net of allowance for doubtful accounts, amounting to $36.4 million as of
February 27, 1999 and $37.6 million as of February 28, 1998. The inventory
notes are collateralized by the inventory in the stores, while the equipment
lease receivables are collateralized by the equipment in the stores. The
current portion of the inventory and equipment leases of approximately $2.1
million as of February 27, 1999 and $1.9 million as of February 28, 1998 are
included in accounts receivable. The repayment of the inventory notes and
equipment leases are dependent on positive operating results of the stores.
To the extent that the franchisees incur operating losses, the Company
establishes an allowance for doubtful accounts. The Company continually
assesses the sufficiency of the allowance on a store
Page 30
by store basis based upon the operating losses incurred and the related
collateral underlying the amounts due from the franchisees. In the event of
default by a franchisee, the Company reserves the option to reacquire the
inventory and equipment at the store and operate the franchise as a
corporate owned store.
Included below are the amounts due to the Company for the next five years
and thereafter from the franchised stores for equipment leases and inventory
notes.
- --------------------------------------------------------------
(Dollars in thousands)
- --------------------------------------------------------------
1999 $ 6,031
2000 6,542
2001 6,542
2002 6,542
2003 6,542
2004 and thereafter 20,331
--------
52,530
Less interest portion (13,995)
--------
Due from Food Basics franchise business $ 38,535
========
For the fiscal years ended February 27, 1999 and February 28, 1998,
approximately $8 million and $2 million, respectively, of the franchise
business notes relate to equipment leases which were non-cash transactions
and, accordingly, have been excluded from the consolidated statements of cash
flows.
INDEBTEDNESS
Debt consists of:
February 27, February 28,
(Dollars in thousands) 1999 1998
- --------------------- ----------- -----------
7.75% Notes, due April 15, 2007 $300,000 $300,000
7.70% Senior Notes, due January 15, 2004 200,000 200,000
7.78% Notes, due November 1, 2000 75,000 75,000
Mortgages and Other Notes, due
1999 through 2002 (average interest
rates at year end of 5.81% and
6.70%, respectively) 7,417 11,972
U.S. Bank Borrowings at 5.49%
and 5.86%, respectively 153,100 127,500
Less unamortized discount on 7.75% Notes (2,171) (2,356)
-------- --------
733,346 712,116
Less current portion (4,956) (16,824)
-------- --------
Long-term debt $728,390 $695,292
======== ========
On June 10, 1997, the Company executed an unsecured five year $465 million
U.S. credit agreement and a five year C$50 million Canadian credit agreement
(the "1997 Credit Agreement") with a syndicate of banks, enabling it to
borrow funds on a revolving basis sufficient to refinance short-term
borrowings. The Company pays a facility fee of 0.25% per annum on the total
commitment of the U.S. and Canadian revolving credit facilities. Borrowings
under the U.S. revolving credit agreement were $130 million and $90 million
at February 27, 1999 and February 28, 1998, respectively. The Canadian
subsidiary had no outstanding borrowings at February 27, 1999 and February
28, 1998. As of February 27, 1999, the Company had available $335 million
under its U.S. credit agreement and C$50 million (U.S. $33 million at
February 27, 1999) under the Canadian credit agreement. As of February 28,
1998, the Company had available $375 million under its U.S. credit agreement
and C$50 million (U.S. $35 million at February 28, 1998) under the Canadian
credit agreement. In addition, the U.S. has uncommitted lines of credit
with various banks amounting to $211 million and $149 million as of February
27, 1999 and February 28, 1998, respectively. Borrowings under these
uncommitted lines of credit amounted to $23 million and $38 million as of
February 27, 1999 and February 28, 1998, respectively. As of February 27,
1999, the Company had $368 million available under the 1997 Credit Agreement
and $188 million in uncommitted lines of credit
As of February 27, 1999, the Company had outstanding a total of $575
million of unsecured, non-callable public debt securities in the form of $75
million 7.78% Notes due November 1, 2000, $200 million 7.70% Notes due
January 15, 2004 and $300 million 7.75% Notes due April 15, 2007.
On April 15, 1997, the Company issued $300 million 7.75% 10 year Notes due
April 15, 2007. The Company used the net proceeds to reduce bank borrowings
under the U.S. and Canadian revolving credit facilities, prepay other
indebtedness and for general corporate purposes. The Company borrowed funds
available under the U.S. credit facility to repay at maturity indebtedness
owing in respect of the Company's 9 1/8% Notes due January 15, 1998.
The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of
Canada, Ltd. ("A&P Canada"), has outstanding U.S. $75 million 5 year Notes
denominated in U.S. dollars that were issued in October 1995 and are due on
November 1, 2000. In conjunction with the issuance of the notes, A&P Canada
entered into a five year cross-currency swap agreement expiring November 1,
2000. The cross-currency swap was executed for protection against the effect
of a decrease in Canadian exchange rates on both the semi-annual interest
payments and the final principal payment due to the Company's U.S.
bondholders. The cross-currency swap enables the Company to pay in Canadian
dollars a fixed
Page 31
rate of interest of 9.23% on a notional amount of C$100 million for the $75
million 7.78% Notes denominated in U.S. dollars. The cost of the cross-
currency swap of 1.45% is charged to interest expense. The Company records
an asset or liability to the extent that an eventual transaction gain or loss
is expected to be recorded upon the settlement of the notional amount of the
underlying debt. Accordingly, the Company has recorded in other assets the
receivable due from the counterparty amounting to approximately $8.4 million
and $4.5 million as of February 27, 1999 and February 28, 1998, respectively.
The fair value of the cross-currency swap was favorable to the Company by
$6.9 million as of February 27, 1999 and favorable to the Company by $1
million as of February 28, 1998. The Company is exposed to credit losses in
the event of nonperformance by the counterparty to its currency swap.
However, the Company anticipates that the counterparty will be able to fully
satisfy its obligations under the contracts.
On April 15, 1997, A&P Canada entered into an interest rate swap agreement
with a notional amount of C$100 million expiring November 1, 2000 where the
Company receives a fixed rate of interest and pays a variable rate of
interest. In August of 1998, A&P Canada assigned the interest rate swap
agreement to a financial institution and received consideration of $0.6
million. The consideration received is amortized as a reduction to interest
expense until November 1, 2000. The fair value of the interest rate swap was
favorable to the Company by $1.4 million as of February 28, 1998.
The Company's loan agreements and certain of its notes contain various
financial covenants which require, among other things, minimum net worth and
maximum levels of indebtedness and lease commitments. As a result of the
store exit charge recorded on December 8, 1998 (see "Store and Facilities
Exit Costs" in the accompanying financial statements), the Company would not
have been in compliance with certain of its covenants as of February 27,
1999, relating to the 1997 Credit Agreement. The Company amended the 1997
Credit Agreement prior to February 27, 1999. Accordingly, the Company was in
compliance with all such financial covenants, as amended, as of February 27,
1999 and believes that it will continue to be in compliance.
The net book value of real estate pledged as collateral for all mortgage
loans amounted to approximately $9 million and $14 million as of February
27, 1999 and February 28, 1998, respectively.
In the second quarter of fiscal 1997, the Company recorded an extraordinary
charge of $0.5 million, net of a tax benefit of $0.4 million relating to the
early extinguishment of debt which amounted to $.01 per share - basic and
diluted. The Company retired at a premium approximately $20 million in
mortgages with a weighted average interest rate of 9.4%.
The U.S. bank borrowings of $153 million and $118 million are classified
as non-current as of February 27, 1999 and February 28, 1998, respectively,
as the Company has the ability and intent to refinance these borrowings on a
long-term basis.
Pursuant to a Shelf Registration Statement dated January 23, 1998, the
Company may offer up to $500 million of debt and equity securities at terms
determined by market conditions at the time of sale.
Maturities for the next five fiscal years and thereafter are: 1999-$5
million; 2000-$77 million; 2001-$77 million; 2002-$77 million; 2003-$200
million; 2004 and thereafter - $300 million. Interest payments on
indebtedness were approximately $56 million for fiscal 1998, $58 million for
fiscal 1997 and $49 million for fiscal 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
(Dollars in thousands) February 27, 1999 February 28, 1998
- --------------------- ----------------- -----------------
Carrying Fair Carrying Fair
Liabilities: Amount Value Amount Value
-------- -------- -------- --------
7.75% Notes, due
April 15, 2007 $297,829 $287,384 $297,644 $299,531
-------- -------- -------- --------
7.70% Senior Notes, due
January 15, 2004 $200,000 $197,271 $200,000 $205,376
-------- -------- -------- --------
7.78% Notes, due
November 1, 2000 $ 75,000 $ 75,243 $ 75,000 $ 75,832
-------- -------- -------- --------
Total Indebtedness $733,346 $720,415 $712,116 $720,211
======== ======== ======== ========
Fair value for the public debt securities is based on quoted market
prices. With respect to all other indebtedness, Management has evaluated
such debt instruments and has determined, based on inte