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<SEC-DOCUMENT>0000043300-00-000008.txt : 20000525
<SEC-HEADER>0000043300-00-000008.hdr.sgml : 20000525
ACCESSION NUMBER: 0000043300-00-000008
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20000226
FILED AS OF DATE: 20000524
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: 643040
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 ended Commission file number 1-4141
February 26, 2000
- -----------------
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.
----
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at May 8, 2000 was $315,331,621.
The number of shares of common stock outstanding at May 8, 2000 was
38,367,216.
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 1999 Annual
Report to Shareholders. The Registrant has filed with the S.E.C. since the
close of its last fiscal year ended February 26, 2000, 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 750 stores
averaging approximately 35,900 square feet per store as of February 26, 2000.
In addition, the Company began franchising as wholesaler, its Canadian Food
Basics stores in fiscal 1995. As of February 26, 2000, the Company served as
wholesaler to 65 franchise stores in Canada averaging approximately 29,400
square feet per store. On the basis of reported sales for fiscal 1999, the
Company believes that it is one of the 10 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, Waldbaum's, Super Foodmart, Ultra Food & Drug, Dominion, Food Basics,
The Barn Markets and Food Emporium, 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 historically
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
including retail stores, warehousing and distribution facilities, supply
logistics and processes. In support of its modernizing program, on March 13,
2000, the Company announced Phase II of its Great Renewal-supply chain
initiative, to develop a state of the art supply chain and business
management infrastructure over the next four years.
During fiscal 1999, the Company expended approximately $480 million for
capital projects which included 54 new supermarkets, 14 new franchised stores
and 59 remodels or enlargements. The Company's plans for fiscal 2000
anticipate capital expenditures of approximately $560 million, including $60
million relating to the supply chain initiative and $500 million relating to
ongoing capital projects which include the opening of 50 to 60 new
supermarkets and the remodeling or expansion of up to 65 stores. In
addition, the Company plans to continue with similar levels of capital
expenditures in fiscal 2001 and several years thereafter.
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 26, 2000, the Company had approximately 80,900 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 1999 Annual Report to
Shareholders on pages 36 through 40, 42, 43 and 46 and is herein incorporated
by reference.
ITEM 2. Properties
At February 26, 2000, the Company operated 750 retail stores and serviced 65
franchised stores. Approximately 10% 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 40
Massachusetts 18
New Hampshire 1
Vermont 2
----
Total 61
Middle Atlantic States:
District of Columbia 1
Delaware 8
Maryland 43
New Jersey 104
New York 148
Pennsylvania 30
----
Total 334
Midwestern States:
Michigan 100
Wisconsin 36
----
Total 136
Southern States:
Louisiana 21
Mississippi 5
North Carolina 1
Virginia 12
----
Total 39
----
Total United States 570
----
Ontario, Canada 180
----
Total Stores 750
====
Franchised Stores:
Ontario, Canada 65
----
Total Franchised Stores 65
====
The total area of all Company operated retail stores is approximately 27
million square feet averaging approximately 35,900 square feet per store.
Excluding liquor and Food Emporium stores, which are generally smaller in
size, the average store size is approximately 38,000 square feet. The total
area of all franchised stores is approximately 1.9 million square feet
averaging approximately 29,400 square feet per store. The 54 new
supermarkets opened in fiscal 1999 had a range in size from 21,500 to 79,900
square feet, with an average size of approximately 48,600 square feet. The
stores built by the Company over the past several years and those planned for
fiscal 2000, generally range in size from 50,000 to 65,000 square feet with
an average of approximately 58,000 square feet. The selling area of new
stores is approximately 73% 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
- ------------------
Indiana 1
Louisiana 1
Maryland 1
Michigan 2
New Jersey 2
New York 2
Pennsylvania 1
Wisconsin 1
----
Total United States 11
----
Ontario, Canada 3
----
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 26, 2000.
ITEM 3. Legal Proceedings
- --------------------------
The information required is contained in the 1999 Annual Report to
Shareholders on page 45 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 1999.
PART II
- -------
ITEM 5. Market for the Registrant's Common Stock and Related Security Holder
- -----------------------------------------------------------------------------
Matters
-------
The information required is contained in the 1999 Annual Report to
Shareholders on pages 47, 50 and 54 and is herein incorporated by reference.
ITEM 6. Selected Financial Data
- --------------------------------
The information required is contained on page 50 of the 1999 Annual Report to
Shareholders and is herein incorporated by reference.
ITEM 7. Management's Discussion and Analysis
- ---------------------------------------------
The information required is contained in the 1999 Annual Report to
Shareholders on pages 20 through 27 and is herein incorporated by reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information required is contained in the 1999 Annual Report to
Shareholders on pages 26 and 27 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 1999 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 47 of the 1999 Annual Report to Shareholders and is herein
incorporated by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
None
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 35 President and Chief Executive Officer
Fred Corrado 59 Vice Chairman of the Board and Chief Financial
Officer
Michael J. Larkin 58 Senior Executive Vice President - Chief Operating
Officer
George Graham 50 Executive Vice President - Chief Merchandising
Officer
William P. Costantini 52 Senior Vice President - General Counsel &
Secretary
John P. Dunne 61 Non-Executive Chairman - The Great Atlantic &
Pacific Company of Canada, Limited
Nicholas L. Ioli, Jr. 56 Senior Vice President - Chief Information Officer
Laurane S. Magliari 49 Senior Vice President - People Resources and
Services
William McEwan 43 President and Chief Executive Officer - Atlantic
Region Operations
Brian Pall 41 Senior Vice President - Chief Development Officer
Cheryl M. Palmer 42 Senior Vice President - Strategic Marketing
Brian Piwek 53 President and Chief Executive Officer - The
Great Atlantic & Pacific Company of Canada,
Limited
Craig C. Sturken 56 Chairman and Chief Executive Officer - Midwestern
Operations
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 a director on December 3, 1991, President and Chief
Operating Officer of the Company on December 7, 1993 and Co-Chief Executive
Officer on April 2, 1997. He was elected to his current position effective
May 1, 1998. He is a member of the Executive Committee and an ex officio
member of the Finance and Retirement Benefits Committees.
Mr. Corrado has been a director since 1990. He is Vice Chairman of the
Executive Committee and a member of the Finance and Retirement Benefits
Committees. During the past five years, Mr. Corrado also served as Treasurer
and Executive Vice President of the Company.
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.
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. Costantini was elected Senior Vice President, General Counsel & Secretary
effective April 24, 2000. Prior to joining the Company and for the past five
years, Mr. Costantini was successively Executive Vice President & General
Counsel of Olsten Corporation and Senior Vice President & General Counsel of
Olsten.
Mr. Dunne was appointed Non-Executive Chairman of The Great Atlantic &
Pacific Company of Canada, Limited on February 14, 2000. Prior thereto and
for the past five years, Mr. Dunne was successively Chairman and Co-Chief
Executive Officer, 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. Ioli was elected Senior Vice President - Chief Information Officer on
July 13, 1999. Prior to joining the Company and for the past five years, Mr.
Ioli was Vice President, Chief Information Officer, Citizens Utilities
Company.
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 successively Vice President, Human Resources,
Publishers Clearing House and Vice President, Global Marketing, The Chase
Manhattan Bank.
Mr. McEwan was appointed President and Chief Executive Officer of the
Company's Atlantic Region effective the beginning of fiscal year 2000. Prior
to assuming his present position and for the past five years, he was
successively President and Chief Merchandising Officer and Executive Vice
President, Merchandising and Procurement of The Great Atlantic and Pacific
Company of Canada, Limited.
Mr. Pall was appointed Chief Development Officer of the Company on May 1,
2000. Prior thereto and for the past five years, Mr. Pall was successively
Senior Vice President, Development and Corporate Vice President, Real Estate
Development.
Ms. Palmer was appointed Senior Vice President, Strategic Marketing on May 3,
1999. Prior to joining the Company and for the past five years, Ms. Palmer
was successively Group Vice President/General Manager for Allied Domecq
Spirits & Wines and held various management positions for Cadbury Beverages,
Inc.
Mr. Piwek was appointed President and Chief Executive Officer of The Great
Atlantic & Pacific Company of Canada, Limited on February 14, 2000. Prior
thereto and for the past five years, Mr. Piwek was successively Vice Chairman
and Co-Chief Executive Officer of The Great Atlantic & Pacific Company of
Canada, Limited and President of Overwaitea Food Group, a retailer and
franchisor in British Columbia and Alberta, Canada.
Mr. Sturken was appointed Chairman and Chief Executive Officer - Midwestern
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. Peter O'Gorman, Executive Vice President, International Store and Product
Development resigned from the Company effective May 28, 1999.
Mr. Robert Ulrich, Senior Vice President, General Counsel and Secretary
retired from the Company effective May 18, 2000.
Mr. Aaron Malinsky, Vice Chairman and Chief Development Officer resigned from
the Company, effective May 12, 2000.
The Company has filed with the Commission since the close of its fiscal year
ended February 26, 2000 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 Company's fiscal 1999
definitive proxy statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The information required is contained in the Company's fiscal 1999 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 1999 definitive
proxy statement on pages 1 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 1999 Annual Report to Shareholders. The
following required items, appearing on pages 28 through 49 of the 1999
Annual Report to Shareholders, are herein incorporated by reference:
Statements of Consolidated Operations
Statements of Consolidated Shareholders' Equity and Comprehensive
Income (Loss)
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 4.1 to Form 8-K
rights of security holders, dated as of January 1, 1991
including indentures *
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,
February 27, 1999 and attached
b) Supplemental Executive Exhibit 10)b) to Form 10-K
Retirement Plan, amended for the fiscal years ended
and restated February 27, 1993 and
February 28, 1998
c) 1984 Stock Option Plan, Exhibit 10)e) to Form 10-K
as amended for the fiscal year ended
February 23, 1991
* Agreements with respect to long-term debt where the total amount of
securities authorized thereunder does not exceed 10% of the total assets
of the Registrant and its subsidiaries on a consolidated basis shall be
furnished to the Commission on request.
Exhibit Incorporated by reference
Numbers Description (If applicable)
------- ----------- -------------------------
10) d) 1994 Stock Option Plan Exhibit 10)e) to Form 10-K
for the fiscal year ended
February 25, 1995
e) 1994 Stock Option Plan Exhibit 10)f) to Form 10-K
for Non-Employee Directors for the fiscal year ended
February 25, 1995
f) Directors' Deferred Exhibit 10)h) to Form 10-K
Payment Plan for the fiscal year ended
February 22, 1997
g) Competitive Advance and Exhibit 10) to Form 8-K
Revolving Credit Facilities filed on June 12, 1997;
Agreement dated as of Exhibit 10)I to Form 10-K
June 10, 1997 and amendment for the fiscal year ended
dated February 17, 1999 February 27, 1999
h) Project Great Renewal - Exhibit 99.1) to Form 8-K
Phase I dated as of filed December 9, 1998;
December 8, 1998; Phase II Exhibit 99) to Form 8-K
dated March 13, 2000 filed March 24, 2000
i) 1998 Long Term Incentive Exhibit 10)k to Form 10-K
and Share Award plan for the fiscal year ended
February 27, 1999
Exhibit Incorporation by reference
Numbers Description (If applicable)
------- ----------- --------------------------
11) Not Applicable
12) Not Applicable
13) 1999 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
---------------------
On March 24, 2000, the Company filed Form 8-K with the Securities and
Exchange Commission with respect to Phase II of its Project "Great
Renewal" program (Great Renewal - Phase II). The Company engaged IBM
Corporation and Retek Inc., food and drug retailing industry systems
consultants, along with a team of Company executives, to help develop
a state of the art supply chain and business management
infrastructure. Great Renewal - Phase II is intended to modernize the
Company's operating facilities, improve efficiency in its processes,
enhance growth and be a catalyst that guides the Company toward a
competitive position in the North America food retailing business.
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 16, 2000 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
- ----------------------- Director
Christian W.E. Haub
/s/ Fred Corrado Vice Chairman of the Board,
- ---------------- Chief Financial Officer and Director
Fred Corrado
/s/ John D. Barline Director
- -------------------
John D. Barline
/s/ Rosemarie Baumeister Director
- ------------------------
Rosemarie Baumeister
/s/ Helga Haub Director
- --------------
Helga Haub
/s/ Barbara Barnes Hauptfuhrer Director
- ------------------------------
Barbara Barnes Hauptfuhrer
/s/ Dan Kourkoumelis Director
- --------------------
Dan Kourkoumelis
/s/ Edward Lewis Director
- ----------------
Edward Lewis
/s/ William A. Liffers Director
- ----------------------
William A. Liffers
/s/ Richard L. Nolan Director
- ----------------------
Richard L. Nolan
/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 16, 2000.
/s/ Kenneth A. Uhl Vice President, Controller May 16, 2000
--------------------- ---------------
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 1999 Fiscal 1998 Fiscal 1997
(52 weeks) (52 weeks) (53 weeks)
----------- ----------- -----------
Sales $10,151,334 $10,179,358 $10,262,243
Income (loss) from operations 104,830 (164,391) 155,259
Income (loss) before
extraordinary item 14,160 (67,164) 63,586
Net income (loss) 14,160 (67,164) 63,042
Net income (loss) per share
before extraordinary item -
basic and diluted .37 (1.75) 1.66
Net income (loss) per share -
basic and diluted .37 (1.75) 1.65
Cash dividends per share .40 .40 .40
Expenditures for property 479,572 438,345 267,623
Depreciation and amortization 232,712 233,663 234,236
Working capital 98,305 109,047 262,097
Shareholders' equity 846,192 837,257 926,632
Debt to total capitalization 54% 51% 48%
Book value per share 22.07 21.87 24.22
New store openings 54 46 40
Number of stores at year end 750 839 936
Number of franchised stores
served at year end 65 55 52
NOTE: Reference should be made to "Management's Discussion and Analysis"
section contained herein for details of non-recurring charges recorded in
fiscal 1999 and 1998.
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 15 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 Food & Drug, Food Basics and The Barn Markets
trade names. As of the fiscal year ended February 26, 2000, the Company
operated 750 stores and served 65 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.
page 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
Fiscal 1999 Compared with 1998
Sales for fiscal 1999 were $10,151 million, a net decrease of $28 million
or 0.3% when compared to fiscal 1998 sales of $10,179 million. The decrease
is attributable to the closure of 249 stores, excluding replacement stores,
since the beginning of fiscal 1998, which reduced total sales by
approximately $1,131 million. Included in the 249 store closures
and $1,131 million sales impact are 165 stores relating to the exit stores
that were closed during fiscal 1998 and 1999 which had an impact of $869
million. Also contributing to the net sales decrease was a decrease in sales
of $17 million in the Company's Compass Food Division. These decreases were
partially offset by the opening of 63 stores, excluding replacement stores,
since the beginning of fiscal 1998, which added approximately $599 million,
or 5.9% to sales in fiscal 1999. In addition, the increase of 4.4% in same
store sales ("same store sales" referred to herein include replacement
stores) increased sales by $365 million. The Food Basics wholesale business
contributed $119 million to the increase and the addition of The Barn
Markets and G. A. Love Foods added $10 million to sales in fiscal 1999,
both exclusive of the effect of the Canadian exchange rate. The increase
in the Canadian exchange rate also improved sales by $27 million or 0.3%.
Average weekly sales per supermarket were approximately $245,700 in fiscal
1999 versus $210,500 in fiscal 1998, reflecting a 16.7% increase. Sales in
the U.S. decreased by $295 million or 4% compared to fiscal 1998. U.S.
same store sales increased 4.1% from the prior year. Sales in Canada
increased $267 million or 14% from fiscal 1998. Canadian
same store sales increased 6.2% from fiscal 1998.
Gross margin as a percent of sales decreased 0.1% to 28.6% from 28.7% for
the prior year. Margins were negatively impacted by accelerated inventory
markdowns in stores that were identified for closure under the first phase of
Project Great Renewal ("Great Renewal - Phase I") and the exit of the Atlanta
market during the first quarter of fiscal 1999. The gross margin dollar
decrease of $12 million resulted predominantly from a decrease in sales
volume. The U.S. operations gross margin decrease of $56 million resulted from
a decrease in sales volume, which impacted gross margin by $88 million,
partially offset by an increase of $32 million from an increase in the gross
margin rate. The Canadian operation's gross margin increase of $44 million
resulted from an increase in sales volume, which impacted gross margin by $57
million, and an increase of $6 million from the effect of the change in the
Canadian exchange rate. The increase was partially offset by a decrease of
$19 million from a decrease in the gross margin rate.
Store operating, general and administrative expense decreased
approximately $281 million from fiscal 1998. As a percent of sales, store
operating, general and administrative expense for fiscal 1999 decreased to
27.6% from 30.3% for the prior year. Fiscal 1998 store operating, general
and administrative expense includes charges of $225 million recorded in the
third and fourth quarters to establish reserves relating to Great Renewal -
Phase I. 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 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 includes a $7 million write-down of
property no longer held for a potential store site and a $4 million
litigation charge.
Fiscal 1999 store operating, general and administrative expense includes
additional Great Renewal - Phase I related costs totaling
approximately $75 million, including severance of $11 million which could not
be accrued in fiscal 1998 because it did not meet the criteria under EITF 94-
3, professional fees of $16 million associated with the implementation of the
store exit program, transitionally higher labor costs which
approximate $14 million, costs of approximately $20 million for the
conversion of additional stores to the Food Basics format and $9 million of
other miscellaneous operating costs incurred in connection with
the closures. The $75 million also includes the costs of exiting the Atlanta
market consisting of severance of $6 million and store occupancy cost of $11
million which relates principally to the present value of future lease
obligations, partially offset by a $12
page 20
million gain that resulted from the disposition of fixed and intangible
assets.
The total fiscal 1999 charge of $75 million is partially offset by a $21.9
million reversal of Great Renewal - Phase I charges originally recorded in
fiscal 1998.
Reference should be made to the "Store and Facilities Exiting Program -
Great Renewal - Phase I" section of this Management's Discussion and Analysis
for further details of the Company's exiting program.
Excluding the non-recurring charges under Great Renewal - Phase I
discussed above, fiscal 1999 store operating, general and administrative
expense decreased approximately $83 million from fiscal 1998. As a percentage
of sales, store operating, general and administrative expense decreased from
27.8% to 27.1%. Included in the fiscal 1999 results, are higher store
operating, general and administrative expense of the stores identified for
closure under Great Renewal - Phase I of approximately $69 million or 43.4%
of sales. Excluding the results of stores identified for closure and the non-
recurring charges under Great Renewal - Phase I, fiscal 1999 store operating,
general and administrative expense as a percentage of sales was 26.8%.
Interest expense increased $13 million from the previous year, primarily
due to the additional present value interest related to the future lease
obligations of the store exit programs as well as the issuance of $200
million of 9.375% senior quarterly interest bonds on August 6, 1999.
Interest income decreased $0.4 million from the previous year, primarily
due to a lower amount of short-term investments.
For fiscal 1999, income before income taxes was $27 million compared to a
loss of $229 million in fiscal 1998 for an increase of $256 million. Income
before taxes for U.S. operations was virtually break even compared to a
loss of $244 million in fiscal 1998. The Canadian income before taxes for
fiscal 1999 amounted to $27 million, which was an increase of $12 million
from the fiscal 1998 amount of $15 million.
The Company recorded an income tax provision amounting to $13 million in
fiscal 1999 as compared to an income tax benefit of $162 million for fiscal
1998. The income tax provision recorded in fiscal 1999 reflects the
Company's estimated annual tax rates applied to its respective domestic and
foreign operations. The effective tax rate for fiscal 1999 was 47.6%. The
fiscal 1998 benefit of $162 million includes the reversal of the Canadian
operation's 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. At the beginning of the fourth quarter of fiscal 1998,
based upon Management's plan to close underperforming stores in Canada, the
implementation of certain tax strategies and the continued performance
improvements of the Canadian operations, Management had concluded that it
was more likely than not that the net deferred tax assets related to the
Canadian operations would be realized. Accordingly, the Company reversed
the remaining portion of the Canadian deferred tax valuation allowance
amounting to approximately $60 million. (see "Income Taxes" footnote for
further discussion). The deferred tax benefit recorded during fiscal 1998
for U.S. operations of approximately $103 million mainly relates to book and
tax differences of the store and facilities exit costs.
Based on these overall results, net income for fiscal 1999 was $14 million
or $0.37 per share - basic and diluted, as compared to a net loss of $67
million or $1.75 per share - basic and diluted. The increase in net income
of $81 million in fiscal 1999 from a net loss of $67 million in fiscal 1998
is mainly the result of improved same store sales, reduced operating costs
and the decrease in the store and facilities exit costs. The increase is
partially offset by a reduction in the number of open stores.
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 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
page 21
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 same 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, offset by an increase in sales
volume and an increase in gross margin rates. 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 expense are charges
recorded in both the third and fourth quarters relating to Great Renewal -
Phase I, 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. Reference
should be made to the "Store and Facilities Exiting Program - Great Renewal -
Phase I" section of this Management's Discussion and Analysis for further
details of the Company's exiting program.
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 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.
Interest expense decreased $9 million from the previous year, primarily
due to a decrease in average debt of approximately $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
page 22
$200 million of 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 an income tax benefit amounting to $162 million in
fiscal 1998 as compared to an income tax provision of $19 million for fiscal
1997. The fiscal 1998 benefit of $162 million includes the previously
discussed reversals of the Canadian operation's deferred tax valuation
allowance.
Based on these overall results, 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
pretax charge of $225 million, partially offset by the reversal of the
remaining Canadian valuation allowance.
STORE AND FACILITIES EXITING PROGRAM - GREAT RENEWAL - PHASE I
In May 1998, the Company named a sole Chief Executive Officer of the
Company. Following the 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 and a coffee plant in
the U.S., 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 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.
As of 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 charge in the fourth quarter
of fiscal 1998 of approximately $215 million.
This $215 million consisted 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
page 23
recoveries, which extend through fiscal 2028, an $83 million write-down of
store fixed assets and a $9 million write-down to their estimated fair value
of the two properties which are held for sale. To the extent fixed assets
included in stores identified for closure could be utilized in other
continuing stores, the Company has or will transfer those assets to
continuing stores. To the extent those fixed assets cannot be transferred,
the Company will scrap them and accordingly, the write-down was calculated
based upon an estimated scrap value. This fourth quarter charge of $215
million was reduced by approximately $2 million in fiscal 1998 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 Statements of Consolidated Operations.
In addition to the charges recorded in fiscal 1998, there are other
charges related to the plan which could not be accrued at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3. Such
costs have been expensed as incurred as the plan was being executed. During
fiscal 1999, the Company recorded an additional pretax charge of $11 million
for severance relating to the 132 stores.
On April 26, 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which
were previously included in the Company's store exit program as discussed
above. 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, at the time of the
announcement, the Company recorded a fiscal 1999 first quarter net pretax
charge of approximately $5 million. This charge is comprised of severance of
$6 million, future lease commitments of $11 million, partially offset
by a $12 million gain related to the disposition of fixed and intangible
assets. The net charge is included in "Store operating, general and
administrative expense" in the Statements of Consolidated Operations.
As of February 26, 2000, the Company has closed all 34 stores in the
Atlanta, Georgia market and 131 of the 132 other stores, including all 31
stores in the Richmond, Virginia market. The remaining store is in the
process of being disposed of.
The Company paid $23 million of the total severance charges from the time
of the original charges through the end of fiscal 1999, which resulted from
the termination of approximately 3,400 employees. The remaining individual
severance payments will be paid by the end of fiscal 2000.
At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result of
changes in circumstances and/or estimates. The Company has made favorable
progress to date in marketing and subleasing the closed stores. As a result,
in the third quarter of fiscal 1999, the Company recorded a net reduction in
"Store operating, general and administrative expense" of $21.9 million to
reverse a portion of the $215 million restructuring charge recorded in fiscal
1998. This amount represents a $22.2 million reduction in "Store operating,
general and administrative expense" for lower store occupancy costs resulting
primarily from earlier than anticipated lease terminations and subleases.
The credit is partially offset by $0.3 million of additional fixed asset
write-downs resulting from lower than anticipated proceeds from the sale of
fixed assets.
Based upon current available information, Management evaluated the
reserve balance of $115 million as of February 26, 2000 and has concluded
that it is adequate. The Company will continue to monitor the status of the
vacant properties and further adjustments to the reserve balance may be
recorded in the future, if necessary.
SUPPLY CHAIN INITIATIVE - GREAT RENEWAL - PHASE II
On March 13, we announced Great Renewal - Phase II, a major investment
over four years to develop a state-of-the-art supply chain and business
management infrastructure.
Overall, we expect to achieve substantial cash benefits over that period
resulting from improved margins, lower operating expenses, reduced working
capital and better product availability. After full implementation, we
expect to significantly raise the level of our ongoing annual operating
income.
The Company expects the cost of implementing
page 24
Great Renewal - Phase II to reduce net earnings for fiscal 2000 by
approximately $1.50 per share. Provided Great Renewal - Phase II plan
objectives are delivered on schedule, benefits from improved systems and
processes could be derived in fiscal 2000. If planned deliverables are met
on time, it is hoped benefits will accelerate in the following years helping
to offset costs in fiscal 2001, and providing the opportunity to derive
positive net impact onto ongoing operating earnings beginning in fiscal 2002.
A team of A&P executives representing all key business functions will work
with a team from a new strategic alliance concentrating on the food and drug
retailing industry formed by IBM Corporation and Retek, Inc. This combined
team will upgrade all processes and business systems related to the flow of
information and products between A&P-operated offices, distribution points
and stores; and between the Company and its suppliers. Such business
processes support Store Operations, Marketing and Merchandising, Supply and
Logistics, People Resources, Finance and the enabling technologies.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the 1999 fiscal year with working capital of $98 million
compared to $109 million at February 27, 1999. The decrease in working
capital is due to a number of current asset and liability changes including a
decrease in inventories of approximately $50 million due to more effective
inventory management practices. Additionally, cash and short-term
investments decreased from $137 million at February 27, 1999 to $125 million
at February 26, 2000.
On August 6, 1999, the Company issued $200 million aggregate principal
amount 9.375% senior quarterly interest bonds due August 1, 2039. The
Company used the net proceeds from the issuance of the bonds to repay
borrowings under its revolving credit facility, to finance the purchase of 16
stores, (6 in the United States and 10 in Canada) and for working capital and
general corporate purposes.
The Company has an unsecured five year $465 million U.S. credit agreement
and a five year C$50 million (U.S. $34 million at February 26, 2000)
Canadian credit agreement (the "Credit Agreement") expiring June 10, 2002
with a syndicate of banks, enabling it to borrow funds on a revolving basis
sufficient to refinance short-term borrowings. Borrowings under the U.S.
credit agreement were $60 million and $130 million at February 26, 2000 and
February 27, 1999, respectively. The Canadian subsidiary had no outstanding
borrowings at February 26, 2000 or February 27, 1999. Accordingly, as of
February 26, 2000, the Company has available $405 million under its U.S.
credit agreement and C$50 million (U.S. $34 million at February 26, 2000)
under the Canadian credit agreement. 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.
The U.S. has uncommitted lines of credit with various banks amounting to
$110 million and $211 million as of February 26, 2000 and February 27, 1999,
respectively. Borrowings under these uncommitted lines of credit amounted
to $27 million and $23 million as of February 26, 2000 and February 27,
1999, respectively. Accordingly, as of February 26, 2000, the Company hads
$83 million available in uncommitted lines of credit.
The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of
Canada, Limited has outstanding $75 million of 5 year Notes denominated in
U.S. dollars that are due on November 1, 2000. Additionally, the Company has
U.S. bank borrowings of $87 million. Both the Notes and the U.S. bank
borrowings have been classified as long-term debt based on Management's
intent and ability, through the use of the Credit Agreement, to refinance
such Notes and bank borrowings on a long-term basis.
The Company has filed two Shelf Registration Statements dated
January 23, 1998 and June 23, 1999, allowing it to offer up to $350 million
of debt and/or equity securities as of February 26, 2000 at terms determined
by market conditions at the time of sale.
During fiscal 1999, the Company funded its capital expenditures, debt
repayments and cash dividends through internally generated funds combined
with proceeds from disposals of property, bank borrowings, revolving lines of
credit and the issuance of $200 million aggregate principal amount 9.375%
senior quarterly interest bonds on August 6, 1999.
page 25
Capital expenditures totaled $480 million during fiscal 1999, which
included 54 new supermarkets, and 59 remodels and enlargements.
For fiscal 2000, the Company plans to incur approximately $150 million,
before tax benefits, in cash expenditures relating to Great Renewal - Phase
II. For fiscal 2001, expected Great Renewal - Phase II cash expenditures
approximate $100 million, before tax. Provided Great Renewal - Phase II plan
objectives are met, fiscal 2001 cash expenditures will be significantly
offset by cash benefits.
In addition to Great Renewal - Phase II, for fiscal 2000, the Company has
planned capital expenditures of approximately $500 million primarily to open
50 to 60 new supermarkets and remodel or expand up to 65 stores. It has been
the Company's experience over the past several years that it typically takes
12 to 15 months or longer 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. The Company currently expects to close a total of approximately
35 stores in fiscal year 2000.
The Company plans to continue with similar levels of capital expenditures
in fiscal 2001 and several years thereafter. 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
$1.5 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 1999 quarterly dividend was $0.10 per share and amounted to
$15.3 million. The Company expects to maintain the same dividend amount for
fiscal 2000.
At fiscal year end 1999, 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 believes that its current cash resources, including the funds
available under the Credit Agreement, together with cash generated from
operations, will be sufficient for the Company's 2000 Great Renewal - Phase
II and other capital expenditure programs, mandatory scheduled debt
repayments and dividend payments throughout fiscal 2000. Additionally,
alternative financing arrangements will be considered when it is advantageous
to the Company.
MARKET RISK
Market risk represents the risk of loss from adverse market changes that
may impact the consolidated financial position, results of operations or cash
flows of the Company. Among other possible market risks, the Company is
exposed to such risk in the areas of interest rates and foreign currency
exchange rates.
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 $775 million in notes as of February
26, 2000 because they are at fixed interest rates. 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 1999, a 1%
change in LIBOR will result in interest expense fluctuating approximately
$0.9 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
page 26
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 $4.6 million as of February 26, 2000. A 10% change in
Canadian exchange rates would have resulted in the fair value fluctuating
approximately $6.9 million in fiscal 1999.
YEAR 2000 COMPLIANCE
The Company reviewed the entire range of its operations relating to Year
2000 issues. Remediation and testing are complete for both information
technology ("IT") and non-IT mission critical areas that required attention
and resources in order to be Year 2000 compliant.
The costs incurred to address the Company's Year 2000 issues were
approximately $10 million.
Although the Company has determined that its major vendors are Year 2000
compliant and the Company has not experienced any significant Year 2000
related issues with its vendors to date, there still is risk of possible
failures by vendors to respond to Year 2000 issues. The Company has a
contingency plan in place to mitigate the potential effects, if any, that may
arise out of such failures.
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"). This statement
requires that all derivative instruments be measured at fair value and
recognized in the balance sheet 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 Statements of Consolidated Operations.
In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which delays the adoption of SFAS 133 for one year, to
fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS
133 in the first quarter of fiscal 2001. The Company is currently evaluating
the impact this pronouncement will have on the Consolidated Financial
Statements.
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 and changes in economic
conditions which affect the buying patterns of the Company's customers.
page 27
STATEMENTS OF CONSOLIDATED OPERATIONS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except per share amounts)
- ------------------------------------------------
Fiscal 1999 Fiscal 1998 Fiscal 1997
(52 weeks) (52 weeks) (53 weeks)
----------- ------------ -----------
Sales $10,151,334 $10,179,358 $10,262,243
Cost of merchandise sold (7,243,718) (7,260,110) (7,327,365)
----------- ----------- -----------
Gross margin 2,907,616 2,919,248 2,934,878
Store operating, general
and administrative expense (2,802,786) (3,083,639) (2,779,619)
----------- ----------- -----------
Income (loss) from operations 104,830 (164,391) 155,259
Interest expense (84,045) (71,497) (80,152)
Interest income 6,218 6,604 7,793
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item 27,003 (229,284) 82,900
(Provision) benefit for income taxes (12,843) 162,120 (19,314)
----------- ----------- -----------
Income (loss) before extraordinary
item 14,160 (67,164) 63,586
Extraordinary loss on early
extinguishment of debt (net
of income tax benefit of $394) - - (544)
----------- ----------- -----------
Net income (loss) $ 14,160 $ (67,164) $ 63,042
=========== =========== ===========
Earnings (loss) per share:
Income (loss) before extraordinary
item - basic and diluted $ 0.37 $ (1.75) $ 1.66
Extraordinary loss on early
extinguishment of debt - basic
and diluted - - (0.01)
----------- ----------- -----------
Net income (loss) per share - basic
and diluted $ 0.37 $ (1.75) $ 1.65
=========== =========== ===========
See Notes to Consolidated Financial Statements.
page 28
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands, except share amounts)
- --------------------------------------------
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
Common stock:
Shares:
Issued and outstanding
at beginning of year 38,290,716 38,252,966 38,247,716
Issuance of 20,000 shares of
restricted common stock 20,000 - -
Stock options exercised 56,500 37,750 5,250
---------- ---------- ----------
Issued and outstanding
at end of year 38,367,216 38,290,716 38,252,966
========== ========== ==========
Balance at beginning of year $ 38,291 $ 38,253 $ 38,247
Issuance of 20,000 shares of
restricted common stock 20 - -
Stock options exercised 56 38 6
---------- ---------- ----------
Balance at end of year $ 38,367 $ 38,291 $ 38,253
========== ========== ==========
Additional paid-in capital:
Balance at beginning of year $ 454,971 $ 453,894 $ 453,751
Issuance of 20,000 shares of
restricted common stock 631 - -
Stock options exercised 1,499 1,077 143
---------- ---------- ----------
Balance at end of year $ 457,101 $ 454,971 $ 453,894
========== ========== ==========
Unamortized value of restricted
stock grant:
Issuance of 20,000 shares of
restricted common stock $ (651) $ - $ -
Amortization of restricted
stock grant 210 - -
---------- ---------- ----------
Balance at end of year $ (441) $ - $ -
========== ========== ==========
Accumulated other comprehensive
(loss) income:
Balance at beginning of year $ (69,039) $ (61,025) $ (49,694)
Comprehensive income (loss) 8,343 (8,014) (11,331)
---------- ---------- ----------
Balance at end of year $ (60,696) $ (69,039) $ (61,025)
========== ========== ==========
Retained earnings:
Balance at beginning of year $ 413,034 $ 495,510 $ 447,768
Net income (loss) 14,160 (67,164) 63,042
Cash dividends (15,333) (15,312) (15,300)
---------- ---------- ----------
Balance at end of year $ 411,861 $ 413,034 $ 495,510
========== ========== ==========
Comprehensive income (loss)
- ---------------------------
Net income (loss) $ 14,160 $ (67,164) $ 63,042
---------- ---------- ----------
Foreign currency translation
adjustment 6,784 (9,936) (5,121)
Minimum pension liability
adjustment 1,559 1,922 (6,210)
---------- ---------- ----------
Other comprehensive income (loss) 8,343 (8,014) (11,331)
---------- ---------- ----------
Total comprehensive income (loss) $ 22,503 $ (75,178) $ 51,711
========== ========== ==========
See Notes to Consolidated Financial Statements.
page 29
CONSOLIDATED BALANCE SHEETS
The Great Atlantic & Pacific Tea Company, Inc.
February 26, February 27,
(Dollars in thousands) 2000 1999
- --------------------- ------------ -----------
Assets
Current assets:
Cash and short-term investments $ 124,603 $ 136,810
Accounts receivable 227,078 204,700
Inventories 791,150 841,030
Prepaid expenses and other current assets 80,052 60,570
---------- ----------
Total current assets 1,222,883 1,243,110
---------- ----------
Property:
Land 137,672 141,061
Buildings 420,345 406,122
Equipment and leasehold improvements 2,274,349 2,147,418
---------- ----------
Total-at cost 2,832,366 2,694,601
Less accumulated depreciation
and amortization (1,042,704) (1,097,142)
---------- ----------
1,789,662 1,597,459
Property leased under capital leases 94,146 89,028
---------- ----------
Property-net 1,883,808 1,686,487
Other assets 228,834 231,217
---------- ----------
Total assets $3,335,525 $3,160,814
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 2,382 $ 4,956
Current portion of obligations
under capital leases 11,327 11,483
Accounts payable 583,142 557,318
Book overdrafts 112,465 160,288
Accrued salaries, wages and benefits 155,649 152,107
Accrued taxes 51,611 54,819
Other accruals 208,002 193,092
---------- ----------
Total current liabilities 1,124,578 1,134,063
---------- ----------
Long-term debt 865,675 728,390
---------- ----------
Long-term obligations under capital leases 117,870 115,863
---------- ----------
Other non-current liabilities 381,210 345,241
---------- ----------
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 38,367,216 and
38,290,716 shares, respectively 38,367 38,291
Additional paid-in capital 457,101 454,971
Unamortized value of restricted
stock grant (441) -
Accumulated other comprehensive loss (60,696) (69,039)
Retained earnings 411,861 413,034
---------- ----------
Total shareholders' equity 846,192 837,257
---------- ----------
Total liabilities and shareholders'
equity $3,335,525 $3,160,814
========== ==========
See Notes to Consolidated Financial Statements.
page 30
STATEMENTS OF CONSOLIDATED CASH FLOWS
The Great Atlantic & Pacific Tea Company, Inc.
(Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997
- --------------------- ----------- ----------- -----------
Cash Flows From Operating Activities:
Net income (loss) $ 14,160 $ (67,164) $ 63,042
Adjustments to reconcile net income (loss)
to cash provided by operating
activities:
Store/Facilities exit charge and
asset write-off 14,078 224,580 -
Depreciation and amortization 232,712 233,663 234,236
Deferred income tax provision (benefit)
on income (loss) before
extraordinary item 8,258 (165,672) 11,425
(Gain) loss on disposal of owned
property and write-down of
property, net (2,973) 4,541 (11,363)
(Increase) decrease in receivables (23,041) 19,562 (14,116)
Decrease (increase) in inventories 60,026 34,762 (6,090)
Decrease (increase) in prepaid
expenses and other current assets 2,392 6,816 (2,630)
(Increase) decrease in other assets (16,630) 2,071 (1,435)
Increase (decrease) in accounts payable 16,546 122,251 (24,542)
Increase in accrued expenses 4,797 2,633 8,594
Increase in other accruals 518 43,604 4,250
Increase in non-current other
liabilities 5,432 28,203 15,906
Other, net (1,615) (2,764) (1,050)
--------- --------- ---------
Net cash provided by operating activities 314,660 487,086 276,227
--------- --------- ---------
Cash Flows From Investing Activities:
Expenditures for property (479,572) (438,345) (267,623)
Proceeds from disposal of property 101,319 12,546 31,783
--------- --------- ---------
Net cash used in investing activities (378,253) (425,799) (235,840)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds under revolving lines of credit 165,102 451,523 947,148
Payments on revolving lines of credit (235,150) (411,632) (991,296)
Proceeds from long-term borrowings 206,010 3,685 304,213
Payments on long-term borrowings (4,975) (22,456) (267,848)
Principal payments on capital leases (11,968) (12,139) (13,711)
(Decrease) increase in book overdrafts (49,354) 12,079 (28,145)
Deferred financing fees (6,298) - (2,471)
Proceeds from stock options exercised 1,555 1,115 149
Cash dividends (15,333) (15,312) (15,300)
--------- --------- ----------
Net cash provided by (used in)
financing activities 49,589 6,863 (67,261)
--------- --------- ---------
Effect of exchange rate changes on cash
and short-term investments 1,797 (2,277) (1,019)
--------- --------- ---------
Net (Decrease) Increase in Cash and
Short-term Investments (12,207) 65,873 (27,893)
Cash and Short-term Investments
at Beginning of Year 136,810 70,937 98,830
--------- --------- ---------
Cash and Short-term Investments
at End of Year $ 124,603 $ 136,810 $ 70,937
========= ========= =========
See Notes to Consolidated Financial Statements.
page 31
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: Operating Segments, Wholesale Franchise Business, Income Taxes
and Retirement Plans and Benefits. The principal shareholder of the
Company, Tengelmann Warenhandelsgesellschaft, owned 54.81% of the Company's
common stock as of February 26, 2000.
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
1999 ended February 26, 2000, fiscal 1998 ended February 27, 1999 and fiscal
1997 ended February 28, 1998. Fiscal 1999 and fiscal 1998 were each
comprised of 52 weeks while fiscal 1997 was comprised of 53 weeks.
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 $139 million for fiscal 1999, $136 million for fiscal
1998 and $138 million for fiscal 1997.
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 1999 and 1997, the
Company disposed of certain assets which resulted in a pretax gain of $3
million and $11 million, respectively. During fiscal 1998, the Company
disposed of certain assets which resulted in a pretax loss of $5 million.
Pre-opening Costs
The costs of opening new stores are expensed as incurred.
Software Costs
The Company capitalizes externally purchased software and amortizes it
over three years. Amortization expense for fiscal 1999, fiscal 1998 and
fiscal 1997 was $0.9 million, $0.8 million and $0.4 million, respectively.
Effective February 29, 1998, the Company 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 Developed 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 1999 and 1998, the Company capitalized $0.9 million and
$1.4 million, respectively, of such software costs and recorded amortization
expense of $0.5 million and $0.1 million, respectively.
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
page 32
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 38,330,379 for fiscal 1999, 38,273,859 for fiscal 1998 and
38,249,832 for fiscal 1997. The common stock equivalents that were added to
the weighted average shares outstanding for purposes of diluted EPS were
85,041 for fiscal 1999 and 19,926 for fiscal 1997. 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.
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 between fifteen to forty years. The Company recorded
amortization expense of $1.2 million for fiscal 1999 and $1.5 million for
both fiscal 1998 and 1997. The accumulated amortization relating to
goodwill amounted to $11.1 million and $13.2 million at February 26, 2000
and February 27, 1999, respectively. The decrease in accumulated
amortization results from the disposal of the Atlanta division in the first
quarter of fiscal 1999 (see "Store and Facilities Exit Costs" footnote" for
further details).
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 26, 2000, 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 No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets 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 for further details).
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 Consolidated
Balance Sheets.
The Company accrues for vested and non-vested vacation pay. Liabilities
for compensated absences of $79 million at both February 26, 2000 and
February 27, 1999, are included in the balance sheet caption "Accrued
salaries, wages and benefits".
Stock-Based Compensation
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25") with pro forma disclosure of net income
and earnings per share as if the fair value based method prescribed by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") had been
applied.
page 33
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 26, 2000 includes
foreign currency translation of $58.0 million and an additional minimum
pension liability adjustment of $2.7 million, net of income tax benefit of
$2.2 million. 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.
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 of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The Consolidated 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
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). This statement requires that all derivative instruments be
measured at fair value and recognized in the balance sheet 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 Statements of Consolidated Operations.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" which delays the adoption of SFAS 133 for one year, to
fiscal years beginning after June 15, 2000. The Company plans to adopt SFAS
133 in the first quarter of fiscal 2001. The Company is currently evaluating
the impact this pronouncement will have on the Consolidated Financial
Statements.
STORE AND FACILITIES EXIT COSTS
In May 1998, 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 and a coffee plant in
the U.S. 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
Statements of Consolidated Operations for fiscal 1998. 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.
As of February 27, 1999, the Company had closed and terminated operations
with respect to
page 34
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 charge in the fourth quarter
of fiscal 1998 of approximately $215 million. This $215 million charge
consisted 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 their 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 stores, the Company transferred those assets to continuing stores.
The Company will scrap fixed assets that could not be transferred and
accordingly, the write-down was calculated based upon an estimated scrap
value. This fourth quarter charge of $215 million was reduced by
approximately $2 million in fiscal 1998 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
Statements of Consolidated Operations for fiscal 1998.
In addition to the charges recorded in fiscal 1998, there are other
charges related to the plan which could not be accrued at February 27, 1999
because they did not meet the criteria for accrual under EITF 94-3. Such
costs have been expensed as incurred as the plan was being executed. During
fiscal 1999, the Company recorded an additional pretax charge of $11 million
for severance related to the 132 stores.
On April 26, 1999, the Company announced that it had reached definitive
agreements to sell 14 stores in the Atlanta, Georgia market, two of which
were previously included in the Company's store exit program. 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, at the time of the announcement,
the Company recorded a fiscal 1999 first quarter net pretax charge of
approximately $5 million. This charge is comprised of severance of $6
million, future lease commitments of $11 million, partially offset by
a $12 million gain related to the disposition of fixed and intangible
assets. The net charge is included in "Store operating, general and
administrative expense" in the Statements of Consolidated
Operations for fiscal 1999.
The Company paid $23 million of the total net severance charges from the
time of the original charges through the end of fiscal 1999 which resulted
from the termination of approximately 3,400 employees. The remaining
individual severance payments will be paid by the end of fiscal 2000.
The following tabular reconciliation summarizes the activity related to
the aforementioned charges since their initial recording:
Severance
Store Fixed and Facilities
(Dollars in thousands) Occupancy Assets Benefits Occupancy Total
- --------------------- --------- -------- -------- ---------- ---------
Original Charge $113,732 $ 93,355 $15,102 $ 4,018 $ 226,207
Addition (1) 1,900 - - - 1,900
Utilization (1,100) (92,639) (3,794) (311) (97,844)
Adjustment (2) - (716) (1,242) 331 (1,627)
--------- -------- ------- ------- ---------
Reserve Balance at
Feb. 27, 1999 114,532 - 10,066 4,038 128,636
Addition (3) 15,730 - 17,060 3,188 35,978
Utilization (4,614)(4) (295) (19,626) (3,659) (28,194)
Adjustment (5) (22,195) 295 - - (21,900)
--------- -------- ------- ------- ---------
Reserve Balance at
Feb. 26, 2000 $103,453 $ - $ 7,500 $ 3,567 $ 114,520
========= ======== ======= ======= =========
(1) The fiscal 1998 addition represents an increase to the store occupancy
reserve for the present value interest accrued.
(2) The fiscal 1998 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.
page 35
(3) The fiscal 1999 addition represents an increase to the store occupancy
reserve for the present value interest accrued ($7.4 million), the
additional severance cost ($11.5 million) and the cost of exiting the
Atlanta market (including store occupancy of $8.3 million, severance
of $5.6 million and facilities costs of $3.2 million).
(4) Store occupancy utilization for fiscal 1999 is comprised of $29.6
million of lease and other occupancy payments for the period, net of $25.0
million of net proceeds on the assignment of leases which was considered in
the original charge recorded during fiscal 1998.
(5) At each balance sheet date, Management assesses the adequacy of the
reserve balance to determine if any adjustments are required as a result
of changes in circumstances and/or estimates. The Company has made
favorable progress to date in marketing and subleasing the closed
stores. As a result, in the third quarter of fiscal 1999, the Company
recorded a net reduction in "Store operating, general and administrative
expense" of $21.9 million to reverse a portion of the $215 million
restructuring charge recorded in fiscal 1998. This amount represents a
$22.2 million reduction in "Store operating, general and administrative
expense" for lower store occupancy costs resulting primarily from
earlier than anticipated lease terminations and subleases. The credit
is partially offset by $0.3 million of additional fixed asset write-
downs resulting from lower than anticipated proceeds from the sale of
fixed assets.
Based upon current available information, Management evaluated the
reserve balance of $114.5 million as of February 26, 2000 and has
concluded that it is adequate. The Company will continue to monitor the
status of the vacant properties and further adjustments to the reserve
balance may be recorded in the future, if necessary.
As of February 26, 2000, the Company closed all 34 stores in the Atlanta,
Georgia market and 131 of the 132 other stores, including all 31 stores in
the Richmond, Virginia market. The remaining store is in the process of
being disposed of.
At February 26, 2000, $28.2 million of the reserve is included in "Other
accruals" and $86.3 million is included in "Other non-current liabilities" in
the Consolidated Balance Sheets.
Included in the Statements of Consolidated Operations are
the operating results of the 132 underperforming stores and the 34 Atlanta
stores which the Company has exited. The operating results of these stores
are as follows:
Fiscal Fiscal Fiscal
(Dollars in thousands) 1999 1998 1997
- ---------------------- -------- ---------- ----------
Sales $200,208 $1,069,441 $1,205,431
======== ========== ==========
Operating Loss $(30,572) $ (43,105) $ (23,210)
======== ========== ==========
INVENTORY
Approximately 13% and 18% of the Company's inventories are valued using
the last-in, first-out ("LIFO") method at February 26, 2000 and February 27,
1999, respectively. Such inventories would have been $20 million and $19
million higher at February 26, 2000 and February 27, 1999, respectively, if
the retail and first-in, first-out methods were used. The Company recorded
LIFO charges of approximately $1 million during both fiscal 1999 and 1998.
During fiscal 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.
WHOLESALE FRANCHISE BUSINESS
The Company serviced 65 franchised stores as of February 26, 2000 and 55
stores as of February 27, 1999. These franchised stores are required to
purchase inventory exclusively from the Company which acts as a wholesaler
to the franchisees. During fiscal 1999 and 1998, the Company had wholesale
sales to these franchised stores of $523 million and $387 million,
respectively. A majority of the 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 franchised business receivables, net of
allowance for doubtful accounts, amounting to $53.4 million as of February
26, 2000 and $36.4 million as of February 27, 1999. The inventory notes are
collateralized by the inventory
page 36
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 $4.1 million as of February 26, 2000 and
$2.1 million as of February 27, 1999 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 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)
- ----------------------
2000 $ 9,910
2001 10,371
2002 10,371
2003 10,371
2004 10,371
2005 and thereafter 29,608
--------
81,002
Less interest portion (23,593)
--------
Due from franchise business $ 57,409
========
For the fiscal years ended February 26, 2000 and February 27, 1999,
approximately $18 million and $8 million, respectively, of the franchise
business notes relate to equipment leases which were non-cash transactions
and, accordingly, have been excluded from the Statements of Consolidated
Cash Flows.
INDEBTEDNESS
Debt consists of:
February 26, February 27,
(Dollars in thousands) 2000 1999
- ---------------------- ----------- -----------
9.375% Notes, due August 1, 2039 $200,000 $ -
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
2000 through 2003 (average interest
rates at year end of 7.12% and
5.81%, respectively) 8,023 7,417
U.S. Bank Borrowings at 6.35%
and 5.49%, respectively 87,000 153,100
Less unamortized discount on 7.75% Notes (1,966) (2,171)
-------- --------
868,057 733,346
Less current portion (2,382) (4,956)
-------- --------
Long-term debt $865,675 $728,390
======== ========
The Company has an unsecured five year $465 million U.S. credit agreement
and a five year C$50 million Canadian credit agreement (the "Credit
Agreement") expiring June 10, 2002 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. credit agreement were $60 million and $130 million at
February 26, 2000 and February 27, 1999, respectively. The Canadian
subsidiary had no outstanding borrowings at February 26, 2000 or February
27, 1999. Accordingly, as of February 26, 2000, the Company has available
$405 million under its U.S. credit agreement and C$50 million (U.S. $34
million at February 26, 2000) under the Canadian credit agreement. 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.
The U.S. has uncommitted lines of credit with various banks amounting to
$110 million and $211 million as of February 26, 2000 and February 27, 1999,
respectively. Borrowings under these uncommitted lines of credit amounted
to $27 million and $23 million as of February 26, 2000 and February 27,
1999, respectively. Accordingly, as of February 26, 2000, the Company has
available $83 million in uncommitted lines of credit.
As of February 26, 2000, the Company has 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. The
Company also has outstanding $200 million unsecured, public debt securities
in the form of 9.375% Notes due August 1, 2039 which are callable after five
years.
On August 6, 1999, the Company issued $200 million aggregate principal
amount 9.375% senior quarterly interest bonds due August 1, 2039. The
page 37
Company used the net proceeds from the issuance of the bonds to repay
borrowings under its revolving credit facility, to finance the purchase of
16 stores, (6 in the United States and 10 in Canada) and for working capital
and general corporate purposes.
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, to prepay other
indebtedness and for general corporate purposes.
The Company's Canadian subsidiary, The Great Atlantic & Pacific Company of
Canada, Limited ("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. The Notes have been classified as long-term debt based on
Management's ability and intent to refinance these borrowings on a long-term
basis. 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 $5.8 million
and $8.4 million as of February 26, 2000 and February 27, 1999, respectively.
The fair value of the cross-currency swap was favorable to the Company by
$4.6 million and $6.9 million as of February 26, 2000 and February 27, 1999,
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 contract.
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 to a financial institution and received consideration of $0.6
million. The consideration received is being amortized as a reduction to
interest expense until November 1, 2000.
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" footnote), the Company would not have been in compliance with
certain of its covenants as of February 27, 1999, relating to the Credit
Agreement. As such, the Company amended the Credit Agreement prior to
February 27, 1999. The Company was in compliance with all such financial
covenants, as amended, as of February 26, 2000 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 for both February 26, 2000 and
February 27, 1999.
In 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 $87 million and $153 million are classified as
non-current as of February 26, 2000 and February 27, 1999, respectively, as
the Company has the ability and intent to refinance these borrowings on a
long-term basis.
The Company has filed two Shelf Registration Statements dated
January 23, 1998 and June 23, 1999, allowing it to offer up to $350 million
of debt and equity securities as of February 26, 2000 at terms determined by
market conditions at the time of sale.
Maturities for the next five fiscal years and
page 38
thereafter are: 2000-$2 million; 2001-$1 million; 2002-$163 million; 2003-
$200 million; 2004-$0; 2005 and thereafter - $504 million. Interest
payments on indebtedness were approximately $66 million for fiscal 1999, $56
million for fiscal 1998 and $58 million for fiscal 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as
follows:
(Dollars in thousands) February 26, 2000 February 27, 1999
- --------------------- ----------------- -----------------
Carrying Fair Carrying Fair
Liabilities: Amount Value Amount Value
-------- -------- -------- --------
9.375% Notes, due
August 1, 2039 $200,000 $175,000 $ - $ -
-------- -------- -------- --------
7.75% Notes, due
April 15, 2007 $298,034 $270,094 $297,829 $287,384
-------- -------- -------- --------
7.70% Senior Notes, due
January 15, 2004 $200,000 $188,250 $200,000 $197,271
-------- -------- -------- --------
7.78% Notes, due
November 1, 2000 $ 75,000 $ 74,438 $ 75,000 $ 75,243
-------- -------- -------- --------
Total Indebtedness $868,057 $802,805 $733,346 $720,415
======== ======== ======== ========
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 interest rates and terms,
that the fair value of such indebtedness approximates carrying value at both
February 26, 2000 and February 27, 1999. As of February 26, 2000 and
February 27, 1999, the carrying values of cash and short-term investments,
accounts receivable and accounts payable approximated fair values due to the
short-term maturities of these instruments.
At February 26, 2000 and February 27, 1999, the estimated fair value of
the cross-currency swap agreement was as follows:
(Dollars in thousands) February 26, 2000 February 27, 1999
- --------------------- ----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ------
Cross-currency swap $5,758 $4,568 $8,438 $6,927
======== ======== ======== ======
The fair values were determined by the counterparty, which is a widely
recognized investment banker.
As of the end of fiscal 1999, the Company holds equity securities of both
common and cumulative preferred stock in Isosceles PLC, which were written-
off in their entirety during fiscal 1992. There are no quoted market prices
for these securities and it is not practicable, considering the materiality
of these securities to the Company, to obtain an estimate of their fair
value. The Company believes that the fair value for these securities is
zero based upon Isosceles' current and prior years' results.
LEASE OBLIGATIONS
The Company operates primarily in leased facilities. Lease terms
generally range up to twenty-five years for store leases and thirty years
for other leased facilities, with options to renew for additional periods.
The majority of the leases contain escalation clauses relating to real
estate tax increases and certain store leases provide for increases in
rentals when sales exceed specified levels. In addition, the Company also
leases some store equipment and trucks.
The Consolidated Balance Sheets include the following:
February 26, February 27,
(Dollars in thousands) 2000 1999
- --------------------- ----------- -----------
Real property leased under capital leases $ 207,117 $ 210,094
Accumulated amortization (112,971) (121,066)
--------- ---------
$ 94,146 $ 89,028
========= =========
During fiscal 1999 and 1998, the Company entered into new capital leases
totaling $16 million and $12 million, respectively. The Company did not
enter into any new capital leases during fiscal 1997. These capital lease
amounts are non-cash transactions and, accordingly, have been excluded from
the Statements of Consolidated Cash Flows. Interest paid as
part of capital lease obligations was approximately $14 million in both
fiscal 1999 and 1998 and $16 million in fiscal 1997.
Rent expense for operating leases consists of:
(Dollars in thousands) Fiscal 1999 Fiscal 1998 Fiscal 1997
- --------------------- ----------- ----------- -----------
Minimum rentals $194,158 $193,703 $181,061
Contingent rentals 3,780 3,987 5,109
-------- -------- --------
$197,938 $197,690 $186,170
======== ======== ========
Future minimum annual lease payments for capital leases and noncancelable
operating leases in effect at February 26, 2000 are shown in the table below.
All amounts are exclusive of lease obligations and sublease rentals
applicable to facilities for which reserves have previously been established.
In addition, the Company subleases 65 stores to the franchise business.
Included in the operating lease table below are the rental payments made by
the Company partially offset by the rental inco